-----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, Qi08KtaYg27mYQ7qpQG56l5y2iZYDxxL5mwvAV8veqH1YT4Z/U2QCNwPvV3Bg29l HpWKVKvYCHp9TrKR1jZX8w== 0000950123-97-009341.txt : 19971114 0000950123-97-009341.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950123-97-009341 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971112 SROS: NONE 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: S-2/A SEC ACT: SEC FILE NUMBER: 333-36435 FILM NUMBER: 97712590 BUSINESS ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2125361950 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 S-2/A 1 AMENDMENT #2 TO FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997 REGISTRATION STATEMENT NO. 333-36435 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-2 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE CIT GROUP, INC. (FORMERLY THE CIT GROUP HOLDINGS, INC.) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6159 13-2994534 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
1211 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10036 (212) 536-1390 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE AND PRINCIPAL EXECUTIVE OFFICES) ------------------------ ERNEST D. STEIN, ESQ. EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL & SECRETARY THE CIT GROUP, INC. 1211 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10036 (212) 536-1390 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S AND CO-REGISTRANT'S AGENT FOR SERVICE) ------------------------ PLEASE SEND COPIES TO: PAUL N. ROTH, ESQ. RICHARD J. SANDLER, ESQ. ANDRE WEISS, ESQ. DAVIS POLK & WARDWELL SCHULTE ROTH & ZABEL LLP 450 LEXINGTON AVENUE 900 THIRD AVENUE NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. [ ] IF THE REGISTRANT ELECTS TO DELIVER ITS LATEST ANNUAL REPORT TO SECURITY HOLDERS, OR A COMPLETE AND LEGIBLE FACSIMILE THEREOF, PURSUANT TO ITEM 11(a)(1) OF THIS FORM, CHECK THE FOLLOWING BOX. [ ] IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF EARLIER EFFECTIVE REGISTRATION STATEMENTS FOR THE SAME OFFERING. [ ] IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, PLEASE CHECK THE FOLLOWING BOX. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion Dated November 12, 1997 PROSPECTUS 31,500,000 Shares Class A Common Stock (par value $0.01 per share) All of the shares of Class A Common Stock offered hereby are being offered by The CIT Group, Inc. (the "Company"), which is an 80% owned subsidiary of The Dai-Ichi Kangyo Bank, Limited ("DKB"). Upon completion of the Offering, DKB will own 100% of the outstanding shares of Class B Common Stock of the Company (which has five votes per share), a class of common stock separate from the Class A Common Stock (which has one vote per share). Following the Offering, the 31,500,000 shares offered hereby will represent 4.8% of the combined voting power of all classes of voting stock and 20% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company. The remainder of the voting power and economic interest in the Company will be beneficially held by DKB. See "Risk Factors--Control By and Relationship with DKB," "Relationship with DKB" and "Description of Capital Stock." Prior to the Offering, there has been no public market for the Class A Common Stock. It is currently anticipated that the initial public offering price will be between $25.00 and $28.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price of the Class A Common Stock. The Class A Common Stock has been approved for listing on The New York Stock Exchange, Inc. (the "New York Stock Exchange"), subject to official notice of issuance, under the symbol "CIT." Shares of Class A Common Stock are being reserved for sale to certain directors, officers, retirees and employees of the Company and certain related persons at the initial public offering price. See "Underwriting." All such persons are expected to purchase, in the aggregate, not more than 5.0% of the Class A Common Stock offered in the Offering. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------- PRICE TO PROCEEDS TO PUBLIC UNDERWRITING COMPANY(2) DISCOUNT(1) - -------------------------------------------------------------------------------------------------------- Per Share $ $ $ - -------------------------------------------------------------------------------------------------------- Total(3) $ $ $ - --------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $2,300,000. (3) The Company has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 4,725,000 shares of Class A Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. 3 [Gatefold Page] [Outside of Gatefold] The CIT Group is a leading diversified finance organization offering 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. It commenced operations in 1908 and has developed a broad array of "franchise" strategic business units that focus on specific industries, asset types and markets which are balanced by client, industry and geographic diversification. The Company believes that its strong credit risk management expertise and long-standing commitment to its markets and its customers provide it with a competitive advantage.
Net Income In Millions 1992 $162.3 1993 182.3 1994 201.1 1995 225.3 1996 260.1
Financing & Leasing Assets In Billions 1992 $12.2 1993 13.5 1994 15.8 1995 17.1 1996 18.6
Stockholders' Equity In Millions 1992 $1,601 1993 1,692 1994 1,793 1995 1,914 1996 2,075
[Inside of Gatefold] The CIT Group...Backing America "Successful business results are the product of hard work and dedicated employees. In the case of The CIT Group, this dedication is complemented by a feeling throughout our organization that our work has a purpose, that we are engaged in delivering financial products and services that, at their core, are 'Backing America.'" [The following six photographs illustrating six strategic business units of the Company appear in the inside of the gatefold, each accompanied by the name of the business unit: Credit Finance (a photograph of a manufacturer of circuit boards); Consumer Finance (a photograph of a house); Equipment Financing (a photograph of a crane); Capital Finance (a photograph of a commercial aircraft); Sales Financing (a photograph of a recreational boat); and Equity Investments/Venture Capital (a photograph of the store of a retailer in which Equity Investments/Venture Capital has invested).] 2 4 CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." No person has been authorized to give any information or to make any representation other than those contained in this Prospectus, and if given or made, such information or representation must not be relied upon as having been authorized by the Company or by any of the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Class A Common Stock in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. No action has been or will be taken by the Company or any Underwriter that would permit a public offering of the Class A Common Stock or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about and to observe any restrictions as to the offering of the Class A Common Stock and the distribution of this Prospectus. TABLE OF CONTENTS
PAGE Available Information....................... 4 Incorporation of Certain Documents by Reference................................. 4 Prospectus Summary.......................... 5 Risk Factors................................ 12 The Company................................. 17 Use of Proceeds............................. 17 Dividend Policy............................. 17 Capitalization.............................. 18 Selected Financial Information.............. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 21 Business.................................... 41 Risk Management............................. 63 PAGE Management.................................. 69 Relationship with DKB....................... 80 Certain Relationships and Related Transactions.............................. 82 History of Ownership of Common Stock........ 82 Shares Available for Future Sale............ 82 Description of Capital Stock................ 84 Certain United States Tax Consequences to Non-United States Holders................. 88 Underwriting................................ 90 Legal Matters............................... 92 Experts..................................... 92 Glossary.................................... 93 Index to Consolidated Financial Statements................................ F-1
The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent public accountants and to make available to them quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year. 3 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at: Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material also can be obtained from the Public Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. Certain of the Company's securities are listed on the New York Stock Exchange and the Class A Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Accordingly, reports and other information concerning the Company can also be inspected at the offices of The New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-2 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement"), under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder, for the registration of the shares of Class A Common Stock offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the shares of Class A Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made. The Registration Statement may be inspected without charge and copied upon payment of prescribed fees at the public reference facilities maintained by the Commission at the addresses set forth above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1996; 2. The Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1997, June 30, 1997 and September 30, 1997; and 3. The Company's Current Reports on Form 8-K dated January 23, 1997 (as amended by a Form 8-K/A dated February 14, 1997), February 13, 1997, April 17, 1997, July 14, 1997, July 17, 1997, September 26, 1997 and October 14, 1997. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents that have been referenced in this Prospectus other than exhibits to such documents. Requests for such copies should be directed to Joseph M. Leone, Chief Financial Officer, The CIT Group, Inc., 1211 Avenue of the Americas, New York, New York 10036, telephone (212) 536-1390. 4 6 PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) the "Company" means The CIT Group, Inc. and its consolidated subsidiaries and (ii) "DKB" means The Dai-Ichi Kangyo Bank, Limited and its consolidated subsidiaries. Unless otherwise defined herein, capitalized terms used in this summary have the meanings ascribed to them elsewhere in this Prospectus. For a description of certain terms and phrases used in this Prospectus, see "Glossary." Unless otherwise indicated, all information set forth herein assumes that the Underwriters' over-allotment option is not exercised. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY The Company is a leading diversified finance organization offering 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. The Company commenced operations in 1908 and has developed a broad array of "franchise" strategic business units that focus on specific industries, asset types and markets which are balanced by client, industry and geographic diversification. The Company believes that its strong credit risk management expertise and long-standing commitment to its markets and its customers provide it with a competitive advantage. The Company operates through two business segments: (i) commercial, which is comprised of the Equipment Financing (equipment financing and leasing), Capital Finance (commercial aircraft and rail financing and leasing), Commercial Services (factoring), Business Credit (secured financing to middle-market and larger-sized businesses) and Credit Finance (secured financing to smaller-sized and middle-market businesses) strategic business units, and (ii) consumer, which is comprised of the Consumer Finance (home equity) and Sales Financing (recreation vehicle, manufactured housing and recreational boat financing) strategic business units. These strategic business units offer products and services designed to satisfy the financing needs of specific customers, industries and markets. The Company believes that in 1996 it had the largest factoring operation and the fourth largest equipment financing and leasing operation in the United States. The Company also has a leading market position in recreation vehicle lending and has significant operations in commercial finance, sales finance and home equity lending. In addition, the Company has significant operations financing the aerospace, construction, transportation, machine tool manufacturing and railroad industries. At September 30, 1997, the Company had total assets of $20.9 billion and stockholders' equity of $2.2 billion. Net income totaled a record $239.1 million for the nine months ended September 30, 1997 and a record $260.1 million for the year ended December 31, 1996. Over the five years ended December 31, 1996, the Company's net income grew at a compound annual rate of 11.6%, while total financing and leasing assets and managed assets grew at compound annual rates of 9.7% and 11.4%, respectively. Over the three years ended December 31, 1996, net income grew at a compound annual rate of 12.6%, and total financing and leasing assets and managed assets grew at compound annual rates of 11.1% and 13.4%, respectively. Such growth resulted from expansion into new lines of business, the introduction of new products, increased profitability of existing businesses and acquisitions. 5 7 The following table sets forth commercial and consumer financing and leasing assets and consumer finance receivables previously securitized and currently managed by the Company at December 31 of each of the five years ended December 31, 1996 and at September 30, 1997. "Financing and leasing assets" are comprised of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments.
--------------------------------------------------------------------- AT SEPTEMBER AT DECEMBER 31, 30, --------------------------------------------------------- 1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- Dollars in millions Financing and leasing assets: Commercial $16,279.1 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5 Consumer(1) 3,999.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8 Other 60.0 53.0 41.6 34.4 21.6 12.0 --------- --------- --------- --------- --------- --------- Total $20,338.3 $18,568.0 $17,062.1 $15,765.4 $13,548.0 $12,246.3 Consumer finance receivables previously securitized and currently managed by the Company 1,918.3 1,437.4 916.5 306.7 175.6 43.8 --------- --------- --------- --------- --------- --------- Total managed assets $22,256.6 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1 ========= ========= ========= ========= ========= =========
- --------------- (1) Includes consumer finance receivables held for sale of $654.3 million, $116.3 million, $112.0 million, $68.7 million, $150.4 million and $0.0 million at September 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively. For the five year period ended December 31, 1996, commercial financing and leasing assets grew at a compound annual rate of 8.2% and consumer managed assets grew at a compound annual rate of 27.5%. The compound annual growth rates over such five year period for total financing and leasing assets and total managed assets were 9.7% and 11.4%, respectively. STRATEGY The Company has delivered consistent growth in earnings and assets over the past five years. The Company believes that its financial performance is a product of its core strengths, which include its array of "franchise" businesses, strong credit risk management expertise and long-standing commitment to its markets. The following fundamental operating principles are significant to the Company's past success and the execution of its business strategy in the future: - - Maintain and build leadership positions in selected markets and industries, focusing on the United States. - - Offer a broad selection of collateral-based credit products through multiple channels of distribution. - - Preserve "best in class" credit culture, coupled with collateral management expertise. - - Maintain a relationship-based approach to customers and business partners. - - Practice disciplined expense management, on-going efficiency improvement and technology investment. - - Maintain access to multiple funding sources with strong debt ratings. - - Retain experienced management team with long tenure in the industry and with the Company. - - Utilize performance-based incentive systems. - - Encourage a corporate culture that emphasizes quality in performance and service to customers, employees and business partners and values service to the community. - - Pursue growth through selective acquisitions of businesses and assets. 6 8 Using its proven strengths and capabilities, the Company pursues the following strategies to continue its earnings and asset growth: Leverage its existing market leadership positions to expand into new markets, industries and products The Company has developed a broad array of "franchise" strategic business units within its two business segments, each with broad geographic reach and multiple distribution channels. The Company is seeking further growth and profitability by: (i) building additional manufacturer and dealer/distributor relationships; (ii) expanding its sales force and marketing reach; (iii) adding complementary products that enhance existing business segments or products; (iv) identifying new markets that have synergy with or that add to the Company's existing strengths and capabilities; and (v) improving marketplace presence and "brand name" recognition in consumer finance. Maintain "best in class" credit quality and strong balance sheet The Company has demonstrated the effectiveness of its credit risk management system and strong credit culture. From 1990 through 1996, including the 1991-1992 economic recession, net credit losses have averaged 0.72% of average finance receivables. The Company's strong performance has been the result of: (i) sophisticated systems and policies which identify target markets and risk acceptance criteria for each market; (ii) decentralized credit approval authorities capable of responding quickly to shifting customer needs and changing economic and market conditions; and (iii) oversight systems that monitor credits from origination throughout the entire lending cycle. In addition, the Company adjusts its pricing to achieve higher yields for greater risk. The Company believes that its strong credit risk management systems and strong credit culture will continue to support long-term profitable asset growth. Grow the consumer businesses The Company believes that opportunities exist to grow its consumer assets and earnings by (i) leveraging its existing capabilities and expertise, (ii) expanding its franchise into new markets and products, as it has done with home equity and recreational boat lending, and (iii) establishing direct to consumer lending capabilities across its recreation vehicle, manufactured housing and recreational boat product lines. For example, in 1997, the Company began providing wholesale financing of inventories to dealers of manufactured housing and recreational boats. Wholesale financing provides dealers with inventory floor plan financing and gives the Company greater access to retail financing opportunities through its existing dealer relationships. The Company plans to pursue further growth of its wholesale financing operations by offering this product to other dealers and manufacturers with whom it has strong relationships. In late 1992, the Company entered the home equity lending market. The Company had $1.9 billion in home equity finance receivables ($2.3 billion of managed home equity finance receivables) at September 30, 1997, establishing it as a significant market participant. These results were achieved by utilizing a multi-channel delivery system with both direct and indirect origination capabilities through a 28 office distribution network that provides national coverage for the Company's products. The Company will seek further consumer asset growth and improved profitability by expanding its sales office network by adding new offices (including five offices during late 1997), improving operating efficiencies, capitalizing on economies of scale and expanding its consumer product offerings into new and existing markets. Improve operating efficiency through increased scale, continued process improvement and technology investments The Company has developed a strong culture attuned to expense control, continuous process improvement and investment in technology. The Company seeks to become a low cost producer by building scale in businesses in which it has significant positions and believes that it already has a competitive advantage as a "low cost producer" in its factoring and equipment financing and leasing businesses. The Company intends to maintain its focus on expense control and efficiency through continuous process improvement and technology investments and by utilizing its proven expense control and efficiency expertise to expand. The Company believes the existing infrastructure of most of its strategic business units can support further growth. Invest in businesses that leverage existing capabilities and complement the Company's core strengths Over the past few years, the Company has acquired various businesses and portfolios of finance receivables and has successfully integrated the acquired assets, operations and personnel while leveraging the Company's proven strengths and expertise. The Company intends to continue to actively pursue strategic acquisition opportunities of both businesses and portfolios of assets that it believes will enhance growth and profitability and that can be integrated into its core franchises. 7 9 THE OFFERING CLASS A COMMON STOCK OFFERED(1).............. 31,500,000 shares of Class A Common Stock COMMON STOCK OUTSTANDING AFTER THE OFFERING(1)(2):............................ 31,500,000 shares of Class A Common Stock 126,000,000 shares of Class B Common Stock Total Shares Outstanding................ 157,500,000 shares of Common Stock USE OF PROCEEDS.............................. The proceeds to the Company from the offering of the Class A Common Stock (the "Offering"), after the deduction of underwriting discounts and before the deduction of expenses payable by the Company, are estimated to be $793 million ($912 million assuming exercise in full of the Underwriters' over-allotment option and, in each case, assuming that the Class A Common Stock is offered at $26.50, the midpoint of the range set forth on the cover page of this Prospectus). Such proceeds will be used to acquire from DKB its option to purchase the 20% interest in the Company currently owned by CBC Holding (Delaware) Inc. ("CBC Holding"), an indirect wholly-owned subsidiary of The Chase Manhattan Corporation ("Chase"), and to purchase such interest from CBC Holding. If the Underwriters' over-allotment option is exercised, the proceeds thereof are expected to be used for general corporate purposes and for potential acquisitions. DIVIDENDS; VOTING RIGHTS; CONVERSION......... The holders of Class A Common Stock and Class B Common Stock (collectively, "Common Stock") share ratably on a per share basis in all dividends and other distributions declared by the Board of Directors. See "Dividend Policy." The holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to five votes per share. See "Description of Capital Stock--Common Stock--Voting Rights." Under certain circumstances, shares of Class B Common Stock are convertible into an equivalent number of shares of Class A Common Stock. See "Description of Capital Stock--Common Stock--Conversion." CONTROLLING STOCKHOLDER...................... For information regarding the Company's controlling stockholder, see "Relationship with DKB." RISK FACTORS................................. For a discussion of certain considerations relevant to an investment in the Class A Common Stock, see "Risk Factors." NEW YORK STOCK EXCHANGE TRADING SYMBOL FOR CLASS A COMMON STOCK....................... "CIT"
- --------------- (1) Excludes up to 4,725,000 shares of Class A Common Stock subject to an over-allotment option granted by the Company to the Underwriters. See "Underwriting." (2) Excludes 966,300 shares of restricted Class A Common Stock and options to purchase 4,175,300 shares of Class A Common Stock to be granted upon consummation of the Offering. Also excludes an additional 7,361,000 shares of Class A Common Stock reserved for future issuance under employee benefit plans. See "Management -- Employee Compensation Plans -- Long-Term Equity Compensation Plan." 8 10 DIVIDEND POLICY The Company's Board of Directors intends to declare and pay quarterly dividends on the Common Stock. It is expected that the dividend in respect of the quarter ending March 31, 1998, which will be the first full quarter following the consummation of the Offering, will be $.10 per share (a rate of $.40 annually) and will be declared and paid in the second quarter of 1998. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors and no assurance can be given that the Company will pay such dividend or any further dividends. The determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company, the credit ratings of the Company and such other factors as the Board of Directors may consider to be relevant. See "Risk Factors--Limitations Upon Payment of Dividends." RELATIONSHIP WITH DKB Upon consummation of the Offering, DKB will own 126,000,000 of the outstanding shares of Class B Common Stock, each of which has five votes per share but is otherwise identical in all material respects to the Class A Common Stock (which has one vote per share). Upon consummation of the Offering, the Class B Common Stock owned by DKB will represent in the aggregate 95.2% of the combined voting power of all of the outstanding Common Stock. For as long as DKB continues to own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, DKB will be able to direct the election of all of the members of the Company's Board of Directors and exercise a controlling influence over the business and affairs of the Company. See "Risk Factors--Control By and Relationship with DKB." DKB has advised the Company that it currently intends to continue to hold all of the Class B Common Stock owned by it following the Offering. However, DKB is not subject to any contractual obligation to retain its controlling interest, except that DKB has agreed not to sell or otherwise dispose of any shares of Class B Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of J.P. Morgan Securities Inc. See "Underwriting." As a result, there can be no assurance concerning the period of time during which DKB will maintain its ownership of Common Stock owned by it immediately following the Offering. See "Risk Factors--Control By and Relationship with DKB," "Risk Factors--Shares Eligible for Future Sale" and "Relationship With DKB." The Company has entered into an agreement with DKB pursuant to which the Company has agreed not to engage in any activities or enter into any transactions without obtaining approvals or giving notices required of DKB under applicable U.S. and Japanese banking laws. From time to time, the Company and DKB have entered into, and can be expected to continue to enter into, other agreements and business transactions and the Company's Restated Certificate of Incorporation includes certain provisions relating to the Company's relationship with DKB. See "Relationship With DKB" and "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate Opportunities." 9 11 SUMMARY FINANCIAL INFORMATION The summary results of operations and balance sheet data presented below for the nine months ended September 30, 1997 and 1996 and as of September 30, 1997 and 1996, respectively, were derived from the unaudited consolidated financial statements of the Company set forth herein. The summary results of operations and balance sheet data presented below for each of the years in the three-year period ended December 31, 1996 and as of December 31, 1996 and 1995, respectively, were derived from the audited consolidated financial statements of the Company and notes thereto set forth herein. The summary results of operations and balance sheet data presented below for each of the years in the two-year period ended December 31, 1993 and as of December 31, 1994, 1993 and 1992, respectively, were derived from audited consolidated financial statements and the related notes thereto not presented herein. The data presented below should be read in conjunction with the consolidated financial statements and the related notes thereto set forth herein. The data for the nine month period ended September 30, 1997 is not necessarily indicative of operating results that may be expected for a full year.
--------------------------------------------------------------------------------- NINE MONTHS ENDED YEARS ENDED DECEMBER 31, Dollars in millions, except per SEPTEMBER 30, --------------------------------------------------------- share data 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS Net finance income $658.3 $594.1 $797.9 $697.7 $649.8 $603.9 $539.5 Total operating revenue 902.3(1) 770.9 1,042.0 882.4 824.2 737.7 653.3 Salaries and general operating expenses 314.1 291.4 393.1 345.7 337.9 282.2 261.6 Provision for credit losses 91.8 78.6 111.4 91.9 96.9 104.9 103.2 Net income 239.1 197.3 260.1 225.3 201.1 182.3 162.3 Pro forma net income per share(2) 1.51 1.25 1.64
--------------------------------------------------------------------------------- AT DECEMBER 31, AT SEPTEMBER 30, --------------------------------------------------------- Dollars in millions 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA Finance receivables: Commercial $14,603.4 $13,829.9 $13,757.6 $13,451.5 $12,821.2 $11,185.2 $10,359.7 Consumer 3,344.9 2,730.3 3,239.0 2,344.0 1,973.2 1,438.9 1,411.8 --------- --------- --------- --------- --------- --------- --------- Total finance receivables $17,948.3 $16,560.2 $16,996.6 $15,795.5 $14,794.4 $12,624.1 $11,771.5 Reserve for credit losses 233.3 214.2 220.8 206.0 192.4 169.4 158.5 Operating lease equipment, net 1,675.7 1,365.0 1,402.1 1,113.0 867.9 751.9 462.8 Total assets 20,854.3 18,625.5 18,932.5 17,420.3 15,959.7 13,725.0 13,026.1 Commercial paper 6,168.7 5,913.2 5,827.0 6,105.6 5,660.2 6,516.1 6,173.5 Variable-rate senior notes 3,461.5 3,997.5 3,717.5 3,827.5 3,812.5 1,686.5 1,477.8 Fixed-rate senior notes 5,659.6 4,182.0 4,761.2 3,337.0 2,619.4 2,389.0 2,476.6 Subordinated fixed-rate notes 300.0 300.0 300.0 300.0 300.0 200.0 200.0 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 250.0 -- -- -- -- -- -- Stockholders' equity 2,242.7 2,031.4 2,075.4 1,914.2 1,793.0 1,692.2 1,601.1
10 12
--------------------------------------------------------------------------------- AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- SELECTED DATA AND RATIOS PROFITABILITY(3) Net interest margin as a percentage of average earning assets ("AEA")(4) 4.87% 4.86% 4.82% 4.54% 4.77% 4.93% 4.73% Return on average stockholders' equity 14.72% 13.33% 13.04% 12.13% 11.49% 11.02% 10.36% Return on AEA(4) 1.77% 1.61% 1.57% 1.46% 1.48% 1.49% 1.42% Ratio of earnings to fixed charges 1.53x 1.50x 1.49x 1.44x 1.52x 1.60x 1.49x Salaries and general operating expenses as a percentage of AEA(4) 2.32% 2.38% 2.38% 2.25% 2.48% 2.30% 2.30% Salaries and general operating expenses as a percentage of average serviced assets ("ASA")(5) 2.07% 2.15% 2.15% 2.13% 2.40% 2.28% 2.29% Dividend payout ratio 30% 41%(6) 38%(6) 46%(6) 50% 50% 50% CREDIT QUALITY 60+ days contractual delinquency as a percentage of finance receivables 1.60% 1.50% 1.72% 1.67% 1.20% 1.71% 2.85% Net credit losses as a percentage of average finance receivables(3) 0.63% 0.59% 0.62% 0.50% 0.61% 0.77% 0.84% Reserve for credit losses as a percentage of finance receivables 1.30% 1.29% 1.30% 1.30% 1.30% 1.34% 1.35% Ratio of reserve for credit losses to current period net credit losses(3) 2.18x 2.25x 2.18x 2.67x 2.29x 1.79x 1.61x LEVERAGE Total debt to stockholders' equity and Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 6.25x 7.08x 7.04x 7.09x 6.91x 6.38x 6.45x Total debt to stockholders' equity(7) 7.06x 7.08x 7.04x 7.09x 6.91x 6.38x 6.45x OTHER Total managed assets (in millions)(8) $22,256.6 $19,426.5 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1 Employees 3,000 2,950 2,950 2,750 2,700 2,400 2,400
- --------------- (1) Includes a gain of $58.0 million on the sale of an equity interest acquired in connection with a loan workout. (2) Based upon 158,466,300 shares of Common Stock to be outstanding upon consummation of the Offering, including 966,300 shares of restricted Class A Common Stock to be granted at that time. Excludes options to purchase 4,175,300 shares of Class A Common Stock to be granted upon consummation of the Offering and an additional 7,361,000 shares of Class A Common Stock reserved for future issuance under employee benefit plans. (3) Nine month data and ratios calculated on an annualized basis. (4) "AEA" reflects the average of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments, less credit balances of factoring clients. (5) "ASA" reflects average earning assets plus the average of consumer finance receivables previously securitized and currently managed by the Company and consumer finance receivables serviced for third parties. (6) In 1995, the Company operated under a dividend policy requiring the payment of dividends equal to and not exceeding 50% of operating earnings. The actual ratio for 1995, however, fell below 50% due to the deferral of the declaration and payment of dividends on December 1995 earnings into the first quarter of 1996. (7) 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. (8) "Managed assets" include (i) financing and leasing assets and (ii) off-balance sheet consumer finance receivables previously securitized and currently managed by the Company. 11 13 RISK FACTORS Prospective investors should carefully consider, in addition to the other information contained in this Prospectus, the following factors before purchasing the Class A Common Stock offered hereby. ECONOMIC FACTORS Risk of Economic Slowdown or Downturn The Company's results of operations and financial position may be affected by various economic factors. Unfavorable economic conditions may make it more difficult for the Company to maintain both its new business origination volume and the credit quality thereof at levels previously attained and may adversely affect margins on new finance receivables. In adverse economic conditions, growth in finance receivables and leases may not be attainable and non-performing assets and loan charge-offs are likely to increase. The Company's growth rate has differed between its commercial and consumer businesses and, over time, the Company expects that its consumer business will grow at a more rapid rate than its commercial business. As a result of such growth, the Company will become more susceptible to economic factors that may adversely affect the demand for the Company's products and services by consumers. There can be no assurance that the growth rates experienced by the Company in the recent past will continue. The Company is also subject to industry-specific economic and other factors that may affect the demand for its products. At September 30, 1997, 10.8% of the Company's total financing and leasing assets related to obligations of retailers, 9.7% related to commercial airline obligations, 9.1% related to home equity obligations and 8.4% related to construction obligations. An economic downturn or slowdown in these or other industries or markets could have a material adverse effect on the Company's results of operations or financial position. Although the Company maintains a consolidated reserve for credit losses on finance receivables in an amount which it believes is sufficient to provide adequate protection against potential credit losses in its portfolios, this reserve could prove to be insufficient. Adverse economic conditions may cause declines in the realizable value of certain collateral securing the Company's finance receivables, or in the value of equipment subject to lease agreements. Adverse economic conditions, including those affecting demand for commercial aircraft and railcars, which represent a substantial portion of the Company's leased assets, may impair the Company's ability to re-lease or remarket such equipment and fully realize the carrying value of its leased assets and/or the estimated lease residual values. See "--Leasing Transactions and Equipment Risk" and "--Reserve for Credit Losses." Interest Rate Risk Although the Company has an active and comprehensive approach to managing its interest rate risk, including matching the maturities of its interest rate sensitive assets and interest rate sensitive liabilities and closely monitoring product pricing to stay responsive to changing market interest rates, significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both the Company's ability to originate new finance receivables and its ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of owned and serviced finance receivables. In addition, changes in market interest rates or in the relationships between short-term and long-term market interest rates or between different interest rate indices (i.e., basis risk) could affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, which could result in an increase in interest expense relative to finance income. An increase in market interest rates also could adversely impact the ability of the Company's floating-rate borrowers to meet their higher payment obligations, which could result in an increase in non-performing assets and net credit losses. See "Risk Management--Asset/Liability Management--Interest Rate Risk Management." An economic slowdown or downturn, or significant change in interest rates, could contribute to a downgrading of the Company's credit ratings, which is likely to increase the Company's funding costs and could decrease its net finance income, limit its access to the capital markets or result in a decision by the lenders under the Company's existing credit facilities not to extend such credit facilities after their expiration. There can be no assurance that a decline in economic conditions or increase in interest rates will not have a material adverse effect on the Company's results of operations or financial position. LEASING TRANSACTIONS AND EQUIPMENT RISK The Company maintains ownership of various types of equipment and leases this equipment to customers through two distinct types of transactions: (i) direct financing leases; and (ii) operating leases. A direct financing lease is usually long-term in nature, passes substantially all of the risks and rewards of the related equipment to the customer and is accounted for as a 12 14 financing by the Company. The Company structures its direct financing leasing transactions so that a material portion of the underlying equipment's cost at the inception of the lease (approximately 90%) is recovered over the initial term of the lease. The Company expects to assume equipment risk on the equipment's estimated residual value at the end of the initial lease term. An operating lease, however, is typically of a shorter duration, with periodic rentals recorded as income, and depreciation on related equipment recorded as an expense by the Company. The shorter-term nature of operating leases inherently increases the risk that the Company may not recover its investment in the related equipment due to several factors, including the Company's inability to remarket the equipment and obsolescence. The initial establishment, ongoing review and ultimate realization of direct financing lease residual values, as well as the realization of operating lease equipment values, are important elements of the Company's leasing business. Residual values are recorded upon acquisition of the equipment purchased for direct financing leasing transactions based upon the estimated future value of the equipment at the time the Company expects to dispose of the equipment. The estimates are derived by the Company from, among other things, market information on sales of used equipment and estimated future obsolescence trends. Periodic depreciation expense on equipment purchased for operating lease transactions is also derived through the use of estimates that include the equipment's useful life and the future value of the equipment at the end of this life. Because such values are heavily influenced by estimates, there can be no assurance that such values will be realized by the Company upon disposition of equipment owned by the Company and returned by lessees upon termination of their leases. At September 30, 1997, the Company had finance leases of $4.1 billion, including recorded estimated lease residual values of $906.3 million, and operating lease equipment with a book value of $1.7 billion, net of depreciation. To the extent that the Company fails to realize its direct financing lease residual values and operating lease equipment values, the Company's results of operations and financial position could be materially adversely affected. RESERVE FOR CREDIT LOSSES The Company maintains a consolidated reserve for credit losses on finance receivables at an amount which it believes is sufficient to provide adequate protection against potential credit losses in its portfolios. The level of the consolidated reserve for credit losses is determined principally on the basis of (i) the current credit quality of the portfolio and trends, (ii) the current mix of finance receivables and (iii) historical loss experience. The consolidated reserve for credit losses reflects management's judgment of the loss potential, after considering factors such as the nature and characteristics of obligors, economic conditions and trends, charge-off experience, delinquencies and the value of underlying collateral and guarantees, including recourse to dealers and manufacturers. Although the consolidated reserve for credit losses in the Company's balance sheet as of September 30, 1997 is considered adequate by the Company's management, there can be no assurance that this consolidated reserve for credit losses will prove to be adequate over time to cover credit losses in the Company's portfolios. This consolidated reserve for credit losses may prove to be inadequate if unanticipated adverse changes in the economy or discrete events adversely affect specific customers, industries or markets, or if credit losses arising out of the seasoning of the Company's consumer portfolio exceed those anticipated by the Company. The Company's results of operations and financial position could be materially adversely affected to the extent that the Company's consolidated reserve for credit losses is insufficient to cover such changes or events. See "--Economic Factors--Risk of Economic Slowdown or Downturn," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Management--Credit Risk Management--Loan Loss Reserves and Credit Losses." COMPETITION The Company's markets are highly competitive and are characterized by competitive factors that vary based upon product and geographic region. The Company's 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 the Company. 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 the competitors of the Company are large companies that have substantial capital, technological and marketing resources, and some of these competitors are larger than the Company and may have access to capital at a lower cost than the Company. Also, the Company's 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 the Company. Competition has been enhanced in recent years by an improving economy and growing marketplace liquidity. The markets for most of the Company's products are characterized by a large number of competitors. However, with respect to some of the Company's products, competition is more concentrated. See "Business--Additional Information Regarding the Company--Competition." 13 15 The Company competes primarily on the basis of pricing, terms and structure in many of its markets. From time to time, competitors of the Company seek to compete aggressively on the basis of these factors and the Company may lose market share to the extent it is unwilling to match its competitors' pricing, terms and structure in order to maintain its interest margins or to maintain its credit discipline. To the extent that the Company matches competitors' pricing, terms or structure, it may experience lower interest margins and/or increased credit losses. In addition, demand for the Company's 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. See "Business--Additional Information Regarding the Company--Competition." LIMITATIONS UPON LIQUIDITY AND CAPITAL RAISING The Company's primary sources of funds are cash flow from operations, commercial paper borrowings, medium-term notes, other term debt securities and asset-backed securitizations. At September 30, 1997, commercial paper borrowings were $6.2 billion and amounts due on term debt within one year were $4.2 billion. A downgrade in the Company's credit ratings could result in an increase in the Company's interest expense and could have an adverse impact on the Company's ability to access the commercial paper market or the public and private debt markets, which could have a material adverse effect on the Company's results of operations or financial position. If the Company is unable to access such markets on acceptable terms, it could utilize its bank credit lines and cash flow from operations and portfolio liquidations to satisfy its liquidity needs. At September 30, 1997, the Company had committed revolving bank credit lines totaling $5.0 billion, representing 81% of operating commercial paper outstanding (commercial paper outstanding less interest-bearing deposits). The Company believes that such credit lines should provide sufficient additional liquidity to the Company under foreseeable conditions. However, there can be no assurance that the Company's committed revolving bank credit lines would provide adequate liquidity to the Company following a downgrade in its credit ratings or other adverse conditions or that these bank credit lines will be renewed. The Company funds its operations independently of DKB and believes that the business of and the outlook for DKB is not necessarily closely related to the business of and the outlook for the Company. However, there can be no assurance that a future downgrading of DKB's credit ratings would not have an adverse impact on the Company's credit ratings. Therefore, while DKB maintains a controlling interest in the Company, a deterioration in the financial condition of DKB could result in increased borrowing costs to the Company and could impair its access to the public and private capital markets, which could have a material adverse effect on the Company's results of operations or financial position. If DKB chooses to maintain its percentage ownership of the Company, the Company may be constrained in its ability to raise common or preferred equity capital in the future. DKB is not under any obligation to make future capital contributions to the Company or to agree to allow the Company to raise additional common or preferred equity capital. See "Relationship with DKB." CONTROL BY AND RELATIONSHIP WITH DKB Upon consummation of the Offering, DKB will beneficially own 100% of the outstanding Class B Common Stock, which will, in the aggregate, represent 95.2% of the combined voting power of all of the outstanding Common Stock. For as long as DKB continues to beneficially own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, DKB will be able to direct the election of all of the members of the Company's Board of Directors and exercise a controlling influence over the business and affairs of the Company, including any determinations with respect to (i) mergers or other business combinations involving the Company, (ii) the acquisition or disposition of assets by the Company, (iii) the incurrence of indebtedness by the Company, (iv) the issuance of any additional Common Stock or other equity securities and (v) the payment of dividends with respect to the Common Stock. See "--Limitations Upon Liquidity and Capital Raising." Similarly, DKB will have the power to (i) determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, (ii) prevent or cause a change in control of the Company or (iii) take other actions that might be favorable to DKB. In the foregoing situations or otherwise, various conflicts of interest between the Company and DKB could arise. Ownership interests of directors or officers of the Company in common stock of DKB or service as a director or officer or other employee of both the Company and DKB could create or appear to create potential conflicts of interest when directors and officers and employees are faced with decisions that could have different implications for the Company and DKB. The Company's Amended and Restated Certificate of Incorporation will include certain provisions relating to the allocation of business opportunities that may be suitable for both the Company and DKB. The Company has entered into an agreement with DKB pursuant to which the Company has agreed not to engage in any activities or enter into any transactions without obtaining approvals or giving notices required of DKB under applicable U.S. and Japanese banking laws. See "Relationship with DKB" and "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate Opportunities." 14 16 REGULATION The Company is subject to extensive federal and state regulation and supervision in the jurisdictions in which it operates. Such regulation and supervision are primarily for the benefit and protection of the Company's customers, and not for the benefit of investors, and could limit the Company's discretion in operating its businesses. For example, state laws often establish maximum allowable finance charges for certain consumer and commercial loans. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that interest rates that the Company charges will not rise to state maximum levels, the effect of any of which could be to adversely affect the business or results of operations of the Company. See "Business--Additional Information Regarding the Company--Regulation." Because the Company is a subsidiary of DKB, the Company and its activities are subject to examination and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Under certain circumstances, the Federal Reserve has the authority to issue orders which could restrict the ability of the Company to engage in new activities or to acquire additional businesses or to acquire assets outside of the normal course of business. See "Business--Additional Information Regarding the Company--Regulation." LIMITATIONS UPON PAYMENT OF DIVIDENDS As a holding company, the Company's ability to pay dividends to stockholders will depend primarily upon the receipt of dividends and other distributions by the Company from its subsidiaries. The right of the Company to participate in any distribution of assets of any subsidiary upon such subsidiary's liquidation or reorganization or otherwise (and thus the ability of holders of the Class A Common Stock to benefit from such distribution) will be subject to the prior claims of creditors of that subsidiary, except to the extent that any claims of the Company as a creditor of such subsidiary may be recognized as such. As of September 30, 1997, the Company's subsidiaries had approximately $2.6 billion of indebtedness and other liabilities, in addition to other contractual obligations. The Company believes that maintaining its debt to equity ratio within certain parameters is an important factor in maintaining its existing credit ratings. Accordingly, under certain circumstances, the Company may limit its payment of dividends in order to allow for portfolio growth and to maintain debt to equity ratios within parameters considered appropriate by the Company. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors and no assurance can be given that the Company will pay dividends. The Company may at any time cease to pay dividends. The determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company, the credit ratings of the Company and such other factors as the Board of Directors may consider to be relevant. For a discussion of the Company's dividend policy and certain related matters, see "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE Subject to applicable federal securities laws and the restrictions described below, after completion of the Offering DKB may sell any and all of the shares of Common Stock owned by it. The Company will grant to DKB, its subsidiaries and certain transferees registration rights enabling such persons to demand the registration for sale under the federal securities laws of shares of Class A Common Stock that it may hold or that are issuable upon conversion of any other security that it may hold (including Class B Common Stock) and of any other securities issued or issuable in respect of the Class A Common Stock. Such persons also will have the right to require such securities to be included in registration statements under the federal securities laws proposed to be filed with the Commission covering other equity securities of the Company. See "Relationship with DKB--Registration Rights Agreement." Sales or distribution by any such person of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of Class A Common Stock. DKB has advised the Company that its current intent is to continue to hold all of the Common Stock owned by it immediately following the Offering. However, DKB is not subject to any contractual obligation to retain its controlling interest, except that DKB has agreed not to sell or otherwise dispose of any shares of Common Stock of the Company for a period of 180 days after the date of this Prospectus without the prior written consent of J.P. Morgan Securities Inc. See "Underwriting." As a result, there can be no assurance that DKB will maintain its percentage ownership of Common Stock immediately following the Offering for any specific period of time. See "Relationship with DKB" and "Shares Available for Future Sale." 15 17 NO PRIOR MARKET FOR CLASS A COMMON STOCK Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price of the Class A Common Stock was determined by negotiations between the Company and the Underwriters. There can be no assurance that the initial public offering price will correspond to the price at which the Class A Common Stock will trade in the public market subsequent to the Offering or that an active public market for the Class A Common Stock will develop and continue after the Offering. See "Underwriting." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Risk Management," including, without limitation, those concerning (i) the Company's strategy, (ii) the Company's liquidity, (iii) the Company's credit risk management, (iv) the Company's asset/liability risk management, (v) the Company's operational and legal risks, (vi) the growth of the Company's consumer business and (vii) the effects on the Company of certain legal proceedings, constitute forward-looking statements concerning the Company's operations, economic performance and financial condition. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors" and "Risk Management." 16 18 THE COMPANY The Company is a leading diversified finance organization offering 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. The Company commenced operations in 1908 and has developed a broad array of "franchise" strategic business units that focus on specific industries, asset types and markets, which are balanced by client, industry and geographic diversification. The Company believes that its strong credit risk management expertise and long-standing commitment to its markets and its customers provide it with a competitive advantage. Prior to the consummation of the Offering, the Company had been owned 80% by DKB and 20% by CBC Holding. Immediately prior to the consummation of the Offering, the Company will reclassify its existing class of common stock into shares of Class A Common Stock and Class B Common Stock and DKB will receive 126,000,000 shares of Class B Common Stock in exchange for its existing shares of common stock of the Company. Upon consummation of the Offering, the Class B Common Stock owned by DKB will represent in the aggregate 95.2% of the combined voting power of all of the outstanding Common Stock and 80.0 % of the economic interest in the Company. See "Relationship with DKB" and "Description of Capital Stock--Common Stock--Voting Rights." The Company's principal executive offices are located at 1211 Avenue of the Americas, New York, New York 10036, and its telephone number is (212) 536-1390. USE OF PROCEEDS The proceeds of the Offering, after the deduction of underwriting discounts and before the deduction of expenses payable by the Company, are estimated to be $793 million ($912 million assuming exercise in full of the Underwriters' over-allotment option and, in each case, assuming that the Class A Common Stock is offered at $26.50, the midpoint of the range set forth on the cover page of this Prospectus). Such proceeds will be used to acquire from DKB its option to purchase the 20% interest in the Company currently owned by CBC Holding and to purchase such interest from CBC Holding. If the Underwriters' over-allotment option is exercised, the proceeds from the exercise of such options are expected to be used for general corporate purposes and for potential acquisitions. DIVIDEND POLICY The holders of the Class A Common Stock and Class B Common Stock share ratably on a per share basis in all dividends and other distributions declared by the Company's Board of Directors. The Company's Board of Directors intends to declare and pay quarterly dividends. It is expected that the dividend in respect of the quarter ending March 31, 1998, which will be the first full quarter following the consummation of the Offering, will be $.10 per share (a rate of $.40 annually), and will be declared and paid in the second quarter of 1998. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors and no assurance can be given that the Company will pay such dividend or any further dividends. The determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company, the credit ratings of the Company and such other factors as the Board of Directors may consider to be relevant. See "Risk Factors--Limitations Upon Payment of Dividends" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity." 17 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997 and on a pro forma basis giving effect to the reclassification of the common stock of the Company into shares of Class A Common Stock and Class B Common Stock and the consummation of the Offering. The information set forth below assumes that the Class A Common Stock offered hereby will be sold in the Offering at $26.50 per share (the midpoint of the range set forth on the cover page of this Prospectus) and gives effect to the use of the net proceeds of the Offering as described under "Use of Proceeds," before taking into account the expenses of the Offering to be paid by the Company. This table should be read in conjunction with the consolidated financial statements and the related notes thereto set forth herein.
------------------------- AS OF SEPTEMBER 30, 1997 Dollars in millions ACTUAL AS ADJUSTED --------- ----------- Debt: Commercial paper $ 6,168.7 $ 6,168.7 Variable-rate senior notes 3,461.5 3,461.5 Fixed-rate senior notes 5,659.6 5,659.6 Subordinated fixed-rate notes 300.0 300.0 --------- --------- Total debt $15,589.8 $15,589.8 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 250.0 250.0 Stockholders' equity: Common stock, 1,000 shares authorized, issued and outstanding 250.0 -- Class A common stock, par value $.01 per share, 700,000,000 shares authorized and 31,500,000 shares issued and outstanding(1) -- .3 Class B common stock, par value $.01 per share, 510,000,000 shares authorized and 126,000,000 shares issued and outstanding -- 1.3 Paid-in capital 573.3 821.7 Retained earnings 1,419.4 1,419.4 --------- --------- Total stockholders' equity $ 2,242.7 $ 2,242.7 --------- --------- Total capitalization $18,082.5 $18,082.5 ========= =========
- --------------- (1) Excludes 966,300 shares of restricted Class A Common Stock and options to purchase 4,175,300 shares of Class A Common Stock to be granted upon consummation of the Offering. Also excludes 7,361,000 additional shares of Class A Common Stock reserved for future issuance under employee benefit plans. See "Management--Employee Compensation Plans--Long-Term Equity Compensation Plan." 18 20 SELECTED FINANCIAL INFORMATION The results of operations and balance sheet data presented below for the nine months ended September 30, 1997 and 1996 and as of September 30, 1997 and 1996, respectively, were derived from the unaudited consolidated financial statements of the Company set forth herein. The results of operations and balance sheet data presented below for each of the years in the three-year period ended December 31, 1996 and as of December 31, 1996 and 1995, respectively, were derived from the audited consolidated financial statements of the Company and notes thereto set forth herein. The results of operations and balance sheet data presented below for each of the years in the two-year period ended December 31, 1993 and as of December 31, 1994, 1993 and 1992, respectively, were derived from the audited consolidated financial statements and the related notes thereto not presented herein. The data presented below should be read in conjunction with the consolidated financial statements and the related notes thereto set forth herein. The data for the nine month period ended September 30, 1997 is not necessarily indicative of operating results that may be expected for a full year.
--------------------------------------------------------------------------------- NINE MONTHS ENDED YEARS ENDED DECEMBER 31, Dollars in millions, except per SEPTEMBER 30, --------------------------------------------------------- share data 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS Net finance income $658.3 $594.1 $797.9 $697.7 $649.8 $603.9 $539.5 Total operating revenue 902.3(1) 770.9 1,042.0 882.4 824.2 737.7 653.3 Salaries and general operating expenses 314.1 291.4 393.1 345.7 337.9 282.2 261.6 Provision for credit losses 91.8 78.6 111.4 91.9 96.9 104.9 103.2 Net income 239.1 197.3 260.1 225.3 201.1 182.3 162.3 Pro forma net income per share(2) 1.51 1.25 1.64
--------------------------------------------------------------------------------- AT DECEMBER 31, AT SEPTEMBER 30, --------------------------------------------------------- Dollars in millions 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA Finance receivables: Commercial $14,603.4 $13,829.9 $13,757.6 $13,451.5 $12,821.2 $11,185.2 $10,359.7 Consumer 3,344.9 2,730.3 3,239.0 2,344.0 1,973.2 1,438.9 1,411.8 --------- --------- --------- --------- --------- --------- --------- Total finance receivables $17,948.3 $16,560.2 $16,996.6 $15,795.5 $14,794.4 $12,624.1 $11,771.5 Reserve for credit losses 233.3 214.2 220.8 206.0 192.4 169.4 158.5 Operating lease equipment, net 1,675.7 1,365.0 1,402.1 1,113.0 867.9 751.9 462.8 Total assets 20,854.3 18,625.5 18,932.5 17,420.3 15,959.7 13,725.0 13,026.1 Commercial paper 6,168.7 5,913.2 5,827.0 6,105.6 5,660.2 6,516.1 6,173.5 Variable-rate senior notes 3,461.5 3,997.5 3,717.5 3,827.5 3,812.5 1,686.5 1,477.8 Fixed-rate senior notes 5,659.6 4,182.0 4,761.2 3,337.0 2,619.4 2,389.0 2,476.6 Subordinated fixed-rate notes 300.0 300.0 300.0 300.0 300.0 200.0 200.0 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 250.0 -- -- -- -- -- -- Stockholders' equity 2,242.7 2,031.4 2,075.4 1,914.2 1,793.0 1,692.2 1,601.1
19 21
-------------------------------------------------------------------------------- AT OR FOR THE NINE MONTHS ENDED SEPTEMBER AT OR FOR THE YEARS ENDED DECEMBER 31, 30, ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- SELECTED DATA AND RATIOS PROFITABILITY(3) Net interest margin as a percentage of AEA(4) 4.87% 4.86% 4.82% 4.54% 4.77% 4.93% 4.73% Return on average stockholders' equity 14.72% 13.33% 13.04% 12.13% 11.49% 11.02% 10.36% Return on AEA(4) 1.77% 1.61% 1.57% 1.46% 1.48% 1.49% 1.42% Ratio of earnings to fixed charges 1.53x 1.50x 1.49x 1.44x 1.52x 1.60x 1.49x Salaries and general operating expenses as a percentage of AEA(4) 2.32% 2.38% 2.38% 2.25% 2.48% 2.30% 2.30% Salaries and general operating expenses as a percentage of ASA(5) 2.07% 2.15% 2.15% 2.13% 2.40% 2.28% 2.29% Dividend payout ratio 30% 41%(6) 38%(6) 46%(6) 50% 50% 50% CREDIT QUALITY 60+ days contractual delinquency as a percentage of finance receivables 1.60% 1.50% 1.72% 1.67% 1.20% 1.71% 2.85% Net credit losses as a percentage of average finance receivables(3) 0.63% 0.59% 0.62% 0.50% 0.61% 0.77% 0.84% Reserve for credit losses as a percentage of finance receivables 1.30% 1.29% 1.30% 1.30% 1.30% 1.34% 1.35% Ratio of reserve for credit losses to current period net credit losses(3) 2.18x 2.25x 2.18x 2.67x 2.29x 1.79x 1.61x LEVERAGE Total debt to stockholders' equity and Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company 6.25x 7.08x 7.04x 7.09x 6.91x 6.38x 6.45x Total debt to stockholders' equity(7) 7.06x 7.08x 7.04x 7.09x 6.91x 6.38x 6.45x OTHER Total managed assets (in millions)(8) $22,256.6 $19,426.5 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1 Employees 3,000 2,950 2,950 2,750 2,700 2,400 2,400
- --------------- (1) Includes a gain of $58.0 million on the sale of an equity interest acquired in connection with a loan workout. (2) Based upon 158,466,300 shares of Common Stock to be outstanding upon consummation of the Offering, including 966,300 shares of restricted Class A Common Stock to be granted at that time. Excludes options to purchase 4,175,300 shares of Class A Common Stock to be granted upon consummation of the Offering and an additional 7,361,000 shares of Class A Common Stock reserved for future issuance under employee benefit plans. (3) Nine month data and ratios calculated on an annualized basis. (4) "AEA" reflects the average of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments, less credit balances of factoring clients. (5) "ASA" reflects average earning assets plus the average of consumer finance receivables previously securitized and currently managed by the Company and consumer finance receivables serviced for third parties. (6) In 1995, the Company operated under a dividend policy requiring the payment of dividends equal to and not exceeding 50% of operating earnings. The actual ratio for 1995, however, fell below 50% due to the deferral of the declaration and payment of dividends on December 1995 earnings into the first quarter of 1996. (7) 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. (8) "Managed assets" include (i) financing and leasing assets and (ii) off-balance sheet consumer finance receivables previously securitized and currently managed by the Company. 20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that management believes to be relevant to understanding the Company's consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the related notes thereto contained in the Company's consolidated financial statements included in this Prospectus. The following discussion includes certain forward-looking statements. For a discussion of important factors that may cause actual results to differ materially from such forward-looking statements, see "Risk Factors." See also "Risk Management" for certain factors that have in the past and may in the future affect the financial performance of the Company. The Company is engaged in the commercial and consumer finance businesses, providing secured financing and leasing products on both a fixed and floating interest rate basis. The Company's revenues principally consist of finance income and fees and other income, which include factoring commissions, commitment, facility, servicing, letter of credit and syndication fees, and gains and losses from sales of equipment and other investments and sales and securitizations of finance receivables. The Company's primary expenses are (i) interest expense related to funding its finance receivables and operating lease equipment, (ii) salaries and general operating expenses, (iii) provision for credit losses and (iv) depreciation on operating lease equipment. Comparability of results among quarterly periods may be affected by the timing of several events, primarily consisting of equipment sales, securitizations and the sales of venture capital investments. The Company's business requires significant funds to originate finance receivables and purchase leasing equipment, and the Company consequently requires substantial liquidity to finance its operations. See "--Liquidity." The Company's commercial segment includes equipment financing and leasing, factoring and commercial finance. The Company's consumer segment includes consumer finance and sales financing. The Company entered the home equity lending business in late 1992 and the recreational boat market in 1993. The Company has been growing the assets of its consumer segment at a faster rate than that of its commercial segment. The contribution of the Company's consumer segment to its profitability is significantly lower in relation to such segment's financing and leasing assets than that of the commercial segment. This reflects the Company's relatively recent entry into the home equity lending business and the continuing significant investment in building the infrastructure of this business. NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996 Overview For the nine months ended September 30, 1997, net income totaled a record $239.1 million compared with $197.3 million for the same period in 1996, an increase of 21.2%. Return on average earning assets for the nine months in 1997 increased to 1.77%, compared with 1.61% for the same period in 1996. The improvement resulted from growth in finance income less interest expense ("net finance income") from a higher level of financing and leasing assets, increased noninterest revenue and improvements in operating efficiency. The nine months ended September 30, 1997 also include a gain on sale of an equity interest acquired in a loan workout recognized in the second quarter of 1997. Financing and leasing assets totaled a record $20.3 billion at September 30, 1997, an increase of 9.5% over $18.6 billion at December 31, 1996. Growth was broad-based, with increases in both the commercial and consumer segments. The increases are the result of strong new business activity across both segments, partially offset by continued paydowns in the highly competitive commercial segment. The Company securitized $500.0 million of home equity finance receivables and $260.9 million of recreational boat finance receivables in the first nine months of 1997, as compared to $454.1 million of recreation vehicle finance receivables during the first nine months of 1996. Managed assets, comprised of financing and leasing assets and consumer finance receivables previously securitized and currently managed by the Company, totaled $22.3 billion at September 30, 1997, an increase of 11.3% over $20.0 billion at December 31, 1996. 21 23 Net Finance Income A comparison of net finance income for the first nine months of 1997 and 1996 is set forth below.
------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, INCREASE 1997 1996 AMOUNT PERCENT --------- --------- --------- ------- Dollars in millions Finance income $ 1,352.0 $ 1,222.3 $ 129.7 10.6% Interest expense 693.7 628.2 65.5 10.4 --------- --------- -------- ---- Net finance income $ 658.3 $ 594.1 $ 64.2 10.8% ========= ========= ======== ==== AEA $18,029.8 $16,311.9 $ 1,717.9 10.5% Net finance income as a percentage of AEA 4.87% 4.86%
Finance income totaled $1,352.0 million for the nine months ended September 30, 1997, up $129.7 million or 10.6% over the comparable period in 1996. As a percentage of AEA, finance income (excluding interest income relating to short-term interest-bearing deposits) was 9.91% for the nine months ended September 30, 1997 and 9.94% for the comparable period in 1996. Commercial segment finance income as a percentage of commercial AEA was 10.03% for the nine months ended September 30, 1997, compared to 9.97% for the comparable period during 1996, and consumer segment finance income as a percentage of consumer AEA was 9.51% for the nine months ended September 30, 1997, compared to 9.86% for the comparable period during 1996. The decline in consumer segment finance income as a percentage of consumer AEA primarily reflects the purchase of a lower yielding variable rate home equity credit line portfolio in December 1996 and the sale of certain higher yielding high loan-to-value loans during the second quarter of 1997. Interest expense totaled $693.7 million in the nine months ended September 30, 1997, up $65.5 million or 10.4% over the comparable period in 1996. As a percentage of AEA, interest expense (excluding interest expense relating to short-term interest-bearing deposits) in the nine months ended September 30, 1997 decreased to 5.04% from 5.08% in the comparable period in 1996. A comparative analysis of the weighted average principal outstanding and interest rates paid on the Company's debt for the nine month periods ended September 30, 1997 and 1996, before and after giving effect to interest rate swaps, is shown in the following table.
------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ------------------------------------- ------------------------------------- BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS ---------------- ---------------- ---------------- ---------------- Dollars in millions Commercial paper and variable-rate senior notes $ 9,726.8 5.59% $ 6,419.9 5.52% $10,025.9 5.48% $ 6,958.9 5.43% Fixed-rate senior and subordinated notes 5,212.4 6.54 8,519.3 6.51 3,709.9 6.86 6,776.9 6.69 --------- --------- --------- --------- Composite $14,939.2 5.92% $14,939.2 6.09% $13,735.8 5.86% $13,735.8 6.05% ========= ========= ========= =========
The Company's interest rate swaps principally convert floating-rate debt to fixed-rate debt and resulted in lowered variable and fixed rates during both periods. The weighted average composite rate increases, however, because a larger proportion of the Company's debt, after giving effect to interest rate swaps, is subject to a fixed rate. The Company does not enter into derivative financial instruments for trading or speculative purposes. The weighted average interest rates before the effect of swap hedging activity do not necessarily reflect the interest expense that would have been incurred had the Company chosen to manage interest rate risk without the use of such swaps. 22 24 Fees and Other Income For the nine months ended September 30, 1997, fees and other income totaled $186.0 million, an increase of $9.2 million over the comparable 1996 period. The following table sets forth the components of fees and other income:
----------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ------ ------ Dollars in millions Commissions, fees and other $122.6 $121.5 Gains on equipment and other investment sales(1) 39.0 38.5 Gains on sales and on securitizations of consumer finance receivables 24.4 16.8 ------ ------ $186.0 $176.8 ====== ======
- --------------- (1) Includes $12.0 million and $15.8 million in 1997 and 1996, respectively, from sales of venture capital investments. Gain On Sale Of Equity Interest Acquired In Loan Workout The Company 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 the Company and a co-lender. In 1991, the Company received all amounts due and retained an equity interest in such telecommunications company, which was sold in the second quarter of 1997 for a pretax gain to the Company of $58.0 million. Salaries and General Operating Expenses Salaries and general operating expenses increased $22.7 million or 7.8% to $314.1 million in the first nine months of 1997 from $291.4 million in the comparable period in 1996. Salaries and employee benefits rose $18.4 million, or 11.0%, while general operating expenses rose $4.3 million, or 3.5%. Personnel increased to 3,000 at September 30, 1997 from 2,950 at September 30, 1996. The increases in salaries and employee benefits were primarily attributable to the higher level of serviced assets and higher performance-based incentive accruals. The increase in general operating expenses resulted from a provision for vacant leased office space recorded in the second quarter of 1997. Management monitors productivity via the relationship of salaries and general operating expenses to both AEA and ASA. ASA is comprised of average earning assets plus the average of consumer finance receivables previously securitized and currently managed by the Company and consumer finance receivables serviced for third parties. Changes in the relationship of salaries and general operating expenses to AEA and ASA, which have improved over the comparable 1996 period, are set forth below:
--------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- ---------------------------- 1997 1996 AMOUNT % AEA % ASA AMOUNT % AEA % ASA ------ ----- ----- ------ ----- ----- Dollars in millions Salaries and employee benefits $185.3 1.37% 1.22% $166.9 1.36% 1.23% General operating expenses 128.8 0.95 0.85 124.5 1.02 0.92 ------ ----- ----- ------ ----- ----- Total $314.1 2.32% 2.07% $291.4 2.38% 2.15% ====== ===== ===== ====== ===== =====
The Company manages expenditures using a comprehensive budgetary process. Expenses are monitored closely by business unit management and are reviewed monthly with senior management of the Company. To ensure overall project cost control, an approval and review procedure is in place for all major capital expenditures, such as purchases of computer equipment, including a post-implementation analysis. 23 25 Provision and Reserve For Credit Losses The provision for credit losses for the first nine months of 1997 was $91.8 million, compared with $78.6 million for the same period of 1996. Comparative net credit loss experience is provided in the following table.
-------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ------------------------------ ----------------------------- TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER ------- ---------- -------- ------ ---------- -------- Dollars in millions Net credit losses $80.1 $53.4 $26.7 $71.4 $56.9 $14.5 Net credit losses as a percentage of average finance receivables, excluding consumer finance receivables held for sale 0.63% 0.52% 1.11% 0.59% 0.57% 0.71%
The increase in total net credit losses reflect higher consumer net credit losses due to portfolio seasoning. The consolidated reserve for credit losses increased to $233.3 million (1.30% of finance receivables) at September 30, 1997 from $220.8 million (1.30% of finance receivables) at December 31, 1996. The consolidated reserve for credit losses is periodically reviewed for adequacy based on the nature and characteristics of the obligors, economic conditions and trends, charge-off experience, delinquencies and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). It is management's judgment that the consolidated reserve for credit losses is adequate to provide for potential credit losses. Finance receivables are reviewed periodically to determine the probability of loss. Charge-offs are taken 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 discrete events adversely affecting specific obligors or industries may necessitate additions to the consolidated reserve for credit losses. Operating Lease Equipment Depreciation on operating lease equipment for the first nine months of 1997 was $108.3 million, up from $84.3 million for the same period in 1996, reflecting growth in the operating lease portfolio. From time to time, financial or operating difficulties may adversely affect future payments to the Company related to operating lease equipment. At September 30, 1997, operators of certain aircraft assets and operations at an oil refinery were subject to such difficulties. The approximate aggregate carrying values of these assets were $69.4 million. The Company does not believe that these difficulties will have a material effect on its consolidated financial position or results of operations. Income Taxes For the first nine months of 1997, the effective tax rate was 36.5%, compared with 37.7% for the comparable period in 1996. The decrease is the result of lower state and local income taxes. 24 26 Financing and Leasing Assets Financing and leasing assets increased $1.8 billion, or 9.5%, to $20.3 billion, as presented in the following table:
------------------------------------------------------- AT SEPTEMBER 30, AT DECEMBER 31, CHANGE 1997 1996 AMOUNT PERCENT ---------------- --------------- --------- ------- Dollars in millions COMMERCIAL Equipment Financing and Leasing Finance receivables Capital Finance(1) $ 2,520.5 $ 4,302.7 $(1,782.2) (41.4)% Equipment Financing(1) 7,182.1 5,616.8 1,565.3 27.9 --------- --------- --------- ------ 9,702.6 9,919.5 (216.9) (2.2) --------- --------- --------- ------ Operating lease equipment, net Capital Finance(1) 1,142.2 975.5 166.7 17.1 Equipment Financing(1) 533.5 426.6 106.9 25.1 --------- --------- --------- ------ 1,675.7 1,402.1 273.6 19.5 --------- --------- --------- ------ Total Equipment Financing and Leasing 11,378.3 11,321.6 56.7 0.5 --------- --------- --------- ------ Factoring Commercial Services 2,586.9 1,804.7 782.2 43.3 --------- --------- --------- ------ Commercial Finance Business Credit 1,435.7 1,235.6 200.1 16.2 Credit Finance 878.2 797.8 80.4 10.1 --------- --------- --------- ------ Total Commercial Finance 2,313.9 2,033.4 280.5 13.8 --------- --------- --------- ------ Total commercial 16,279.1 15,159.7 1,119.4 7.4 --------- --------- --------- ------ CONSUMER Consumer Finance(2) 1,856.4 2,005.5 (149.1) (7.4) Sales Financing(3) 2,142.8 1,349.8 793.0 58.7 --------- --------- --------- ------ Total consumer 3,999.2 3,355.3 643.9 19.2 --------- --------- --------- ------ CORPORATE AND OTHER 60.0 53.0 7.0 13.2 --------- --------- --------- ------ Total financing and leasing assets 20,338.3 18,568.0 1,770.3 9.5 Consumer finance receivables previously securitized and currently managed by the Company 1,918.3 1,437.4 480.9 33.5 --------- --------- --------- ------ Total managed assets $ 22,256.6 $20,005.4 $ 2,251.2 11.3 % ========= ========= ========= ======
- --------------- (1) On January 1, 1997, $1,519.2 million of financing and leasing assets were transferred from Capital Finance to Equipment Financing. (2) Consists of home equity finance receivables. (3) Consists of finance receivables secured by manufactured housing, recreation vehicles and recreational boats. Commercial financing and leasing assets increased 7.4% from December 31, 1996 as a result of a rise in factoring receivables partially offset by continued paydowns. Growth in factoring receivables was favorably impacted by seasonal sales and higher client borrowings, as well as strong new business signings. Growth also occurred in the operating lease portfolio, primarily in railcars and commercial aircraft. Commercial growth was partially offset by continued paydowns and a competitive marketplace. Consumer managed assets increased to $5.9 billion at September 30, 1997 from $4.8 billion at December 31, 1996, up 23.5%. The consumer increase was the result of 51.9% growth in Sales Financing new business originations, primarily in recreational boat and manufactured housing products. During the third quarter of 1997, $500.0 million of home equity finance receivables were securitized. Substantially all recreational boat and recreation vehicle finance receivables originated in 1997 are classified as held for sale at September 30, 1997. 25 27 Financing and Leasing Assets Composition The Company's ten largest financing and leasing asset accounts at September 30, 1997 in the aggregate represented 4.1% of the Company's total financing and leasing assets. All ten of such accounts are commercial accounts and are secured by equipment, accounts receivable or inventory. Geographic Composition. The following table presents financing and leasing assets by customer location.
----------------------------------------------------- AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996 AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- Dollars in millions United States West $ 4,823.6 23.7% $ 4,599.4 24.8% Northeast 4,676.4 22.9 4,279.4 23.0 Midwest 4,326.9 21.3 3,727.1 20.1 Southeast 2,858.5 14.1 2,814.1 15.1 Southwest 2,439.9 12.0 2,036.6 11.0 Foreign (principally commercial aircraft) 1,213.0 6.0 1,111.4 6.0 --------- ----- --------- ----- Total $20,338.3 100.0% $18,568.0 100.0% ========= ===== ========= =====
The Company's financing and leasing asset portfolio is diversified by state. At September 30, 1997, with the exception of California (12.4%), New York (8.4%), Texas (8.0%) and Illinois (5.1%), no state represented more than 5.0% of financing and leasing assets. Industry Composition. The following table presents financing and leasing assets by major industry class.
----------------------------------------------------- AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996 AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- Dollars in millions Manufacturing(1) (none greater than 4.5%) $ 4,772.4 23.5% $ 4,472.8 24.0% Retail 2,193.5 10.8 1,651.1 8.9 Commercial airline(2) 1,981.4 9.7 1,910.0 10.3 Home mortgage(3) 1,856.4 9.1 2,005.5 10.8 Construction equipment 1,699.2 8.4 1,683.1 9.1 Transportation(4) 1,221.3 6.0 1,184.5 6.4 Manufactured housing(5) 1,042.7 5.1 790.3 4.3 Recreation vehicle(6) 873.2 4.3 510.1 2.7 Other (none greater than 3.4%)(7) 4,698.2 23.1 4,360.6 23.5 --------- ----- --------- ----- Total $20,338.3 100.0% $18,568.0 100.0% ========= ===== ========= =====
- --------------- (1) Includes manufacturers of steel and metal products, textiles and apparel, printing and paper products and other industries. (2) See "-- Concentrations" below for a discussion of the commercial airline portfolio. (3) Excludes securitized finance receivables of $482.9 million at September 30, 1997. (4) Includes rail, bus, over-the-road trucking and business aircraft industries. (5) Excludes securitized finance receivables of $363.1 million and $412.2 million at September 30, 1997 and December 31, 1996, respectively. (6) Excludes securitized finance receivables of $591.1 million and $746.8 million at September 30, 1997 and December 31, 1996, respectively. (7) Excludes securitized recreational boat finance receivables of $481.2 million and $278.4 million at September 30, 1997 and December 31, 1996, respectively. 26 28 Concentrations Commercial Airline Industry. Commercial airline financing and leasing assets totaled $2.0 billion or 9.7% of total financing and leasing assets at September 30, 1997, up slightly from $1.9 billion at December 31, 1996. The portfolio is secured by commercial aircraft and related equipment. The Company has determined to grow this portfolio, but will continue to monitor the size of the portfolio relative to the Company's total financing and leasing assets. The following table presents information about the commercial airline industry portfolio. See also "-- Operating Lease Equipment."
---------------------------------------- AT SEPTEMBER 30, AT DECEMBER 31, 1997 1996 ---------------- --------------- Dollars in millions Finance receivables: Amount outstanding(1) $1,271.0 $ 1,286.0 Number of obligors 51 54 Operating lease equipment, net Net carrying value $ 710.4 $ 624.0 Number of obligors 33 32 Total $1,981.4 $ 1,910.0 Number of obligors(2) 68 72 Number of aircraft(3) 222 239
- --------------- (1) Includes accrued rents on operating leases that are classified as finance receivables in the Company's 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 which phase out the use of Stage II aircraft in the United States through the year 2000. The International Civil Aviation Organization has issued similar requirements for Europe. At September 30, 1997, the portfolio consisted of Stage III aircraft of $1,837.7 million (92.7%) and Stage II aircraft of $115.6 million (5.8%), versus Stage III aircraft of $1,733.2 million (90.7%) and Stage II aircraft of $149.1 million (7.8%) at year-end 1996. Foreign Outstandings. Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U.S. dollar denominated and totaled $1.2 billion at September 30, 1997. The largest exposures at September 30, 1997 were to obligors in France, $131.8 million (0.65% of financing and leasing assets), the United Kingdom, $109.6 million (0.54%), and Mexico, $108.3 million (0.53%). The remaining foreign exposure was geographically dispersed, with no other individual country representing more than 0.51% of financing and leasing assets. At December 31, 1996, financing and leasing assets to foreign obligors totaled $1.1 billion. The largest exposures at December 31, 1996 were to obligors in Mexico, $141.5 million (0.76%), France, $130.4 million (0.70%), and the United Kingdom, $126.9 million (0.68%). The remaining foreign exposure was geographically dispersed, with no other individual country representing more than 0.51% of financing and leasing assets. Highly Leveraged Transactions. Highly-leveraged transactions ("HLTs") totaled less than 2.0% of financing and leasing assets at both September 30, 1997 and December 31, 1996. The Company's HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flows from operations. Unfunded commitments to lend in secured HLT situations were $88.4 million at September 30, 1997 compared with $144.1 million at year-end 1996. 27 29 Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans The following table sets forth certain information concerning past due and nonaccrual finance receivables and assets received in satisfaction of loans at September 30, 1997 and December 31, 1996.
-------------------------------------- AT SEPTEMBER 30, AT DECEMBER 31, 1997 1996 ---------------- --------------- Dollars in millions Finance receivables, past due 60 days or more $287.9 $292.3 Finance receivables, past due 60 days or more, as a percentage of finance receivables 1.60% 1.72% Finance receivables on nonaccrual status $83.6 $119.6 Assets received in satisfaction of loans 37.7 47.9(1) ------------ -------- Nonperforming assets $121.3 $167.5 ============ ======== Nonperforming assets as a percentage of finance receivables 0.68% 0.99%
- --------------- (1) Consists primarily of cruise line vessels. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (collectively referred to hereafter as "SFAS 125"), 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 the portion of previously recognized excess servicing assets that did not exceed contractually specified servicing fees to servicing assets, which are included in other assets in the Company's Consolidated Balance Sheets. The remaining balances of previously recognized excess servicing assets are included in other assets in the Consolidated Balance Sheets 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 amortized cost approximates the current fair market value of such assets. The adoption of SFAS 125 did not have a significant impact on the Company's financial position, results of operations or liquidity. Additionally, in February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 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. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period EPS is required to be restated to conform with SFAS 128. YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995 Overview For the year ended December 31, 1996, net income totaled $260.1 million, an increase of 15.5% from $225.3 million for the same period in 1995, and represented the ninth consecutive increase in annual earnings and the sixth consecutive year of record earnings. The 1996 results reflect stronger revenues from increased finance income and higher fees and other income, partially offset by an increase in operating expenses. Financing and leasing assets totaled a record $18.6 billion, an increase of 8.8% over 1995. This increase is the result of growth in the operating lease portfolio as well as strong new business originations across all units, particularly in the areas of consumer and small to medium ticket equipment financing, offset by paydowns. Additionally, the Company continued its securitization activity, securitizing $774.9 million of recreation vehicle and recreational boat finance receivables during 1996, 28 30 compared with securitizations of recreation vehicle and manufactured housing finance receivables of $723.2 million in 1995. Managed assets totaled $20.0 billion, an increase of 11.3% over $18.0 billion in 1995. Net Finance Income A comparison of the components of 1996 and 1995 net finance income is set forth below.
-------------------------------------------------- YEARS ENDED DECEMBER 31, INCREASE 1996 1995 AMOUNT PERCENT --------- --------- -------- ------- Dollars in millions Finance income $ 1,646.2 $ 1,529.2 $ 117.0 7.7% Interest expense 848.3 831.5 16.8 2.0 --------- --------- -------- ---- Net finance income $ 797.9 $ 697.7 $ 100.2 14.4% ========= ========= ======== ==== AEA $16,543.1 $15,377.5 $1,165.6 7.6% Net finance income as a percentage of AEA 4.82% 4.54%
Finance income totaled $1,646.2 million in 1996, up $117.0 million or 7.7% over 1995. As a percentage of AEA, finance income was 9.90% for both periods. Commercial segment finance income as a percentage of commercial AEA was 9.93% for each of 1996 and 1995 and consumer segment finance income as a percentage of consumer AEA was 9.85% for 1996 compared to 9.79% for 1995. Interest expense totaled $848.3 million in 1996, up $16.8 million or 2.0% over 1995. As a percentage of AEA, 1996 interest expense decreased to 5.08% from 5.36% in 1995. Net finance income increased $100.2 million or 14.4% in 1996, surpassing the growth in AEA as a result of both lower borrowing costs and higher yield-related fees on account terminations. A comparative analysis of the weighted average principal outstanding and interest rates paid on the Company's debt, before and after giving effect to interest rate swaps, is shown in the following table.
---------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 ------------------------------------ ------------------------------------ BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS ---------------- ---------------- ---------------- ---------------- Dollars in millions Commercial paper and variable-rate senior notes $ 9,952.2 5.48% $ 6,774.3 5.42% $ 9,785.4 6.03% $ 7,226.0 6.02% Fixed-rate senior and subordinated notes 3,917.0 6.83 7,094.9 6.68 3,194.5 7.09 5,753.9 6.78 --------- --------- --------- --------- Composite $13,869.2 5.86% $13,869.2 6.06% $12,979.9 6.29% $12,979.9 6.36% ========= ========= ========= =========
The Company's interest-rate swaps principally convert floating-rate debt to fixed-rate debt and resulted in lowered variable and fixed rates during both periods. The increases in the composite interest rates after the effect of hedging activity reflect the greater proportion of debt effectively paying fixed interest rates. The weighted average interest rates before the effect of swap hedging activity do not necessarily reflect the interest expense that would have been incurred had the Company chosen to manage interest rate risk without the use of such swaps. 29 31 Fees and Other Income Fees and other income improved $59.4 million to $244.1 million during 1996, primarily due to higher gains from equipment sales and venture capital investment transactions and, to a lesser extent, increased servicing fees associated with the Company's managed third party portfolio and higher factoring commissions. The following table sets forth the components of fees and other income.
----------------------- YEARS ENDED DECEMBER 31, 1996 1995 ------ ------ Dollars in millions Commissions, fees and other $165.2 $147.9 Gains on equipment and other investment sales 54.6(1) 10.5 Gains on sales and securitizations of finance receivables 24.3 26.3 ------ ------ $244.1 $184.7 ====== ======
- --------------- (1) Includes a $16.2 million gain resulting from the sale of venture capital investments. Salaries and General Operating Expenses Salaries and general operating expenses increased $47.4 million or 13.7 percent to $393.1 million in 1996 from $345.7 million in 1995. Salaries and employee benefits rose $29.6 million (15.3%) while general operating expenses rose $17.8 million (11.7%). Personnel increased to 2,950 at December 31, 1996 from 2,750 at December 31, 1995. The increase in expenses from 1995 to 1996 is primarily due to strong new business originations and 12.6% growth in ASA, and the Company's continued investment in its consumer-related infrastructure. Changes in the relationship of salaries and employee benefits and general operating expenses to AEA and ASA are set forth below:
--------------------------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 -------------------------- -------------------------- AMOUNT % AEA % ASA AMOUNT % AEA % ASA ------ ----- ----- ------ ----- ----- Dollars in millions Salaries and employee benefits $223.0 1.35% 1.22% $193.4 1.26% 1.19% General operating expenses 170.1 1.03 0.93 152.3 0.99 0.94 ------ ---- ---- ------ ---- ---- Total $393.1 2.38% 2.15% $345.7 2.25% 2.13% ====== ==== ==== ====== ==== ====
Provision and Reserve for Credit Losses Net credit losses were $101.5 million in 1996 compared with $77.2 million in 1995, primarily reflecting provisions related to certain nonaccrual loans secured by oceangoing carriers and cruise line vessels, as well as seasoning of the consumer portfolio. Information concerning the provisions for credit losses is summarized in the following table.
------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 -------------------------------- ------------------------------- TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER ------ ---------- -------- ----- ---------- -------- Dollars in millions Net credit losses $101.5 $ 80.4 $ 21.1 $77.2 $ 67.1 $ 10.1 Net credit losses as a percentage of average finance receivables, excluding consumer finance receivables held for sale 0.62% 0.59% 0.75% 0.50% 0.51% 0.44%
The reserve for credit losses increased to $220.8 million (1.30% of finance receivables) at December 31, 1996, from $206.0 million (1.30% of finance receivables) at December 31, 1995, primarily reflecting growth in finance receivables. 30 32 Operating Lease Equipment Depreciation on operating lease equipment for 1996 was $121.7 million, up from $79.7 million for 1995 due to growth in the operating lease portfolio. From time to time, certain operators of leased equipment may experience financial or operational difficulties that may affect their ability to meet their contractual obligations with the Company. At December 31, 1996, commercial aircraft with an approximate carrying value of $30.9 million were subject to agreements with an operator that is experiencing such difficulties. The Company does not believe these difficulties will have a material effect on its consolidated financial position or results of operations. Income Taxes The provision for federal and state and local income taxes totaled $155.7 million in 1996, compared with $139.8 million in 1995. The effective income tax rate for 1996 declined to 37.4%, compared to 38.3% in 1995, as a result of lower state and local income taxes. Financing and Leasing Assets Financing and leasing assets rose $1.5 billion (8.8%) to $18.6 billion in 1996 as presented in the following table.
------------------------------------------------------ AT DECEMBER 31, CHANGE 1996 1995 AMOUNT PERCENT ------------ ------------ -------- ------- Dollars in millions COMMERCIAL Equipment Financing and Leasing Finance receivables Capital Finance $ 4,302.7 $ 4,548.7 $ (246.0) (5.4)% Equipment Financing 5,616.8 4,929.9 686.9 13.9 --------- --------- -------- ------ 9,919.5 9,478.6 440.9 4.7 --------- --------- -------- ------ Operating lease equipment, net Capital Finance 975.5 750.0 225.5 30.1 Equipment Financing 426.6 363.0 63.6 17.5 --------- --------- -------- ------ 1,402.1 1,113.0 289.1 26.0 --------- --------- -------- ------ Total Equipment Financing and Leasing 11,321.6 10,591.6 730.0 6.9 --------- --------- -------- ------ Factoring Commercial Services 1,804.7 1,743.3 61.4 3.5 --------- --------- -------- ------ Commercial Finance Business Credit 1,235.6 1,471.0 (235.4) (16.0) Credit Finance 797.8 758.7 39.1 5.2 --------- --------- -------- ------ Total Commercial Finance 2,033.4 2,229.7 (196.3) (8.8) --------- --------- -------- ------ Total commercial 15,159.7 14,564.6 595.1 4.1 --------- --------- -------- ------ CONSUMER Consumer Finance(1) 2,005.5 1,039.0 966.5 93.0 Sales Financing(2) 1,349.8 1,416.9 (67.1) (4.7) --------- --------- -------- ------ Total consumer 3,355.3 2,455.9 899.4 36.6 --------- --------- -------- ------ CORPORATE AND OTHER 53.0 41.6 11.4 27.4 --------- --------- -------- ------ Total financing and leasing assets 18,568.0 17,062.1 1,505.9 8.8 Consumer finance receivables previously securitized and currently managed by the Company 1,437.4 916.5 520.9 56.8 --------- --------- -------- ------ Total managed assets $ 20,005.4 $ 17,978.6 $2,026.8 $ 11.3% ========= ========= ======== ======
- --------------- (1) Consists of home equity finance receivables. (2) Consists of finance receivables secured by manufactured housing, recreation vehicles and recreational boats. 31 33 Commercial financing and leasing assets grew 4.1% due to strong growth in equipment financing, particularly in small to medium ticket originations, and an increased level of operating lease equipment. These increases were offset by high customer paydowns reducing outstanding balances in the commercial financing sector. Consumer financing and leasing assets increased $899.4 million from December 31, 1995 due to higher home equity originations and recreational boat originations and $468.7 million in home equity finance receivables portfolio purchases. Financing and Leasing Assets Composition Geographic Composition. The following table presents financing and leasing assets by customer location.
----------------------------------------------- AT DECEMBER 31, 1996 1995 --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- Dollars in millions United States West $ 4,599.4 24.8% $ 4,019.2 23.6% Northeast 4,279.4 23.0 4,117.6 24.1 Midwest 3,727.1 20.1 3,227.9 18.9 Southeast 2,814.1 15.1 2,653.0 15.5 Southwest 2,036.6 11.0 1,958.5 11.5 Foreign (principally commercial aircraft) 1,111.4 6.0 1,085.9 6.4 --------- ------ --------- ------ Total $18,568.0 100.0% $17,062.1 100.0% ========= ====== ========= ======
Industry Composition. The following table presents financing and leasing assets by major industry class.
----------------------------------------------- AT DECEMBER 31, 1996 1995 --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- Dollars in millions Manufacturing(1) (none greater than 3.9%) $ 4,472.8 24.0% $ 4,385.7 25.7% Home mortgage 2,005.5 10.8 1,039.0 6.1 Commercial airline(2) 1,910.0 10.3 1,911.6 11.2 Construction equipment 1,683.1 9.1 1,463.9 8.6 Retail 1,651.1 8.9 1,519.3 8.9 Transportation(3) 1,184.5 6.4 1,043.1 6.1 Manufactured housing(4) 790.3 4.3 561.5 3.3 Other (none greater than 4.1%)(5) 4,870.7 26.2 5,138.0 30.1 --------- ------ --------- ------ Total $18,568.0 100.0% $17,062.1 100.0% ========= ====== ========= ======
- --------------- (1) Includes manufacturers of steel and metal products, textiles and apparel, printing and paper products and other industries. (2) See "--Concentrations" below for a discussion of the commercial airline portfolio. (3) Includes rail, bus, over-the-road trucking and business aircraft. (4) Excludes securitized finance receivables of $412.2 million and $470.8 million at December 31, 1996 and 1995, respectively. (5) Excludes securitized recreation vehicle finance receivables of $746.8 million and $445.7 million at December 31, 1996 and 1995, respectively, and recreational boat finance receivables of $278.4 million at December 31, 1996. Concentrations Commercial Airline Industry. Commercial airline financing and leasing assets totaled $1.9 billion (10.3% of total financing and leasing assets) at December 31, 1996, compared with $1.9 billion (11.2%) in 1995. The portfolio is secured by commercial aircraft and related equipment. 32 34 The following table presents information about the commercial airline industry portfolio.
--------------------- AT DECEMBER 31, 1996 1995 -------- -------- Dollars in millions Finance receivables Amount outstanding(1) $1,286.0 $1,412.2 Number of obligors 54 51 Operating lease equipment, net Net carrying value $ 624.0 $ 499.4 Number of obligors 32 24 Total $1,910.0 $1,911.6 Number of obligors(2) 72 68 Number of aircraft(3) 239 256
- --------------- (1) Includes accrued rents on operating leases which are classified as finance receivables in the Company's Consolidated Balance Sheets. (2) Certain obligors are obligors under both finance receivable and operating lease transactions. (3) At year-end 1996, the portfolio consisted of Stage III aircraft of $1,733.2 million (90.7%) and Stage II aircraft of $149.1 million (7.8%), versus Stage III aircraft of $1,664.3 million (87.1%) and Stage II aircraft of $207.7 million (10.9%) at year-end 1995. Foreign Outstandings. Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U.S. dollar denominated and totaled $1.1 billion at December 31, 1996. The largest exposures at December 31, 1996 were to obligors in Mexico, $141.5 million (0.76% of financing and leasing assets), France, $130.4 million (0.70%), and the United Kingdom, $126.9 million (0.68%). The remaining foreign exposure was geographically dispersed with no other individual country representing more than 0.51% of financing and leasing assets. At December 31, 1995, financing and leasing assets to foreign obligors totaled $1.1 billion. The largest exposures at December 31, 1995 were to obligors in the United Kingdom, $145.5 million (0.85%), France, $122.0 million (0.72%), Mexico, $115.8 million (0.68%), and Australia, $97.0 million (0.57%). The remaining foreign exposure was geographically dispersed with no other individual country representing more than 0.51% of financing and leasing assets. Highly Leveraged Transactions. The Company uses the following criteria to classify a buyout financing or recapitalization which equals or exceeds $20 million as an HLT: - - The transaction at least doubles the borrower's liabilities and results in a leverage ratio (as defined) higher than 50%, or - - The transaction results in a leverage ratio higher than 75%, or - - The transaction is designated as an HLT by a syndication agent. A transaction originally reported as an HLT can be removed from this classification ("delisted") if the leveraged company has demonstrated the ability to operate successfully as a highly leveraged entity for at least two years after the original financing and meets one of the following criteria: - - The original financing has been repaid using cash flow from operations, planned asset sales or a capital infusion, or - - The debt has been serviced without undue reliance on unplanned asset sales, and certain leverage ratios (related to the original criteria under which the financing qualified as an HLT) have been maintained. HLTs which the Company originated and in which it participated totaled $321.4 million (1.7% of financing and leasing assets) at December 31, 1996, down from $412.6 million (2.4%) at December 31, 1995. The decline in HLT outstandings during 1996 was primarily due to payoff of accounts as well as the removal of two companies that met the delisting criteria, partially offset by new HLT fundings. The Company's HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flows from operations. Unfunded commitments to lend in secured HLT situations were $144.1 million at December 31, 1996, compared with $220.4 million at year-end 1995. 33 35 At December 31, 1996, the HLT portfolio consisted of 27 obligors in 3 different industry groups, with 29.5% of the outstandings located in the Northeast region of the United States and 23.8% in the Southeast. One account totaling $16.0 million and $20.1 million was classified as nonaccrual at December 31, 1996 and 1995, respectively. Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans The following table sets forth certain information concerning past due and nonaccrual finance receivables and assets received in satisfaction of loans at December 31, 1996 and 1995.
----------------- AT DECEMBER 31, 1996 1995 ------ ------ Dollars in millions Finance receivables, past due 60 days or more $292.3 $263.9 Finance receivables, past due 60 days or more, as a percentage of finance receivables 1.72% 1.67% Finance receivables on nonaccrual status $119.6 $139.5 Assets received in satisfaction of loans 47.9 42.0 ------ ------ Nonperforming assets $167.5 $181.5 ====== ====== Nonperforming assets as a percentage of finance receivables 0.99% 1.15%
Finance receivables on nonaccrual status declined to $119.6 million (0.70% of finance receivables) at December 31, 1996, from $139.5 million (0.88%) at December 31, 1995, primarily due to the transfer of oceangoing carriers and cruise line vessels to assets received in satisfaction of loans. Assets received in satisfaction of loans increased to $47.9 million at December 31, 1996 from $42.0 million at December 31, 1995. The increase was primarily due to these transfers, offset by the sale of an equity interest in a building supply retailer. The Company has remarketed a majority of the oceangoing carriers and is in the process of remarketing the remaining carriers and cruise line vessels. The following table summarizes by type assets received in satisfaction of loans.
--------------- AT DECEMBER 31, 1996 1995 ----- ----- Dollars in millions Transportation(1) $33.6 $ 8.9 Property, equipment and other 14.3 9.0 Retail merchandise, property and accounts receivable(2) -- 24.1 ------ ------ Total $47.9 $42.0 ====== ======
- --------------- (1) Transportation includes oceangoing carriers and cruise line vessels in 1996 and oceangoing carriers in 1995. (2) Retail merchandise, property and accounts receivable included an equity interest in a building supply retailer. YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994 Overview For the year ended December 31, 1995, net income totaled $225.3 million, an increase of 12.0% from the $201.1 million for 1994, and represented the eighth consecutive increase in annual earnings and the fifth consecutive year of record earnings. The results reflect increased finance income from a higher level of financing and leasing assets, improved fees and other income, and lower net credit losses, offset by an increase in borrowing costs. Financing and leasing assets, totaled a record $17.1 billion, an increase of 8.2% over 1994. Manufactured housing and recreation vehicle receivables of $723.2 million were securitized during 1995, compared to $198.7 million in 1994. Managed assets totaled $18.0 billion, an increase of 11.9% over 1994. 34 36 Net Finance Income A comparison of the components of 1995 and 1994 net finance income is set forth below.
------------------------------------------------------ YEARS ENDED DECEMBER 31, INCREASE 1995 1994 AMOUNT PERCENT --------- --------- -------- ------- Dollars in millions Finance income $ 1,529.2 $ 1,263.8 $ 265.4 21.0% Interest expense 831.5 614.0 217.5 35.4 --------- --------- -------- ----- Net finance income $ 697.7 $ 649.8 $ 47.9 7.4% ========= ========= ======== ===== AEA $15,377.5 $13,630.3 $1,747.2 12.8% Net finance income as a percent of AEA 4.54% 4.77%
Finance income totaled $1,529.2 million in 1995, up $265.4 million or 21.0% over 1994. As a percentage of AEA, 1995 finance income increased to 9.90% from 9.19% in 1994. Commercial segment finance income as a percentage of commercial AEA was 9.93% for 1995, compared to 9.18% for 1994, and consumer segment finance income as a percentage of consumer AEA was 9.79% for 1995, compared to 9.28% for 1994. The increase in both commercial and consumer finance income as a percentage of their respective AEA's was the result of increased origination volume and rising market interest rates. Interest expense totaled $831.5 million in 1995, up $217.5 million or 35.4% over 1994. As a percentage of AEA, 1995 interest expense increased to 5.36% from 4.42% in 1994. Net finance income increased $47.9 million or 7.4% in 1995, trailing the growth in AEA of 12.8% as higher 1995 market interest rates increased borrowing costs more rapidly than lending yields due to heightened pricing competition, particularly from banks. A comparative analysis of the weighted average principal outstanding and interest rates paid on the Company's debt, before and after giving effect to interest rate swaps, is shown in the following table.
----------------------------------------------------------------------------------- 1995 YEARS ENDED DECEMBER 31, 1994 --------------------------------------- --------------------------------------- BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS ----------------- ----------------- ----------------- ----------------- Dollars in millions Commercial paper and variable rate senior notes $ 9,785.4 6.03% $ 7,226.0 6.02% $ 8,847.5 4.46% $ 6,865.7 4.41% Fixed rate senior and subordinated notes 3,194.5 7.09 5,753.9 6.78 2,525.8 7.24 4,507.6 6.70 --------- --------- --------- --------- Composite $12,979.9 6.29% $12,979.9 6.36% $11,373.3 5.07% $11,373.3 5.32% ========= ========= ========= =========
The Company's interest-rate swaps principally convert floating-rate debt to fixed-rate debt and resulted in lowered variable and fixed rates during both periods. The increases in the composite interest rates after the effect of hedging activity reflect the greater proportion of debt effectively paying fixed interest rates. The weighted average interest rates before the effect of swap hedging activity do not reflect the interest expense that would have been incurred had the Company chosen to manage interest rate risk without the use of such swaps. Fees and Other Income Fees and other income improved $10.3 million to $184.7 million during 1995 due to higher gains from securitizations of manufactured housing and recreation vehicle receivables, offset by lower factoring commissions due to the weak retailing environment. 35 37 The following table sets forth the components of fees and other income.
------------------------- YEARS ENDED DECEMBER 31, 1995 1994 ------ ------ Dollars in millions Commissions, fees and other $147.9 $148.3 Gains on equipment and other investment sales 10.5 10.1 Gains on sales and securitizations of finance receivables 26.3 16.0 ------ ------ $184.7 $174.4 ====== ======
Salaries and General Operating Expenses Salaries and general operating expenses increased $7.8 million or 2.3% to $345.7 million in 1995 from $337.9 million in 1994, reflecting significant productivity achievements during a year of 12.8% AEA growth. Salaries and employee benefits rose $7.6 million (4.0%) and general operating expenses increased $0.2 million during 1995. Personnel increased to 2,750 at December 31, 1995 from 2,700 at December 31, 1994. Changes in the relationship of salaries and employee benefits and general operating expenses to AEA and ASA are set forth below:
--------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1994 -------------------------- -------------------------- AMOUNT % AEA % ASA AMOUNT % AEA % ASA ------ ----- ----- ------ ----- ----- Dollars in millions Salaries and employee benefits $193.4 1.26% 1.19% $185.8 1.36% 1.32% General operating expenses 152.3 0.99 0.94 152.1 1.12 1.08 ------ ----- ----- ------ ----- ----- Total $345.7 2.25% 2.13% $337.9 2.48% 2.40% ====== ===== ===== ====== ===== =====
Provision and Reserve for Credit Losses Net credit losses were $77.2 million in 1995, down $7.0 million (8.3%) from $84.2 million in 1994, reflecting a higher level of recoveries during 1995. Information concerning the provisions for credit losses is summarized in the following table.
------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1994 ----------------------------- ----------------------------- TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER ----- ---------- -------- ----- ---------- -------- Dollars in millions Net credit losses $77.2 $67.1 $10.1 $84.2 $ 74.8 $ 9.4 Net credit losses as a percentage of average finance receivables, excluding consumer finance receivables held for sale 0.50% 0.51% 0.44% 0.61% 0.62% 0.55%
The reserve for credit losses increased to $206.0 million (1.30% of finance receivables) at December 31, 1995, from $192.4 million (1.30% of finance receivables) at December 31, 1994, primarily reflecting growth in finance receivables. Income Taxes The provision for federal and state and local income taxes totaled $139.8 million in 1995, compared with $123.9 million in 1994. The effective income tax rate for 1995 was 38.3% compared to 38.1% in 1994. 36 38 Financing and Leasing Assets Financing and leasing assets rose $1.3 billion (8.2%) to $17.1 billion in 1995 as presented in the following table.
------------------------------------------------ AT DECEMBER 31, CHANGE 1995 1994 AMOUNT PERCENT --------- --------- -------- ------- Dollars in millions COMMERCIAL Equipment Financing and Leasing Finance receivables Capital Finance $ 4,548.7 $ 4,493.5 $ 55.2 1.2% Equipment Financing 4,929.9 4,269.7 660.2 15.5 --------- --------- -------- ----- 9,478.6 8,763.2 715.4 8.2 --------- --------- -------- ----- Operating lease equipment, net Capital Finance 750.0 648.7 101.3 15.6 Equipment Financing 363.0 219.2 143.8 65.6 --------- --------- -------- ----- 1,113.0 867.9 245.1 28.2 --------- --------- -------- ----- Total Equipment Financing and Leasing 10,591.6 9,631.1 960.5 10.0 --------- --------- -------- ----- Factoring Commercial Services 1,743.3 1,896.2 (152.9) (8.1) Commercial Finance Business Credit 1,471.0 1,442.1 28.9 2.0 Credit Finance 758.7 719.6 39.1 5.4 --------- --------- -------- ----- Total Commercial Finance 2,229.7 2,161.7 68.0 3.1 --------- --------- -------- ----- Total commercial 14,564.6 13,689.0 875.6 6.4 --------- --------- -------- ----- CONSUMER Consumer Finance(1) 1,039.0 570.8 468.2 82.0 Sales Financing(2) 1,416.9 1,471.2 (54.3) (3.7) --------- --------- -------- ----- Total consumer 2,455.9 2,042.0 413.9 20.3 --------- --------- -------- ----- CORPORATE AND OTHER 41.6 34.4 7.2 20.9 --------- --------- -------- ----- Total financing and leasing assets 17,062.1 15,765.4 1,296.7 8.2 Consumer finance receivables previously securitized and currently managed by the Company 916.5 306.7 609.8 198.8 --------- --------- -------- ----- Total managed assets $17,978.6 $16,072.1 $1,906.5 11.9% ========= ========= ======== =====
- --------------- (1) Consists of home equity finance receivables. (2) Consists of finance receivables secured by manufactured housing, recreation vehicles and recreational boats. Total commercial financing and leasing assets rose 6.4% due to growth in small and medium ticket originations, partially offset by lower factoring finance receivables as a result of weakness in the retail industry. Consumer financing and leasing assets grew 20.3% from December 31, 1994 due to higher home equity, recreational vehicle and manufactured housing originations. 37 39 Financing and Leasing Assets Composition Concentrations Commercial Airlines. Commercial airline financing and leasing assets totaled $1.9 billion (11.2% of total financing and leasing assets) at December 31, 1995, compared with $1.9 billion (12.0%) in 1994. The portfolio is secured by commercial aircraft and related equipment. The following table presents information about the commercial airline industry portfolio.
-------------------- AT DECEMBER 31, 1995 1994 -------- -------- Dollars in millions Finance receivables: Amount outstanding(1) $1,412.2 $1,417.0 Number of obligors 51 46 Operating lease equipment, net: Net carrying value $ 499.4 $ 482.3 Number of obligors 24 21 Total $1,911.6 $1,899.3 Number of obligors(2) 68 62 Number of aircraft(3) 256 272
- --------------- (1) Includes accrued rents on operating leases which are classified as finance receivables in the Company's Consolidated Balance Sheets. (2) Certain obligors are obligors under both finance receivable and operating lease transactions. (3) At year-end 1995, the portfolio consisted of Stage III aircraft of $1,664.3 million (87.1%) and Stage II aircraft of $207.7 million (10.9%), versus Stage III aircraft of $1,587.5 million (83.6%) and Stage II aircraft of $262.2 million (13.8%) at year-end 1994. The decline in the number of aircraft from December 1994 principally reflects the maturity of loans with one obligor collateralized by 17 aircraft. Foreign Outstandings. Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U.S. dollar denominated and totaled $1.1 billion at December 31, 1995. The largest exposures at December 31, 1995 were to obligors in the United Kingdom, $145.5 million (0.85% of financing and leasing assets), France, $122.0 million (0.72%), Mexico, $115.8 million (0.68%), and Australia, $97.0 million (0.57%). The remaining foreign exposure was geographically dispersed with no other individual country representing more than 0.55% of financing and leasing assets. At December 31, 1994, financing and leasing assets to foreign obligors totaled $1.1 billion. The largest exposures at December 31, 1994 were to obligors in the United Kingdom, $177.2 million (1.12%), Mexico, $140.0 million (0.89%), France, $120.2 million (0.76%), and Australia, $99.7 million (0.63%). The remaining foreign exposure was geographically dispersed, with no other individual country representing more than 0.55% of financing and leasing assets. Highly Leveraged Transactions. HLTs totaled $412.6 million (2.42% of financing and leasing assets) at December 31, 1995, down from $436.1 million (2.77%) at December 31, 1994. The decline in HLT outstandings during 1995 was primarily due to payoff of accounts as well as a company that met the delisting criteria, partially offset by new HLT fundings. The Company's HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flows from operations. Unfunded commitments to lend in secured HLT situations were $220.4 million at December 31, 1995, compared with $202.1 million at year-end 1994. At December 31, 1995, the HLT portfolio consisted of 33 obligors in three different industry groups, with 34.3% of the outstandings located in the Southeast region of the United States and 24.4% in the West. One account totaling $20.1 million was classified as nonaccrual at December 31, 1995, compared with four accounts totaling $57.7 million at year-end 1994. 38 40 Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans The following table sets forth certain information concerning past due and nonaccrual finance receivables and assets received in satisfaction of loans at December 31, 1995 and 1994.
----------------- AT DECEMBER 31, 1995 1994 ------ ------ Dollars in millions Finance receivables, past due 60 days or more $263.9 $176.9 Finance receivables, past due 60 days or more, as a percentage of finance receivables 1.67% 1.20% Finance receivables on nonaccrual status $139.5 $110.2 Assets received in satisfaction of loans 42.0 86.5 ----- ----- Nonperforming assets $181.5 $196.7 ===== ===== Nonperforming assets as a percentage of finance receivables 1.15% 1.33%
Finance receivables of $42.9 million collateralized by oceangoing carriers of a shipping company and $36.6 million of finance receivables collateralized by two cruise line vessels were placed on nonaccrual status during the third quarter of 1995. The following table summarizes by type assets received in satisfaction of loans.
--------------- AT DECEMBER 31, 1995 1994 ----- ----- Dollars in millions Retail merchandise, property and accounts receivable(1) $24.1 $32.3 Transportation(2) 8.9 4.4 Property, equipment and other 9.0 13.8 Commercial aircraft -- 36.0 ----- ----- Total $42.0 $86.5 ===== =====
- --------------- (1) Retail merchandise, property and accounts receivable includes an equity interest in a building supply retailer. (2) Transportation includes oceangoing carriers in 1995 and buses in 1994. LIQUIDITY The Company manages liquidity by monitoring the relative maturities of assets and liabilities and by borrowing funds, primarily in the U.S. money and capital markets. Such cash is used 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 term debt securities and securitizations. During the first nine months of 1997, commercial paper outstanding increased $341.7 million from $5.8 billion at December 31, 1996 to $6.2 billion. Commercial paper outstanding decreased $278.6 million to $5.8 billion at December 31, 1996 from $6.1 billion at December 31, 1995. During the first nine months of 1997, the Company issued $1.7 billion of prime-based variable-rate term debt. During the years 1996 and 1995, the Company issued $2.3 billion and $2.6 billion, respectively, of variable-rate term debt. During the nine months ended September 30, 1997, the Company issued $1.6 billion of fixed-rate debt and during the years 1996 and 1995 the Company issued $2.5 billion and $1.2 billion of fixed-rate debt, respectively. Repayments of debt totaled $2.7 billion during the nine months ended September 30, 1997. During the years 1996 and 1995, the Company repaid $3.5 billion and $3.0 billion of debt, respectively. At September 30, 1997, $7.7 billion of registered, but unissued, debt securities remained available under shelf registration statements. The Company's commercial paper, publicly issued variable-rate and fixed-rate senior debt, and senior subordinated long-term notes and debentures are rated by Moody's, Duff & Phelps and Standard & Poor's. 39 41 At September 30, 1997, commercial paper borrowings were supported by $5.0 billion of committed revolving credit-line facilities. At September 30, 1997, such credit-line facilities represented 81% of operating commercial paper outstanding (commercial paper outstanding less interest-bearing deposits), as compared to 90.2% at December 31, 1996. No borrowings have been made under credit lines supporting commercial paper since 1970. As part of the Company's continuing program of accessing the public and private asset-backed securitization markets as an additional liquidity source, home equity and recreational boat finance receivables of $760.9 million were securitized by the Company during the first nine months of 1997. The Company securitized recreation vehicle finance receivables and recreational boat finance receivables of $774.9 million in 1996 and manufactured housing and recreation vehicle finance receivables of $723.2 million in 1995. The Company had $700.0 million of registered, but unissued, securities at September 30, 1997 relating to the Company's asset-backed securitization program available under shelf registration statements. In February 1997, CIT Capital Trust I, a wholly-owned subsidiary of the Company, issued $250.0 million of 7.70% Preferred Capital Securities, the proceeds of which were invested in Junior Subordinated Debentures of the Company having identical rates and payment dates. Through March 31, 1996, the Company operated under a dividend policy requiring the payment of dividends by the Company equal to and not exceeding 50% of net operating earnings on a quarterly basis. Commencing with the 1996 second quarter dividend, the dividend policy of the Company was changed to require the payment of dividends by the Company of 30% of net operating earnings on a quarterly basis. During the first nine months of 1997, $71.8 million of regular cash dividends were paid and, during 1996 and 1995, regular cash dividends of $98.9 million and $104.1 million, respectively, were paid. On December 24, 1996, with the consent of the Company's stockholders, the Company paid a special dividend in the aggregate amount of $165.0 million to its stockholders. DKB and CBC Holding immediately contributed an aggregate amount of $165.0 million to the paid-in-capital of the Company in proportion to their respective 80% and 20% ownership interests. During the third quarter of 1997, the Company paid $23.1 million of regular cash dividends. In connection with the Offering, the Company will terminate its current dividend policy in favor of a new policy beginning with the payment of a dividend for the first quarter of 1998. See "Dividend Policy." By agreement of DKB and CBC Holding, the final cash dividend under the Company's current policy will be paid to DKB and CBC Holding for the fourth quarter of 1997 prior to the consummation of the Offering. The amount of the fourth quarter dividend will not exceed the amount of the Company's 1997 third quarter dividend. 40 42 BUSINESS OVERVIEW The Company is a leading diversified finance organization offering 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. The Company commenced operations in 1908 and has developed a broad array of "franchise" strategic business units that focus on specific industries, asset types and markets, which are balanced by client, industry and geographic diversification. The Company believes that its strong credit risk management expertise and long-standing commitment to its markets and its customers provides it with a competitive advantage. The Company believes that in 1996 it had the largest factoring operation and the fourth largest equipment financing and leasing operation in the United States. The Company also has a leading market position in recreation vehicle lending and has significant operations in commercial finance, sales finance and home equity lending. In addition, the Company has significant operations financing the aerospace, construction, transportation, machine tool manufacturing and railroad industries. At September 30, 1997, the Company had total assets of $20.9 billion and stockholders' equity of $2.2 billion. Net income totaled a record $239.1 million for the nine months ended September 30, 1997 and a record $260.1 million for the year ended December 31, 1996. Over the five years ended December 31, 1996, the Company's net income grew at a compound annual rate of 11.6%, while total financing and leasing assets and managed assets grew at compound annual rates of 9.7% and 11.4%, respectively. Over the three years ended December 31, 1996, net income grew at a compound annual rate of 12.6%, and total financing and leasing assets and managed assets grew at compound annual rates of 11.1% and 13.4%, respectively. Such growth resulted from expansion into new lines of business, the introduction of new products, increased profitability of existing businesses and acquisitions. The following table presents the Company's net income and return on average equity for each of the years in the five-year period ended December 31, 1996. [Table presenting the Company's net income (dollars in millions) and return on average equity for each of the years in the five-year period ended December 31, 1996 appears here.]
Measurement Period (Fiscal Year Covered) Net|Income Return|on|Average|Equity 1992 162.30 10.36 1993 182.30 11.02 1994 201.10 11.49 1995 225.30 12.13 1996 260.10 13.04
41 43 The commercial and consumer business segments of the Company, its strategic business units, the industries and markets served and its principal product offerings and origination structures are set forth in the following chart. [Chart illustrating the commercial and consumer business segments of the Company, its strategic business units, the industries and markets served and its principal product offerings and origination structures appears here.] 42 44 The following table sets forth certain information concerning financing and leasing assets as well as consumer finance receivables previously securitized and currently managed by the Company at December 31 of each of the five years ended December 31, 1996 and at September 30, 1997. "Financing and leasing assets" are comprised of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments.
--------------------------------------------------------------------- AT SEPTEMBER AT DECEMBER 31, 30, --------------------------------------------------------- 1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- Dollars in millions Financing and leasing assets: Commercial $16,279.1 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5 Consumer(1) 3,999.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8 Other 60.0 53.0 41.6 34.4 21.6 12.0 --------- --------- --------- --------- --------- --------- Total financing and leasing assets $20,338.3 $18,568.0 $17,062.1 $15,765.4 $13,548.0 $12,246.3 Consumer finance receivables previously securitized and currently managed by the Company 1,918.3 1,437.4 916.5 306.7 175.6 43.8 --------- --------- --------- --------- --------- --------- Total managed assets $22,256.6 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1 ========= ========= ========= ========= ========= =========
- --------------- (1) Includes consumer finance receivables held for sale of $654.3 million, $116.3 million, $112.0 million, $68.7 million, $150.4 million and $0.0 million at September 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively. For the five year period ended December 31, 1996, commercial financing and leasing assets grew at a compound annual rate of 8.2% and consumer managed assets grew at a compound annual rate of 27.5%. The compound annual growth rates over such five year period for total financing and leasing assets and total managed assets were 9.7% and 11.4%, respectively. STRATEGY The Company has delivered consistent growth in earnings and assets over the past five years. The Company believes that its financial performance is a product of its core strengths, which include its array of "franchise" businesses, strong credit risk management expertise and long-standing commitment to its markets. The following fundamental operating principles are significant to the Company's past success and the execution of its business strategy in the future: - - Maintain and build leadership positions in selected markets and industries, focusing on the United States. - - Offer a broad selection of collateral-based credit products through multiple channels of distribution. - - Preserve "best in class" credit culture, coupled with collateral management expertise. - - Maintain a relationship-based approach to customers and business partners. - - Practice disciplined expense management, on-going efficiency improvement and technology investment. - - Maintain access to multiple funding sources with strong debt ratings. - - Retain experienced management team with long tenure in the industry and with the Company. - - Utilize performance-based incentive systems. - - Encourage a corporate culture that emphasizes quality in performance and service to customers, employees and business partners and values service to the community. - - Pursue growth through selective acquisitions of businesses and assets. Using its proven strengths and capabilities, the Company pursues the following strategies to continue its earnings and assets growth: Leverage its existing market leadership positions to expand into new markets, industries and products The Company has developed an array of "franchise" strategic business units within its two business segments, each with broad geographic reach and multiple distribution channels. These strategic business units focus on specific industries, asset types 43 45 and markets. The Company believes that its industry expertise and long-standing commitment to its markets and customers are competitive advantages. The Company has expanded its equipment financing and leasing business, including its railroad equipment and business aircraft operations, and plans to seek further growth and profitability by: (i) building additional manufacturer and dealer/distributor relationships; (ii) expanding its sales force and marketing reach; (iii) adding complementary products that enhance existing business segments or products; (iv) identifying new markets that have synergy with or add to the Company's existing strengths and capabilities; and (v) improving marketplace presence and "brand name" recognition in consumer finance. Maintain "best in class" credit quality and strong balance sheet The Company has demonstrated the effectiveness of its credit risk management system and strong credit culture. From 1990 through 1996, including the 1991-1992 economic recession, net credit losses have averaged 0.72% of average finance receivables. The Company's strong performance has been the result of: (i) sophisticated systems and policies which identify target markets and risk acceptance criteria for each market; (ii) decentralized credit approval authorities capable of responding quickly to shifting customer needs and changing economic and market conditions; and (iii) oversight systems that monitor credits from origination throughout the entire lending cycle. From 1992 to September 30, 1997, nonperforming assets declined from $328.0 million (2.79% of finance receivables) to $121.3 million (0.68%). While this decline clearly is a result of the improving economy during that period, the Company believes that its credit discipline also contributed to this trend. Further, at September 30, 1997, the consolidated reserve for credit losses was more than two times the current year's net credit losses (on an annualized basis). In addition, the Company adjusts its pricing to achieve higher yields for greater risk. The Company believes that its strong credit risk management systems and strong credit culture will continue to support long-term profitable asset growth. Grow the consumer businesses The Company believes that opportunities exist to grow its consumer earnings and assets by (i) leveraging its existing capabilities and expertise, (ii) expanding its franchise into new markets and products, as it has done with home equity and recreational boat lending, and (iii) establishing direct to consumer lending capabilities across its recreation vehicle, manufactured housing and recreational boat product lines. In 1993, the Company entered the recreational boat market, leveraging its ability to build dealer and manufacturer relationships, its strong credit risk management skills and its servicing and asset management capabilities. Based upon 1996 originations, the Company has significant operations in the $8.6 billion U.S. recreational boats market. The Company in 1997 began providing wholesale financing of inventories to dealers of manufactured housing and recreational boats. Wholesale financing provides dealers with inventory floor plan financing and gives the Company greater access to retail financing opportunities through its existing dealer relationships. The Company plans to pursue further growth of its wholesale financing operations by offering this product to other dealers and manufacturers with whom it has strong relationships. In late 1992, the Company entered the home equity lending market. The Company had $1.9 billion in home equity finance receivables ($2.3 billion of managed home equity finance receivables) at September 30, 1997, establishing it as a significant market participant. These results were achieved by utilizing a multi-channel delivery system with both direct and indirect origination capabilities through a 28 office distribution network that provides national coverage for the Company's products. The Company will seek further consumer asset growth and improved profitability by expanding its sales office network through the addition of new offices (including five new offices during late 1997), improving operating efficiencies, capitalizing on economies of scale and expanding its consumer product offerings into new and existing markets. Improve operating efficiency through increased scale, continued process improvement and technology investments The Company has developed a strong culture attuned to expense control, continuous process improvement and investment in technology. During the past five years, the Company has controlled the growth of its operating expenses relative to revenue growth. The Company improved its efficiency ratio from 41.1% in 1992 to 40.1% in the first nine months of 1997 while growing its managed assets at an 11.9% annual rate and making substantial investments in its consumer lending operations. The Company seeks to become a low cost producer by building scale in businesses in which it has significant positions and believes that it already has a competitive advantage as a "low cost producer" in its factoring and equipment financing and leasing businesses. Additionally, the Company seeks to increase turnaround and efficiency with its existing manufacturer relationships through electronic back office to back office linkages. The Company intends to maintain its focus on expense control and efficiency through continuous process improvement and technology investments and by utilizing its proven expense control and efficiency expertise to expand. The Company believes the existing infrastructure of most of its strategic business units can support further growth. 44 46 Invest in businesses that leverage existing capabilities and complement the Company's core strengths Over the past few years, the Company has acquired various businesses and portfolios of finance receivables and has successfully integrated the acquired assets, operations and personnel while leveraging the Company's proven strengths and expertise. The Company intends to continue to actively pursue strategic acquisition opportunities of both businesses and portfolios of assets that it believes will enhance growth and profitability and that can be integrated into its core franchises. A summary of the Company's key acquisitions is presented in the table immediately below. Dollars in millions
FINANCING AND LEASING ACQUISITION (YEAR) ASSETS ACQUIRED DESCRIPTION - --------------------------------------------------------------- ------------------------------------------ Fidelcor Business Credit (1991) $474.8 Acquisition of business and existing commercial finance receivables (renamed "The CIT Group/ Credit Finance"). Chase Business Aircraft (1991) $128.4 Portfolio of business aircraft loans and leases. L B Credit (1993) $269.4 Portfolio of commercial loans and leases secured by various types of equipment. Barclays Commercial Corporation -- Factoring Operations (1994) $674.8 Acquisition of business and existing factoring receivables (merged into The CIT Group/Commercial Services). Home Equity Portfolio (1996) $357.8 Portfolio of home equity closed-end loans and home equity lines of credit.
During June 1997, the Company also entered into an arrangement with Chase pursuant to which the Company provides servicing for Chase's recreation vehicle and recreational boat finance receivables portfolio of $1.3 billion. The Company commenced providing portfolio services under that arrangement during August 1997. The Company also acquired the origination capabilities related to Chase's recreation vehicle and recreational boat dealer relationships. PRODUCT INITIATIVES In order to improve profitability and diversify its portfolio, the Company engages on an ongoing basis in the introduction of new products and the expansion of its existing product offerings into new markets and industries. These internal growth and expansion initiatives permit the Company to leverage efficiently its existing management, expertise and infrastructure to seek further growth and profitability. The following table presents the principal internal growth and expansion initiatives undertaken by the Company from 1992 to September 30, 1997.
PRODUCT DESCRIPTION - ----------------------------------- --------------------------------------------------------------------- Home equity 1992--started de novo; $2.3 billion of managed assets at September 30, 1997. Manufactured housing 1993--leveraged existing origination and servicing capabilities to grow annual originations; $1.4 billion of managed assets at September 30, 1997. Recreational boats 1993--began retail financing of new product; has $609.7 million of managed assets at September 30, 1997. Rail equipment 1994--separate rail group established; now generally recognized as an established industry source of leasing general service railcars. Wholesale inventory 1997--started de novo; offering inventory financing to manufactured housing and recreational boat dealers.
COMMERCIAL The Company's commercial operations are diverse and provide a wide range of financing and leasing products to small, mid-size and larger companies across a wide variety of industries, including aerospace, retailing, construction, rail, machine tools, business aircraft, apparel, textiles, electronics and technology, chemicals, manufacturing and transportation. The secured lending, leasing and factoring products of the Company's 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. 45 47 The Company believes that it had the largest factoring operation and the fourth largest equipment financing and leasing operation in the United States. The Company also has significant operations financing the aerospace, construction, transportation, machine tool manufacturing and railroad industries. The following table sets forth the financing and leasing assets of the Company's commercial segment at December 31 of each of the years in the five-year period ended December 31, 1996 and at September 30, 1997.
-------------------------------------------------------------------------------------- AT DECEMBER 31, AT SEPTEMBER 30, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------------- --------- --------- --------- --------- --------- Dollars in millions Equipment Financing and Leasing $ 11,378.3 $11,321.6 $10,591.6 $ 9,631.1 $ 9,027.4 $ 7,986.0 Factoring 2,586.9 1,804.7 1,743.3 1,896.2(1) 981.9 1,010.2 Commercial Finance 2,313.9 2,033.4 2,229.7 2,161.7 1,927.8 1,826.3 --------- --------- --------- --------- --------- --------- $ 16,279.1 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5 ========= ========= ========= ========= ========= =========
- --------------- (1) The increase in financing and leasing assets at December 31, 1994 as compared to December 31, 1993 was primarily attributable to the acquisition by the Company during 1994 of the factoring operations and receivables of Barclays Commercial Corporation. See "--Strategy." The Company's commercial operations generate transactions through direct calling efforts with borrowers, lessees, equipment end-users, manufacturers and distributors and through referral sources and other intermediaries. In addition, the Company's strategic business units also refer or cross-sell transactions to other Company units to best meet customers' overall financing needs. The Company's marketing efforts are supplemented by its Multi-National Marketing Group, which promotes the Company's 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. The Company also buys and sells participations in and syndications of finance receivables and/or lines of credit. In addition, from time to time in the normal course of business, the Company purchases finance receivables in bulk to supplement its own originations and sells selected finance receivables and equipment under operating leases for risk management and/or other balance sheet management purposes. The Company believes that the key factors in the growth and profitability of its commercial operations are: (i) the broad market coverage and industry specialization provided by its strategic business units and specialty marketing group; (ii) its strong credit discipline and culture; (iii) its long-standing commitments to its markets and its customers; and (iv) its employees, who possess extensive experience and knowledge in the industries served, credit risk management, deal structure and management of underlying collateral and equipment. EQUIPMENT FINANCING AND LEASING The Company's Equipment Financing and Leasing operations had total financing and leasing assets of $11.4 billion at September 30, 1997, representing 55.9% of the Company's total financing and leasing assets. The Company's Equipment Financing and Leasing operations are conducted through two strategic business units: (i) The CIT Group/Equipment Financing ("Equipment Financing"), which focuses on the broad distribution of its products through manufacturers, dealer/distributors, intermediaries and direct calling primarily with the construction, transportation and machine tools industries; and (ii) The CIT Group/Capital Finance ("Capital Finance"), which focuses on the direct marketing of customized transactions relating primarily to commercial aircraft and rail equipment. At September 30, 1997, the average Equipment Financing outstanding per customer account was $151,000 and the average Capital Finance outstanding per customer account was $6.3 million. Equipment Financing and Capital Finance provide substantial value to their customers by arranging financing terms that meet customers' individual needs. Such financing situations may include, for example, a customer's need for varying as opposed to fixed payment terms in order to better match its cash flow, as well as off-balance sheet financing (where the customer treats the financing as a lease for financial reporting or tax purposes) versus on-balance sheet financing (where the customer owns the equipment for financial reporting or tax purposes). Equipment Financing and Capital Finance personnel have extensive expertise in managing equipment over its full life cycle, including, in the case of Capital Finance, the expertise to repossess commercial aircraft, if necessary, to obtain required maintenance and repairs for such aircraft, and to recertify such aircraft with appropriate authorities. Equipment Financing's and Capital Finance's equipment and industry expertise enable them to evaluate effectively residual value risk and to manage equipment and residual value risks by locating alternative equipment users and/or purchasers in order to minimize such risk and/or the risk of equipment remaining idle for extended periods of time or in amounts that could materially impact 46 48 profitability. For example, beginning in 1991, the aerospace industry experienced a series of commercial airline bankruptcies, which included several customers of Capital Finance. However, Capital Finance was able to effectively manage its equipment and residual value risk, including the use of short-term operating leases, to minimize the losses in its aircraft portfolio. During the 1990s, net credit losses to Capital Finance's aircraft portfolio have totalled less than $1.0 million. For the period 1992 through 1996, Equipment Financing and Capital Finance have realized in excess of 100% of the aggregate booked residual value in connection with equipment sales. The following table sets forth certain information concerning the financing and leasing assets of Equipment Financing and Leasing at December 31 of each of the years in the five-year period ended December 31, 1996 and at September 30, 1997.
------------------------------------------------------------------ AT SEPTEMBER AT DECEMBER 31, 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 1992 --------- --------- --------- -------- -------- -------- Dollars in millions Finance receivables--loans $ 5,639.5 $ 6,357.5 $ 6,383.4 $5,852.6 $5,607.3 $5,037.3 Finance receivables--leases 4,063.1 3,562.0 3,095.2 2,910.6 2,668.2 2,485.9 Operating lease equipment, net 1,675.7 1,402.1 1,113.0 867.9 751.9 462.8 --------- --------- --------- -------- -------- -------- Total financing and leasing assets $11,378.3 $11,321.6 $10,591.6 $9,631.1 $9,027.4 $7,986.0 ========= ========= ========= ======== ======== ========
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 has also enabled Capital Finance to focus on the specialized markets and industries best served by its ability to handle larger customized financings of capital equipment, particularly aerospace and rail. Equipment Financing Equipment Financing is the largest of the Company's strategic business units with total financing and leasing assets of $7.7 billion at September 30, 1997, representing 37.9% of the Company's total financing and leasing assets. Equipment Financing offers secured equipment financing and leasing products on a fixed- and floating-rate basis, 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 seeks a leadership market position in each of its key distribution channels through its experience, reputation, financing and equipment management capabilities and long-term relationships it has developed with its customers, manufacturers, dealers, distributors and intermediaries. Equipment Financing is a leading nationwide asset-based equipment lender. At September 30, 1997, 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 (32%), followed by construction (22%) and printing (7%). The Equipment Financing portfolio at September 30, 1997 included many different types of equipment, with construction equipment comprising the largest percentage (33%), followed by transportation (11%), manufacturing (9%) and business aircraft (9%). Equipment Financing's portfolio included approximately 51,000 accounts. The average new financing was approximately $215,000 with an average financing term of 62 months. At September 30, 1997, 86% of the Equipment Financing finance receivable portfolio was based on fixed interest rates, with the remaining 14% based on variable interest rates. At September 30, 1997, Equipment Financing's ten largest financings constituted 5.3% of its portfolio. 47 49 Equipment Financing has sustained excellent growth and portfolio credit quality, as shown in the following table.
---------------------------------------------------------------------------------- AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31, NINE MONTHS ENDED -------------------------------------------------------- SEPTEMBER 30, 1997 1996 1995 1994 1993 1992 ------------------- -------- -------- -------- -------- -------- Dollars in millions Finance receivables--loans $4,479.1 $3,859.0 $3,657.0 $3,081.7 $2,690.0 $2,112.7 Finance receivables--leases 2,703.0 1,757.8 1,272.9 1,188.0 1,191.0 981.4 Operating lease equipment, net 533.5 426.6 363.0 219.2 186.2 78.5 -------- -------- -------- -------- -------- -------- Total financing and leasing assets $7,715.6(1) $6,043.4 $5,292.9 $4,488.9 $4,067.2 $3,172.6 ======== ======== ======== ======== ======== ======== 60+ days past due as a percentage of finance receivables 1.64% 1.86% 1.42% 1.33% 2.48% 4.05% Net credit losses as a percentage of average finance receivables 0.24%(2) 0.27% 0.35% 0.46% 0.48% 0.56%
- --------------- (1) During January 1997, $1,519.2 million of financing and leasing assets and related marketing and servicing operations were transferred from Capital Finance to Equipment Financing. (2) Calculated on an annualized basis. Equipment Financing entered the operating lease business in 1991 and has grown its operating lease portfolio to $533.5 million at September 30, 1997. Operating lease equipment consists primarily of business aircraft, but also includes trucks, trailers and buses, manufacturing equipment and construction equipment. The Company believes that operating leases offer the opportunity for higher yields from shorter term leases as compared to standard financing arrangements or direct financing leases, and for additional revenue generated from the remarketing, including re-leasing and sale, of operating lease equipment. Marketing and Distribution. Equipment Financing believes that a key to its success is its ability to effectively meet the financing needs of the customers in its different distribution channels. Equipment Financing is headquartered in Livingston, New Jersey, with two full service business centers in Tempe, Arizona and Atlanta, Georgia and conducts its business through a network of 27 sales offices in cities that include Boston, Chicago, Dallas, Los Angeles, San Francisco and Seattle. The Tempe business center originates and services the construction, transportation, business aircraft and certain other industries on a nationwide basis and the Atlanta business center originates and services the printing, machine tools, manufacturing and certain other industries on a nationwide basis. Equipment Financing supplements its sales offices with field sales personnel throughout the United States, which provides cost effective market coverage. Equipment Financing originates its products through direct calling on customers and through its relationships with manufacturers, dealers/distributors and intermediaries that have leading or significant sales 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. Equipment Financing has developed approximately 60 manufacturer, 1,500 dealer/ distributor and 40 intermediary relationships. From time to time, Equipment Financing also supplements its core direct origination and manufacturer and dealer/distributor origination capabilities with broker-generated business through a centralized operation. Equipment Financing also (i) syndicates transactions with other lenders to facilitate the origination of larger transactions, manage portfolio concentration risk and enhance profitability, (ii) participates in financings arranged by other finance companies, leasing companies and banks and (iii) from time to time acquires portfolios of finance receivables. Over 60% of Equipment Financing customers are multiple contract relationships, versus single contract financings. Equipment Financing customers primarily range from small- to middle-market companies in a range of industries and equipment types. The Company believes that Equipment Financing's access to multiple marketing channels allows it to use the most effective marketing channel for generating new financings in each of its target industries (for example, developing relationships with dealers and distributors in construction and with manufacturers in printing). Servicing. Equipment Financing handles all servicing through its Tempe and Atlanta business centers. Each business center is responsible for nationwide customer service for the industries within its purview. Equipment Financing believes it has developed highly efficient processes and systems that enable it to handle increasing transaction levels very cost effectively. From 1992 through 1996, Equipment Financing improved its operating expense ratio (operating expenses divided by average earning assets) by 30%. During that time period, the financing and leasing assets of Equipment Financing grew from $3.2 billion to $6.0 billion. 48 50 Capital Finance Capital Finance had financing and leasing assets of $3.7 billion at September 30, 1997, which represented 18.0% of the Company's total financing and leasing assets. Capital Finance specializes in customized secured financing, including leases, loans, operating leases, single investor leases, debt and equity portions of leveraged leases and sale and leaseback arrangements relating primarily to end-users of commercial aircraft and railcars. Typical Capital Finance customers are middle-market to larger-sized companies. At September 30, 1997, approximately 87% of the Capital Finance finance receivables portfolio was based on fixed interest rates, with the remaining 13% based on variable interest rates. Capital Finance's experience in specialized equipment lending began in the late 1960's. 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 had 222 commercial aircraft in its portfolio at September 30, 1997, including narrow body, wide body, cargo and commuter aircraft predominantly manufactured by The Boeing Company and McDonnell-Douglas Corp., and, to a lesser extent, Airbus Industrie, British Aerospace and Embraer. Capital Finance has developed strong relationships with most major airlines and all major aircraft and aircraft engine manufacturers, the latter of which provides Capital Finance with access to technical information, which supports customer service and provides opportunities to finance new business. 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. 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 included over 8,100 rail cars at September 30, 1997 and primarily is comprised of covered hopper cars used to ship grain and agricultural products and plastic pellets, 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. The following table sets forth certain information concerning Capital Finance at December 31 of or for each of the years in the five year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
------------------------------------------------------------------------------------ AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 ----------------- -------- -------- -------- -------- -------- Dollars in millions Finance receivables--loans $1,160.4 $2,498.5 $2,726.4 $2,770.9 $2,917.3 $2,924.6 Finance receivables--leases 1,360.1 1,804.2 1,822.3 1,722.6 1,477.2 1,504.5 Operating lease equipment, net 1,142.2 975.5 750.0 648.7 565.7 384.3 -------- -------- -------- -------- -------- -------- Total financing and leasing assets $3,662.7(1) $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4 ======== ======== ======== ======== ======== ======== 60+ days past due as a percentage of finance receivables 0.42% 1.08% 1.84% -- 0.42% 2.25% Net credit losses as a percentage of average finance receivables 1.51%(2) 0.91% 0.15% 0.26% 0.36% 0.74%
- --------------- (1) During January 1997, $1,519.2 million of financing and leasing assets and related marketing and servicing operations were transferred from Capital Finance to Equipment Financing. (2) Calculated on an annualized basis. The increase in net credit losses as a percentage of average finance receivables was due to chargeoffs for nonaccrual loans secured by oceangoing shipping and cruise line vessels in 1996 and for power generation project energy loans in the first nine months of 1997. The Company ceased its marketing to the oceangoing maritime and power generation project sectors in the third quarter of 1997. 49 51 The following table sets forth the financing and leasing assets of Capital Finance by industry type at December 31 of each of the years in the five-year period ended December 31, 1996 and at September 30, 1997.
----------------------------------------------------------------------------------------- AT AT DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 -------------- -------- -------- -------- -------- -------- Dollars in millions Aerospace $1,975.3 $1,901.2 $1,900.3 $1,880.0 $1,894.9 $1,986.3 Rail 765.6 716.1 578.7 495.9 396.0 346.4 Other 921.8 2,660.9 2,819.7 2,766.3 2,669.3 2,480.2 ------ ------ ------ ------ ------ ------ Total $3,662.7 $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4 ====== ====== ====== ====== ====== ======
- --------------- During January 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 other financing and leasing assets at September 30, 1997 consisted primarily of maritime, energy and intermodal assets. Capital Finance ceased marketing to the maritime and energy industries during the third quarter of 1997 and is permitting its portfolio of related financing and leasing assets to liquidate. At September 30, 1997, Capital Finance's maritime and energy portfolios were $284.8 million and $328.5 million, respectively. In September, 1997, Equipment Financing commenced marketing to certain sectors of the maritime and energy industries, consisting principally of U.S. inland waterway and energy-related equipment financing. From 1992 through September 30, 1997, commercial airline financing and leasing assets declined from 16.2% to 9.7% of the Company's total financing and leasing assets. From 1992 to 1996, the Company limited the growth of the Capital Finance aerospace portfolio due to weakness in the commercial airline industry, industry overcapacity and declining equipment values. The Company has determined that it is appropriate to grow the aerospace portfolio, but will continue to monitor this growth relative to the Company's total financing and leasing assets. Capital Finance believes that there are additional financing opportunities among its existing aerospace and rail clients, as well as among potential new clients. The commercial airline industry currently is in one of the more profitable periods in its history. The Company believes that growth and profitability prospects for the railcar industry are favorable based on its expectation that railroads will maintain their market share of coal and grain shipments and will have opportunities to compete more effectively with the trucking industry. Marketing and Distribution. New business is generated by Capital Finance through (i) direct calling efforts with equipment end-users and borrowers, including major airlines, railroads and shippers, (ii) relationships with aerospace, railcar and other manufacturers and (iii) intermediaries and other referral sources. Capital Finance maintains relationships with the leading commercial airline manufacturers in the world and several leading railcar manufacturers in the United States. Capital Finance is headquartered in New York City, with a full service office in New York City and additional sales offices in two other cities. Important elements of the Capital Finance operation are its product experience, industry expertise, equipment knowledge, customized deal structuring and equipment remarketing. Capital Finance employees are organized and focused both by industry and by product (i.e., operating lease versus longer-term financing) to bring focus and expertise to its customers and to meet their specific financing needs. Many Capital Finance employees have extensive experience in various capacities in the industries served by Capital Finance. FACTORING The CIT Group/Commercial Services ("Commercial Services") factoring operation was, at December 31, 1996, the largest factoring operation in the United States based on annual factoring volume. This business unit had total financing and leasing assets of $2.6 billion at September 30, 1997, which represented 12.7% of the Company's total financing and leasing assets. Commercial Services offers a full range of domestic and international customized credit protection and lending services that include factoring, working capital and term loans, receivable management outsourcing, bulk purchases of accounts receivable, import and export financing and letter of credit programs. Commercial Services had a 21% U.S. market share, based on volume, of the $64.0 billion factoring market in 1996. The Company's three largest competitors collectively had a 41% U.S. market share. Industry-wide factoring volume has grown from $53.0 billion in 1992 to $64.0 billion in 1996, a compound annual growth rate of approximately 4.5%. Commercial Services market share during the same period grew from 14% to 21% as a result of its business development and origination efforts and the acquisition of the factoring operations of Barclays Commercial Corporation during February 1994. 50 52 Commercial Services' client base consists of textile and apparel related companies, furniture manufacturers, home furnishings organizations, importers, wholesalers and distributors. For the year ended December 31, 1996, approximately 70% of Commercial Services' clients (by factored volume) were in the textile and apparel industries and 14% were manufacturers of furniture and home furnishings. Commercial Services clients primarily are small- to medium-sized companies. Commercial Services currently has over 850 clients who generate annual sales ranging from $1.0 million to over $450.0 million. Commercial Services collects receivables from more than 175,000 retail and wholesale customers of its clients. Generally, the clients notify their customers to make all payments on the receivables directly to Commercial Services. Clients use Commercial Services' factoring product 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. The following table sets forth certain information for Commercial Services at December 31 of or for each of the years in the five-year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
--------------------------------------------------------------------------------------- AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31, NINE MONTHS ENDED --------------------------------------------------------------- SEPTEMBER 30, 1997 1996 1995 1994 1993 1992 ------------------- --------- --------- --------- -------- -------- Total financing and leasing assets $ 2,586.9 $ 1,804.7 $ 1,743.3 $ 1,896.2(1) $ 981.9 $1,010.2 Factoring volume(2) $11,280.4 $13,162.5 $12,653.3 $12,903.0(1) $7,667.4 $7,382.1 60+ days past due as a percentage of finance receivables 1.65% 2.65% 1.89% 1.42% 4.84%(3) 6.00%(3) Net credit losses as a percentage of average finance receivables 0.74%(4) 0.89% 0.72% 0.85% 2.29%(3) 2.14%(3)
- --------------- (1) The increase in both financing and leasing assets and factoring volume was primarily attributable to the acquisition by the Company during 1994 of the factoring operations and then existing factoring receivables of Barclays Commercial Corporation. See "--Strategy." (2) Includes receivables management servicing volume. (3) 60+ days past due as a percentage of finance receivables and net credit losses as a percentage of average finance receivables were higher during 1992 and 1993 due to a loan to a manufacturer on non-accrual status in 1992 and 1993 which was settled in 1994. (4) Calculated on an annualized basis. Commercial Services generally provides financing to its clients through the purchase of accounts receivable owed to clients by their customers, usually on a non-recourse basis, 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, generally ranging from 0.3% to 2% of the factored sales volume. On the date that 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 receivables (as defined for that transaction), charging interest on such advances (in addition to any factoring fees) and satisfying such advances from receivables collections. Approximately 50% of Commercial Services' clients obtain advances against their purchased receivables, in addition to the credit protection, collection and management information services offered by Commercial Services in connection with the purchase of their accounts receivable. Commercial Services guarantees the collection of each client's pre-approved receivables or receivables from each client's customers with pre-approved credit lines. Payment of receivables which are credit-approved by Commercial Services is made to the client after collection from the client's customer or, if the receivable is not paid based solely on the customer's financial inability to pay, payment is made to the client within a specific time after the due date of the receivable. All client credit balances are reduced by amounts outstanding to Commercial Services by factoring fees charged or any outstanding advances to the client. Interest charged on such advances is predominantly based on a spread over the designated prime rate. In larger transactions, a spread over LIBOR is sometimes used. Marketing and Distribution. Commercial Services is headquartered in New York City, with full service offices in Charlotte, Dallas, Los Angeles and New York and sales offices in Boston, Hong Kong and Miami. Commercial Services generates business regionally from a variety of sources, including direct calling and referrals from existing clients and other referral sources. During 1996, the Company added approximately 200 new client relationships through regional marketing efforts. 51 53 Servicing. Commercial Services has developed processes and systems designed to efficiently process the very high transaction volumes related to factoring invoices and believes that such low cost volume processing capability provides it with a competitive advantage in the factoring business. The Company has made efficiency improvements which utilize technology to electronically link clients and transfer transaction data, perform basic credit surveillance routines and to replace higher cost manual labor. Commercial Services clients can electronically submit transactions and inquire on account status on virtually all client orders. More than half of Commercial Services' invoices are submitted electronically (as opposed to paper invoices or other physical means). Operating expenses as a percent of factored volume decreased by over 27% from 1992 to 1996. Bookkeeping and collection functions are located in a service center in Danville, Virginia. COMMERCIAL FINANCE At September 30, 1997, the financing and leasing assets of Commercial Finance totaled $2.3 billion, representing 11.4% of the Company's total financing and leasing assets. The Company's Commercial Finance operations are conducted through two strategic business units: (i) The CIT Group/Business Credit ("Business Credit"), which provides secured financing primarily to middle-market to larger-sized borrowers and has an average credit facility size at origination of $22.4 million; and (ii) The CIT Group/Credit Finance ("Credit Finance"), which provides secured financing primarily to smaller-sized to middle-market borrowers and has an average credit facility size at origination of $6.9 million. 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. The following table sets forth financing and leasing assets of Commercial Finance at December 31 of each of the years in the five-year period ended December 31, 1996 and at September 30, 1997.
------------------------------------------------------------------------------ AT DECEMBER 31, AT SEPTEMBER 30, ------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 ------------- -------- -------- -------- -------- -------- Dollars in millions Business Credit $ 1,435.7 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3 Credit Finance 878.2 797.8 758.7 719.6 645.7 545.0 -------- -------- -------- -------- -------- -------- Total financing and leasing assets $ 2,313.9 $2,033.4 $2,229.7 $2,161.7 $1,927.8 $1,826.3 ======== ======== ======== ======== ======== ========
Business Credit Financing and leasing assets of Business Credit totaled $1.4 billion at September 30, 1997 and represented 7.1% of the Company's 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. Such loans are used by clients 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. Customers usually range in size of annual sales from $20.0 million to $2.0 billion, and conduct their business in a wide range of industries. The average customer loan balance outstanding was $6.3 million at September 30, 1997. The following table sets forth certain information concerning Business Credit at December 31 of or for each of the five years in the five-year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
------------------------------------------------------------------------------------- AT OR FOR THE NINE MONTHS AT OR FOR THE YEARS ENDED DECEMBER 31, ENDED -------------------------------------------------------------- SEPTEMBER 30, 1997 1996 1995 1994 1993 1992 ------------------ -------- -------- -------- -------- -------- Dollars in millions Total financing and leasing assets $1,435.7 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3 60+ days past due as a percentage of finance receivables %0.62 1.77% 2.81% 5.53% 2.88% 2.53% Net credit losses as a percentage of average finance receivables %0.19(1) 0.69% 1.82% 1.95% 1.70% 1.00%
- --------------- (1) Calculated on an annualized basis. From 1992 through 1996, Business Credit's finance receivables have remained relatively unchanged in amount, although business originations of new credit lines have increased each year. In response to higher delinquencies and charge offs in 52 54 1994 and 1995, management initiated a strategy in early 1996 to diversify portfolio credit risk by decreasing individual borrower "hold" positions (retained or owned portion), which restricted portfolio growth. The impact of management's decision to reduce its target hold amount is reflected in the change in Business Credit's ten largest managed credit facilities. At September 30, 1997, the share attributable to Business Credit's ten largest managed credit facilities represented 31% of those total approved lines, down from 49% at September 30, 1993. Further, the largest ten credits based on actual borrowings represented 12% of finance receivables at September 30, 1997, down from 18% at September 30, 1993. Business Credit has experienced a higher level of paydowns attributable to greater availability of alternative capital and greater client liquidity due to a strong economy, which also has restricted portfolio growth. With respect to new originations, current market conditions have led to substantially enhanced competition in both pricing, terms and deal structure (secured versus unsecured, advance rates, qualifying assets, etc.) and has improved the creditworthiness of many borrowers to the level that permits them to obtain lower cost unsecured financing from alternative sources. 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. A credit line is arranged with each borrower establishing the maximum amount the borrower may finance, subject to the amount of underlying eligible collateral and corresponding advance rates. At September 30, 1997, total credit facilities to individual borrowers ranged up to $175.0 million. For the nine months ended September 30, 1997, such credit facilities averaged $22.4 million at origination. Amounts in excess of Business Credit's target credit line hold are primarily syndicated or participated out to other lenders. The excess of approved credit lines outstanding over finance receivables outstanding represents potential additional borrowings or finance receivables that borrowers may qualify for, subject to the availability of required collateral and corresponding advance rates. Business Credit typically advances funds (lends) up to 85% of eligible accounts receivable and up to 60% of eligible inventories. In conjunction with its lending operations, Business Credit also generates significant fees, including facility line availability, collateral management, letter of credit and syndication fees. Marketing and Distribution. Business Credit is headquartered in New York City, with sales and customer service offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, New York and San Francisco. Business is originated through direct calling efforts and intermediary and referral sources. Approximately 70% of new business was developed through referral sources and intermediaries during the nine months ended September 30, 1997. 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. As recently as 1995, approximately 90% of new business was generated through intermediaries. Business Credit has the capacity to respond quickly in the marketplace to underwriting larger-sized transactions (i.e.,greater than its target hold size) because of its restructuring and financing expertise and its syndication capabilities, which allow it to sell down a portion of the credit facility and reduce its credit concentration risk. Servicing. Servicing of customer accounts is centrally performed in Business Credit's New York office. An important competitive advantage in servicing revolving credit facilities is the ability to handle the high transaction volumes associated with advancing and collecting funds. Business Credit has developed advanced servicing or "back-office" systems, providing it with a low-cost capability to service its customers. Over half of Business Credit borrowers communicate directly with Business Credit systems to process transactions via its proprietary "bulletin board" interface. This allows customers to report required transaction data electronically, to request advances of funds and to obtain account information such as balances and availability. Further, Business Credit borrowers typically direct the funds collected on their own accounts receivable into lock-boxes and "blocked" accounts controlled by Business Credit. Cleared funds are transferred directly to Business Credit and are used to reduce the borrower's loan. Credit Finance Financing and leasing assets of Credit Finance totaled $878.2 million at September 30, 1997 and represented 4.3% of the Company's 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 was acquired by the Company in February 1991 and has been engaged in the commercial financing of smaller-sized and middle-market businesses for over 48 years. 53 55 Credit Finance customers generally have annual revenues ranging from $10.0 million to $200.0 million. Credit Finance lends to customers in many industries, including the metal fabrication, distribution, food and food services, lumber and wood products and manufacturing industries. The average customer loan balance outstanding was $4.2 million at September 30, 1997. The following table sets forth certain information concerning Credit Finance at December 31 of or for each of the years in the five-year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
---------------------------------------------------------------------------- AT OR FOR AT OR FOR THE YEARS ENDED DECEMBER 31, THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 1997 1996 1995 1994 1993 1992 ------------------- ------ ------ ------ ------ ------ Dollars in millions Total financing and leasing assets $ 878.2 $797.8 $758.7 $719.6 $645.7 $545.0 60+ days past due as a percentage of finance receivables -- -- 0.07% 0.46% 0.12% -- Net credit losses (recoveries) as a percentage of average finance receivables )(0.27%(1) 0.13% 0.36% 0.46% 0.32% --
- --------------- (1) Represents net credit recoveries, calculated on an annualized basis. Through its variable interest rate senior revolving and term loan products, Credit Finance meets its customers' financing needs for working capital in growth, acquisition and other financing situations otherwise not met through traditional bank or other unsecured financing alternatives. Revolving and term loans are made on a variable interest rate basis based on a prime rate of interest, with total credit facilities to individual borrowers ranging in size from $5.0 million to up to $15.0 million. Credit facilities are established through contractual arrangements, are typically two to three years in length and typically include prepayment penalties. Credit Finance also has developed a specialty division designed to meet the needs of smaller borrowers requiring credit facilities ranging from $750,000 to $5.0 million. Further, Credit Finance has the capacity to respond quickly in the marketplace to larger-sized transactions (i.e., greater than its target hold size) because of its syndication capabilities, which allow it to sell down a portion of a credit facility and reduce its credit concentration risk. Marketing and Distribution. Credit Finance is headquartered in New York City, with sales and customer service offices in Chicago, Los Angeles and New York and loan production offices in Atlanta, Boston, Charlotte, Cleveland, Dallas, Reston, San Francisco, St. Louis and Tampa. Business is originated through the sales and regional offices. Business also is developed through 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. Servicing. Servicing of customer accounts is performed at Credit Finance's regional service centers and national service center and includes the processing of borrower's accounts receivable collections. Credit Finance borrowers typically direct the funds collected on their own accounts receivable into lock boxes controlled by Credit Finance and the funds are transferred directly to Credit Finance to reduce the borrower's loan. As a result, Credit Finance maintains control over such cash collections. CONSUMER At September 30, 1997, the Company's consumer segment financing and leasing assets totaled $4.0 billion, representing 19.7% of the Company's total financing and leasing assets. The consumer segments' managed assets were $5.9 billion at September 30, 1997, representing 26.6% of total managed assets. Between January 1, 1992 and December 31, 1996, the consumer segment's managed assets grew at a compound annual rate of 27.5%. The Company's consumer business is focused primarily on home equity lending and 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 products sold through dealers is performed by The CIT Group/Sales Financing ("Sales Financing") business unit. During 1997, Sales Financing began to provide wholesale inventory financing to manufactured housing and recreational boat dealers utilizing its dealer and manufacturer relationships. 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. As an additional source of liquidity, the Company has securitized home equity, manufactured housing, recreational boat and recreation vehicle finance receivables and expects to continue to securitize the foregoing types of finance receivables in the future. See "--Securitization Program" for information concerning the Company's securitization program. 54 56 The following table sets forth certain information regarding the Company's consumer business segment at December 31 of each of the years in the five-year period ended December 31, 1996 and at September 30, 1997.
------------------------------------------------------------------------- AT SEPTEMBER AT DECEMBER 31, 30, ------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- Dollars in millions Home equity $1,856.4 $2,005.5(2) $1,039.0 $ 570.8 $ 131.3 $ -- Sales financing 2,044.4 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8 Wholesale inventory financing 98.4 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total financing and leasing assets 3,999.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8 Consumer finance receivables previously securitized and currently managed by the Company 1,918.3(1) 1,437.4 916.5 306.7 175.6 43.8 -------- -------- -------- -------- -------- -------- Total managed assets 5,917.5 4,792.7 3,372.4 2,348.7 1,764.9 1,455.6 -------- -------- -------- -------- -------- -------- Consumer finance receivables serviced for third parties 1,611.9(3) 549.2 338.2 191.5 240.5 296.5 -------- -------- -------- -------- -------- -------- Total serviced assets $7,529.4 $5,341.9 $3,710.6 $2,540.2 $2,005.4 $1,752.1 ======== ======== ======== ======== ======== ========
- --------------- (1) Includes the initial securitization of home equity loans totaling $500.0 million in July 1997. (2) In 1996, the Company purchased a portfolio of $357.8 million in home equity closed-end loans and home equity lines of credit. (3) In August 1997, the Company commenced providing servicing for Chase's recreation vehicle and recreational boat finance receivables portfolio of $1.3 billion. Consumer Finance Financing and leasing assets of Consumer Finance, which aggregated $1.9 billion at September 30, 1997, represented 9.1% of the Company's total financing and leasing assets. The managed assets of Consumer Finance were $2.3 billion at September 30, 1997, or 10.5% of the 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. The lending activities of Consumer Finance consist primarily of originating, purchasing and selling loans secured by first or second liens on detached, single family residential properties. Such loans are primarily made 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. 55 57 The following table sets forth certain information concerning Consumer Finance at December 31 of or for each of the years in the five year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
------------------------------------------------------------------------- AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ------------- -------- -------- ------- ------ ------ Dollars in millions Number of accounts 46,900 52,617 27,122 13,200 3,496 -- Original term (months) 237 225 204 190 146 -- Total financing and leasing assets $ 1,856.4 $2,005.5 $1,039.0 $ 570.8 $131.3 $ -- Finance receivables previously securitized and currently managed by the Company 482.9 -- -- -- -- -- -------- -------- -------- ------ ------ ------ Total managed assets $ 2,339.3 $2,005.5 $1,039.0 $ 570.8 $131.3 $ -- ======== ======== ======== ====== ====== ====== Percentage of owned finance receivables that were 60+ days past due(1)(2) 3.41% 2.10% 1.61% 0.20% 0.02% -- Percentage of managed assets that were 60+ days past due(3) 3.00% 2.10% 1.61% 0.20% 0.02% -- Owned finance receivable net credit losses as a percent of average owned finance receivables(2) 0.91% 0.60% 0.18% 0.02% 0.11% -- Managed asset net credit losses as a percent of average managed assets(3) 0.79%(4) 0.60% 0.18% 0.02% 0.11% --
- --------------- (1) Amounts include balances for which the underlying collateral currently is in the foreclosure process. (2) Owned finance receivables exclude consumer finance receivables held for sale. (3) Managed assets include consumer finance receivables held for sale. (4) Calculated on an annualized basis. Initially, Consumer Finance originated or purchased the majority of its home equity loans with original terms of up to 180 months. Commencing in 1994, Consumer Finance expanded its product offerings to include more loans with terms of up to 360 months, as Consumer Finance believes that the longer term and correspondingly lower monthly payment are attractive to customers who might otherwise refinance an existing loan or obtain a new loan from a bank or other traditional long-term lender. The increase in delinquencies and net credit losses, as highlighted in the above table, is the result of both the seasoning of a growing portfolio and unfavorable loss experience on certain high loan to value loans originated prior to the establishment in the fourth quarter of 1995 of current high loan to value underwriting guidelines. A majority of these high loan to value loans originated prior to 1995 were sold by Consumer Finance during the second quarter of 1997. At September 30, 1997, approximately 82% of Consumer Finance's receivables were fixed-rate and approximately 73% of Consumer Finance's receivables were secured by first liens. The Company believes that its network of Consumer Finance offices, located in most major U.S. markets, enables it to provide a competitive, extensive product offering complemented by high levels of service delivery. Through experienced lending professionals and advanced automation afforded by technology, Consumer Finance provides rapid turnaround time from application to loan funding, a characteristic considered to be critical by its broker and correspondent relationships. Marketing and Distribution. Consumer Finance originates loans on both a direct and indirect basis through the channels described below. New business originations for the first nine months of 1997 were $848.9 million. New business originations for the years ended December 1996, 1995, 1994 and 1993 were $943.9 million, $617.1 million, $481.2 million and $153.9 million, respectively. Broker Business. Consumer Finance originates real estate loans based upon applications received from independent mortgage brokers. Consumer Finance directly underwrites and funds these broker loans. At September 30, 1997, Consumer Finance had relationships with over 1,300 brokers. A nationwide network of sales executives located in 25 area offices that are strategically located in major market areas throughout the United States are responsible for the development and maintenance of broker relationships as well as coordination between the broker and Consumer Finance. Mortgage brokers participating in this program must be approved by the Company by satisfying established 56 58 requirements pertaining to experience, financial stability and licensing. After a broker is approved, Consumer Finance conducts regular reviews of the relationship and the broker's performance by examining the performance of loans originated by the broker, including reviews of seasoned and unseasoned delinquencies, and other factors, including maintenance of required regulatory licenses and third party credit reports. Correspondent Lending. Consumer Finance also purchases real estate loans through its correspondent lending program on an individual basis based upon applications that it has previously approved, or Consumer Finance may approve the purchase of groups of such loans. At September 30, 1997, Consumer Finance had relationships with over 250 correspondents. Consumer Finance establishes certain requirements that each correspondent must meet pertaining to the correspondent's experience, financial stability and licensing, and has agreements with all correspondents governing the nature of such relationships. Substantially all loans acquired from correspondents conform to the underwriting criteria used by Consumer Finance in its direct marketing originations. Correspondent relationships are managed through three regional offices that are strategically located in major market areas throughout the United States. Direct Marketing. Direct marketing to consumers in 44 states is performed centrally through the Company's National Home Equity Sales Center ("NHEC") located in Chicago. Utilizing a staff of marketing professionals, Consumer Finance markets real estate loans directly to the consumer through print ads, direct mail campaigns and other media. Prospective applicants either submit an application included in the mailing or telephone their information toll free to a Consumer Finance representative. Once an application is completed, a preliminary approval may be given within twenty-four hours. Bulk Purchases. Consumer Finance may, from time to time, purchase portfolios of home equity loans from other financial institutions which originated the loans using their own underwriting criteria. Depending upon the size of the portfolio, Consumer Finance performs a due diligence review on either all the loans in the portfolio or a statistical sample of loans. Due diligence generally includes legal and credit file reviews, as well as confirmation of property values. See "--Sales Financing" for information concerning servicing by Consumer Finance. Sales Financing The financing and leasing assets of Sales Financing, which aggregated $2.1 billion at September 30, 1997, represented 10.5% of the Company's total financing and leasing assets. The managed assets of Sales Financing were $3.6 billion at September 30, 1997, or 16.1% of the total managed assets. The lending activities of Sales Financing consist primarily of providing nationwide retail financing for the purchase of new and used recreation vehicles, manufactured housing and recreational boats. Sales Financing has been a lender to the recreation vehicles and manufactured housing industries for over 30 years and is a leading lender for recreation vehicles and recreational boats based on 1996 origination volume. Sales Financing also provides wholesale manufactured housing and recreational boats inventory financing. Sales Financing offers (i) fixed-rate, fully amortizing retail sales finance loans and (ii) short-term, variable-rate inventory finance loans and lines of credit. 57 59 The following table sets forth certain information with respect to owned finance receivables and finance receivables previously securitized and currently managed by the Company at December 31 of or for each of the years in the five-year period ended December 31, 1996 and at or for the nine months ended September 30, 1997.
--------------------------------------------------------------------------------- AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31, NINE MONTHS ENDED -------------------------------------------------------- SEPTEMBER 30, 1997 1996 1995 1994 1993 1992 ------------------ -------- -------- -------- -------- -------- Dollars in millions Retail recreation vehicle Financing and leasing assets $ 873.2 $ 510.1 $ 698.5 $ 898.0 $1,022.4 $ 930.3 Finance receivables previously securitized and currently managed by the Company 591.1 746.8 445.7 118.3 -- -- -------- -------- -------- -------- -------- -------- $1,464.3 $1,256.9 $1,144.2 $1.016.3 $1,022.4 $ 930.3 -------- -------- -------- -------- -------- -------- Retail manufactured housing Financing and leasing assets $1,042.7 $ 790.3 $ 561.5 $ 501.6 $ 396.7 471.8 Finance receivables previously securitized and currently managed by the Company 363.1 412.2 470.8 188.4 175.6 43.8 -------- -------- -------- -------- -------- -------- $1,405.8 $1,202.5 $1,032.3 $ 690.0 $ 572.3 $ 515.6 -------- -------- -------- -------- -------- -------- Retail recreational boat Financing and leasing assets $ 128.5 $ 49.4 $ 156.9 $ 71.6 $ 38.9 $ 9.7 Finance receivables previously securitized and currently managed by the Company 481.2 278.4 -- -- -- -- -------- -------- -------- -------- -------- -------- $ 609.7 $ 327.8 $ 156.9 $ 71.6 $ 38.9 $ 9.7 -------- -------- -------- -------- -------- -------- Wholesale inventory financing Financing and leasing assets $ 98.4(1) -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total financing and leasing assets 2,142.8 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8 Total finance receivables previously securitized and currently managed by the Company 1,435.4 1,437.4 916.5 306.7 175.6 43.8 -------- -------- -------- -------- -------- -------- Total managed assets $3,578.2 $2,787.2 $2,333.4 $1,777.9 $1,633.6 $1,455.6 ======== ======== ======== ======== ======== ======== Percent of owned finance receivables that were 60+ days past due(2) 3.13% 2.47% 1.42% 0.64% 1.25% 1.26% -------- -------- -------- -------- -------- -------- Percent of managed assets that were 60+ days past due(3) 2.18% 1.88% 1.21% 0.69% 1.07% 1.27% -------- -------- -------- -------- -------- -------- Owned finance receivable net credit losses as a percent of average owned finance receivables(2) 1.39%(4) 0.90% 0.58% 0.68% 0.80% 0.91% -------- -------- -------- -------- -------- -------- Managed asset net credit losses as a percent of average managed assets(3) 1.00%(4) 0.76% 0.55% 0.65% 0.77% 0.89% -------- -------- -------- -------- -------- --------
- --------------- (1) The Company began offering this product during January 1997. (2) Owned finance receivables exclude consumer finance receivables held for sale. (3) Managed assets include consumer finance receivables held for sale. (4) Calculated on an annualized basis. Sales Financing has undertaken a number of strategic steps to bolster growth, increase market share and improve productivity, which have resulted in annual compound growth of 14.4% in managed assets for the five year period ended December 31, 1996. In 1993, Sales Financing entered the retail recreational boat lending business. The timing of this new product initiative was predicated largely on an improving recreational boat market (recovering from the economic downturn of the 1980's and 58 60 early 1990's), as well as the withdrawal of several retail recreational boat lenders from the market. Sales Financing places great emphasis on superior dealer service and, as a result, has increased its marine dealer base from 125 dealers in 1993 to over 1,800 dealers (or 25% of the marketplace) at September 30, 1997. Additionally in 1995, Sales Financing realigned its sales force across all three product lines (recreation vehicle, manufactured housing and recreational boat) into a product management structure. The realignment has resulted in the continued expansion of the Company's dealer base, improved focus on needs of individual product end users and ultimately higher retail originations. During June 1997, the Company entered into an arrangement with Chase pursuant to which the Company provides servicing for Chase's recreation vehicle and recreational boat finance receivables portfolio of $1.3 billion. The Company commenced providing portfolio services under that arrangement during August 1997. Marketing and Distribution. Sales Financing originates retail sales finance contracts predominantly through recreation vehicle, manufactured housing and recreational boat dealer, broker and manufacturer relationships. At September 30, 1997, Sales Financing had over 2,700 active dealer and manufacturer relationships. Sales Financing on occasion purchases recreation vehicle, manufactured housing and recreational boat loans in "bulk" from other financial institutions. These origination channels are serviced through seven regional business centers located strategically throughout the United States. The dealer base is serviced and marketed with local sales personnel. Sales Financing believes that its experience in dealer operations and finance, long standing dealer relationships and product expertise have been instrumental in growing its dealer and broker base. Although Sales Financing originates finance receivables through several sources, delivery can be categorized broadly into retail and wholesale. Retail. Prior to accepting a retail sales finance application from a dealer, Sales Financing must review and approve the dealer relationship. This process includes examination of financial statements, trade references and credit reports. Sales Financing pays origination fees for certain of its products offered. These fees, commonly referred to as "dealer participations," are paid by Sales Financing to the dealer and are accounted for as an adjustment to yield over the anticipated life of the loan. Once a retail application is underwritten and approved by a regional business center, the dealer receives the purchase proceeds as well as any participation due. Certain events, such as early default or payoff, may result in the dealer forfeiting a portion of a participation. Wholesale. Working through established manufacturer relationships, Sales Financing provides financing to manufactured housing and recreational boat dealers for the purchase of inventory from manufacturers to be sold to the retail buyer. Notwithstanding Sales Financing's manufacturer relationships, all dealers participating in the wholesale program must be initially approved and periodically reviewed by a credit officer, who examines, among other things, the dealer's financial statements, trade references and credit reports. Once approved, a dealer accesses credit as each inventory unit is ordered from the manufacturer. When the manufacturer receives an order, Sales Financing is contacted for a credit approval. Upon credit approval by Sales Financing, the manufacturer ships the inventory to the dealer and bills Sales Financing, who pays the invoice and charges the dealer's account. Dealers are also incentivized to "roll-over" wholesale financing into a retail contract upon sale of the unit to the end-user. Servicing. The ASC centrally services and collects substantially all of the Company's consumer finance receivables, including home equity loans, recreation vehicle, manufactured housing, recreational boat and other receivables (collectively, the "servicing portfolio"). The servicing portfolio includes both loans originated or purchased by Sales Financing or Consumer Finance, as well as loans originated or purchased by Sales Financing or Consumer Finance 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 September 30, 1997, the ASC's consumer finance servicing portfolio aggregated approximately 339,300 loans, representing $7.5 billion, which included $2.3 billion of managed home equity finance receivables serviced for Consumer Finance. During August 1997, the Company commenced servicing $1.3 billion of recreation vehicle and recreational boat finance receivables pursuant to its agreement with Chase. Servicing and collections are performed at two locations in Oklahoma City. Servicing responsibilities of the ASC include collecting principal and interest payments, taxes and other payments, as applicable, from obligors. For loans previously owned by Sales Financing that have been securitized, as well as loans owned by other third parties, servicing responsibilities also include remitting principal, interest and other payments to the holders of the related loans. The ASC has responsibilities for the repossession and remarketing of collateral on defaulted loans, and entering into workout arrangements with obligors under certain defaulted loans. Advanced technology is used to perform many servicing and collecting tasks. Automated tools engaged in the operation include predictive autodialers, voice response units and automated payment processing. 59 61 Securitization Program As an additional source of liquidity, in 1992, the Company established a program to access the public and private asset backed securitization markets. Current products utilized in the Company's program include consumer loans secured by manufactured housing, recreation vehicles, recreational boats and residential real estate. Under a typical asset backed securitization, Sales Financing or Consumer Finance sells a "pool" of secured loans to a special purpose entity that, in turn, issues certificates and/or notes that are collateralized by the loan pool and that entitle the holders thereof to participate in certain loan pool cash flows. Sales Financing or Consumer Finance retains the servicing of the securitized loans for which it is paid a fee, and also participates 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 a securitization, Sales Financing or Consumer Finance estimates the "residual" cash flows to be received over the life of the securitization, records the present value of these cash flows as an asset (a retained interest in the securitization) and recognizes a gain. The following table sets forth each of the Company's asset backed securitizations since inception of the program:
------------------------------------------------------ Dollars in millions ORIGINAL POOL BALANCE AT ASSET TYPE/YEAR SECURITIZED PUBLIC/PRIVATE POOL BALANCE SEPTEMBER 30, 1997 - ---------------------------------------------------------- --------------- ------------- ------------------- Manufactured Housing 1992 Private $ 47.7 $ 11.0 Manufactured Housing 1993 Public 155.0 74.2 Manufactured Housing 1994 Private 48.3 22.2 Manufactured Housing 1995-1 Public 124.0 87.8 Manufactured Housing 1995-2 Public 199.2 167.9 Recreation Vehicle 1994 Public 150.4 54.9 Recreation Vehicle 1995-A Public 200.0 91.9 Recreation Vehicle 1995-B Public 200.0 106.9 Recreation Vehicle 1996-A Public 250.0 157.7 Recreation Vehicle 1996-B Public 240.0 179.7 Marine 1996(1) Private 545.9 481.2 Home Equity 1997-1 Private/Public 500.0 482.9 -------- -------- Total $2,660.5 $1,918.3 ======== ========
- --------------- (1) Reflects a conduit program into which newly originated recreational boat finance receivables are sold. Substantially all recreational boat and recreation vehicle finance receivables originated in 1997 are classified as held for sale at September 30, 1997. At September 30, 1997, the remaining balance of retained interests in securitizations related to the foregoing transactions aggregated $126.9 million. The amortized cost of these assets approximates their fair value at such date. EQUITY INVESTMENTS The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture Capital (together "Equity Investments") 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. Business is developed through direct solicitation or through referrals from investment banking firms, financial intermediaries and the Company's other business units. Equity Investments made its first investment in 1991 and had total investments of $60.0 million at September 30, 1997. The average individual investment size is approximately $2.1 million at September 30, 1997. ADDITIONAL INFORMATION REGARDING THE COMPANY EMPLOYEES At September 30, 1997, the Company had approximately 3,000 employees, approximately 1,740 of whom were employed in connection with commercial operations, 800 of whom were employed in connection with consumer operations and 460 of whom 60 62 were employed in corporate functions. The Company is not subject to any collective bargaining agreements. The Company believes that its employee relations are good. PROPERTIES The operations of the Company 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 the needs of the Company. The Company utilizes, or plans to utilize in the foreseeable future, substantially all of its leased office space. LEGAL PROCEEDINGS The Company is a defendant in various lawsuits arising in the ordinary course of its business. The Company aggressively manages its litigation and assesses appropriate responses to its lawsuits in light of a number of factors, including potential impact of the actions on the conduct of the Company's operations. In the opinion of management, none of the pending matters is expected to have a material adverse effect on the Company's 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 such a material adverse effect. COMPETITION The Company's markets are highly competitive and are characterized by competitive factors that vary based upon product and geographic region. The Company's competitors include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, leasing companies, manufacturers and vendors. Substantial national financial services networks also have been formed by insurance companies and bank holding companies that compete with the Company. On a local level, community banks and smaller independent finance and/or mortgage companies are a competitive force. Some of the Company's competitors have substantial local market positions. Many of the competitors of the Company are large companies that have substantial capital, technological and marketing resources, and some of these competitors are larger than the Company and may have access to capital at a lower cost than the Company. Also, the Company's competitors include businesses that are not related to bank holding companies and, accordingly, may engage in activities, for example short-term aircraft rental and servicing, which currently are prohibited to the Company. Competition has been enhanced in recent years by an improving economy and growing marketplace liquidity. The markets for most of the Company's products are characterized by a large number of competitors. However, with respect to certain of the Company's markets, such as factoring and manufactured housing, competition is more concentrated. The Company competes primarily on the basis of pricing, terms and structure, with other primary competitive factors including industry experience and client service and relationships. From time to time, competitors of the Company seek to compete aggressively on the basis of these factors and the Company may lose market share to the extent it is unwilling to match its competitors' pricing and terms in order to maintain its interest margins or maintain its credit discipline. To the extent that the Company matches competitors' pricing or terms, it may experience lower interest margins and/or increased credit losses. Other primary competitive factors include industry experience and client service and relationships. In addition, demand for the Company's 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 Federal Reserve. As a result, the Company is subject to certain provisions of the Act and is subject to examination by 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." See "Relationship with DKB--Regulatory Compliance Agreement." The Company's current principal business activities constitute permissible activities for a nonbank subsidiary of a bank holding company. Two of the subsidiaries of the Company are investment companies organized under Article XII of the New York Banking Law and, as a result, 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 the voting stock of the Company. The operations of the Company 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 61 63 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. See "--Commercial Finance" and "--Consumer Finance" below. In the judgment of management, existing statutes and regulations have not had a material adverse effect on the business conducted by the Company. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, results of operations or financial condition or prospects of the Company. Commercial Finance Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies and require licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply with certain provisions of the Equal Credit Opportunity Act ("ECOA") that are applicable to commercial loans. Consumer Finance The Company's 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 policy 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 the Company's 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 the Company 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 and the Real Estate Settlement Procedures Act and Regulation X promulgated thereunder, which require certain disclosures to borrowers and other parties regarding the terms of certain of the loans; (ii) ECOA 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; (iii) the Fair Credit Reporting Act, which regulates the use and reporting of information related to a borrower's credit experience; and (iv) the Fair Housing Act, which prohibits discrimination on the basis of, among other things, familial status or handicap. In certain circumstances, loans may be subject to the Home Ownership and Equity Protection Act of 1994 (the "Home Ownership Act"), which amended the Federal Truth-in-Lending Act as it applies to mortgages subject to the Home Ownership Act. The Home Ownership Act requires certain additional disclosures, specifies the timing of such disclosures and limits or prohibits the inclusion of certain provisions in mortgages subject to the Home Ownership Act. The Home Ownership Act also provides that any purchaser or assignee of a mortgage covered by the Home Ownership Act is subject to all of the claims and defenses which the borrower could assert against the original lender. The maximum damages that may be recovered by a borrower from an assignee in an action under the Home Ownership Act are the remaining amount of indebtedness plus the total amount paid by the borrower in connection with the mortgage loan. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws may limit the ability of the Company 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 the Company to damages and administrative sanctions. In addition, numerous other federal and state statutory provisions, including the federal bankruptcy laws and state debtor relief laws, may also adversely affect the Company's ability to collect the principal of or interest on certain loans. Federal and state legislation seeking to regulate the maximum interest rate and/or other charges on consumer finance receivables has been introduced in the past, and may from time to time be introduced in the future. However, it is not possible to predict the nature of future legislation with respect to the foregoing or its impact on the future business, results of operations, financial condition or prospects of the Company. 62 64 RISK MANAGEMENT The Company's business activities contain elements of risk. The Company considers the principal types of risk to be credit risk (including credit, collateral and equipment risk), asset/liability risk (including interest rate and liquidity risk), and, to a lesser extent, operational and legal risk. The Company considers the management of risk essential to conducting its commercial and consumer businesses and to maintaining profitability. Accordingly, the Company's risk management systems and procedures are designed to identify and analyze the Company's 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 The Company has developed systems specifically designed to manage credit risk in its commercial and consumer business segments and at its strategic business units. Financing and leasing assets are evaluated for credit and collateral risk both during the credit granting process and periodically after the advancement of funds. Credit authority is delegated to each strategic business unit by the Executive Credit Committee of the Company ("ECC"). 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, all non-standard transactions, transactions outside of certain established target market definitions and transactions outside of certain risk acceptance criteria must be approved by members of the ECC. Each of the Company's 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: (i) the acceptable maximum credit line; (ii) selected target markets and products; (iii) the creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and (iv) the type and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). The Company also employs a risk adjusted pricing process where the perceived credit risk is a factor in determining the interest rate or fees charged for the Company's 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 the Company's internal audit department. That 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 the Company and the Audit Committee. Commercial The Company has developed systems specifically designed to effectively manage credit risk in its commercial operations. 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 for 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 perform a thorough evaluation of the customer's borrowing and repayment ability. Borrowers are graded according to credit quality based upon the Company's uniform credit grading system, which grades both the borrower's financial condition and underlying collateral. Credit facilities are subject to approval within the Company's overall credit approval and underwriting guidelines and are issued commensurate with the credit evaluation performed of each borrower. The Company's ongoing review and monitoring of credit exposures is designed to identify, as early as possible, those customers that may be experiencing declining creditworthiness or financial difficulty. Commercial finance receivables are periodically evaluated based upon credit criteria developed under the Company's uniform credit grading system. Concentrations are monitored by borrower, industry, geographic region and equipment type and limits are changed by management as conditions warrant to seek to minimize the risk of credit loss. Periodically, the status of finance receivables greater than $500,000 to obligors with higher (riskier) credit grades is individually reviewed with the Asset Quality Review Committee, which is comprised of members of senior management, 63 65 including the Vice Chairman, the Executive Vice President--Credit Administration and the Chief Financial Officer, and certain senior executives of the applicable strategic business unit. Equipment Financing and Leasing Equipment Financing and Capital Finance are secured equipment lenders and equipment lessors. Experienced credit personnel 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 perform a thorough evaluation of the customer's borrowing and repayment ability. Borrowers are graded according to credit quality based upon the Company's uniform credit grading system, which grades both the borrower's financial condition and any underlying collateral. Credit facilities are subject to approval within the Company's overall credit approval and underwriting guidelines and are issued commensurate with the credit evaluation performed of each borrower. Monitoring of borrowers and underlying collateral is conducted on an ongoing basis through reports and regular field audits and evaluation of collateral. Collateral primarily consists of equipment which is evaluated as to value, condition, risk of obsolescence and, where applicable, estimated future residual value. Equipment Financing and Capital Finance use their asset management and equipment remarketing capabilities and their technical expertise to manage their equipment collateral positions and their equipment residual value risk. For the period 1992 through 1996, the Company has realized in excess of 100% of the aggregate booked residual value in connection with equipment sales. Given, however, that operating lease equipment values and direct financing lease residual values are heavily influenced by estimates, there can be no assurance that such values will continue to be realized by the Company upon disposition of equipment owned by the Company and returned by lessees upon termination of their leases. To the extent that the Company fails to realize its operating lease equipment values and direct financing lease residual values, the Company's results of operations and financial condition could be materially adversely affected. See "Risk Factors -- Leasing Transactions and Equipment Risk." Factoring Commercial Services requires clients to both meet its established credit criteria and have a customer base that passes an established credit screen. This dual credit process is required because advances made to a client are to be repaid by collections from the client's customer base. If the customer is unable to pay its payables to Commercial Services' client due to financial difficulties, Commercial Services will nevertheless be responsible for payment to the extent of its credit guarantee. The Company's client credit teams and field examiners in the Company's various regional offices review financial statements, cash flows, projections and examine collateral. Upon completion, the client credit teams obtain from the appropriate credit committee approval of a seasonal financing plan, including advance rates against eligible receivables. Where required, third party appraisers are utilized. The approved seasonal plan is monitored closely by the client credit teams as advances, collateral and accounts receivable are updated on a daily basis. Customer credit departments located in the Company's various regional offices analyze the customer's credit worthiness at the onset and throughout the relationship. Frequent communications exist between the department, the client and client credit teams regarding the credit quality of the customer base. Close monitoring occurs through collection experience, financial analysis, frequent visits and conversations with customers. All clients are generally required to submit customer orders for approval. The Company has developed proprietary systems that automatically make certain credit determinations based upon the Company's stringent credit criteria. The balance of orders are manually reviewed and the disposition of such orders are determined by an analyst specializing in the customer's industry. Deterioration in the quality of the customer base leads to a reevaluation of the client's advance rates. Commercial Finance In Commercial Finance, evaluation of each borrower's creditworthiness and underlying collateral are significant to managing credit risk and controlling loan charge-offs. The primary focus is on the availability and quality of collateral underlying approved credit facilities and borrowings. Evaluation of collateral includes on-site field audits and third party appraisals where appropriate. Regular monitoring of borrowers and underlying collateral is important to controlling credit risk and is conducted on an ongoing basis through reports and regular field audits and evaluation of collateral. Both Business Credit and Credit Finance have employees experienced in evaluating accounts receivable, inventories and other collateral and utilize third parties from time to time in evaluating and/or liquidating certain inventories and other collateral. The credit underwriting standards of Business Credit and Credit Finance limit their respective credit exposures to larger borrowings (concentrations) by limiting the maximum amount each will retain or hold for its own position. Both Business Credit and Credit Finance syndicate or sell participation interests in loans over their respective hold limits. 64 66 A credit line is arranged with each borrower establishing the maximum amount the borrower may finance, subject to the amount of underlying eligible collateral and corresponding advance rates. The excess of approved credit lines outstanding over finance receivables outstanding represents potential additional borrowings or finance receivables that borrowers may qualify for, subject to the availability of required collateral and corresponding advance rates. Both Business Credit and Credit Finance typically advance funds up to 85% of eligible accounts receivable and up to 60% of eligible inventories. Consumer For consumer loans, 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. The Company's credit criteria include reliance on credit scores, including those based upon both its proprietary internal credit scoring model and external credit bureau scoring, combined with judgment. The credit scoring models are reviewed for effectiveness monthly utilizing statistical tools. Consumer loans are regularly evaluated 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 the Company's consumer operations and a credit approval hierarchy exists to ensure that all applications are reviewed by an underwriter with the appropriate level of authority. Consumer Finance Consumer Finance's direct originations are underwritten at the NHEC, while broker and correspondent originations are underwritten at area and regional offices, respectively. Credit officers evaluate an application and loan package based upon the internally generated credit score, as well as external credit bureau scoring (FICO score) and other characteristics of the application. Once an application is scored and reviewed along with other risk factors, it is either approved, declined or referred to a credit officer for further consideration. As part of the approval process, an application is also assigned a risk rating and applicable loan program code(s) for which the applicant is eligible. Collateral values are an important component of Consumer Finance's credit approval process. Accordingly, third party property appraisals are required for all applications. Certain third party appraisals are also subject to internal Consumer Finance review, depending upon origination source and/or the appraised value of the subject property. Consumer Finance has instituted an underwriting quality control program ("QCP") covering all origination channels. The QCP, performed on a sample basis, focuses on overall underwriting decisions, loan documentation, appraisal recertifications and employment reverifications. Sales Financing Sales Financing's retail sales finance loans are documented on standardized forms. Typical credit approval protocol includes the submission of a potential customer's application, manufacturer's invoice (new unit financings) and other pertinent information to a regional business center credit officer, who then prepares an analysis of the creditworthiness of the customer and of other aspects of the transaction. Once an application is scored against targeted profiles and reviewed for other risk factors, it is either approved, declined or referred to a credit officer for further consideration. Pricing on an approved application is also "risk adjusted," as necessary, to reflect the scoring of that application relative to "buy rates" supplied to dealers or brokers. Guarantors, endorsers or co-signers are not considered in the determination of whether or not an application is approved. The credit review and approval processes of each regional business center are subject to internal reviews and internal audits. Loan Loss Reserves and Credit Losses The Company maintains a consolidated reserve for credit losses on finance receivables at an amount which it believes is sufficient to provide adequate protection against potential credit losses in its portfolios. The level of the consolidated reserve for credit losses is determined principally on the basis of: (i) current credit quality of the portfolios and trends; (ii) the current mix of finance receivables; and (iii) historical loss experience. The consolidated reserve for credit losses reflects management's judgment of loss potential after considering factors such as the nature and characteristics of obligors, economic conditions and trends, charge-off experience, delinquencies and the value of underlying collateral and guarantees, including recourse to dealers and manufacturers. 65 67 Commercial and consumer finance receivables are reviewed to determine the probability of loss. Charge-offs are taken after considering the above mentioned factors. Such charge-offs are deducted from the carrying value of the related finance receivables. To the extent that an unrecovered balance remains due, a final charge-off is taken at the time collection efforts are no longer deemed useful. Charge-offs from carrying value of commercial finance receivables are determined on a case-by-case basis. Automatic charge-offs of consumer finance receivables are recorded to the extent of shortfalls in the value of the collateral when no contractual payments are received for 120 days, or at 180 days when partial payments have been received. Although the Company's management considers the consolidated reserve for credit losses reflected in the Company's consolidated balance sheet as of September 30, 1997 adequate, there can be no assurance that this consolidated reserve for credit losses will prove to be adequate over time to cover credit losses in connection with the Company's portfolio. This reserve may prove to be inadequate due to unanticipated adverse changes in the economy or discrete events adversely affecting specific customers or industries or if credit losses occurring as a consequence of the seasoning of the Company's consumer portfolio exceed those anticipated by the Company. The Company's results of operations and financial condition could be materially adversely affected to the extent that the Company's consolidated reserve for credit losses is insufficient to cover such changes or events. See "Risk Factors -- Reserve for Credit Losses." Analysis of Past Due Finance Receivables and Net Credit Losses The following table sets forth information as of the dates shown concerning total finance receivables, balances past due 60 days or more, net credit losses and net credit losses as a percentage of average finance receivables. This information should be read in conjunction with the discussion of the Company's financial condition under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
-------------------------------------------------------------------------------- NET CREDIT LOSSES AS A PERCENTAGE BALANCE PAST DUE OF 60 DAYS OR MORE NET AVERAGE FINANCE ------------------------ CREDIT FINANCE Dollars in millions RECEIVABLES AMOUNT PERCENT LOSSES RECEIVABLES ----------- ------ ------- ------ ---- September 30, 1997: Commercial $14,603.4 $178.1 1.22% $ 53.4 0.52% Consumer 3,344.9 109.8 3.28 26.7 1.11 --------- ------ ---- ------ ---- $17,948.3 $287.9 1.60% $ 80.1 0.63% ========= ====== ==== ====== ==== December 31, 1996: Commercial $13,757.6 $219.8 1.60% $ 80.4 0.59% Consumer 3,239.0 72.5 2.24 21.1 0.75 --------- ------ ---- ------ ---- $16,996.6 $292.3 1.72% $101.5 0.62% ========= ====== ==== ====== ==== December 31, 1995: Commercial $13,451.5 $228.7 1.70% $ 67.1 0.51% Consumer 2,344.0 35.2 1.50 10.1 0.44 --------- ------ ---- ------ ---- $15,795.5 $263.9 1.67% $ 77.2 0.50% ========= ====== ==== ====== ==== December 31, 1994: Commercial $12,821.2 $166.8 1.30% $ 74.8 0.62% Consumer 1,973.2 10.1 0.51 9.4 0.55 --------- ------ ---- ------ ---- $14,794.4 $176.9 1.20% $ 84.2 0.61% ========= ====== ==== ====== ==== December 31, 1993: Commercial $11,185.2 $199.8 1.79% $ 82.9 0.77% Consumer 1,438.9 16.3 1.13 11.5 0.77 --------- ------ ---- ------ ---- $12,624.1 $216.1 1.71% $ 94.4 0.77% ========= ====== ==== ====== ==== December 31, 1992: Commercial $10,359.7 $318.0 3.07% $ 85.7 0.83% Consumer 1,411.8 17.8 1.26 12.6 0.91 --------- ------ ---- ------ ---- $11,771.5 $335.8 2.85% $ 98.3 0.84% ========= ====== ==== ====== ====
66 68 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, which is comprised of members of senior management, including the Chief Executive Officer, Vice Chairman, Chief Financial Officer and senior representatives of DKB and Chase. Three members of the Capital Committee are also members of the Company's 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. The Company uses off-balance sheet derivatives for hedging purposes only. The Company 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 directly issued 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. Derivative positions are managed in such a way that the exposure to interest rate, credit or foreign exchange risk is in accordance with the overall operating goals established by the Capital Committee. There is an approved, diversified list of creditworthy counterparties used for derivative financial instruments, each of whom has specific credit exposure limits. 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 the Company's derivative portfolio, refer to "Note 7--Derivative Financial Instruments" in the consolidated financial statements and related notes thereto set forth herein. Interest Rate Risk Management Changes in market interest rates or in the relationships between short-term and long-term market interest rates or 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. See "Risk Factors--Economic Factors--Interest Rate Risk". The 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 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 the liquidity needs of the Company. 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, the Company may enter into a hedge that has an inverse correlation to the interest rate sensitivity created, whereby the Company would pay a fixed interest rate and receive a commercial paper interest rate. Basis risk is similarly managed through the issuance of new debt or the utilization of interest rate swaps or other derivative instruments. The Company's degree of interest rate sensitivity is continuously monitored and simulated through computer modeling by measuring the repricing characteristics of interest-sensitive assets, liabilities and off-balance sheet derivatives. The results of this modeling are reviewed monthly by the Capital Committee. The interest rate sensitivity modeling techniques employed by the Company 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 also 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 known, market interest rates, 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 the Company's 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 September 30, 1997, an immediate hypothetical 100 basis points 67 69 parallel rise in the yield curve on October 1, 1997 would increase net income by an estimated $1.6 million after-tax over the twelve months ending September 30, 1998. Although management believes that this measure provides a meaningful estimate of the Company's interest rate sensitivity, it does not adjust for potential changes in the credit quality, size and composition 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 the Company's computer modeling. Further, it does not necessarily represent management's current view of future market interest rate movements. The Company periodically enters 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 LIBOR interest rate-based 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 LIBOR interest rate. This creates, in effect, a lower cost LIBOR-based medium-term obligation which also reduces the interest rate basis risk of funding LIBOR-based assets with commercial paper or U.S. federal funds rate-based debt. Interest rate swaps with notional principal amounts of $4.0 billion at September 30, 1997 and $5.3 billion at December 31, 1996 were designated as hedges against outstanding debt and were principally used to effectively convert the interest rate on variable rate debt to a fixed rate, which sets the Company's fixed rate term debt borrowing cost over the life of the swap and reduces the Company's exposure to rising interest rates but reduces the Company's benefits from lower interest rates. Interest rate swaps are further discussed in "Note 7--Derivative Financial Instruments" in the consolidated financial statements and related notes thereto set forth herein. Liquidity Risk The Company manages liquidity risk by monitoring the relative maturities of assets and liabilities and by borrowing funds, primarily in the U.S. money and capital markets. Such cash is used 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 funds are commercial paper borrowings, medium-term notes, other term debt securities and asset-backed securitizations. At September 30, 1997, commercial paper borrowings were $6.2 billion and amounts due on term debt within one year were $4.2 billion. If the Company is unable to access such markets at acceptable terms, it could utilize its bank credit lines and cash flow from operations and portfolio liquidations to satisfy its liquidity needs. At September 30, 1997, the Company had committed revolving bank credit lines totaling $5.0 billion, representing 81% of operating commercial paper outstanding (commercial paper less interest-bearing deposits). The Company believes that such credit lines should provide sufficient liquidity to the Company under foreseeable conditions. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" for further information concerning the liquidity of the Company. OPERATIONAL AND LEGAL RISKS The Company, like all large financial institutions, is exposed to many types of operational risks, including the potential for loss caused by a breakdown in information, communication, transaction processing or by fraud by employees or outsiders or unauthorized transactions by employees. The Company attempts to mitigate operational risks, by maintaining a system of internal controls designed to keep operational risk at appropriate levels in view of its consolidated financial position, the characteristics of the businesses and markets in which it operates, competitive circumstances and regulatory considerations. The potential for material losses from operational risks in the future cannot be excluded. Legal risk arises from the uncertainty of enforceability, through legal or judicial process, of obligations of the Company's customers and counterparties, and also the possibility that changes in law or regulation could adversely affect the Company's position. The Company seeks to minimize legal risk through consultation with internal and external legal counsel. YEAR 2000 COMPLIANCE The Company has made and will continue to make certain investments in its software applications and systems to ensure that the Company's systems function properly to and through the year 2000. The financial impact to the Company of such investments has not been, and is not anticipated to be, material to its financial position or results of operations. 68 70 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The names and ages of all directors and executive officers of the Company as of November 7, 1997 and a biographical summary of each such person, appear on the following pages. No family relationship exists among these persons. The executive officers were appointed by and hold office at the discretion of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------- NAME AGE CURRENT POSITION/OFFICES - ------------------------------------------------------------------------------------------------------------- Directors Hisao Kobayashi 62 Senior Advisor, DKB Chairman of the Board of Directors of the Company Albert R. Gamper, Jr. 55 President & Chief Executive Officer of the Company Yoshiro Aoki 51 Director and General Manager, New York Branch, DKB Takasuke Kaneko 55 Deputy President, DKB Joseph A. Pollicino 57 Vice Chairman of the Company Paul N. Roth 58 Partner, Schulte Roth & Zabel LLP Peter J. Tobin 53 Chief Financial Officer, The Chase Manhattan Corporation Tohru Tonoike 47 Senior Executive Vice President of the Company Keiji Torii 50 General Manager, International Planning and Coordination Division and International Banking Coordination Division, DKB Yukiharu Uno 44 Executive Vice President of the Company Executive Officers(1) Thomas A. Johnson 51 General Auditor Joseph M. Leone 44 Executive Vice President and Chief Financial Officer William M. O'Grady 57 Executive Vice President-Administration Ernest D. Stein 57 Executive Vice President, General Counsel and Secretary Corinne M. Taylor 36 Senior Vice President and Treasurer William J. Taylor 46 Senior Vice President and Controller
- --------------- (1) Messrs. Gamper, Pollicino, Tonoike and Uno, who are listed above as Directors, are also Executive Officers of the Company. HISAO KOBAYASHI has served as a Director of the Company 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 has been an employee since 1959. Prior to his appointment as a Senior Advisor, Mr. Kobayashi has served in other executive positions at DKB, including most recently as Senior Managing Director from May 1993 and Managing Director from June 1991. 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. YOSHIRO AOKI has served as a Director of the Company since July 1997. Mr. Aoki has been Director and General Manager of the New York Branch of DKB 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. 69 71 TAKASUKE KANEKO has served as a Director of the Company since June 1995. He also was a Director and Senior Executive Vice President of the Company 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 from May 1997 and as Managing Director of DKB 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 the Company since August 1986 and Vice Chairman of its Board of Directors since December 1989. Prior to August 1986, Mr. Pollicino held a number of executive positions at the Company and at Manufacturers Hanover Corporation, where he had been employed since 1957. PAUL N. ROTH has served as a Director of the Company since December 1989. Mr. Roth is a founding partner in the law firm of Schulte Roth & Zabel LLP in New York, which was founded in 1969. PETER J. TOBIN has served as a Director of the Company since May 1984. Mr. Tobin is the Chief Financial Officer of The Chase Manhattan Corporation, a position that he has held since April 1996. From January 1992 to April 1996, Mr. Tobin served as Chief Financial Officer of Chemical Bank & 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 the Company 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. KEIJI TORII has served as a Director of the Company from May 1993 to April 1997 and was re-elected as a Director in July 1997. Mr. Torii also served as Senior Executive Vice President of the Company from April 1996 to April 1997 and as Executive Vice President of the Company from May 1993 to April 1996. Since July 1997, Mr. Torii has held the position of General Manager of the International Planning and Coordination Division of DKB and General Manager of its International Banking Coordination Division. Mr. Torii was Chief Inspector of the Inspecting Division of DKB from February 1993 to May 1993 and, from June 1990 to February 1993, he was Assistant General Manager of the Securities Division of DKB. YUKIHARU UNO has served as Executive Vice President and as a Director of the Company since April 1996. Previously, Mr. Uno was employed by DKB since April 1976, where he served in a number of executive positions including Manager and Head of the CIT Office in the Americas Division and Assistant General Manager of the Americas Group in the International Banking Coordination Division. THOMAS A. JOHNSON has served as General Auditor of the Company since January 1990. Previously, Mr. Johnson served in various internal audit positions with Manufacturers Hanover Corporation, including Deputy General Auditor, since September 1968. JOSEPH M. LEONE has served as Executive Vice President and Chief Financial Officer of the Company since July 1995. Previously, Mr. Leone served as Executive Vice President of Sales Financing from June 1991, and in a number of other executive positions with the Company and Manufacturers Hanover Corporation since May 1982. WILLIAM M. O'GRADY has served as Executive Vice President of Administration of the Company since January 1986, and previously served in a number of other executive positions with the Company and with RCA Corporation, a prior owner of the Company, from July 1965. ERNEST D. STEIN has served as Executive Vice President, General Counsel and Secretary of the Company 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. CORINNE M. TAYLOR has served as Senior Vice President and Treasurer of the Company since March 1993. Previously, Ms. Taylor served in various executive positions with the Company, including Vice President-Finance since September 1990. WILLIAM J. TAYLOR has served as Senior Vice President and Controller of the Company since March 1993. Previously, Mr. Taylor served in various executive positions with the Company, including Vice President and Controller since May 1989. 70 72 Upon consummation of the Offering, the Company will have a Board of Directors consisting of the then current members of the Board of Directors and at least one other person who will not be associated with the Company or DKB. The Board of Directors is expected to appoint members to a compensation committee of the Board of Directors (the "Compensation Committee") and an audit committee of the Board of Directors (the "Audit Committee"). Both such committees will be comprised solely of independent directors. The Compensation Committee will establish remuneration levels for certain officers of the Company and perform such functions as may be delegated to it under certain benefit and executive compensation programs. The Audit Committee will select and engage the independent public accountants to audit the Company's annual financial statements. The Audit Committee will also review and approve the planned scope of the annual audit. The Board of Directors may from time to time establish certain other committees to facilitate the management of the Company. Regular meetings of the Board of Directors will be held six times a year. COMPENSATION OF DIRECTORS It is anticipated that Directors who are not employees or officers of DKB or CIT or of any subsidiary of either of them will be 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 will be eligible for grants under the Company's Long-Term Equity Compensation Plan. See "-- Employee Compensation Plans -- Long-Term Equity Compensation Plan." OUTSIDE DIRECTORSHIPS As indicated in the table above, some of the Directors of the Company concurrently hold positions as director or officers or are employees of DKB or Chase. Additionally, Mr. Kobayashi is a director of AFLAC, Inc., a life insurance company, which is not affiliated with the Company and which is listed on the New York Stock Exchange. A number of the Executive Officers are also directors of privately-held and not-for-profit organizations not affiliated with the Company. 71 73 EXECUTIVE COMPENSATION The table below sets forth the annual and long-term compensation, including bonuses and deferred compensation, of the President and Chief Executive Officer, the Vice Chairman and the other three most highly compensated executive officers of the Company (the "Named Executive Officers") for services rendered in all capacities to the Company during the fiscal years ended December 31, 1996, 1995 and 1994. SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------- LONG-TERM COMPENSATION ANNUAL COMPENSATION PAYOUTS ------------------------------------- ------------ OTHER ANNUAL LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) PAYOUTS(2) COMPENSATION(3) - ---------------------------- ----- -------- -------- --------------- ------------ --------------- Albert R. Gamper, Jr. 1996 $600,002 $785,000 $74,319 $722,369 $33,000 President and Chief 1995 542,302 675,000 87,626 722,369 30,692 Executive Officer 1994 530,379 600,000 46,092 295,748 30,215 Joseph A. Pollicino 1996 $439,998 $550,000 $44,775 $433,400 $26,600 Vice Chairman 1995 401,523 475,000 51,205 433,400 25,061 1994 392,294 425,000 28,340 177,440 38,215 Joseph M. Leone 1996 $203,231 $170,000 $11,109 $126,444 $17,129 Executive Vice President 1995 189,846 150,000 16,362 126,444 16,594 and Chief Financial Officer 1994 175,692 120,000 7,552 51,768 16,028 William M. O'Grady 1996 $209,769 $150,000 $9,801 $108,350 $17,391 Executive Vice President - 1995 200,923 130,000 12,080 108,350 17,037 Administration 1994 192,885 115,000 8,216 55,450 22,390 Ernest D. Stein 1996 $192,692 $115,000 $6,744 $ 75,845 $16,708 Executive Vice President, 1995 183,077 100,000 8,979 75,845 16,323 General Counsel and 1994 167,307 85,000 2,790 -- 15,692 Secretary
- --------------- (1) The payments set forth under "Other Annual Compensation" represent the dividends paid under The CIT Group Holdings, Inc. Career Incentive Plan (the "CIT Career Incentive Plan"). For the performance period 1993-1995, 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 are vested annually 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 of stock, Mr. Pollicino was awarded 12,000 phantom shares, Mr. Leone was awarded 2,625 phantom shares, Mr. O'Grady was awarded 2,250 phantom shares and Mr. Stein was awarded 1,500 shares. The Company will terminate the CIT Career Incentive Plan in conjunction with the consummation of the Offering. See "-- Long-Term Incentive Plan." (2) The payments set forth under LTIP Payouts represent the payout of shares vested under the CIT Career Incentive Plan. The payout in 1994 was for phantom shares awarded for the performance period 1990-1992. The payouts in 1995 and 1996 were for shares awarded for the performance period 1993-1995. Dividend equivalent payments received in respect of such phantom shares are included under "Other Annual Compensation." (3) The payments set forth under "All Other Compensation" include the matching employer contribution to each participant's account and an employer flexible retirement contribution to each participant's flexible retirement account under The CIT Group Holdings, Inc. Savings Incentive Plan (the "CIT Savings Plan"). The matching employer contribution is made pursuant to a compensation deferral feature of the CIT Savings Plan under Section 401(k) of the Internal Revenue Code of 1986. The payments set forth under "All Other Compensation" also include 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. In 1994, Mr. Pollicino and Mr. O'Grady received payments designed to cover the 1.45% Medicare tax liability created by vesting in the Company's deferred retirement benefits. 72 74 THE CIT CAREER INCENTIVE PLAN Under The CIT Career Incentive Plan, awards were granted in the form of phantom shares of stock by the Executive Committee of the Board of Directors in its discretion. Participants in the CIT Career Incentive Plan were selected by the Executive Committee from among the executives of the Company who were in a position to make a substantial contribution to the long-term financial success of the Company. Grants to members of the Executive Committee were made by the Board of Directors. The amount of phantom shares eligible for allocation during a "Performance Period" (as defined in the CIT Career Incentive Plan) is determined by the Executive Committee. The Performance Period is at least three consecutive calendar years. The "Performance Goals" (as defined in the CIT Career Incentive Plan) for each Performance Period that have been designated by the Executive Committee were based upon net income growth targets and return on equity performance. The value of the phantom shares is determined at the end of each Performance Period relative to such performance targets. Following the end of a Performance Period, one-third of such phantom shares vest on the first day of the following year and one-third vest on the first day of each of the next two years. All vested shares are settled in cash. Cash in an amount equivalent to dividends are paid quarterly during the Performance Period and the vesting period, based on the number of phantom shares granted to a participant. The amount of the dividend equivalent payment is based on the quarterly return on equity of the Company. All or a part of the value of a vested award could either be paid currently in cash or deferred in up to five annual installments. Deferred amounts were credited with interest. THE CIT CAREER INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
---------------------------------------------------------------------------------------- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS NUMBER OF SHARES, PERFORMANCE OR ------------------------------------------------ UNITS OR OTHER OTHER PERIOD UNTIL THRESHOLD TARGET MAXIMUM NAME RIGHTS MATURATION OR PAYOUT ($ PER SHARE) ($ PER SHARE) ($ PER SHARE) - -------------------------------------------------- -------------------- ------------- ------------- ---------------- Albert R. Gamper, Jr. 20,000 1996-1998 -- $176.52 $355.13 President and Chief Executive Officer Joseph A. Pollicino 12,000 1996-1998 -- $176.52 $355.13 Vice Chairman Joseph M. Leone 2,625 1996-1998 -- $176.52 $355.13 Executive Vice President and Chief Financial Officer William M. O'Grady 2,250 1996-1998 -- $176.52 $355.13 Executive Vice President-- Administration Ernest D. Stein 1,500 1996-1998 -- $176.52 $355.13 Executive Vice President, General Counsel and Secretary
In conjunction with the Offering, the Company will terminate the CIT Career Incentive Plan. Payments to participants in respect of the termination will be made partially in the form of cash in 1998 and partially in the form of a grant in 1997 of Restricted Stock (as hereinafter defined) in the form of shares of Class A Common Stock and Options to purchase shares of Class A Common Stock. The shares of Restricted Stock and the options to be associated with the termination of the CIT Career Incentive Plan are included in the table "Long-Term Equity Compensation Plan Awards" under "--Employee Compensation Plans" below. BENEFIT PLANS 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 the Company's employees participated. Accumulated years of benefit service under the 73 75 MHC Retirement Plan are included in the benefit 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 annual salary received in any five consecutive years in the last ten years. "Salary" includes all wages paid by the Company, 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 the participating company 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. 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, the Company has established the CIT Supplemental Retirement Plan. The CIT Supplemental Retirement Plan provides retirement benefits on an unfunded basis to participants who retire from the Company (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 participant's 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
------------------------------------------------------------------------- FINAL AVERAGE ANNUAL BENEFITS BASED ON YEARS OF CREDITED SERVICE(1) SALARY OF EMPLOYEE 15 20 25 30 35 40 - -------------------------------- -------- -------- -------- -------- -------- -------- $150,000 $ 43,242 $ 57,656 $ 64,570 $ 71,484 $ 78,397 $ 85,897 200,000 58,242 77,656 87,070 96,484 105,897 115,897 250,000 73,242 97,656 109,570 121,484 133,397 145,897 300,000 88,242 117,656 132,070 146,484 160,897 175,897 350,000 103,242 137,656 154,570 171,484 188,397 205,897 400,000 118,242 157,656 177,070 196,484 215,897 235,897 450,000 133,242 177,656 199,570 221,484 243,397 265,897 500,000 148,242 197,656 222,070 246,484 270,897 295,897 550,000 163,242 217,656 244,570 271,484 298,397 325,897 600,000 178,242 237,656 267,070 296,484 325,897 355,897 650,000 193,242 257,656 289,570 321,484 353,397 385,897
- --------------- (1) At December 31, 1996, Messrs. Gamper, Pollicino, Leone, O'Grady and Stein had 29, 32, 12, 27 and 3 years of benefit service, respectively. EXECUTIVE RETIREMENT PLAN Executive officers of the Company, including 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 74 76 employment,with a life annuity option payable monthly by the Company upon retirement. The participant pays a portion of the annual premium and the Company pays the balance on behalf of the participant. The Company is entitled to recoup its 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 the current income of the Company and the Company anticipates 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 on the preceding page, the Company is conditionally obligated to make annual payments under the Executive Retirement Plan in the amounts indicated to the Named Executive Officers at retirement: Mr. Gamper, $343,130, Mr. Pollicino, $217,642, Mr. Leone, $145,392, Mr. O'Grady, $103,579 and Mr. Stein, $65,663. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the Offering, the Executive Committee of the Board of Directors functioned as the compensation committee and set the compensation for all executives except Messrs. Gamper, Pollicino, Tonoike and Uno. The members of the Executive Committee were as follows: Albert R. Gamper, Jr. Joseph A. Pollicino Peter J. Tobin Tohru Tonoike Yukiharu Uno The Board of Directors, except for Messrs. Gamper and Pollicino, who were absent from any portion of meetings when their compensation was discussed, set the compensation of Messrs. Gamper and Pollicino. DKB determines the compensation for Messrs. Tonoike and Uno. Mr. Tobin is an executive of Chase. The Executive Committee will be dissolved following the consummation of the Offering, although the Board of Directors may determine to reconstitute the Executive Committee at any time. EMPLOYMENT AGREEMENTS Mr. Gamper has an employment agreement with the Company which provides that he will serve as the Chief Executive Officer, President, Chairman of the Executive Committee and member of the Board of Directors of the Company. His employment agreement initially ran for five years from December 29, 1989, and subsequently was extended until December 31, 1999. The agreement provides for the payment of an annual base salary of not less than the amount Mr. Gamper received prior to the date of his last extension on April 1, 1997. Pursuant to his employment agreement, Mr. Gamper's base salary and performance is reviewed by the Board of Directors during the term of the agreement pursuant to the Company's normal practices, subject to increases but not to decreases. Mr. Gamper's employment agreement provides for participation in all executive bonus and incentive compensation plans. Mr. Pollicino has an employment agreement with the Company which provides that he shall serve as the Vice Chairman and member of the Board of Directors of the Company. Mr. Pollicino's employment agreement initially ran for five years from December 29, 1989, and subsequently was extended until December 31, 1999. The agreement provides for the payment of an annual base salary of not less than the amount Mr. Pollicino received prior to the date of his last extension on April 1, 1997. Pursuant to his employment agreement, Mr. Pollicino's base salary and performance is reviewed by the Board of Directors during the term of the agreement pursuant to the Company's normal practices, subject to increases but not to decreases. Mr. Pollicino's employment agreement provides for participation in all executive bonus and incentive compensation plans. Mr. Leone, Mr. O'Grady and Mr. Stein also have employment agreements with the Company. Mr. Leone's and Mr. O'Grady's employment agreements initially ran for three years from December 29, 1989, and subsequently were extended until December 31, 1998. Mr. Stein entered into an employment agreement on March 17, 1995, which was subsequently extended until December 31, 1998. 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 the last extension on December 6, 1996, to be reviewed by the chief executive officer or his designee pursuant to the Company's 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 the Company 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 the greater of thirty-six months or the remainder of the 75 77 agreement term, 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 the Company 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 the Company, full employee welfare benefit coverage, outplacement services for up to one year, any awards due under the Company's Long-Term Incentive Plan, and all benefits payable under the Company's 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 his base salary for the greater of 24 months or the remainder of the agreement term, provided that he does 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), in which case the Company would have no obligation to make any remaining payments. 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 18 months, outplacement services, any awards due under the Company's Long-Term Incentive Plan and all benefits payable under the Company's Executive Benefits Program. If the Company terminates Mr. Gamper or Mr. Pollicino 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 the Company. With respect to Mr. Leone, Mr. O'Grady and Mr. Stein, if they are terminated by the Company for cause based on non-performance as determined by the chief executive officer of the Company as of the execution of the employment agreement, they will receive all earned and accrued entitlements and benefits, participation for 18 months in the Company's welfare benefit plan, outplacement services and base salary for 12 months. This amount is increased to base salary for 24 months if the chief executive officer at the time of such termination is not the chief executive officer of the Company as of the execution of the employment agreement. Termination for Cause based on malfeasance or resignation for any reason other than "Good Reason" provides for all previously earned and accrued entitlements and benefits from the Company. 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, Mr. Gamper and Mr. Pollicino will be entitled to receive a "special payment." With respect to Mr. Gamper, the amount of such 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. Mr. Gamper and Mr. Pollicino's special payments are payable over a one-year period as follows: (i) one-half of the payment shall be paid within 30 days after the date of the Change of Control; and (ii) one-half shall be paid on or before the first anniversary date of such Change of Control. Notwithstanding the foregoing provision, the special payment shall be forfeited if during the one-year period following the date of a Change of Control: (i) their employment is involuntarily terminated by the Company for cause; (ii) they voluntarily terminate employment with the Company for any reason other than good reason; or (iii) they breach any non-compete or confidentiality covenant contained in their employment agreements. In the event of a Change of Control during the term of employment, Mr. Gamper or Mr. Pollicino may elect, on 90 days notice, to terminate their employment, and have such termination deemed "Good Reason" (i) upon the first anniversary of the Change of Control or (ii) at their election, if the first anniversary is prior to December 31, 1998, then on December 31, 1998. 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, during the term of their respective employment agreements, a "Change of Control" (as defined in the agreement) occurs on or prior to December 31, 1998, 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 as follows: (i) one-third of the payment shall be paid within 30 days after the Change of Control; (ii) one-third shall be paid on or before the first anniversary date of such Change of Control; and (iii) one-third shall be paid on or before the second anniversary date of such Change of Control. Notwithstanding the above, the special payment will be forfeited (i) to the extent such payment or any part thereof, when aggregated with any other benefit or compensation payment due to the executive would cause the executive to be subject to taxation under Section 4999 of the Internal Revenue Code of 1986 or (ii) if during the two year period commencing on the date of such Change of Control and ending on the second anniversary of such date, (a) their employment is involuntarily terminated by the Company for cause, (b) they voluntarily terminate employment for any reason other than "Good Reason" as defined in their respective employment agreements or (c) they breach the non-compete or confidentiality provisions of their agreements. 76 78 EMPLOYEE COMPENSATION PLANS Corporate Annual Bonus Plan Under The CIT Group Bonus Plan, which covers the Named Executive Officers and other employees, cash awards for each calendar year may be paid in amounts determined by the Executive Committee of the Board of Directors in its discretion. Following consummation of the Offering, the annual bonus plan will be administered by the Compensation Committee. 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. Long-Term Equity Compensation Plan The Company has adopted a stock-based incentive plan, the Long-Term Equity Compensation Plan (the "ECP"), covering Directors and employees of the Company and its subsidiaries. The ECP will be administered by the Board of Directors or a committee or individual designated by the Board of Directors (the "Administrator"). The ECP provides for the grant of annual incentive awards, incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance shares and performance units (individually, an "Award," or collectively, "Awards"). The terms of the awards will be set forth in award agreements ("Award Agreements"). The Administrator of the ECP will have the discretion to select the employees to whom Awards will be granted and to determine the type, size and terms and conditions applicable to each Award, and the authority to interpret, construe and implement the provisions of the ECP. The Administrator's decisions will be binding. Awards to Directors will be made by the Board of Directors of the Company or by a committee of Directors not otherwise entitled to participate in the ECP or based on a formula developed by the Board of Directors or such committee. The total number of shares of Class A Common Stock that may be subject to Awards under the ECP is approximately 12,503,000 shares. Class A Common Stock issued under the ECP may be either authorized but unissued shares, treasury shares or any combination thereof. The maximum aggregate payout with respect to an Annual Incentive Award in any fiscal year to any one participant is 25% of the pool for that year. The maximum aggregate number of shares of Class A Common Stock that may be granted in the form of stock options, stock appreciation rights, restricted stock, or performance units/shares in any one fiscal year to any one participant is 100% of the pool for that year. Set forth below is a brief description of the Awards that may be granted under the ECP: Annual Incentive Awards. An annual incentive award ("Annual Incentive Award") may be granted under the ECP upon such terms and conditions as may be established by the Administrator. Annual Incentive Awards may be granted in lieu of cash awards under The CIT Group Bonus Plan. Stock Options. Options (each an "Option") to purchase shares of Class A Common Stock, which may be incentive or non-qualified stock options, may be granted under the ECP at an exercise price (the "Option Price") determined by the Administrator of the ECP in its discretion, provided that the Option Price may be no less than the closing trading price of the Class A Common Stock on the New York Stock Exchange on the date of grant. Notwithstanding the foregoing, the initial grants described below will be granted with an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus. Each Option represents the right to purchase one share of Class A Common Stock at the specified Option Price. Options will expire no later than ten years after the date on which they were granted and will become exercisable at such times and in such installments as determined by the Administrator of the ECP. Payment of the Option Price, except as set forth below, must be made in full at the time of exercise in cash or by certified or bank check. As determined by the Administrator of the ECP, payment in full or in part may also be made by tendering to the Company shares of Class A Common Stock having a fair market value equal to the Option Price (or such portion thereof). The Administrator may also allow a cashless exercise of such options. Stock Appreciation Rights. An Award of a stock appreciation right ("SAR") may be granted under the ECP with respect to shares of Class A Common Stock. Generally, one SAR is granted with respect to one share of Class A Common Stock. The SAR entitles the participant, upon the exercise of the SAR, to receive an amount equal to the appreciation in the underlying share of Class A Common Stock. The appreciation is equal to the difference between (i) the "base value" of the SAR (which is determined with reference to the closing trading price of the Class A Common Stock on the New York Stock Exchange on the 77 79 date the SAR is granted) and (ii) the closing trading price of the Class A Common Stock on the New York Stock Exchange on the date the SAR is exercised. Upon the exercise of a vested SAR, the exercising participant will be entitled to receive the appreciation in the value of one share of Class A Common Stock as so determined, payable at the discretion of the participant in cash, shares of Class A Common Stock, or some combination thereof, subject to availability of shares of Class A Common Stock to the Company. SARs will expire no later than ten years after the date on which they are granted. SARs become exercisable at such times and in such installments as determined by the Administrator of the ECP. Tandem Options/SARs. An Option and a SAR may be granted "in tandem" with each other (a "Tandem Option/SAR"). An Option and a SAR are considered to be in tandem with each other because the exercise of the Option aspect of the tandem unit automatically cancels the right to exercise the SAR of the tandem unit, and vice versa. The Option may be an incentive stock option or non-qualified stock option, and the Option may be coupled with one SAR, more than one SAR or a fractional SAR in any proportionate relationship selected by the Administrator. Descriptions of the terms of the Option and the SAR aspects of a Tandem Option/SAR are provided above. Restricted Stock. An Award of restricted stock ("Restricted Stock") is an Award of Class A Common Stock that is subject to such restrictions as the Administrator of the ECP deems appropriate, including forfeiture conditions and restrictions against transfer for a period specified by the Administrator of the ECP. Restricted Stock Awards may be granted under the ECP for services and/or payment of cash. Restrictions on Restricted Stock may lapse in installments based on factors selected by the Administrator of the ECP. Prior to the expiration of the restricted period, except as and only if provided by the Administrator of the ECP, a grantee who has received a Restricted Stock Award generally has the rights of a stockholder of the Company, including the right to vote and to receive cash dividends on the shares subject to the Award. Stock dividends issued with respect to a Restricted Stock Award may be treated as additional shares under such Award with respect to which such dividends are issued. Performance Shares and Performance Units. A performance share Award ("Performance Share") and/or a performance unit Award (a "Performance Unit") may be granted under the ECP. Each Performance Unit will have an initial value that is established by the Administrator of the ECP at the time of grant. Each Performance Share will have an initial value equal to the closing trading price of one share of Class A Common Stock on the New York Stock Exchange on the date of grant. Such Awards may be earned based upon satisfaction of certain specified performance criteria, subject to such other terms and conditions as the Administrator of the ECP deems appropriate. Performance objectives will be established before, or as soon as practicable after the commencement of the performance period during which performance will be measured (the "Performance Period"). Prior to the end of a Performance Period, the Administrator of the ECP, in its discretion, may adjust the performance objectives to reflect an event that may materially affect the performance of the Company, including, but not limited to, market conditions or a significant acquisition or disposition of assets or other property by the Company. The extent to which a grantee is entitled to payment in settlement of such an Award at the end of a Performance Period will be determined by the Administrator of the ECP in its sole discretion, based on whether the performance criteria have been met and payment will be made in cash or in shares of Class A Common Stock, or some combination thereof, subject to availability of shares of Class A Common Stock to the Company, in accordance with the terms of the applicable Award Agreements. Performance Measures. The Administrator may grant Awards under the ECP to eligible participants subject to the attainment of certain specified performance measures. The number of performance-based Awards granted under the ECP in any year is determined by the Administrator in its sole discretion. The value of each performance-based Award shall be determined solely upon achievement of certain pre-established objective performance goals during each performance period. The duration of a Performance Period is set by the Administrator. A new Performance Period may begin every year, or at more or less frequent intervals, as determined by the Administrator. The value of performance-based Awards may be based on absolute measures or on a comparison of the Company's measures during a Performance Period to the comparable measures of a group of competitors. Measures selected by the Administrator shall be one or more of the following: net earnings, operating earnings or income, net income, absolute and/or relative return on equity, capital invested or assets, earnings per share, cash flow, profits, earnings growth, share price, total shareholder return, economic value added, expense reduction, customer satisfaction, and any combination of the foregoing measures as the Administrator deems appropriate. Change of Control. If a participant's employment with the Company is terminated by the Company, or a successor to the Company, 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 Offering, held by the participant, if any, shall become immediately exercisable; (ii) all restrictions and 78 80 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 Offering, held by the participant, if any, shall lapse; and (iii) the target payout opportunities under all outstanding Annual Incentive Awards, Performance Shares and Performance Units held by the participant, if any, will be deemed to have been fully earned for the Performance Period. The vesting of all Awards denominated in shares of Class A Common Stock will be accelerated as of the date of termination of the participant's employment with the Company and there shall be paid out in cash within 30 days of the date of termination of the participant's employment with the Company, a pro rata amount based on assumed achievement of all performance goals and upon the length of time of the performance period elapsed before the Change of Control as determined by the Administrator. 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 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 Offering. Effective upon consummation of the Offering, the Company will grant Awards (the "Offering Awards") to the Named Executive Officers and other selected participants. The Offering Awards, which include Restricted Stock and Options granted in respect of the termination of The CIT Career Incentive Plan, are summarized in the following table and are described below. Long-Term Equity Compensation Plan Awards
---------------------------------------- SHARES OF NON-QUALIFIED NAME AND POSITION RESTRICTED STOCK(1) STOCK OPTIONS(2) - ----------------------------------------------------------- ------------------- -------------------- Albert R. Gamper, Jr. President and Chief Executive Officer 128,302 619,200 Joseph A. Pollicino Vice Chairman 79,245 337,800 Joseph M. Leone Executive Vice President and Chief Financial Officer 26,534 114,600 William M. O'Grady Executive Vice President-- Administration 23,945 108,700 Ernest D. Stein Executive Vice President, General Counsel and Secretary 17,474 79,200 All Executive Officers as a Group (including those listed above) 305,270 1,360,600 All Other Employees as a Group 651,030 2,814,700 Non-Employee Directors 10,000 --
- --------------- (1) Assumes that the price to the public per share of Class A Common Stock in the Offering is $26.50 (the midpoint of the range set forth on the cover page of this Prospectus). To the extent that such price varies, the number of shares of Restricted Stock to be awarded will vary. (2) The Company intends to grant these options with an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus. The principal terms of the Offering Awards are as follows: (i) Upon termination of the Career Incentive Plan, an Award will be granted to each Named Executive Officer and to approximately 100 other officers which will consist of Restricted Stock which will vest on the third anniversary of the date of grant. In addition, 52 of the approximately 100 officers who were participants in the CIT Career Incentive Plan will be granted Options that will vest one-third on the first anniversary of the date of grant, an additional one-third on the second anniversary of the date of grant, and in full on the third anniversary of the date of grant. See " -- The CIT Career Incentive Plan." (ii) An Award will be granted pursuant to the Long-Term Equity Compensation Plan to each Named Executive Officer and to approximately 20 other officers that will consist of Options that will vest one-third on the third anniversary of the date of the grant, an additional one-third on the fourth anniversary of the date of the grant, and in full on the fifth anniversary of the date of the grant. 79 81 (iii) An Award will be granted pursuant to the Long-Term Equity Compensation Plan to each Named Executive Officer and to a significantly larger group of eligible employees which will consist of Options that will vest one-third on the first anniversary of the date of grant, an additional one-third on the second anniversary of the date of grant, and in full on the third anniversary of the date of grant. Certain Federal Income Tax Consequences of Awards. Certain of the federal income tax consequences to ECP participants and the Company of Awards granted under the ECP are generally set forth in the following summary. An employee to whom an Option which is an incentive stock option ("ISO") that qualifies under Section 422 of the Internal Revenue Code is granted will not recognize income at the time of grant or exercise of such Option. No federal income tax deduction will be allowable to the Company upon the grant or exercise of such ISO. However, upon the exercise of an ISO, any excess in the fair market price of the Class A Common Stock over the Option Price constitutes a tax preference item that may have alternative minimum tax consequences for the employee. When the employee sells such shares more than one year after the date of transfer of such shares and more than two years after the date of grant of such ISO, the employee will normally recognize a capital gain or loss equal to the difference, if any, between the sale prices of such shares and the aggregate Option Price and the Company will not be entitled to a federal income tax deduction with respect to the exercise of the ISO or the sale of such shares. If the employee does not hold such shares for the required period, when the employee sells such shares, the employee will recognize ordinary compensation income and possibly capital gain or loss in such amounts as are prescribed by the Internal Revenue Code and the regulations thereunder and the Company will generally be entitled to a federal income tax deduction in the amount of such ordinary compensation income. An employee to whom an Option which is a nonqualified stock option ("NSO") is granted will not recognize income at the time of grant of such Option. When the employee exercises such NSO, the employee will recognize ordinary compensation income equal to the difference, if any, between the Option Price paid and the fair market value, as of the date of Option exercise, of the shares of Class A Common Stock the employee receives. The tax basis of such shares to such employee will be equal to the Option Price paid plus the amount includible in the employee's gross income, and the employee's holding period for such shares will commence on the date of exercise. Subject to the applicable provisions of the Internal Revenue Code and regulations thereunder, the Company will generally be entitled to a federal income tax deduction in respect of an NSO in an amount equal to the ordinary compensation income recognized by the employee upon the exercise of the NSO. Generally, absent an election to be taxed currently under Section 83(b) of the Internal Revenue Code (a "Section 83(b) Election"), there will be no federal income tax consequences to either the employee or the Company upon the grant of Restricted Stock. At the expiration of the restricted period and the satisfaction of any other restrictions applicable to the Restricted Stock, the employee will recognize ordinary compensation income and the Company will be entitled to a corresponding federal income tax deduction equal to the fair market value of the Class A Common Stock at that time. If a Section 83(b) Election is made within 30 days after the date the Restricted Stock is received by the employee, the employee will recognize an amount of ordinary compensation income at the time of the receipt of the Restricted Stock and the Company will be entitled to a corresponding federal income tax deduction equal to the fair market value (determined without regard to applicable restrictions) of the shares at such time. If a Section 83(b) Election is made, no additional income will be recognized by the employee upon the lapse of restrictions on the shares, but, if the shares are subsequently forfeited, the employee may not deduct the income that was recognized pursuant to the Section 83(b) Election at the time of the receipt of the shares. There will be no federal income tax consequences to either the employee or the Company upon the grant of a SAR, Performance Share or Performance Unit. Generally, the employee will recognize ordinary income upon the receipt of payment pursuant to a SAR, Performance Share or Performance Unit in an amount equal to the fair market value of the Common Stock and the aggregate amount of cash received. The Company generally will be entitled to a corresponding tax deduction equal to the amount includible in the employee's income. RELATIONSHIP WITH DKB Upon consummation of the Offering, DKB will beneficially own 126,000,000 of the outstanding shares of Class B Common Stock of the Company (which have five votes per share). Upon consummation of the Offering, the Common Stock owned by DKB will represent in the aggregate 95.2% of the combined voting power and 80% of the combined economic interest of all of the outstanding Common Stock. For as long as DKB continues to own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, DKB will be able to direct the election of all of the members of the Company's Board of Directors and exercise a controlling influence over the business and affairs of the Company, including any determinations with respect to (i) mergers or other business combinations involving the Company, (ii) the acquisition or disposition of assets by the Company, (iii) the incurrence of indebtedness by the Company, (iv) the 80 82 issuance of any additional Common Stock or other equity securities and (v) the payment of dividends with respect to the Common Stock. Similarly, DKB will have the power (i) to determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, (ii) to prevent a change in control of the Company or (iii) to take other actions that might be favorable to DKB. See "Risk Factors--Control By and Relationship With DKB." DKB has advised the Company that it currently intends to continue to hold all of the shares of Class B Common Stock owned by it following the consummation of the Offering. However, DKB is not subject to any contractual obligation to retain its controlling interest, except that DKB has agreed not to sell or otherwise dispose of any shares of Class B Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of J.P. Morgan Securities Inc. As a result, there can be no assurance that DKB will maintain its percentage ownership of Common Stock immediately following the Offering for any specified period of time. See "Risk Factors--Shares Eligible for Future Sale" and "Underwriting." For a description of certain provisions of the Company's Restated Certificate of Incorporation concerning the allocation of business opportunities that may be suitable for both the Company and DKB, see "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate Opportunities." Set forth below are descriptions of certain agreements, relationships and transactions between the Company and DKB. REGULATORY COMPLIANCE AGREEMENT DKB is subject to U.S. and Japanese banking laws, regulations, guidelines and orders that affect permissible activities of the Company. DKB and the Company have entered into 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 the Company 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. The Company is also prohibited from engaging in any activity as would cause DKB, the Company or any affiliate of DKB or the Company to violate any Banking Laws. In the event that, at any time, it is determined by DKB that any activity then conducted by the Company is prohibited by any Banking Law, the Company is 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 the Company or any of its subsidiaries engaging in any activity and (ii) DKB and the Company are no longer subject to the jurisdiction of the Banking Laws with respect to the activities or transactions in which the Company may engage. REGISTRATION RIGHTS AGREEMENT The Registration Rights Agreement will provide that, upon the request of DKB, its subsidiaries or certain transferees of Common Stock from DKB or its subsidiaries (each, a "Qualified Transferee"), the Company will use its 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 it may hold or that are issued or issuable upon conversion of any other security that it may hold (including the shares of Class B Common Stock) and of any other securities issued or issuable in respect of the Class A Common Stock, in each case for sale in accordance with the intended method of disposition of the holder or holders making such demand for registration, and will take such other actions as may be necessary to permit the sale thereof in other jurisdictions, subject to certain specified limitations. DKB, its subsidiaries or any Qualified Transferee will also have 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 the Company initiated by the Company on its own behalf or on behalf of its other stockholders. The Company will agree to 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. The Registration Rights Agreement will contain indemnification and contribution provisions: (i) by DKB and its permitted assigns for the benefit of the Company; and (ii) by the Company 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. 81 83 TAX ALLOCATION AGREEMENT DKB does not include the Company in its consolidated group for federal income tax purposes. DKB includes the Company 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"), the Company 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, the Company is obligated to pay to DKB the California franchise tax that the Company would have paid as if it were filing on the same basis it would have filed on had it not entered into the Tax Allocation Agreement, and its liability cannot exceed the tax liability it would have incurred had it 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. 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. 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. Additional information regarding these transactions can be found in the Notes to Consolidated Financial Statements, "Note 20 -- Certain Relationships and Related Transactions." Schulte Roth & Zabel LLP, of which Paul N. Roth, a director of the Company, is a partner, provides legal services to the Company. Schulte Roth & Zabel LLP has been retained in the past and will continue in the future to serve as outside counsel for DKB. HISTORY OF OWNERSHIP OF COMMON STOCK Prior to the consummation of the Offering, DKB owned 80% of the issued and outstanding shares of common stock of the Company. DKB purchased a 60% common stock interest in the Company from Manufacturers Hanover Corporation ("MHC") at year-end 1989 and acquired an additional twenty percent (20%) common stock interest in the Company on December 15, 1995 from CBC Holding. DKB held an option, expiring December 15, 2000, to purchase the remaining twenty percent (20%) common stock interest from CBC Holding and its parent. CBC Holding became a direct, wholly-owned subsidiary of Chemical Banking Corporation ("CBC") after the merger between MHC and CBC on December 31, 1991. On March 31, 1996, CBC was merged into Chase and Chase became the sole stockholder of CBC Holding. The principal executive offices of DKB are located at 1-5, Uchisaiwaicho 1-chome, Chiyoda-ku, Tokyo 100, Japan. SHARES AVAILABLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have 31,500,000 shares of Class A Common Stock and 126,000,000 shares of Class B Common Stock issued and outstanding. All of the shares of Class A Common Stock to be sold in the Offering will be freely tradeable without restrictions or further registration under the Securities Act, except for any share purchased by an "affiliate" of the Company (as that term is defined in Rule 144 adopted under the Securities Act ("Rule 144")), which will be subject to the resale limitations of Rule 144. Immediately following the consummation of the Offering, all of the outstanding shares of Class B Common Stock will be beneficially owned by DKB and will not have been registered under the Securities Act. Therefore, such shares owned by DKB may be sold only pursuant to an effective registration statement under the Securities Act or in accordance with Rule 144 or another exemption from registration. DKB has certain rights to require the Company to effect registration of shares of Class A Common Stock, and certain other securities issued or issuable in respect thereof, owned by DKB, which rights may be assigned. See "Relationship with DKB--Registration Rights Agreement." In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of Common Stock for at least one year, including a person who may be deemed an "affiliate," is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) one percent (1%) of the total number of outstanding shares of the class of stock being sold or (ii) the average weekly reported trading volume of the class of stock being sold during the four calendar weeks preceding such sale. A person who is not deemed an "affiliate" of the Company at any time during the three months preceding a sale and who has beneficially owned shares for at least two years is entitled to sell such shares under Rule 144 without regard to the volume limitations described above. As defined in Rule 144, 82 84 an "affiliate" of an issuer is a person that directly or indirectly through the use of one or more intermediaries controls, is controlled by, or is under common control with, such issuer. Rule 144A under the Securities Act ("Rule 144A") provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act for specified resales of restricted securities to certain institutional investors. In general, Rule 144A allows unregistered resales of restricted securities to a "qualified institutional buyer," which generally includes an entity, acting for its own account or for the account of other qualified institutional buyers, that in the aggregate owns or invests at least $100 million in securities of unaffiliated issuers. Rule 144A does not extend an exemption to the offer or sale of securities that, when issued, were of the same class as securities listed on a national securities exchange or quoted on an automated quotation system. The shares of Class B Common Stock outstanding as of the date of this Prospectus would be eligible for resale under Rule 144A because such shares, when issued, were not of the same class as any listed or quoted securities. The foregoing summary of Rule 144 and Rule 144A is not intended to be a complete description thereof. Prior to the Offering, there has been no market for the Class A Common Stock, and no prediction can be made as to the effect, if any, that market sales of outstanding shares of Common Stock by DKB, or the availability of such shares for sale, will have on the market price of the Class A Common Stock prevailing from time to time. Nevertheless, sales by DKB of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A Common Stock offered in the Offering. See "Risk Factors--Shares Eligible for Future Sale." Although DKB in the future may effect or direct sales or other dispositions of Class B Common Stock that would reduce its beneficial ownership interest in the Company, DKB has advised the Company that it currently intends to continue to hold all of the Class B Common Stock beneficially owned by it following the Offering. However, DKB is not subject to any contractual obligation to retain its controlling interest, except that DKB has agreed not to sell or otherwise dispose of any shares of Class B Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of J.P. Morgan Securities Inc. As a result, there can be no assurance concerning the period of time during which DKB will maintain its ownership of Class B Common Stock owned by it immediately following the consummation of the Offering. See "Risk Factors--Shares Eligible for Future Sale" and "Underwriting." Beneficial ownership of at least 50% of the issued and outstanding Common Stock of the Company is required in order for DKB to continue to include the Company in its consolidated group for state income tax purposes in the State of California. See "Relationship with DKB." 83 85 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company will consist of (i) 700,000,000 shares of Class A Common Stock, par value $.01 per share, and 510,000,000 shares of Class B Common Stock, par value $.01 per share, and (ii) 50,000,000 shares of Preferred Stock (the "Preferred Stock"), par value $.01 per share. Of the 700,000,000 shares of Class A Common Stock, 31,500,000 shares are being offered in the Offering and 126,000,000 shares will be reserved for issuance upon conversion of shares of Class B Common Stock into shares of Class A Common Stock. There will be 126,000,000 shares of Class B Common Stock outstanding on the closing date of the Offering, all of which will be beneficially owned by DKB. In addition, 966,300 shares of restricted Class A Common Stock and options to purchase 4,175,300 shares of Class A Common Stock will be granted upon consummation of the Offering and 7,361,000 shares of Class A Common Stock will be reserved for future issuance under employee benefit plans. Upon consummation of the Offering, there will be no Preferred Stock outstanding. A description of the material terms and provisions which will be set forth in the Company's Amended and Restated Certificate of Incorporation, as amended immediately prior to the closing of the Offering, affecting the relative rights of the Class A Common Stock, the Class B Common Stock and the Preferred Stock is set forth below. The following description of the capital stock of the Company is intended as a summary only and is qualified in its entirety by reference to the Company's Amended and Restated Certificate of Incorporation, which will be filed with the Registration Statement of which this Prospectus forms a part, and to Delaware corporate law. COMMON STOCK Voting Rights The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to five votes per share on all matters to be voted on by stockholders, subject to the right of DKB or the Class B Transferee (as defined below), as the case may be, to reduce from time to time the number of votes per share of Class B Common Stock by written notice to the Company specifying the reduced number of votes per share. Holders of shares of Class A Common Stock and Class B Common Stock are not entitled to cumulate their votes for the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of the election of directors, by a plurality) of the votes entitled to be cast by all holders of shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any Preferred Stock. Except as otherwise provided by law or the Company's Amended and Restated Certificate of Incorporation, and subject to any voting rights granted to holders of any outstanding Preferred Stock, amendments to the Company's Amended and Restated Certificate of Incorporation must be approved by the vote of the holders of Common Stock having a combined voting power of a majority of all shares of Class A Common Stock and Class B Common Stock, voting together as a single class. Amendments to the Company's Amended and Restated Certificate of Incorporation that would alter or change the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock so as to affect them adversely also must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. Notwithstanding the foregoing, any amendment to the Company's Amended and Restated Certificate of Incorporation to increase or decrease the authorized shares of either class must be approved by the affirmative vote of the holders of Common Stock having a combined voting power of a majority of the shares of Class A Common Stock and Class B Common Stock, voting together as a single class. Dividends Holders of Class A Common Stock and Class B Common Stock will share ratably on a per share basis in any dividends declared by the Board of Directors, subject to any preferential rights of any outstanding Preferred Stock. In the case of dividends or other distributions payable in Common Stock, including distributions pursuant to stock splits or divisions of Common Stock, only shares of Class A Common Stock shall be paid or distributed to holders of shares of Class A Common Stock, and only shares of Class B Common Stock shall be paid or distributed to holders of Class B Common Stock. The Company may not reclassify, subdivide or combine shares of one class of Common Stock without at the same time proportionally reclassifying, subdividing or combining shares of the other class of Common Stock. 84 86 Conversion Each share of Class B Common Stock will be convertible at any time while held by DKB and/or any of its subsidiaries or the Class B Transferee (as defined below) and/or any of its subsidiaries at the option of the holder thereof into one share of Class A Common Stock. Except as provided below, any shares of Class B Common Stock transferred to a person other than DKB or any of its subsidiaries or the Class B Transferee or any of its subsidiaries shall automatically convert into shares of Class A Common Stock upon such disposition. Shares of Class B Common Stock representing more than a 50% economic interest in the Company transferred by DKB and/or any of its subsidiaries in a single transaction or series of related transactions to one unrelated person (the "Class B Transferee") and/or any of its subsidiaries shall not automatically convert into shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by DKB or any of its subsidiaries following any such disposition of more than a 50% economic interest in the Company to the Class B Transferee and/or any of its subsidiaries shall automatically convert into shares of Class A Common Stock upon such disposition. All shares of Class B Common Stock shall automatically convert into Class A Common Stock if the number of outstanding shares of Class B Common Stock beneficially owned by DKB and its subsidiaries or the Class B Transferee and its subsidiaries, as the case may be, falls below 25% of the aggregate number of outstanding shares of Common Stock. This will prevent DKB and its subsidiaries or the Class B Transferee and its subsidiaries, as the case may be, from decreasing their economic interest in the Company to less than 25% while still retaining control of a majority of the Company's voting power. The foregoing automatic conversion is intended to ensure that DKB and/or its subsidiaries or the Class B Transferee and/or its subsidiaries, as the case may be, retain voting control by virtue of their ownership of Class B Common Stock only if they continue to have a significant economic interest in the Company. All conversions will be effected on a share-for-share basis. Other Rights In the event of any merger, reorganization or consolidation of the Company with or into another entity in connection with which shares of Common Stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of Common Stock, regardless of class, will be entitled to receive the same kind and amount of shares of stock and other securities and property (including cash) except that shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class B Common Stock may differ from the shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class A Common Stock to the extent that the Class B Common Stock and Class A Common Stock differ as provided in the Company's Amended and Restated Certificate of Incorporation. On liquidation, dissolution or winding up of the Company, after payment in full of the amounts required to be paid to holders of Preferred Stock, if any, all holders of Common Stock, regardless of class, are entitled to share ratably in any assets available for distribution to holders of shares of Common Stock. No shares of either class of Common Stock are subject to redemption. Shares of Class A Common Stock do not have preemptive rights to purchase additional shares. Holders of shares of Class B Common Stock have preemptive rights to subscribe for and receive additional securities of the Company upon all additional issuances of stock by the Company (other than in connection with certain issuances pursuant to employee stock or stock option benefit plans or in connection with any stock split or stock dividend) of any or all classes or series thereof, or securities of the Company convertible into such stock, such that such holder of Class B Common Stock may, by purchasing such additional securities, maintain the percentage interest it had immediately prior to such issuance of the votes of the capital stock of the Company voting together as a single class and/or its economic interest in the Company. Upon consummation of the Offering, all the outstanding shares of Class A Common Stock and Class B Common Stock will be legally issued, fully paid and nonassessable. PREFERRED STOCK The Preferred Stock will be issuable from time to time in one or more series, with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company's Amended and Restated Certificate of Incorporation to determine, among other things, the rights and preferences and the limitations thereon pertaining to each such series. The Board of Directors, without stockholder approval, may issue Preferred Stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the Common Stock and could have certain anti-takeover effects. Upon consummation of the Offering, the Company will have no Preferred Stock outstanding and it has no current plans to issue any shares of Preferred Stock. The ability of the Board of Directors to issue Preferred Stock in the future without 85 87 stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Company or the removal of existing management. CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS Corporate Opportunities The Company's Amended and Restated Certificate of Incorporation will provide that DKB shall have no duty to refrain from engaging in the same or similar activities or lines of business as the Company, and neither DKB nor any director, officer or other employee thereof (except as provided below) will be liable to the Company or its stockholders for breach of any fiduciary duty by reason of any such activities of DKB. In the event that DKB acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both DKB and the Company, DKB shall have no duty to communicate or offer such corporate opportunity to the Company and shall not be liable to the Company or its stockholders for breach of any fiduciary duty as a stockholder of the Company by reason of the fact that DKB pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Company. In the event that a director, officer or other employee of the Company who is also a director or officer or other employee of DKB acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Company and DKB, such director, officer or other employee of the Company shall have fully satisfied and fulfilled the fiduciary duty of such director, officer or other employee of the Company and its stockholders with respect to such corporate opportunity if such director, officer or other employee acts in a manner consistent with the following policy: (i) a corporate opportunity offered to any person who is an officer or other employee of the Company, and who is also a director but not an officer or other employee of DKB, shall belong to the Company; (ii) a corporate opportunity offered to any person who is a director but not an officer or other employee of the Company, and who is also a director or officer or other employee of DKB, shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his or her capacity as a director of the Company, and otherwise shall belong to DKB; and (iii) a corporate opportunity offered to any person who is an officer or other employee of both the Company and DKB, or an officer of one and an employee of the other, shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his or her capacity as an officer of the Company, and otherwise shall belong to DKB. For purposes of the foregoing: (i) A director of the Company who is Chairman of the Board of Directors of the Company or of a committee thereof shall not be deemed to be an officer or employee of the Company by reason of holding such position (without regard to whether such position is deemed an officer of the Company under the By-Laws of the Company), unless such person is a full-time employee of the Company; and (ii) (A) The term "Company" shall mean the Company and all corporations, partnerships, joint ventures, associations and other entities controlled directly or indirectly by the Company through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise and (B) the term "DKB" shall mean DKB and all corporations, partnerships, joint ventures, associations and other entities (other than the Company, defined in accordance with clause (A) of this section (ii)) controlled (directly or indirectly) by DKB through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise. The foregoing provisions of the Company's Amended and Restated Certificate of Incorporation will expire on the date that DKB ceases to own beneficially Common Stock representing at least 25% of the voting power of all classes of outstanding Common Stock and no person who is a director, officer or employee of the Company is also a director, officer or employee of DKB or any of its subsidiaries (other than the Company). Any person purchasing or otherwise acquiring Common Stock will be deemed to have notice of, and to have consented to, the foregoing provisions of the Company's Amended and Restated Certificate of Incorporation. Provisions That May Have an Anti-Takeover Effect Certain provisions to be contained in the Company's Amended and Restated Certificate of Incorporation and By-Laws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover 86 88 attempt that a stockholder might consider to be in its best interest, including attempts that might result in a premium being paid over the market price for the shares held by stockholders. The Company's Amended and Restated Certificate of Incorporation will provide that, subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Company will be fixed as specified in the By-Laws. The By-Laws will provide that, (i) subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, the number of directors will be fixed at ten (10) unless the Board of Directors votes that such number shall be increased or decreased and (ii) subject to any rights of holders of Preferred Stock, any director may be removed from office, with or without cause, by vote of the holders of a majority of the votes entitled to be cast by the holders of all outstanding shares of Common Stock, voting together as a class. In addition, the Amended and Restated Certificate of Incorporation and By-Laws will provide that, subject to any rights of holders of Preferred Stock, and unless the Company's Board of Directors otherwise determines, any vacancies may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum, or by a sole remaining director, and except as otherwise provided by law, any such vacancy may not be filled by the stockholders. The Company's By-Laws will provide for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise matters at such meetings will have to be received in writing by the Company at its principal executive offices not less than 60 nor more than 90 days prior to the first anniversary of the previous year's annual meeting of stockholders, subject to adjustment in certain situations, and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The Company's Amended and Restated Certificate of Incorporation and By-Laws will also provide that special meetings of stockholders may be called only by certain specified officers of the Company or by any such officer at the request in writing of the Board of Directors; special meetings of stockholders cannot be called by stockholders. In addition, the Company's Amended and Restated Certificate of Incorporation will provide that any action required or permitted to be taken by stockholders may be effected by written consent provided, however, that on and after the date on which neither DKB and its subsidiaries nor the Class B Transferee and its subsidiaries continue to beneficially own more than 50% of the total voting power of the outstanding Common Stock, any action required or permitted to be taken by stockholders may be effected only at a duly called annual or special meeting of stockholders and may not be effected by a written consent by stockholders in lieu of such a meeting. TRANSACTIONS WITH INTERESTED STOCKHOLDERS The Company has elected not to be governed by Section 203 of the Delaware General Corporation Law, which provision requires the vote of at least 66 2/3% of the outstanding voting stock of a company not owned by an interested stockholder (as defined) to approve certain business combinations. As a result, any such proposed business combination with respect to the Company will require the vote of only a majority of stockholders. So long as DKB controls a majority of the voting power of the Company, it will be able to approve or disapprove of any such action without the vote of any other stockholder. LIMITATIONS ON DIRECTORS' LIABILITY The Company's Amended and Restated Certificate of Incorporation provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock will be The Bank of New York. 87 89 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of certain U.S. federal income and estate tax consequences of the ownership and disposition of Class A Common Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person who is, for U.S. federal income tax purposes, a foreign corporation, a non-resident alien individual, a foreign partnership or a foreign estate or trust. This discussion does not address all aspects of U.S. federal income and estate taxes and does not deal with foreign, state and local consequences that may be relevant to such Non-U.S. Holders in light of their personal circumstances (such as certain tax consequences applicable to pass-through entities). Furthermore, this discussion is based on provisions of the Internal Revenue Code of 1986, as amended, existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change (possibly with retroactive effect). EACH PROSPECTIVE PURCHASER OF CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF CLASS A COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING JURISDICTION. DIVIDENDS Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will be subject to withholding of U.S. federal income tax either at a rate of 30% of the gross amount of the dividends or at such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where a tax treaty applies, are attributable to a U.S. permanent establishment of the Non-U.S. Holder, are not subject to the withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current law, dividends paid prior to January 1, 1999 to an address outside the United States are presumed to be paid to a resident of such country (unless the payer has knowledge to the contrary) for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. Under recently finalized United States Treasury regulations, however, a Non-U.S. Holder of Class A Common Stock who wishes to claim the benefit of an applicable treaty rate (and/or generally to avoid backup withholding, as discussed below) with respect to dividends paid after December 31, 1998 will be required to satisfy applicable certification and other requirements. Currently, certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption discussed above. A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service (the "IRS"). GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of Class A Common Stock unless (i) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, and, where a tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the Class A Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to U.S. expatriates or (iv) the Company is or has been a "U.S. real property holding corporation" for U.S. federal income tax purposes and, in the event that the Class A Common Stock is considered "regularly traded," the Non-U.S. Holder held directly or indirectly at any time during the five-year period ending on the date of disposition more than five percent of the Class A Common Stock. The Company believes it is not and does not anticipate becoming a "U.S. real property holding corporation" for U.S. federal income tax purposes. An individual Non-U.S. Holder described in clause (i) above, will, unless an applicable treaty provides otherwise, be taxed on the net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual Non-U.S. Holder described in clause (ii) above, will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by certain U.S. source capital losses. 88 90 If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it will be taxed on its gain under regular graduated U.S. federal income tax rates and may be subject to an additional branch profits tax at a 30% rate, unless it qualifies for a lower rate under an applicable income tax treaty. FEDERAL ESTATE TAX Class A Common Stock owned or treated as owned by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and therefore may be subject to U.S. federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. Under current law, backup withholding at the rate of 31% generally will not apply to dividends paid prior to January 1, 1999 to a Non-U.S. Holder at an address outside the United States (unless the payer has knowledge that the payee is a U.S. person). Under recently finalized United States Treasury regulations, however, a Non-U.S. Holder will generally be subject to backup withholding with respect to dividends paid after December 31, 1998 unless applicable certification requirements are met. Payment of the proceeds of a sale of Class A Common Stock by or through a U.S. office of a broker is subject to both backup withholding and information reporting unless the beneficial owner provides the payer with its name and address and certifies under penalties of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption. In general, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of Class A Common Stock by or through a foreign office of a foreign broker. If, however, such broker is, for U.S. federal income tax purposes a U.S. person, a controlled foreign corporation, a foreign person that derives 50% or more of its gross income for a certain period from the conduct of a trade or business in the United States or, effective after December 31, 1998, another U.S. related person described in Section 1.6049-5(c)(5) of the Treasury Regulations, such payments will be subject to information reporting, but not backup withholding, unless (1) such broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and certain other conditions are met, or (2) the beneficial owner otherwise establishes an exemption. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished in a timely manner to the IRS. The backup withholding and information reporting rules are under review by the Treasury Department and their application to the Class A Common Stock could be changed by future regulations. Non-U.S. Holders should consult their tax advisors regarding the application of these rules to their particular situations, the availability of an exemption therefrom, the procedure for obtaining such an exemption, if available, and the possible application of the proposed United States Treasury regulations addressing the withholding and the information reporting rules. 89 91 UNDERWRITING J.P. Morgan & Co. is acting as bookrunning lead manager for the Offering. J.P. Morgan & Co. and Goldman, Sachs & Co. are acting as joint lead managers. Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the Underwriters named below, for whom J.P. Morgan Securities Inc., Goldman, Sachs & Co., Morgan Stanley & Co., Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc and UBS Securities LLC are acting as representatives (the "Representatives"), have severally agreed to purchase, and the Company has agreed to sell to them, the respective number of shares of Class A Common Stock set forth opposite their names below. Under the terms and conditions of the Underwriting Agreement, the Underwriters are obligated to take and pay for all such shares of Class A Common Stock, if any are taken. Under certain circumstances, the commitments of nondefaulting Underwriters may be increased as set forth in the Underwriting Agreement.
---------------- UNDERWRITERS NUMBER OF SHARES ---------------- J.P. Morgan Securities Inc. ............................................................. Goldman, Sachs & Co. .................................................................... Morgan Stanley & Co. Incorporated........................................................ Credit Suisse First Boston Corporation................................................... Lehman Brothers Inc. .................................................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated....................................... Salomon Brothers Inc..................................................................... UBS Securities LLC....................................................................... Total.................................................................................... =============
The Underwriters propose initially to offer the Class A Common Stock directly to the public at the price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering of the Class A Common Stock, the public offering price and such concession may be changed. Pursuant to the Underwriting Agreement, the Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 4,725,000 shares of Class A Common Stock on the same terms and conditions as set forth on the cover page hereof. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the sale of the Class A Common Stock offered hereby. To the extent such option is exercised, such Underwriter will have a commitment, subject to certain conditions, to purchase approximately the same percentage of such additional Class A Common Stock as the number set forth next to each Underwriter's name in the preceding tables bears to the total number of shares of Class A Common Stock offered hereby. 90 92 In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a syndicate short position. In addition, the Underwriters may bid for, and purchase, shares of Class A Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Class A Common Stock. Finally, the underwriting syndicate may reclaim selling concessions allowed for distributing the Class A Common Stock in the Offering if the syndicate repurchases previously distributed Class A Common Stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Class A Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company, DKB and each of the Company's executive officers and directors have agreed, with limited exceptions, that during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus they will (i) not offer, sell, contract to sell or otherwise dispose of Class A Common Stock or any securities of the Company which are substantially similar to the Class A Common Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Class A Common Stock or any such substantially similar securities or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequence of ownership of Class A Common Stock or any securities substantially similar to the Class A Common Stock (other than (i) pursuant to employee stock option and restricted stock plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Prospectus and (ii) the issuance of Common Stock in connection with the transactions described in this Prospectus), without the prior written consent of J.P. Morgan Securities Inc. Prior to the Offerings, CBC Holding holds a 20% interest in the Company. CBC Holding is affiliated with Chase Securities Inc., which is a member of the NASD and is expected to participate in the distribution of the Offering. Chase Securities Inc. is an affiliate of the Company under the rules of the NASD. The Offering is being conducted in accordance with NASD Rule 2720, which provides that, among other things, when an NASD member is in a conflict of interest with an issuer, the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" (a "QIU") meeting certain standards. J.P. Morgan Securities Inc. is assuming the responsibilities of acting as "qualified independent underwriter" within the meaning of such rules in pricing the Offering and conducting due diligence. The Company has agreed to indemnify the QIU against certain liabilities, including liabilities under the Securities Act or to contribute to payments which the QIU may be required to make in respect thereof. In addition, NASD members may not execute transactions in shares of Class A Common Stock offered hereby to any accounts over which they exercise discretionary authority without the prior written approval of the customer, in accordance with NASD Rule 2720. The Underwriters have reserved for sale, at the initial public offering price, shares of the Class A Common Stock for certain directors, officers, retirees and employees of the Company and certain related persons in the United States and, subject to local laws, internationally, who have expressed an interest in purchasing such shares of Class A Common Stock in the Offering. Such persons are expected to purchase, in the aggregate, not more than 5.0% of the Class A Common Stock offered in the Offering. The number of shares available for sale to the general public in the Offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered to the general public on the same basis as other shares offered hereby. The Class A Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the trading symbol "CIT." Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price for the shares of Class A Common Stock offered hereby has been determined by agreement between the Company and the Underwriters. Among the factors considered in making such determination were the history of and the prospects for the industry in which the Company competes, an assessment of the Company's management, the present operations of the Company, the historical results of operations of the Company and the trend of its revenues and earnings, the prospects for future earnings of the Company, the general condition of the securities markets at the time of the Offering and the prices of similar securities of generally comparable companies. There can be no assurance that an active trading market will develop for the Class A Common Stock or that the Class A Common Stock will trade in the public market at or above the initial public offering price. From time to time in the ordinary course of their respective businesses, certain of the Underwriters and their affiliates have engaged in and may in the future engage in commercial and/or investment banking transactions with the Company and its affiliates. 91 93 LEGAL MATTERS The validity of the Class A Common Stock offered hereby will be passed upon for the Company by Schulte Roth & Zabel LLP, New York, New York. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York. Schulte Roth & Zabel LLP has in the past provided, and may continue to provide, legal services to DKB and its affiliates. Paul N. Roth, a director of the Company, is a partner of Schulte Roth & Zabel LLP. EXPERTS The consolidated balance sheets of the Company as of December 31, 1996 and 1995 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, 1996 included in this Prospectus, have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent accountants, included in this Prospectus, and upon the authority of said firm as experts in accounting and auditing. 92 94 GLOSSARY ASA Average serviced assets -- AEA plus the average of consumer finance receivables previously securitized and currently managed by the Company and consumer finance receivables serviced for third parties. AEA Average earning assets -- the average of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments, less credit balances of factoring clients. charge-off A loan which is deemed uncollectible, in whole or in part, and is charged against the reserve for credit losses. Generally, finance receivables are charged-off after considering such factors as the customer's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Class A Common Stock Class A Common Stock, par value $0.01 per share, of the Company. Class B Common Stock Class B Common Stock, par value $0.01 per share, of the Company. Common Stock Class A Common Stock and Class B Common Stock. contractual delinquency Failure to pay when due any amount as called for by the terms of the contract. debt to common equity ratio The ratio of interest bearing debt to total common stockholders' equity. Duff & Phelps Duff & Phelps Credit Rating Company. earning assets The sum of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments, less credit balances of factoring clients. efficiency ratio 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. FICO scores Borrower ratings determined under the Fair Isaac Company consumer loan credit scoring system. finance receivables The sum of loans and leases (except operating leases) extended to customers, net of any unearned income or other adjustments. financing and leasing assets The sum of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments. HLT Highly Leveraged Transaction. See page 33 for the criteria used to determine whether a transaction is an HLT. home equity Fixed- and adjustable-rate loans secured by mortgages on residential real estate. LIBOR London Interbank Offered Rate. loans See "finance receivables." managed assets The sum of financing and leasing assets and off-balance sheet consumer finance receivables previously securitized and currently managed by the Company. Moody's Moody's Investor Services, Inc. net credit losses The losses from accounts charged-off, net of recoveries on loans previously charged-off. net finance income Finance income less interest expense. portfolio seasoning The maturing of a loan portfolio beyond an early stage when past due and net credit loss experience increases to normalized levels. serviced assets The sum of financing and leasing assets, consumer finance receivables previously securitized and currently managed by the Company and other consumer finance receivables serviced for third parties. Standard & Poor's Standard & Poor's Ratings Group. 93 95 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995, and 1994 F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and December 31, 1996 F-26 Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996 F-27 Unaudited Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1997 and 1996 F-28 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 F-29 Notes to Unaudited Condensed Consolidated Financial Statements F-30
F-1 96 INDEPENDENT AUDITORS' REPORT The Board of Directors The CIT Group, Inc.: We have audited the accompanying consolidated balance sheets of The CIT Group, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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 from 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Short Hills, New Jersey January 17, 1997, except as to Note 21 which is as of February 21, 1997 and Note 22 which is as of September 26, 1997 F-2 97 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
----------------------- AT DECEMBER 31, 1996 1995 --------- --------- Dollars in millions ASSETS Financing and leasing assets Loans Commercial $10,195.6 $10,356.3 Consumer 3,239.0 2,344.0 Lease receivables 3,562.0 3,095.2 --------- --------- Finance receivables (Note 3) 16,996.6 15,795.5 Reserve for credit losses (Note 4) (220.8) (206.0) --------- --------- Net finance receivables 16,775.8 15,589.5 Operating lease equipment, net (Note 5) 1,402.1 1,113.0 Cash and cash equivalents 103.1 161.5 Other assets 651.5 556.3 --------- --------- Total assets $18,932.5 $17,420.3 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Debt (Notes 6 and 7) Commercial paper $ 5,827.0 $ 6,105.6 Variable rate senior notes 3,717.5 3,827.5 Fixed rate senior notes 4,761.2 3,337.0 Subordinated fixed rate notes 300.0 300.0 --------- --------- Total debt 14,605.7 13,570.1 Credit balances of factoring clients 1,134.1 980.9 Accrued liabilities and payables 594.0 485.9 Deferred Federal income taxes (Note 11) 523.3 469.2 --------- --------- Total liabilities 16,857.1 15,506.1 STOCKHOLDERS' EQUITY (Note 8) Common stock--authorized, issued and outstanding--1,000 shares 250.0 250.0 Paid-in capital 573.3 408.3 Retained earnings 1,252.1 1,255.9 --------- --------- Total stockholders' equity 2,075.4 1,914.2 --------- --------- Total liabilities and stockholders' equity $18,932.5 $17,420.3 ========= =========
See accompanying notes to consolidated financial statements. F-3 98 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 -------- -------- -------- Dollars in millions Finance income $1,646.2 $1,529.2 $1,263.8 Interest expense 848.3 831.5 614.0 -------- -------- -------- Net finance income 797.9 697.7 649.8 Fees and other income (Note 9) 244.1 184.7 174.4 -------- -------- -------- Operating revenue 1,042.0 882.4 824.2 -------- -------- -------- Salaries and general operating expenses (Note 10) 393.1 345.7 337.9 Provision for credit losses (Note 4) 111.4 91.9 96.9 Depreciation on operating lease equipment (Note 5) 121.7 79.7 64.4 -------- -------- -------- Operating expenses 626.2 517.3 499.2 -------- -------- -------- Income before provision for income taxes 415.8 365.1 325.0 Provision for income taxes (Note 11) 155.7 139.8 123.9 -------- -------- -------- Net income $ 260.1 $ 225.3 $ 201.1 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 99 THE CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 -------- -------- -------- Dollars in millions COMMON STOCK Balance, beginning and end of period $ 250.0 $ 250.0 $ 250.0 -------- -------- -------- PAID-IN CAPITAL Balance, beginning of period $ 408.3 $ 408.3 $ 408.3 Capital contribution from stockholders (Note 1) 165.0 -- -- -------- -------- -------- Balance, end of period $ 573.3 $ 408.3 $ 408.3 -------- -------- -------- RETAINED EARNINGS Balance, beginning of period $1,255.9 $1,134.7 $1,033.9 Net income 260.1 225.3 201.1 Dividends paid--regular (98.9) (104.1) (100.3) --special (Note 1) (165.0) -- -- -------- -------- -------- Balance, end of period $1,252.1 $1,255.9 $1,134.7 -------- -------- -------- Total stockholders' equity (Note 8) $2,075.4 $1,914.2 $1,793.0 ======== ======== ========
See accompanying notes to consolidated financial statements F-5 100 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 ---------- ---------- ----------- Dollars in millions CASH FLOWS FROM OPERATIONS Net income $ 260.1 $ 225.3 $ 201.1 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses 111.4 91.9 96.9 Depreciation and amortization 140.3 88.7 75.4 Provision for deferred Federal income taxes 54.1 42.5 27.7 Gains on sales of equipment, other investments, receivable sales and securitizations (78.9) (36.8) (26.1) Increase in accrued liabilities and payables 108.1 131.2 24.2 Increase in other assets (65.9) (17.7) (0.1) Other (3.7) (22.7) (17.2) ------------- ------------- ------------- Net cash flows provided by operations 525.5 502.4 381.9 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Loans extended (31,414.4) (30,567.6) (23,610.9) Collections on loans 30,355.8 28,750.8 22,394.0 Purchases of assets to be leased (1,664.0) (1,079.8) (1,039.7) Proceeds from asset and receivable sales 1,144.9 816.8 535.6 Collections on lease receivables 776.4 712.9 632.2 Purchases of finance receivable portfolios (661.3) (22.7) (181.7) Proceeds from sales of assets received in satisfaction of loans 76.7 26.2 40.4 Purchases of investment securities (20.8) (12.1) (21.1) Net decrease (increase) in short-term factoring receivables (0.3) 123.6 (207.4) Acquisition of Barclays Commercial Corporation -- -- (435.6) Other (25.5) (43.4) (26.7) ------------- ------------- ------------- Net cash flows used for investing activities (1,432.5) (1,295.3) (1,920.9) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of variable and fixed rate notes 4,776.0 3,698.6 3,985.8 Repayments of variable and fixed rate notes (3,461.8) (2,966.0) (1,529.6) Net (decrease) increase in commercial paper (278.6) 445.4 (855.9) Cash dividends paid (263.9) (104.1) (100.3) Capital contribution from stockholders 165.0 -- -- Repayments of non-recourse leveraged lease debt (146.2) (135.7) (103.1) Proceeds from non-recourse leveraged lease debt 58.1 9.7 47.0 ------------- ------------- ------------- Net cash flows provided by financing activities 848.6 947.9 1,443.9 ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (58.4) 155.0 (95.1) Cash and cash equivalents, beginning of year 161.5 6.5 101.6 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 103.1 $ 161.5 $ 6.5 ============= ============= ============= SUPPLEMENTAL DISCLOSURES Interest paid $ 842.6 $ 958.8 $ 616.8 Federal and state and local income taxes paid 102.5 95.0 98.9 Noncash transfer of finance receivables to other assets (principally securitizations) 778.9 772.5 117.1 Noncash transfer of finance receivables to assets received in satisfaction of loans 91.8 30.8 80.5 Noncash transfer of assets received in satisfaction of loans to finance receivables 10.9 40.6 -- Noncash transfer of finance receivables to operating lease equipment 14.4 -- -- Noncash transfers of assets received in satisfaction of loans to operating lease equipment -- -- 17.3
See accompanying notes to consolidated financial statements. F-6 101 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 commercial and consumer financial services activities through a nationwide distribution network. The Dai-Ichi Kangyo Bank, Limited ("DKB") owns 80% of the issued and outstanding stock of the Company, 60% of which it purchased from Manufacturers Hanover Corporation ("MHC") in 1989. DKB acquired an additional 20% of the Company from Chemical Banking Corporation ("CBC") in December 1995. The remaining 20% of the Company's issued and outstanding stock is owned by The Chase Manhattan Corporation ("Chase") which merged with CBC during 1996. DKB has an option expiring December 15, 2000 to purchase the remaining twenty percent (20%) common stock interest from Chase. On December 24, 1996, the Company paid a special dividend in the aggregate amount of $165.0 million to its stockholders, DKB and Chase. The stockholders then immediately contributed $165.0 million to the Company's paid-in capital in proportion to their 80% and 20% common stock ownership interests, respectively. 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, principally in the Consolidated Statements of Cash Flows, 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. 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. The amounts outstanding on loans and leases are referred to as finance receivables and, when combined with the net book value of operating lease equipment, 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 is suspended and an account is placed on nonaccrual status either when a payment is contractually delinquent for 90 days or more and collateral is insufficient to cover both the outstanding principal and accrued finance income or immediately if, in the opinion of management, full collection of all principal and income is doubtful. For certain consumer loans, the accrual of finance income is suspended at either 120 days when no contractual payments are received or at 180 days when partial payments have been received. Accrued but uncollected income at the date finance income is suspended is reversed and charged against income to the extent the estimated fair value of collateral does not satisfy both the principal and accrued income outstanding. Such accrued but uncollected income is immaterial. 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. 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 equipment, other 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 F-7 102 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Leveraged leases are recorded at the aggregate value of future minimum lease payments plus estimated residual value, less amounts due to non-recourse third-party lenders 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 reserve for credit losses is established and periodically reviewed for adequacy based on the nature and characteristics of the obligors, economic conditions and trends, charge-off experience, delinquencies, and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). It is management's judgment that the reserve for credit losses is adequate to provide for potential credit losses. Charge-off of Finance Receivables Finance receivables are reviewed periodically to determine the probability of loss. Chargeoffs are taken after considering such factors as the customer's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Such chargeoffs 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. Although certain consumer loans are reviewed individually for chargeoffs, automatic chargeoffs are recorded on consumer loans when no contractual payments are received for 120 days, or at 180 days when partial payments have been received. Impaired Loans The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures", (collectively referred to hereafter as "SFAS 114") on January 1, 1995. SFAS 114 requires that the value of an impaired loan be measured based upon 1) the present value of expected future cash flows discounted at the loan's effective interest rate or, 2) at 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 ("AQR"). The AQR is comprised of members of senior management, which covers 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. Other Assets 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 "excess servicing assets." In determining expected net cash flows, the Company considers assumptions of prepayment and loss experience and market interest rates. Excess servicing assets are stated at the lower of amortized cost or fair value, which is determined by adjusting the present value of the remaining cash flows for anticipated prepayment and loss experience. Amortization is recognized on excess servicing assets systematically in relation to the excess cash flows of securitizations. In 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires an enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and then sells or securitizes those loans with servicing rights retained to allocate the total cost F-8 103 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) between the mortgage servicing rights and the loans based on their relative fair values. This Statement applies to the sale or securitization of home mortgage or manufactured housing finance receivables when servicing is retained. The Statement also requires that the enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The adoption of SFAS 122 did not affect the Company's consolidated financial position, results of operations or liquidity for the year ended December 31, 1996. 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 20 years. 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 provision for credit losses. 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 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 enters into 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 market 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 interest expense to correspond with the hedged asset or liability position, respectively. In the event that early termination of a derivative instrument occurs, the net proceeds paid or received are deferred and amortized over the shorter of the remaining original contract life of the interest rate swap or the maturity of the hedged asset or liability position. The Company will also utilize derivative instruments to hedge the interest rate used to price 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 reclassified to other assets. The net interest differential on the derivative instrument, including premium paid or received, if any, is recognized as an adjustment to the basis of the corresponding assets at the time of sale. In the event the anticipated 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 loans. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment. 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 on the Consolidated Balance Sheets. Such credits are amortized as a reduction of the provision for income taxes using an actuarial method over the related lease term. 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. F-9 104 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1996 and 1995 are leveraged lease receivables of $648.8 million and $576.7 million, respectively. Leveraged lease receivables exclude the portion of lease receivables offset by related non-recourse debt payable to third-party lenders of $2.1 billion at both December 31, 1996 and 1995, including amounts owed to affiliates of DKB which totaled $486.6 million at year-end 1996, and $501.3 million at year-end 1995. Also excluded from finance receivables are $1.4 billion of finance receivables at December 31, 1996 ($0.9 billion in 1995) previously securitized by the Company. Commercial and consumer loans are presented net of unearned income of $540.4 million and $571.2 million at December 31, 1996 and 1995, respectively. Lease receivables are presented net of unearned income of $1.0 billion and $978.9 million at December 31, 1996 and 1995, respectively. The following table sets forth the contractual maturities of finance receivables.
--------------------------------------------- AT DECEMBER 31, 1996 1995 -------------------- -------------------- Dollars in millions AMOUNT PERCENT AMOUNT PERCENT --------- ------ --------- ------ Due Within One Year $ 5,698.2 33.53% $ 5,523.6 34.97% Due Within One to Two Years 2,515.6 14.80 2,488.8 15.76 Due Within Two to Four Years 3,647.0 21.46 3,288.7 20.82 Due After Four Years 5,135.8 30.21 4,494.4 28.45 --------- ------ --------- ------ Total $16,996.6 100.00% $15,795.5 100.00% ========= ====== ========= ======
Information about concentrations of credit risk is set forth in "Industry Composition" and "Geographic Composition" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table sets forth information regarding finance receivables on nonaccrual status and assets received in satisfaction of loans.
----------------- AT DECEMBER 31, 1996 1995 ------ ------ Dollars in millions Nonaccrual finance receivables $119.6 $139.5 Assets received in satisfaction of loans 47.9 42.0 ------ ------ Total nonperforming assets $167.5 $181.5 ====== ====== Percent to finance receivables 0.99% 1.15%
The amount of finance income recognized on year-end nonaccrual finance receivables totaled $8.5 million, $8.0 million and $6.2 million in 1996, 1995 and 1994, respectively. The amount of finance income which would have been recorded under contractual terms for such nonaccrual receivables totaled $24.7 million, $29.3 million, and $20.7 million in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the recorded investment in impaired loans, which are generally collateral dependent, totaled $103.9 million and $159.3 million, respectively. The fair value of the collateral or the present value of expected future cash flows equaled or exceeded the recorded investment for the impaired loans and, as such, there was no related SFAS 114 allowance for credit losses. The average monthly recorded investment in the impaired loans was $89.4 million and $116.9 million for the years ended December 31, 1996 and 1995, respectively. There was no finance income recorded on these loans during 1996 after being classified as impaired. During 1995, finance income of $1.0 million was recognized on these loans F-10 105 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) after being classified as impaired loans. The adoption of SFAS 114 on January 1, 1995 had no material effect on the Company's 1995 financial condition, results of operation or liquidity. At December 31, 1996, and 1995, the Company had $10.8 million and $30.0 million, respectively, of finance receivables that met the criteria of troubled debt restructurings, which were not included in the preceding table. Finance income recognized on troubled debt restructurings totaled $0.7 million, $2.8 million and $0.8 million in 1996, 1995 and 1994, respectively. Finance income on these restructured receivables would have been $1.3 million, $3.3 million and $2.1 million for 1996, 1995 and 1994, respectively, based on original contractual terms. NOTE 4--RESERVE FOR CREDIT LOSSES The following table presents changes in the reserve for credit losses.
---------------------------- 1996 1995 1994 ------ ------ ------ Dollars in millions Balance, January 1 $206.0 $192.4 $169.4 ------ ------ ------ Finance receivables charged-off (122.2) (96.9) (95.4) Recoveries on finance receivables previously charged-off 20.7 19.7 11.2 ------ ------ ------ Net credit losses (101.5) (77.2) (84.2) ------ ------ ------ Provision for credit losses 111.4 91.9 96.9 Portfolio acquisitions (dispositions), net 4.9 (1.1) 10.3 ------ ------ ------ Net addition to the reserve for credit losses 116.3 90.8 107.2 ------ ------ ------ Balance, December 31 $220.8 $206.0 $192.4 ====== ====== ====== Reserve for credit losses as a percentage of finance receivables 1.30% 1.30% 1.30%
NOTE 5--OPERATING LEASE EQUIPMENT The following table provides an analysis of operating lease equipment by equipment type, net of accumulated depreciation of $287.7 million in 1996 and $198.1 million in 1995.
--------------------- AT DECEMBER 31, Dollars in millions 1996 1995 -------- -------- Commercial aircraft $ 624.0 $ 499.4 Railroad equipment 273.2 153.4 Business aircraft 167.8 141.2 Trucks, trailers and buses 160.1 163.2 Other 177.0 155.8 --------- --------- Total $1,402.1 $1,113.0 ========= =========
Included in the preceding table is equipment not currently subject to lease agreements of $1.9 million and $24.4 million at December 31, 1996 and 1995, respectively. During the first quarter of 1996, the Company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that a review for impairment be 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 exceed 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. The F-11 106 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) adoption of SFAS 121 did not have a significant impact on the Company's consolidated financial position, results of operations or liquidity. Rental income on operating leases, included in finance income, totaled $182.4 million in 1996, $128.8 million in 1995 and $97.2 million in 1994. The following table presents future minimum lease rentals on noncancellable operating leases as of December 31, 1996. 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.
---------- AMOUNTS IN MILLIONS ----------- Years Ended December 31, 1997 $ 193.7 1998 162.7 1999 126.3 2000 91.9 2001 70.1 Thereafter 89.8 ------ Total $ 734.5 ======
NOTE 6--DEBT The following table presents data on commercial paper borrowings.
---------------------------------- 1996 1995 1994 -------- -------- -------- Dollars in millions At December 31, Borrowings outstanding $5,827.0 $6,105.6 $5,660.2 Weighted average interest rate 5.45% 5.75% 5.65% Weighted average maturity 32 days 45 days 22 days For the year ended December 31, Daily average borrowings $5,817.7 $5,800.1 $6,532.5 Maximum amount outstanding $6,591.3 $6,672.1 $7,207.3 Weighted average interest rate (excluding amounts related to interest bearing deposits) 5.44% 5.95% 4.31%
The following table presents the contractual maturities of total debt at December 31, 1996.
------------------------------------------------------ COMMERCIAL VARIABLE RATE 1996 1995 PAPER SENIOR NOTES TOTAL TOTAL ---------- ------------- -------- -------- Dollars in millions Due in 1996 (rates ranging from 5.55% to 5.95%) $ -- $ -- $ -- $8,505.6 Due in 1997 (rates ranging from 5.04% to 6.14%) 5,827.0 2,856.0 8,683.0 806.0 Due in 1998 (rates ranging from 5.47% to 6.03%)(1) -- 461.5 461.5 241.5 Due in 1999 (rates ranging from 5.04% to 6.06%) -- 380.0 380.0 380.0 Due after 2001 (rate of 5.85%) -- 20.0 20.0 -- -------- -------- -------- -------- Total $5,827.0 $ 3,717.5 $9,544.5 $9,933.1 ======== ======== ======== ========
F-12 107 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
--------------------------------------------------- FIXED RATE NOTES 1996 1995 SENIOR SUBORDINATED TOTAL TOTAL -------- ------------ -------- -------- Dollars in millions Due in 1996 (rates ranging from 4.75% to 8.88%) $ -- $ -- $ -- $1,030.0 Due in 1997 (rates ranging from 5.50% to 8.75%) 700.2 -- 700.2 702.0 Due in 1998 (rates ranging from 5.63% to 8.75%) 1,550.0 -- 1,550.0 800.0 Due in 1999 (rates ranging from 5.38% to 6.63%) 1,070.0 -- 1,070.0 20.0 Due in 2000 (rate of 6.15%) 20.0 -- 20.0 20.0 Due in 2001 (rates ranging from 5.63% to 9.25%) 500.0 200.0 700.0 200.0 Due after 2001 (rates ranging from 5.37% to 7.13%)(2) 928.6 100.0 1,028.6 870.2 -------- ------ -------- -------- Face amount of maturities 4,768.8 300.0 5,068.8 3,642.2 Issue discount (7.6) -- (7.6) (5.2) -------- ------ -------- -------- Total $4,761.2 $300.0 $5,061.2 $3,637.0 ======== ====== ======== ========
- --------------- (1) $61.5 million may be repaid at the option of the holder upon 30 days' notice. (2) $100.0 million may be repaid at the option of the holder upon 30 days' notice. Fixed rate senior and subordinated debt outstanding at December 31, 1996, matures at various dates through 2008 at interest rates ranging from 5.38% to 9.25%. The consolidated weighted average interest rates on fixed rate senior and subordinated debt at December 31, 1996 and 1995 were 6.52% and 7.00%, respectively. Variable rate senior notes outstanding at December 31, 1996 with interest rates ranging from 5.25% to 5.94% mature at various dates through 2003. The consolidated weighted average interest rates on variable rate senior notes at December 31, 1996 and 1995 were 5.44% and 5.64%, respectively. The following table represents information on unsecured revolving lines of credit with 60 banks which support commercial paper borrowings at December 31, 1996.
Dollars in millions -------- MATURITY AMOUNT -------------------------------------------------------------- -------- May 1997 $1,212.0 September 1997 81.0 May 2001 3,638.0 September 2001 244.0 Total $5,175.0
The credit line agreements contain clauses which allow the Company to extend the termination dates upon written consent from the participating banks. There have been no borrowings under credit lines supporting commercial paper since 1970. 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, including subsidiaries of DKB and Chase. The Company uses off-balance sheet derivatives for hedging purposes only. The Company 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 directly issued 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. F-13 108 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1996. Notional Amounts in Millions
------------------------------------------------------------------------------------------------- FLOATING TO FIXED RATE FIXED TO FLOATING RATE FLOATING TO FLOATING RATE ----------------------------- ----------------------------- ----------------------------- YEARS ENDING NOTIONAL RECEIVE PAY NOTIONAL RECEIVE PAY NOTIONAL RECEIVE PAY DECEMBER 31 AMOUNT RATE RATE AMOUNT RATE RATE AMOUNT RATE RATE -------- ------- ---- -------- ------- ---- -------- ------- ---- 1997 $1,425.0 5.86% 5.99% $250.2 6.94% 5.97% $456.0 5.54% 5.56% 1998 700.0 6.27 6.61 -- -- -- -- -- -- 1999 980.0 5.75 6.15 -- -- -- 130.0 5.55 5.76 2000 700.0 5.93 7.05 20.0 6.15 5.76 -- -- -- 2001 200.0 5.80 7.45 200.0 5.82 5.50 -- -- -- 2002-2008 -- -- -- 200.0 5.92 5.58 -- -- -- -------- ---- ---- ------ ---- ---- ------ ---- ---- $4,005.0 $670.2 $586.0 ======== ====== ====== Weighted average rate 5.91% 6.40% 6.28% 5.71% 5.54% 5.60%
All rates were those in effect at December 31, 1996. Variable rates are based on the contractually determined rate or other market rate indices and may change significantly, affecting future cash flows. The following table presents the notional principal amounts of interest rate swaps by class and the corresponding hedged liability position. Notional Amounts in Millions
NOTIONAL INTEREST RATE SWAPS AMOUNTS COMMENTS - ------------------------------------------ ---------------- -------------------------------------------- Floating to fixed rate swaps Hedging commercial paper $3,005.0 Effectively converts the interest rate on an equivalent amount of commercial paper to a fixed rate. Hedging variable rate notes 1,000.0 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 4,005.0 -------- Fixed to floating rate swaps Hedging fixed rate notes 670.2 Effectively converts the interest rate on an equivalent amount of fixed rate notes to a variable rate. Basis swaps Hedging variable rate debt 586.0 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 $5,261.2 ========
The Company's hedging activity increased interest expense by $27.8 million, $7.8 million and $27.3 million in 1996, 1995 and 1994, 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, which would also tend to increase interest expense. F-14 109 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Additionally, there were cross-currency interest rate swaps with a notional principal amount of $218.6 million on which the Company was paying interest at a weighted average rate of 5.67% at December 31, 1996 that effectively converted yen denominated fixed rate debt into variable rate U.S. dollar obligations. These swaps have maturities ranging from 1999 to 2006 to 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 at December 31, 1996, reduced by the effects of master netting agreements as presented in Footnote 16--Fair Values of Financial Instruments. However, due to the investment grade credit ratings of all counterparties and limits on the exposure with any individual counterparty, the Company's actual counterparty credit risk is not considered significant. NOTE 8--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 $300.0 million. NOTE 9--FEES AND OTHER INCOME The following table sets forth the components of fees and other income.
---------------------------- YEARS ENDED DECEMBER 31, Dollars in millions 1996 1995 1994 ------ ------ ------ Commissions, fees and other $165.2 $147.9 $148.3 Gains on equipment and other investment sales 54.6 10.5 10.1 Gains on sales and securitizations of finance receivables 24.3 26.3 16.0 ------ ------ ------ $244.1 $184.7 $174.4 ====== ====== ======
NOTE 10--SALARIES AND GENERAL OPERATING EXPENSES The following table sets forth the components of salaries and general operating expenses.
---------------------------- YEARS ENDED DECEMBER 31, Dollars in millions 1996 1995 1994 ------ ------ ------ Salaries and employee benefits $223.0 $193.4 $185.8 General operating expenses 170.1 152.3 152.1 ------ ------ ------ $393.1 $345.7 $337.9 ====== ====== ======
NOTE 11--INCOME TAXES The effective tax rate of the Company varied from the statutory Federal corporate income tax rate as follows:
------------------------ YEARS ENDED DECEMBER 31, Percentage of Pretax Income 1996 1995 1994 ---- ---- ---- 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 4.5 5.1 5.3 Investment tax credits (0.3) (0.3) (0.3) Other (1.8) (1.5) (1.9) ----- ----- ----- - - - Effective Tax Rate 37.4% 38.3% 38.1% ====== ====== ======
F-15 110 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes is comprised of the following:
---------------------------- YEARS ENDED DECEMBER 31, Dollars in millions 1996 1995 1994 ------ ------ ------ Current Federal income tax provision $ 72.9 $ 68.5 $ 69.5 Deferred Federal income tax provision 54.1 42.5 27.7 ------ ------ ------ Total Federal income taxes 127.0 111.0 97.2 State and local income taxes 28.7 28.8 26.7 ------ ------ ------ Total provision for income taxes $155.7 $139.8 $123.9 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred Federal income tax assets and liabilities are presented below.
------------------- YEARS ENDED DECEMBER 31, 1996 1995 ------- ------- Dollars in millions Assets Provision for credit losses $ (83.8) $ (73.8) Loan origination fees (10.5) (9.1) Other (37.8) (20.2) ------ ------ Total deferred tax assets (132.1) (103.1) ------ ------ Liabilities Leasing transactions 610.0 549.5 Market discount income 23.8 -- Amortization of intangibles 9.2 11.2 Prepaid pension costs 2.0 2.3 Depreciation of fixed assets 2.7 0.3 Other 2.7 2.7 ------ ------ Total deferred tax liabilities 650.4 566.0 ------ ------ Net deferred tax liability $ 518.3 $ 462.9 ====== ======
Also, included in deferred Federal income taxes on the Consolidated Balance Sheets are unamortized investment tax credits of $5.0 million and $6.3 million at December 31, 1996 and December 31, 1995, respectively. Included in the accrued liabilities and payables caption in the Consolidated Balance Sheets are state and local deferred tax liabilities of $97.4 million and $86.4 million at December 31, 1996 and December 31, 1995, respectively, arising from the temporary differences shown in the above tables. NOTE 12--POSTRETIREMENT AND OTHER BENEFIT PLANS Retirement Plan 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 the funding qualifies for an income tax deduction. Such funding is charged to salaries and employee benefits expense. F-16 111 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The accompanying table sets forth the funded status of the Plan and the amounts recognized in the Consolidated Balance Sheets.
------------------------------ AT OR FOR THE YEARS ENDED DECEMBER 31, Dollars in millions 1996 1995 1994 ------ ------ ------ Actuarial present value of benefit obligations: Accumulated benefit obligation including vested benefits of $54.8 in 1996, $54.0 in 1995, and $36.2 in 1994 $ 61.6 $ 58.1 $ 39.7 ====== ====== ====== Plan assets at fair market value $109.9 $101.2 $ 81.5 Projected benefit obligation (84.0) (79.9) (55.8) ------ ------ ------ Excess plan assets 25.9 21.3 25.7 Unrecognized prior service cost 1.8 1.9 2.1 Unrecognized net gain 15.9 10.5 13.8 ------ ------ ------ Prepaid pension cost $ 8.2 $ 8.9 $ 9.8 ====== ====== ====== Pension cost included the following components: Service cost-benefits earned during the period $ 5.3 $ 3.8 $ 4.0 Interest cost on projected benefit obligation 5.7 4.9 4.5 Actual (return)/loss on plan assets (11.5) (21.9) 2.7 Net amortization and deferral 1.2 14.1 (11.0) ------ ------ ------ Pension cost $ 0.7 $ 0.9 $ 0.2 ====== ====== ======
The following assumptions were used for calculating the projected benefit obligations shown in the preceding table.
-------------------------- 1996 1995 1994 ----- ----- ------ Discount rate 7.50% 7.25% 8.75% Rate of increase in compensation 4.50% 4.50% 5.00% Expected long-term rate of return on plan assets 10.00% 10.00% 9.00%
Postretirement Medical and Life Insurance Benefits The Company 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. F-17 112 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The postretirement benefit liability at December 31, 1996 and December 31, 1995 is set forth in the following table.
--------------- AT DECEMBER 31, 1996 1995 ----- ----- Dollars in millions Accumulated post retirement benefit obligation ("APBO"): Retirees $22.5 $21.8 Fully eligible, active plan participants 4.1 4.8 Other active plan participants 8.3 13.8 ----- ----- Unfunded postretirement obligation 34.9 40.4 Unrecognized prior service cost -- (0.5) Unrecognized net gain (7.7) (0.8) Unrecognized transition obligation 26.2 28.3 ----- ----- Accrued postretirement benefit obligation $16.4 $13.4 ===== =====
The components of net periodic postretirement benefit cost were as follows.
------------------------ YEARS ENDED DECEMBER 31, 1996 1995 1994 ----- ----- ---- Dollars in millions Service cost, benefits earned during the period $ 1.1 $ 1.1 $1.2 Interest cost on accumulated postretirement benefit obligation 2.4 3.2 2.8 Amortization of unrecognized transition obligation 1.7 1.7 1.7 Amortization of gain (0.6) -- -- Amortization of unrecognized prior service cost -- (0.1) -- ----- ----- ---- Net periodic postretirement benefit cost $ 4.6 $ 5.9 $5.7 ===== ===== ====
The following assumptions were used for calculating the APBO shown in the preceding tables.
------------------------ 1996 1995 1994 ---- ----- ----- Discount Rate 7.50% 7.25% 8.75% Rate of increase in compensation 4.50% 4.50% 5.00% Assumed Health Care Cost Trend Rate: Retirees prior to reaching age 65 9.00% 10.00% 11.00% Retirees older than 65 6.00% 7.00% 8.00%
The assumed health care cost trend rates decline to an ultimate level of 4.75% in 2001 for retirees prior to reaching age 65 and 4.75% in 1998 for retirees older than 65 for 1996, 4.75% in 2003 for retirees prior to reaching age 65 and 4.75% in 2000 for retirees older than 65 for 1995 and 6.25% in 2001 for all retirees for 1994. If the health care cost trend rate were increased by 1%, the APBO relating to the medical benefits as of December 31, 1996, would be increased by $2.4 million (9.5%), and the sum of the service cost and interest cost components of net periodic postretirement benefit cost relating to the medical benefits for 1996 would be increased by $0.3 million (12.4%). 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 $9.1 million, $8.2 million and $8.0 million for 1996, 1995 and 1994, respectively. F-18 113 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--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, 1996.
DOLLARS AT DECEMBER 31, IN MILLIONS -------------------------------------------------------------- ------------ 1997 $ 23.8 1998 22.3 1999 18.9 2000 15.6 2001 14.5 Thereafter 60.5 ------ Total $155.6 ======
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 $19.6 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, 1996 1995 1994 ----- ----- ----- Dollars in millions Premises $18.0 $18.0 $18.3 Equipment 6.3 5.7 5.2 Less sublease income (1.2) (1.3) (1.3) ----- ----- ----- Total $23.1 $22.4 $22.2 ===== ===== =====
Rental expense paid to Chase totaled $0.5 million, $0.6 million and $1.6 million in 1996, 1995 and 1994, respectively. NOTE 14--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 15--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 represents the contractual amount outstanding less the value of all underlying collateral and guarantees. F-19 114 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The accompanying table summarizes the contractual amounts of credit-related commitments.
--------------------------------------------- DUE TO EXPIRE ------------------- TOTAL OUTSTANDING WITHIN AFTER ------------------------- ONE YEAR ONE YEAR 1996 1995 -------- -------- ----------- ----------- Dollars in millions AT DECEMBER 31, Unused commitments to extend credit Loans $1,457.2 $ 30.2 $ 1,487.4 $ 1,244.1 Leases 50.9 -- 50.9 61.6 Letters of credit and acceptances Standby letters of credit 144.8 6.8 151.6 176.9 Other letters of credit 221.2 10.5 231.7 197.2 Acceptances 14.6 -- 14.6 3.9 Guarantees 51.9 28.0 79.9 101.2 Foreign exchange contracts 0.8 -- 0.8 0.1
NOTE 16--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 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 15, are primarily short-term floating rate contracts whose terms and conditions are individually negotiated, taking into account the creditworthiness of the customer and the nature, accessibility and quality of the collateral and guarantees. Therefore, the fair value of credit-related commitments, if exercised, would approximate their contractual amounts. Estimated fair values, recorded carrying values and various assumptions used in valuing the Company's financial instruments at December 31, 1996 and 1995 are set forth below. F-20 115 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
------------------------------------------------------- AT DECEMBER 31, 1996 1995 -------------------------- -------------------------- 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) $ 13,275.2 $ 13,480.1 $ 12,563.4 $ 12,844.1 Other Assets(b) 389.7 424.4 305.5 333.2 Commercial Paper(c) (5,827.0) (5,827.0) (6,105.6) (6,105.6) Fixed rate senior notes and subordinated fixed rate notes(d) (5,061.2) (5,091.6) (3,637.0) (3,762.2) Variable rate notes(d) (3,717.5) (3,714.3) (3,827.5) (3,827.5) Credit balances of factoring clients and accrued liabilities and payables(e) (1,578.9) (1,578.9) (1,344.8) (1,344.8) Derivative Financial Instruments(f) Interest Rate Swaps Off-balance sheet assets -- 6.3 -- 2.8 Off-balance sheet liabilities -- (64.6) -- (107.8) Cross currency interest rate swaps -- 14.1 -- 36.8 Forward interest rate agreement -- -- -- (0.5)
- --------------- (a) The fair value of performing fixed-rate loans was estimated based upon a present value discounted cash flow analysis, using interest rates that were being offered at the end of the year for loans with similar terms to borrowers of similar credit quality. Discount rates used in the present value calculation range from 7.96% to 9.37% for 1996 and 8.46% to 9.99% for 1995. 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 values approximate carrying value. The net carrying value of lease finance receivables not subject to fair value disclosure totaled $3.5 billion in 1996 and $3.0 billion in 1995. (b) Other assets subject to fair value disclosure include accrued interest receivable, excess servicing assets and investment securities. The carrying amount of accrued interest receivable approximates fair value. The fair value of excess servicing assets was determined by adjusting the present value of remaining cash flows for anticipated prepayment and loss experience. 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 $261.8 million in 1996 and $250.8 million in 1995. (c) The estimated fair value of commercial paper approximates carrying value due to its relatively short maturity. (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 5.53% to 6.95% in 1996 and 5.30% to 6.25% in 1995. 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 which approximates carrying value. The carrying value of other liabilities not subject to fair value disclosure totaled $672.5 million in 1996 and $591.2 million in 1995. (f) 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 $5.26 billion at December 31, 1996 ($1.80 billion of which related to interest rate swaps whose fair market value represented an asset and $3.46 billion related to interest rate swaps whose fair market value represented a liability, after adjusting for master netting agreements) and $5.27 billion at December 31, 1995 ($0.7 billion of assets and $4.6 billion of liabilities). The notional principal amount of cross currency interest rate swaps F-21 116 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) totaled $218.6 million at December 31, 1996 and $190.2 million at December 31, 1995. 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 17--INVESTMENTS IN DEBT AND EQUITY SECURITIES At December 31, 1996 and 1995, the book value of the Company's investments in debt and equity securities subject to the provision of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" totaled $24.4 million and $22.3 million, respectively, all of which was designated as available for sale. Unrealized gains and losses, representing the difference between amortized cost and current fair market value were immaterial. NOTE 18--ACCOUNTING FOR STOCK-BASED COMPENSATION The Company's Long Term Incentive Plan (the "CIT Career Incentive Plan") awards phantom shares of stock to selected executives. The performance period for each plan is three consecutive calendar years and performance goals are a function of net income growth targets and return on equity performance. The value of the shares is determined at the end of each performance period based upon a price/earnings multiplier determined by the Executive Committee of the Board of Directors of the Company. Following the end of a performance period, one-third of the shares vest immediately and one-third vest at the end of each of the next two years. All vested shares are settled in cash. Prior to January 1, 1996, the Company accounted for the CIT Career Incentive Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which did not change the accounting for plans settled in cash and, therefore, had no impact on the Company. Compensation cost is recognized over the periods in which the participants' services are rendered and a liability has been established for the estimated payments to participants. The amount of compensation cost recorded for the CIT Career Incentive Plan during 1996, 1995 and 1994 was $9.5 million, $3.8 million and $4.0 million, respectively. NOTE 19--ACQUISITION OF BARCLAYS COMMERCIAL CORPORATION On February 28, 1994, the Company acquired, for cash, Barclays Commercial Corporation ("BCC"), a company of the Barclays Group. BCC had total assets of approximately $700.0 million at December 31, 1993 and total factoring volume of approximately $5.0 billion for the year then ended. 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. At December 31, 1995, the Company had $135.0 million of interest-bearing deposits with DKB. At December 31, 1996, the Company had no such deposits. From time to time, the Company may maintain such deposits with DKB or Chase. At December 31, 1996, the Company's credit line coverage with 60 banks totaled $5.18 billion of committed facilities. Additional information regarding these credit lines can be found in Note 6--Debt. At December 31, 1996, DKB was a committed bank under a $3.6 billion revolving credit facility, a $244.0 million revolving credit facility, a $1.2 billion revolving credit facility, and an $81.0 million revolving credit facility, with commitments of $108.8 million, $93.8 million, $36.3 million and $31.3 million, respectively. DKB is the agent under the $244.0 million facility and the $81.0 million facility. Chase is both the agent and a committed bank under the $3.6 billion revolving credit facility and the $1.2 billion revolving credit facility with commitments of $187.5 million and $62.5 million, respectively. At December 31, 1995, the Company's credit line coverage with 69 banks totaled $4.64 billion of committed facilities. At December 31, 1995, DKB was a committed bank under a $1.25 billion revolving credit facility, a $770.0 million revolving credit facility, and a $325.0 million revolving credit facility, with commitments of $55.0 million, $80.0 million and $105.0 F-22 117 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) million, respectively. DKB was a co-agent under the $1.25 billion and $770.0 million revolving credit facilities and the Agent under the $325.0 million facility. 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 and Chase. At December 31, 1996, the notional principal amount outstanding on interest rate swap agreements with DKB and Chase totaled $270.0 million and $705.0 million, respectively. At December 31, 1995, the notional principal amount outstanding on interest rate swap agreements with DKB and Chase totaled $270.0 million and $300.0 million, respectively. The notional principal amount outstanding on foreign currency swaps totaled $168.0 million and $140.2 million with DKB at year-end 1996 and 1995, 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. The Company held a $9.0 million letter of credit from Chase as additional collateral on a business aircraft loaned to a third party with an outstanding balance of $22.2 million and $23.1 million at December 31, 1996 and 1995, respectively. Chase is also indebted to the Company in the amount of $7.3 million and $7.7 million, at December 31, 1996 and 1995, respectively, for financing relating to the purchase of a business aircraft by Chase. The Company has also entered into various noncancellable long-term facility lease agreements with Chase. Future minimum rentals under these leases are $0.5 million in 1997, $0.5 million in 1998, $0.4 million in 1999, $0.1 million in 2000. At December 31, 1996 and 1995, the Company had entered into credit-related commitments with DKB in the form of letters of credit totaling $19.8 million and $21.7 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 purchased finance receivables totaling $33.4 million from Chase during 1996. The Company has 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. At December 31, 1996 and 1995, the principal amount outstanding on the cash collateral loans was $40.7 million and $12.3 million, respectively. The Company has entered into multiple trust agreements with Chase with respect to certain securitization transactions. NOTE 21--SUBSEQUENT EVENT--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 and the Trust owned Debentures of the Company are redeemable in whole or in part on or after February 15, 2007 or at anytime 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. For financial reporting purposes, the Capital Securities will be presented in the consolidated balance sheet of the Company as a separate line item directly above stockholders' equity and captioned "Redeemable preferred capital securities of subsidiary holding solely parent company debentures." For financial reporting purposes, the Company will record distributions payable on the Capital Securities as an expense in the consolidated statements of income. NOTE 22--SUBSEQUENT EVENT--INITIAL PUBLIC OFFERING On September 26, 1997, the Company filed a Registration Statement in connection with the proposed initial public offering of the Company's common stock. F-23 118 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 23--BUSINESS SEGMENT INFORMATION The Company's primary business activities are comprised of commercial and consumer operations. The Company's diversified commercial segment is engaged in equipment financing and leasing, factoring and commercial finance. The Company's consumer segment offers home equity lending, secured retail sales financing of manufactured housing, recreation vehicles and recreational boats, as well as consumer loan servicing. Segment total revenue is defined as finance income plus fees and other income. Segment operating income (loss) is defined as total revenue less direct segment interest and operating expenses. Other includes general corporate expenses, and revenues and expenses related to other operations of the Company. The following table sets forth information on the Company's commercial and consumer business segments (in millions).
------------------------------------- AT DECEMBER 31, 1996 1995 1994 --------- --------- --------- Dollars in millions TOTAL ASSETS Commercial $15,143.2 $14,590.5 $13,670.7 Consumer 3,563.4 2,587.7 2,122.2 Other 225.9 242.1 166.8 --------- --------- --------- Total $18,932.5 $17,420.3 $15,959.7 ======== ======== ========
---------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 -------- -------- -------- Dollars in millions TOTAL REVENUES Commercial $1,542.6 $1,443.0 $1,242.7 Consumer 325.6 264.4 177.2 Other 22.1 6.5 18.3 -------- -------- -------- Total $1,890.3 $1,713.9 $1,438.2 ======= ======= ======= OPERATING INCOME (LOSS) Commercial $ 390.2 $ 341.5 $ 336.9 Consumer 67.4 63.9 24.3 Other (41.8) (40.3) (36.2) -------- -------- -------- Total $ 415.8 $ 365.1 $ 325.0 ======= ======= =======
NOTE 24--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
---------------------------------------------------- 1996 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ------ Dollars in millions Net finance income $195.4 $197.3 $201.4 $203.8 $797.9 Fees and other income 52.7 73.2 50.9 67.3 244.1 Salaries and general operating expenses 95.9 97.6 97.9 101.7 393.1 Provision for credit losses 27.8 26.6 24.2 32.8 111.4 Depreciation on operating lease equipment 27.5 28.8 28.0 37.4 121.7 Provision for income taxes 37.1 45.1 37.1 36.4 155.7 Net income $ 59.8 $ 72.4 $ 65.1 $ 62.8 $260.1
F-24 119 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
---------------------------------------------------- 1995 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ------ Dollars in millions Net finance income $164.5 $171.5 $178.8 $182.9 $697.7 Fees and other income 43.4 41.9 47.8 51.6 184.7 Salaries and general operating expenses 84.8 82.3 85.9 92.7 345.7 Provision for credit losses 21.0 22.2 24.0 24.7 91.9 Depreciation on operating lease equipment 17.6 17.2 21.4 23.5 79.7 Provision for income taxes 31.7 35.2 36.8 36.1 139.8 Net income $ 52.8 $ 56.5 $ 58.5 $ 57.5 $225.3
F-25 120 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
----------------------------------- AT SEPTEMBER 30, AT DECEMBER 31, 1997 1996 --------------- --------------- (UNAUDITED) Dollars in millions ASSETS Financing and leasing assets Loans Commercial $10,540.3 $10,195.6 Consumer 3,344.9 3,239.0 Lease receivables 4,063.1 3,562.0 --------- --------- Finance receivables 17,948.3 16,996.6 Reserve for credit losses (233.3) (220.8) --------- --------- Net finance receivables 17,715.0 16,775.8 Operating lease equipment, net 1,675.7 1,402.1 Consumer finance receivables held for sale 654.3 116.3 Cash and cash equivalents 202.9 103.1 Other assets 606.4 535.2 --------- --------- Total assets $20,854.3 $18,932.5 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Debt Commercial paper $ 6,168.7 $ 5,827.0 Variable rate senior notes 3,461.5 3,717.5 Fixed rate senior notes 5,659.6 4,761.2 Subordinated fixed rate notes 300.0 300.0 --------- --------- Total debt 15,589.8 14,605.7 Credit balances of factoring clients 1,535.3 1,134.1 Accrued liabilities and payables 686.3 594.0 Deferred Federal income taxes 550.2 523.3 --------- --------- Total liabilities 18,361.6 16,857.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company 250.0 -- STOCKHOLDERS' EQUITY Common stock--authorized, issued and outstanding--1,000 shares 250.0 250.0 Paid-in capital 573.3 573.3 Retained earnings 1,419.4 1,252.1 --------- --------- Total stockholders' equity 2,242.7 2,075.4 --------- --------- Total liabilities and stockholders' equity $20,854.3 $18,932.5 ========= =========
See accompanying notes to consolidated financial statements. It is suggested these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included herein as of December 31, 1996 and 1995 and for the each of the years in the three-year period ended December 31, 1996. F-26 121 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
--------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ------- ------- -------- -------- Dollars in millions Finance income $ 463.0 $ 415.8 $1,352.0 $1,222.3 Interest expense 237.0 214.4 693.7 628.2 ------ ------ ------ ------ Net finance income 226.0 201.4 658.3 594.1 Fees and other income 78.9 50.9 186.0 176.8 Gain on sale of equity interest acquired in loan workout -- -- 58.0 -- ------ ------ ------ ------ Operating revenue 304.9 252.3 902.3 770.9 ------ ------ ------ ------ Salaries and general operating expenses 103.6 97.9 314.1 291.4 Provision for credit losses 35.8 24.2 91.8 78.6 Depreciation on operating lease equipment 42.3 28.0 108.3 84.3 Minority interest in subsidiary trust holding solely debentures of the company 4.8 -- 11.5 -- ------ ------ ------ ------ Operating expenses 186.5 150.1 525.7 454.3 ------ ------ ------ ------ Income before provision for income taxes 118.4 102.2 376.6 316.6 Provision for income taxes 43.1 37.1 137.5 119.3 ------ ------ ------ ------ Net income $ 75.3 $ 65.1 $ 239.1 $ 197.3 ====== ====== ====== ======
See accompanying notes to consolidated financial statements. It is suggested these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included herein as of December 31, 1996 and 1995 and for the each of the years in the three-year period ended December 31, 1996. F-27 122 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
----------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 -------- -------- Dollars in millions Balance, January 1 $2,075.4 $1,914.2 Net income 239.1 197.3 Dividends paid(1) (71.8) (80.1) -------- -------- Balance, September 30 $2,242.7 $2,031.4 ======== ========
- --------------- (1) Commencing with the 1996 second quarter dividend, the dividend policy of the Company was changed to require the payment of dividends by the Company of 30% of net operating earnings on a quarterly basis. Previously, the Company's dividend policy required the payment of dividends by the Company of 50% of net operating earnings on a quarterly basis. See accompanying notes to consolidated financial statements. It is suggested these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included herein as of December 31, 1996 and 1995 and for the each of the years in the three-year period ended December 31, 1996. F-28 123 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ---------- ---------- Dollars in millions CASH FLOWS FROM OPERATIONS Net income $ 239.1 $ 197.3 Adjustments to reconcile net income to net cash flows from operations Provision for credit losses 91.8 78.6 Depreciation and amortization 124.3 97.8 Provision for deferred Federal income taxes 26.9 37.6 Gains on asset and receivable sales (121.3) (55.3) Increase in accrued liabilities and payables 92.3 34.1 Increase in other assets (31.2) (44.8) Other (2.4) (17.6) ---------- ---------- Net cash flows provided by operations 419.5 327.7 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Loans extended (24,584.1) (23,405.5) Collections on loans 23,068.1 22,239.8 Purchases of assets to be leased (515.3) (288.7) Net increase in short-term factoring receivables (371.7) (127.1) Proceeds from asset and receivable sales 1,092.9 691.3 Proceeds from sales of assets received in satisfaction of loans 31.3 56.0 Purchases of finance receivables portfolios (79.2) (164.5) Purchases of investment securities (20.1) (18.1) Other (17.2) (21.4) ---------- ---------- Net cash flows used for investing activities (1,395.3) (1,038.2) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of variable and fixed rate notes 3,298.5 3,026.4 Repayments of variable and fixed rate notes (2,656.1) (2,011.4) Proceeds from the issuance of company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company 250.0 -- Net increase (decrease) in commercial paper 341.7 (192.4) Proceeds from nonrecourse leveraged lease debt 39.1 36.4 Repayments of nonrecourse leveraged lease debt (125.8) (112.9) Cash dividends paid (71.8) (80.1) ---------- ---------- Net cash flows provided by financing activities 1,075.6 666.0 ---------- ---------- Net increase (decrease) in cash and cash equivalents 99.8 (44.5) Cash and cash equivalents, beginning of period 103.1 161.5 ---------- ---------- Cash and cash equivalents, end of period $ 202.9 $ 117.0 ========== ========== SUPPLEMENTAL DISCLOSURES Interest paid $ 664.8 $ 611.9 Federal and State and local taxes paid 77.7 90.0 Noncash transfer of finance receivables to finance receivables held for sale -- 96.6 Noncash transfers of finance receivables to assets received in satisfaction of loans 18.7 88.3 Noncash transfers of assets received in satisfaction of loans to finance receivables 5.0 10.9
See accompanying notes to consolidated financial statements. It is suggested these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included herein as of December 31, 1996 and 1995 and for the each of the years in the three-year period ended December 31, 1996. F-29 124 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The Company considers that all adjustments (all of which are normal recurring accruals) necessary for a fair statement of financial position and results of operations for these periods have been made; however, results for such interim periods are subject to year-end audit adjustments. Results for such interim periods are not necessarily indicative of results for a full year. NOTE 2--RECENT ACCOUNTING PRONOUNCEMENTS 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 by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (collectively referred to hereafter as "SFAS 125") on January 1, 1997. SFAS 125 uses a "financial components" approach that focuses on control to determine that 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 the portion of previously recognized excess servicing assets that did not exceed contractually specified servicing fees to servicing assets which are included in other assets in the Consolidated Balance Sheets. The remaining balances of previously recognized excess servicing assets are included in other assets in the Consolidated Balance Sheets 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 amortized cost approximates the current fair market value of such assets. The adoption of SFAS 125 did not have a significant impact on the Company's financial position or results of operations. Additionally, in February of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 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. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period EPS is required to be restated to conform with SFAS 128. F-30 125 [Inside Back Cover] THE CIT GROUP...BACKING AMERICA SOME OF THE INDUSTRIES AND MARKETS FINANCED BY THE CIT GROUP Apparel Health Care Motorcoach Automotive OEM High-Tech Packaging Broadcast Home Equity Mortgages Plastics Business Aircraft Home Furnishings Printing & Paper Carpet Housewares Rail Chemicals Information Systems Recreational Boats Commercial Aircraft Inland Marine Recreation Vehicles Construction Intermodal Retailers Consumer Electronics Machine Tools Sporting Goods Energy Manufactured Housing Telecommunications Exporters & Importers Manufacturers Textiles Food Processing Media Toys Footwear Medical Trucking Furniture Mining Wholesalers & Distributors ASSETS AND OFFICES BY GEOGRAPHIC LOCATION [MAP OF THE UNITED STATES ILLUSTRATING ASSETS AND OFFICES OF THE COMPANY BY GEOGRAPHIC LOCATION]. Percentage of financing and leasing assets: Northeast 23% Southeast 14% Midwest 21% South 12% West 24% Locations of the Company's offices nationwide: Northeast 8 Southeast 8 Midwest 10 South 3 West 12 Percentages Represent -------------------- Financing and Leasing Assets 6% by Customer Location Foreign Financing at September 30, 1997 and Leasing Assets -------------------- Dots Represent Locations of CIT Offices Nationwide 126 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC Registration Fee $ 307,364 Blue Sky Fees and Expenses 5,000 NASD Filing Fee 30,500 NYSE Listing Fees 193,888 Transfer Agent Fees and Expenses 25,000 Legal Fees and Expenses 900,000 Accounting Fees and Expenses 300,000 Printing Expenses 300,000 Miscellaneous Expenses 238,248 ---------- Total Fees and Expenses $ 2,300,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Subsection (a) of Section 145 of the General Corporation Law of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that: (i) to the extent a director, officer, employee or agent of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; and (ii) indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled. In addition, Section 145 empowers the corporation to purchase and maintain insurance on behalf of any person acting in any capacities set forth in the second preceding paragraph against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Giving effect to the consummation of the Offering, Article X of the By-Laws of the Registrant provides, in effect, that, in addition to any rights afforded to an officer, director of employee of the Registrant by contract or operation of law, the Registrant may indemnify any person who is or was a director, officer, employee, or agent of the Registrant, or of any other corporation which he served at the requested of the Registrant, against any and all liability and reasonable expense incurred by him in connection with or resulting from any claim, action, suit, or proceeding (whether brought by or in the right of the Registrant or such other corporation or otherwise), civil or criminal, in which he may have become involved, as a party or otherwise, by reason of his being or having been such director, officer, employee, or agent of the Registrant or such other corporation, whether or not he continues to be such at the time such liability or expense is incurred, provided that such person II-1 127 acted in good faith and in what he reasonably believed to be the best interests of the Registrant or such other corporation, and, in connection with any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In addition, the Registrant maintains directors' and officers' reimbursement and liability insurance pursuant to standard form policies with aggregate limits of $90,000,000. The risks covered by such policies do not exclude liabilities under the Securities Act. ITEM 16. EXHIBITS The following exhibits either are filed herewith or will be filed by amendment, as indicated below: 1.1** -- Form of Underwriting Agreement, to be dated the date of the pricing of the Offering. 3.1 -- Amended and Restated Certificate of Incorporation of The CIT Group, Inc., to be dated the date of the pricing of the Offering (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., to be dated the date of the pricing of the Offering (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, 1997). 5** -- Opinion of Schulte Roth & Zabel LLP in respect of the legality of the Class A Common Stock registered hereunder. 8** -- Opinion of Schulte Roth & Zabel LLP in respect of tax matters (included in Exhibit 5). 10.1 -- Stockholders Agreement (incorporated by reference to Exhibit 10(a) to Form 10-K filed by the Company for the year ended December 31, 1989). 10.2 -- Amendment, dated December 15, 1995, to the Stockholders Agreement, dated December 29, 1989 (incorporated by reference to Exhibit 10(a) to Form 8-K dated December 15, 1995). 10.3 -- Registration Rights Agreement, dated December 15, 1995 (incorporated by reference to Exhibit 10(b) to Form 8-K dated December 15, 1995). 10.4** -- Regulatory Compliance Agreement, to be dated the closing date of the Offering. 10.5** -- Registration Rights Agreement, to be dated the closing date of the Offering. 10.6** -- Employment Agreement of Albert R. Gamper, Jr., dated April 1, 1997, comparable to the agreement for Joseph A. Pollicino. 10.7** -- Employment Agreement of Joseph M. Leone, dated December 6, 1996, comparable to the agreements for William M. O'Grady and Ernest D. Stein. 10.8 -- The CIT Group Bonus Plan (incorporated by reference to Exhibit 10(d) to Form 10-K filed by the Company for the year ended December 31, 1992). 10.9 -- The CIT Group Holdings, Inc. Career Incentive Plan (incorporated by reference to Exhibit 10(e) to Form 10-K filed by the Company for the year ended December 31, 1992). 10.10 -- 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 year ended December 31, 1992). 10.11 -- 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 year ended December 31, 1992). 10.12** -- The CIT Group Holdings, Inc. Executive Retirement Plan and New Executive Retirement Plan, each effective as of January 1, 1995. 10.13** -- The CIT Group, Inc. Long-Term Equity Compensation Plan, to be dated November 1, 1997. 12 -- Computation of Ratios of Earnings to Fixed Charges (incorporated by reference to Exhibit 12 to Form 10-Q filed by the Company for the quarterly period ended September 30, 1997 and to Exhibit 12 to Form 10-K filed by the Company for the year ended December 31, 1996). 23.1** -- Consent of KPMG Peat Marwick LLP. 23.2** -- Consent of Schulte Roth & Zabel LLP (included in Exhibit 5). 24* -- Power of Attorney
- --------------- * Previously filed. ** Filed herewith. II-2 128 ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling preceding, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 129 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Livingston, State of New Jersey, on the 12th day of November, 1997. THE CIT GROUP, INC. By: /s/ ERNEST D. STEIN --------------------------------------- Ernest D. Stein Executive Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE - ---------------------------------------------------- ---------------------------------------------------- /s/ ALBERT R. GAMPER, JR. November 12, 1997 - ---------------------------------------------------- Albert R. Gamper, Jr. President, Chief Executive Officer and Director (principal executive officer) /s/ JOSEPH M. LEONE November 12, 1997 - ---------------------------------------------------- Joseph M. Leone Executive Vice President and Chief Financial Officer (principal financial and accounting officer) * - ---------------------------------------------------- Takasuke Kaneko Director * - ---------------------------------------------------- Hisao Kobayashi Director * - ---------------------------------------------------- Yoshiro Aoki Director * - ---------------------------------------------------- Joseph A. Pollicino Director * - ---------------------------------------------------- Paul N. Roth Director * - ---------------------------------------------------- Peter J. Tobin Director * - ---------------------------------------------------- Tohru Tonoike Director * - ---------------------------------------------------- Keiji Torii Director * - ---------------------------------------------------- Yukiharu Uno Director *By: /s/ ERNEST D. STEIN November 12, 1997 - ---------------------------------------------------- Ernest D. Stein, attorney-in-fact
Original powers of attorney authorizing Albert R. Gamper, Jr., Ernest D. Stein, and Joseph M. Leone and each of them to sign this amendment on behalf of the directors and officers of the Registrant indicated above are held by the Registrant and available for examination pursuant to Rule 302(b) of Regulation S-T. II-4 130 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGES ------- ------------------------------------------------------------------------------- ------------ 1.1** -- Form of Underwriting Agreement, to be dated the date of the pricing of the Offering. 3.1 -- Amended and Restated Certificate of Incorporation of The CIT Group, Inc., to be dated the date of the pricing of the Offering (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., to be dated the date of the pricing of the Offering (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, 1997). 5** -- Opinion of Schulte Roth & Zabel LLP in respect of the legality of the Class A Common Stock registered hereunder. 8** -- Opinion of Schulte Roth & Zabel LLP in respect of tax matters (included in Exhibit 5). 10.1 -- Stockholders Agreement (incorporated by reference to Exhibit 10(a) to Form 10-K filed by the Company for the year ended December 31, 1989). 10.2 -- Amendment, dated December 15, 1995, to the Stockholders Agreement, dated December 29, 1989 (incorporated by reference to Exhibit 10(a) to Form 8-K dated December 15, 1995). 10.3 -- Registration Rights Agreement, dated December 15, 1995 (incorporated by reference to Exhibit 10(b) to Form 8-K dated December 15, 1995). 10.4** -- Regulatory Compliance Agreement, to be dated the closing date of the Offering. 10.5** -- Registration Rights Agreement, to be dated the closing date of the Offering. 10.6** -- Employment Agreement of Albert R. Gamper, Jr., dated April 1, 1997, comparable to the agreement for Joseph A. Pollicino. 10.7** -- Employment Agreement of Joseph M. Leone, dated December 6, 1996, comparable to the agreements for William M. O'Grady and Ernest D. Stein. 10.8 -- The CIT Group Bonus Plan (incorporated by reference to Exhibit 10(d) to Form 10-K filed by the Company for the year ended December 31, 1992). 10.9 -- The CIT Group Holdings, Inc. Career Incentive Plan (incorporated by reference to Exhibit 10(e) to Form 10-K filed by the Company for the year ended December 31, 1992). 10.10 -- 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 year ended December 31, 1992). 10.11 -- 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 year ended December 31, 1992). 10.12** -- The CIT Group Holdings, Inc. Executive Retirement Plan and New Executive Retirement Plan, each effective as of January 1, 1995. 10.13** -- The CIT Group, Inc. Long-Term Equity Compensation Plan, to be dated November 1, 1997. 12 -- Computation of Ratios of Earnings to Fixed Charges (incorporated by reference to Exhibit 12 to Form 10-Q filed by the Company for the quarterly period ended September 30, 1997 and to Exhibit 12 to Form 10-K filed by the Company for the year ended December 31, 1996). 23.1** -- Consent of KPMG Peat Marwick LLP. 23.2** -- Consent of Schulte Roth & Zabel LLP (included in Exhibit 5). 24* -- Power of Attorney
- --------------- * Previously filed. ** Filed herewith. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 THE CIT GROUP, INC. ______ Shares Class A Common Stock Underwriting Agreement _______, 1997 J.P. Morgan Securities Inc. Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Credit Suisse First Boston Corporation Lehman Brothers Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Brothers Inc UBS Securities LLC As representatives of the several U.S. underwriters listed in Schedule I hereto c/o J.P. Morgan Securities Inc. 60 Wall Street New York, New York 10260 Ladies and Gentlemen: THE CIT GROUP, INC. a Delaware corporation (the "Company"), proposes to sell to the several Underwriters listed in Schedule I hereto (the "Underwriters") for whom you are acting as representatives (the "Representatives") an aggregate of ___ shares of Class A Common Stock, par value $.01 per share, of the Company (the "Underwritten Shares") and, for the sole purpose of covering over-allotments in connection with the sale of the Underwritten Shares, at the option of the Underwriters, to issue and sell up to an additional ___ shares of Class A Common Stock of the Company (the "Option Shares"). The Underwritten Shares and the Option Shares are herein referred to as the "Shares". The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Securities Act"), a registration 2 statement relating to the Shares. The registration statement as amended at the time when it shall become effective, including information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is referred to in this Agreement as the "Registration Statement" and the prospectus in the form first used to confirm sales of Shares is referred to in this Agreement as the "Prospectus". If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. Any reference in this Agreement to the Registration Statement, any preliminary prospectus or the Prospectus shall also be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-2 under the Securities Act, as of the effective date of the Registration Statement or the date of such preliminary prospectus or the Prospectus, as the case may be. Prior to the recapitalization referred to below, The Dai-Ichi Kangyo Bank ("DKB") owned 80% (the "DKB Shares") of the issued and outstanding shares of common stock, par value $1.00 per share, of the Company. Pursuant to a letter agreement (as amended, the "CBC Letter Agreement") dated December 15, 1995, among Dai-Ichi Kangyo Bank, Limited ("DKB Ltd."), a [wholly-owned] subsidiary of DKB, CBC Holding Inc. and Chemical Banking Corporation (now Chase Manhattan Bank) (together with CBC Holding Inc, the "CBC Entities"), DKB Ltd. was given an option (the "CBC Option") to purchase the remaining 20% of the issued and outstanding shares of common stock, par value $1.00 per share, of the Company (the "CBC Shares") from the CBC Entities. Prior to the execution of this Agreement, the common stock, par value $1.00 per share, of the Company was recapitalized (the "Recapitalization") so that the CBC Shares became shares of Stock and the DKB Shares become shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"). Immediately prior to the execution of this Agreement, DKB Ltd. transferred the DKB Option to the Company pursuant to an Assignment Agreement between the Company and DKB Ltd. On the Closing Date (as hereinafter defined), the Company will exercise the CBC Option and, immediately thereafter, the closing of the purchase of the CBC Shares will occur. The Company hereby agrees with the Underwriters as follows: 1. The Company agrees to sell the Underwritten Shares to the several Underwriters as hereinafter provided, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase, severally and not jointly, from the Company the respective number of Underwritten Shares set forth opposite such 2 3 Underwriter's name in Schedule I hereto at a purchase price per share (the "Purchase Price") of $_____. The public offering price of the Shares is not in excess of the price recommended by J.P. Morgan Securities Inc. ("J.P. Morgan"), acting as a "qualified independent underwriter" within the meaning of Rule 2720 of the Rules of Conduct of the National Association of Securities Dealers, Inc. (the "NASD"). In addition, the Company agrees to issue and sell the Option Shares to the several Underwriters as hereinafter provided, and the Underwriters on the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, shall have the option to purchase, severally and not jointly, from the Company up to an aggregate of ___ Option Shares at the Purchase Price, for the sole purpose of covering over-allotments (if any) in the sales of Underwritten Shares by the several Underwriters. If any Option Shares are to be purchased, the number of Option Shares to be purchased by each Underwriter shall be the number of Option Shares which bears the same ratio to the aggregate number of Option Shares being purchased as the number of Underwritten Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to the aggregate number of Underwritten Shares being purchased from the Company by the several Underwriters, subject, however, to such adjustments to eliminate any fractional Shares as the Representatives in their sole discretion shall make. The Underwriters may exercise the option to purchase the Option Shares at any time (but not more than once) on or before the thirtieth day following the date of this Agreement, by written notice from the Representatives to the Company. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and the date and time when the Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date but shall not be earlier than the Closing Date nor later than the tenth full Business Day (as hereinafter defined) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Any such notice shall be given at least two Business Days prior to the date and time of delivery specified therein. 2. The Company understands that the Underwriters intend (i)to make a public offering of the Shares as soon after (A) the Registration Statement has become effective and (B) the parties hereto have executed and delivered this Agreement, as in the judgment of the Representatives is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 3 4 3. Payment for the Shares shall be made by wire transfer in immediately available funds to the account specified by the Company to the Representatives in the case of the Underwritten Shares, on ___ 1997, or at such other time on the same or such other date, not later than the fifth Business Day thereafter, as the Representatives and the Company may agree upon in writing or, in the case of the Option Shares, on the date and time specified by the U.S. Representatives in the written notice of the U.S. Underwriters' election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares is referred to herein as the "Closing Date" and the time and date for such payment for the Option Shares, if other than the Closing Date, is herein referred to as the "Additional Closing Date". As used herein, the term "Business Day" means any day other than a day on which banks are permitted or required to be closed in New York City. Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against delivery to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date registered in such names and in such denominations as the applicable Representatives shall request in writing not later than two full Business Days prior to the Closing Date or the Additional Closing Date, as the case may be, with any transfer taxes payable in connection with the transfer to the Underwriters of the Shares duly paid by the Company. The certificates for the Shares will be made available for inspection and packaging by the applicable Representatives at the office of J.P. Morgan Securities Inc. set forth above not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date or the Additional Closing Date, as the case may be. 4. The Company represents and warrants to each Underwriter that: (a) no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission, and each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; 4 5 (b) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of the Company, threatened by the Commission; and the Registration Statement and Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) comply, or will comply, as the case may be, in all material respects with the Securities Act and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, if applicable, at the Closing Date or Additional Closing Date, as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; except that the foregoing representations and warranties shall not apply to statements or omissions in the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; (c) the documents incorporated by reference in the Prospectus, when they were filed with the Commission conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Exchange Act"); (d) the financial statements, and the related notes thereto, included or incorporated by reference in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company and its consolidated subsidiaries as of the dates indicated and the consolidated results of their operations and changes in their consolidated cash flows for the periods specified; and said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis, and the supporting schedules included or incorporated by reference in the Registration Statement present fairly the information required to be stated therein; (e) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its 5 6 subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Prospectus; and except as set forth or contemplated in the Prospectus neither the Company nor any of its subsidiaries has entered into any transaction or agreement (whether or not in the ordinary course of business) material to the Company and its subsidiaries taken as a whole; (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; (g) each of the subsidiaries of the Company listed on Exhibit A (the "Principal Subsidiaries"), has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; and all the outstanding shares of capital stock of each Principal Subsidiary of the Company have been duly authorized and validly issued, are fully-paid and non-assessable, and are owned by the Company, directly or indirectly, free and clear of all liens, encumbrances, security interests and claims; (h) prior to the Recapitalization, DKB and the CBC Entities owned all of the issued and outstanding shares of common stock, par value $1.00 per share of the Company; (i) this Agreement has been duly authorized, executed and delivered by the Company; 6 7 (j) the Company has an authorized capitalization as set forth in the Prospectus and such authorized capital stock conforms as to legal matters to the description thereof set forth in the Prospectus, and all of the outstanding shares of capital stock (including the Underwritten Shares) of the Company have been duly authorized, are validly issued, fully-paid and non-assessable and, other than the Underwritten Shares, will be owned by DKB following the sale of the Underwritten Shares; and, except as described in or expressly contemplated by the Prospectus, such capital stock is not subject to any pre-emptive or similar rights and there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options; (k) the Additional Shares have been duly authorized and, when issued and delivered to and paid for by the Underwriters in accordance with the terms of this Agreement, will be validly issued and will be fully paid and non-assessable and will conform to the description thereof in the Prospectus; and the issuance of the Additional Shares is not subject to any preemptive or similar rights; (l) The Assignment Agreement has been, and each of the Regulatory Compliance Agreement, Registration Rights Agreement and Tax Allocation Agreement, in each case, between the Company and DKB (collectively with the Assignment Agreement, the "Intercompany Agreements") will be, on or prior to the Closing Date, duly authorized, executed and delivered by the Company and constitutes or will constitute a valid and binding agreement of the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and the availability of equitable remedies may be limited by equitable principles of general applicability; 7 8 (m) neither the Company nor any of its Principal Subsidiaries is, or with the giving of notice or lapse of time or both would be, in violation of or in default under, its Certificate of Incorporation or By-Laws or any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Principal Subsidiaries is a party or by which it or any of them or any of their respective properties is bound, except for violations and defaults which individually and in the aggregate are not material to the Company and its subsidiaries taken as a whole; the issue and sale of the Shares and the performance by the Company of its obligations under this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Principal Subsidiaries is a party or by which the Company or any of its Principal Subsidiaries is bound or to which any of the property or assets of the Company or any of its Principal Subsidiaries is subject, nor will any such action result in any violation of the provisions of the Certificate of Incorporation or the By-laws of the Company or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, its Principal Subsidiaries or any of their respective properties; and no consent, approval, authorization, order, license, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained under the Securities Act and as may be required under foreign or state securities or Blue Sky Laws in connection with the purchase and distribution of the Shares by the Underwriters; (n) other than as set forth or contemplated in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries or any of their respective properties or to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject which, if determined adversely to the Company or any of its subsidiaries, could individually or in the aggregate reasonably be expected to have a material adverse effect on the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole, and, to the best of the Company's knowledge, no such 8 9 proceedings are threatened or contemplated by governmental authorities or threatened by others; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (o) no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which is required by the Securities Act to be described in the Registration Statement and the Prospectus which is not so described; (p) other than as set forth or contemplated in the Prospectus, no person has the right to require the Company to register any securities for offering and sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issue and sale of the Shares; (q) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (r) KPMG Peat Marwick LLP who have certified certain financial statements of the Company and its subsidiaries are independent public accountants as required by the Securities Act; (s) the Company has not taken nor will it take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Stock; (t) each of the Company and its Principal Subsidiaries owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as conducted as of the date hereof, and neither the Company nor any Principal Subsidiary has received any actual notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other 9 10 authorization; and each of the Company and its Principal Subsidiaries is in compliance in all material respects with all laws and regulations relating to the conduct of its business as conducted as of the date hereof; and (u) the Company and its Principal Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environment Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole; the Company has reasonably concluded that the costs and liabilities associated with its compliance with Environmental Laws would not, singly, or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. 5. The Company covenants and agrees with each of the several Underwriters as follows: (a) to use its best efforts to cause the Registration Statement to become effective at the earliest possible time and, if required, to file the final Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act and to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; and to furnish copies of the Prospectus to the Underwriters in New York City prior to 10:00 a.m., New York City time, on the Business Day next succeeding the date of this Agreement in such quantities as the Representatives may reasonably request; (b) to deliver, at the expense of the Company, to the Representatives eight signed copies of the Registration Statement (as originally filed) and each amendment thereto, in each case including exhibits and documents incorporated by reference therein, and to each 10 11 other Underwriter a conformed copy of the Registration Statement (as originally filed) and each amendment thereto, in each case without exhibits but including the documents incorporated by reference therein and, during the period mentioned in paragraph (e) below, to each of the Underwriters as many copies of the Prospectus (including all amendments and supplements thereto) and documents incorporated by reference therein as the Representatives may reasonably request; (c) before filing any amendment or supplement to the Registration Statement or the Prospectus, whether before or after the time the Registration Statement becomes effective, to furnish to the Representatives a copy of the proposed amendment or supplement for review and not to file such proposed amendment or supplement to which the Representatives reasonably object; (d) to advise the Representatives promptly, and to conform such advice in writing (i) when the Registration Statement has become effective, (ii) when any amendment to the Registration Statement has been filed or becomes effective, (iii) when any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof, (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose, (vi) of the occurrence of any event, within the period referenced in paragraph (e) below, as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, and (vii) of the receipt by the Company of any notification with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and to use its best efforts to prevent the issuance of any such stop order, or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any order suspending any such qualification of the Shares, or notification of any such order thereof and, if issued, to obtain as soon as possible the withdrawal thereof; 11 12 (e) if, during such period of time after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters a prospectus relating to the Shares is required by law to be delivered in connection with sales by the Underwriters or any dealer, any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with law, forthwith to prepare and furnish, at the expense of the Company, to the Underwriters and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Shares may have been sold by the Representatives on behalf of the Underwriters and to any other dealers upon request, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law; (f) to endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request and to continue such qualification in effect so long as reasonably required for distribution of the Shares; provided that the Company shall not be required to file a general consent to service of process in any jurisdiction; (g) to make generally available to its security holders and to the Representatives as soon as practicable an earnings statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the effective date of the Registration Statement, which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder; (h) During a period of two years after the effective date of the Registration Statement, to furnish to the Representatives copies of all reports or other communications (financial or other) furnished to holders of the Shares, and copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange; (i) for a period of 180 days after the date of the initial public offering of the Shares not to (i) offer, sell, contract to sell, or otherwise dispose of, directly or indirectly, any securities of the Company which are substantially similar to shares of Stock, including but not limited to any securities that are convertible into or exchangeable for, or that represent 12 13 the right to receive Stock or any such substantially similar securities or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequence of ownership of the Stock or any such substantially `similar securities, without the prior written consent of J.P. Morgan Securities Inc., other than the Shares to be sold hereunder and shares of Stock issued pursuant to employee stock option plans existing on the date of the initial public offering; (j) to use the net proceeds received by the Company from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (k) to use its best efforts to list, subject to notice of issuance, the Shares on the New York Stock Exchange (the "Exchange"); (l) whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder, including without limiting the generality of the foregoing, all costs and expenses (i) incident to the preparation, issuance, execution and delivery of the Shares, (ii) incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Prospectus and any preliminary prospectus (including in each case all exhibits, amendments and supplements thereto), (iii) incurred in connection with the registration or qualification of the Shares under the laws of such jurisdictions as the Representatives may designate (including fees of counsel for the Underwriters and its disbursements), (iv) in connection with the listing of the Shares on the Exchange, (v) related to the filing with, and clearance of the offering by, the NASD including the fees and expenses of J.P. Morgan, acting as "qualified independent underwriter" within the meaning of Rule 2720 of the Rules of Conduct of the NASD, (vi) in connection with the printing (including word processing and duplication costs) and delivery of this Agreement, any dealer agreements, any Blue Sky Memoranda and the furnishing to the Underwriters and dealers of copies of the Registration Statement and the Prospectus, including mailing and shipping, as herein provided, (vii) any expenses incurred by the Company in connection with a "road show" presentation to potential investors, (viii) the cost of preparing stock certificates and (ix) the cost and charges of any transfer agent and any registrar. 6. The several obligations of the Underwriters hereunder to purchase the Shares on the Closing Date or the Additional Closing Date, as the case may 13 14 be, are subject to the performance by the Company of its respective obligations hereunder and to the following additional conditions: (a) the Registration Statement shall have become effective (or if a post-effective amendment is required to be filed under the Securities Act, such post-effective amendment shall have become effective) not later than 5:00 P.M., New York City time, on the date hereof; and no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission; the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Securities Act and in accordance with Section 5(a) hereof; and all requests for additional information shall have been complied with to the satisfaction of the Representatives; (b) the representations and warranties of the Company contained herein are true and correct on and as of the Closing Date or the Additional Closing Date, as the case may be, as if made on and as of the Closing Date or the Additional Closing Date, as the case may be, and the Company shall have complied with all agreements and all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or the Additional Closing Date, as the case may be; (c) subsequent to the execution and delivery of this Agreement and prior to the Closing Date or the Additional Closing Date, as the case may be, there shall not have occurred any downgrading, nor shall any notice have been given of (i) any downgrading, (ii) any intended or potential downgrading or (iii) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; (d) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Prospectus, the effect of which in the judgment of the Representatives makes it impracticable or 14 15 inadvisable to proceed with the public offering or the delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus; and neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; (e) the Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, a certificate of an executive officer of the Company, with specific knowledge about the Company's financial matters, satisfactory to the Representatives to the effect set forth in subsections (a) through (d) of this Section and to the further effect that there has not occurred any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole from that set forth or contemplated in the Registration Statement; (f) Schulte Roth & Zabel LLP, counsel for the Company, shall have furnished to the Representatives their written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, in form and substance satisfactory to the Representatives, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by the Company; (ii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iii) all of the outstanding shares of capital stock (including the Underwritten Shares) of the Company have been duly authorized and are validly issued, fully paid and non- assessable and, except as described in or expressly contemplated by the Prospectus, such capital stock, is not subject to any preemptive or similar rights; 15 16 (iv) the Additional Shares have been duly authorized and, when issued and delivered to and paid for by the U.S. Underwriters in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and will conform to the description thereof in the Prospectus; and the issuance of the Additional Shares is not subject to any preemptive or similar rights; (v) such counsel does not know of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (vi) the statements in the Prospectus under "Management--Long-Term Incentive Plan; --Defined Benefit Plans; --Employment Agreements"; "Relationship with DKB--Regulatory Compliance Agreements; --Registration Rights Agreement; --Tax Allocation Agreement"; "Description of Capital Stock"; "Certain United States Tax Consequences to Non-United States Holders"; and "Underwriting," and in the Registration Statement in Items 14 and 15, insofar as such statements constitute a summary of the terms of the Stock, legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such terms, legal matters, documents or proceedings; (vii) such counsel is of the opinion that the Registration Statement and the Prospectus and any amendments and supplements thereto (other than the financial statements and related schedules and other financial and statistical data included or incorporated by reference therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and has no reason to believe that (other than the financial statements and related schedules and other financial and statistical data included or incorporated by reference therein, as to which such counsel need express no belief) the Registration Statement and the Prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as amended or supplemented, if applicable, contains any untrue 16 17 statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (viii) no consent, approval, authorization, order, license, registration or qualification of or with any court or governmental agency or body is required for the issue and sale of the Shares or the consummation of the other transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained under the Securities Act and as may be required under foreign or state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; and (ix) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" as such term is defined in the Investment Company Act; (x) each Intercompany Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and the availability of equitable remedies may be limited by equitable principles of general applicability; and the exercise of the CBC Option has been duly authorized, executed and delivered by the Company. (g) Ernest D. Stein, Executive Vice President and General Counsel for the Company, shall have furnished to the Representatives his written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, in form and substance satisfactory to the Representatives, to the effect that: (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases 17 18 properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified or in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; (iii) each of the Company's Principal Subsidiaries has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified and in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; and all of the outstanding shares of capital stock of each Principal Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities and claims; (iv) other than set forth or contemplated in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending or, to the best of such counsel's knowledge, threatened against or affecting the Company or any of its subsidiaries or any of their respective properties or to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or its subsidiaries is or may be the subject which, if determined adversely to the Company or any of its subsidiaries, could individually or in the aggregate, reasonably be expected to have a material adverse effect on the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole; to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; and such counsel does not know of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; 18 19 (v) such counsel is of the opinion that the Registration Statement and the Prospectus and any amendments and supplements thereto (other than the financial statements and related schedules and other financial and statistical data included or incorporated by reference therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and has no reason to believe that (other than the financial statements and related schedules and other financial and statistical data included or incorporated by reference therein, as to which such counsel need express no belief) the Registration Statement and the Prospectus included therein at the time of the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as amended or supplemented, if applicable, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (vi) neither the Company nor any of its Principal Subsidiaries is, or with the giving of notice or lapse of time or both would be, in violation of or in default under, its Certificate of Incorporation or By-Laws or any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its Principal Subsidiaries is a party or by which it or any of them or any of their respective properties is bound, except for violations or defaults which individually and in the aggregate are not material to the Company and its subsidiaries taken as a whole; the sale of the Shares being delivered on the Closing Date or the Additional Closing Date, as the case may be, and the performance by the Company of its obligations under this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its Principal Subsidiaries is a party or by which the Company or any of its Principal Subsidiaries is bound or to which any of the property or assets of the Company or any of its Principal Subsidiaries is subject, nor will any such action result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the 19 20 Company or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, its Principal Subsidiaries or any of their respective properties; (vii) the documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date or the Additional Closing Date, as the case may be, (other than the financial statements and related schedules and other financial and statistical data included therein, as to which such counsel need not express no opinion), when they were filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder; (viii) each of the Company and its Principal Subsidiaries owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as conducted as of the date hereof, and neither the Company nor any such Principal Subsidiary has received any actual notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other authorization; and each of the Company and its Principal Subsidiaries is in compliance in all material respects with all laws and regulations relating to the conduct of its business as conducted as of the date of the Prospectus; and (ix) each of the Company and its Principal Subsidiaries is in compliance with all Environmental Laws, except, in each case, where noncompliance, individually or in the aggregate, would not have a material adverse effect on the Company and its subsidiaries taken as a whole; there are no legal or governmental proceedings pending or, to the knowledge of such counsel, threatened against or affecting the Company or any of its subsidiaries under any Environmental Law which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company and its subsidiaries as a whole. 20 21 In rendering the opinions set forth in paragraphs (f) and (g) of this Section, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and the States of Delaware and New York, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to Underwriters' counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and, in the case of Ernest D. Stein, certificates or other written statements of officials of jurisdictions having custody of documents respecting the corporate existence or good standing of the Company. The opinions of such counsel for the Company shall state that the opinions of any such other counsel upon which they relied is in form satisfactory to such counsel and, in such counsel's opinion, the Underwriters and they are justified in relying thereon. With respect to the matters to be covered in subparagraph (vii) of paragraph (f) and subparagraphs (v) and (vii) paragraph (g) above counsel may state their opinion and belief is based upon their participation in the preparation of the Registration Statement and the Prospectus and any amendment or supplement thereto (other than, in the case of Schulte Roth & Zabel LLP, the documents incorporated by reference therein) and review and discussion of the contents thereof (including the documents incorporated by reference therein) but is without independent check or verification except as specified. The opinions of Schulte Roth & Zabel LLP and Ernest D. Stein described above shall be rendered to the Underwriters at the request of the Company and shall so state therein. (h) on the effective date of the Registration Statement and the effective date of the most recently filed post-effective amendment to the Registration Statement and also on the Closing Date or Additional Closing Date, as the case may be, KPMG Peat Marwick LLP shall have furnished to you letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, containing statements and information of the type customarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; (i) the Representatives shall have received on and as of the Closing Date or Additional Closing Date, as the case may be, an opinion of Davis Polk & Wardwell, counsel to the Underwriters, with respect to the due authorization and valid issuance of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives 21 22 may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (j) the Shares to be delivered on the Closing Date or Additional Closing Date, as the case may be, shall have been approved for listing on the Exchange, subject to official notice of issuance; (k) on or prior to the Closing Date or Additional Closing Date, as the case may be, the Company shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request; (l) The "lock-up" agreements, each substantially in the form of Exhibit B hereto, between you and DKB and certain officers and directors of the Company relating to sales and certain other dispositions of shares of Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date or Additional Closing Date, as the case may be; and (m) the Company shall have purchased the CBC Option pursuant to the Assignment Agreement and notice of exercise of the CBC Option shall have been given. 7. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein. 22 23 The Company also agrees to indemnify and hold harmless, J.P. Morgan and each person, if any, who controls J.P. Morgan within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities incurred as a result of J.P. Morgan's participation as a "qualified independent underwriter" within the meaning of Rule 2720 of the Rules of Conduct of the NASD in connection with the offering of the Shares. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, officers who sign the Registration Statement and each person who controls the Company within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any preliminary prospectus. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnity may be sought pursuant to any of the three preceding paragraphs, such person (the "Indemnified Person") shall promptly notify the person against whom such indemnity may be sought (the "Indemnifying Person") in writing, and the Indemnifying Person, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impeded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred provided, however, that if indemnity may be sought pursuant to the second paragraph of this Section 7 in respect of such proceeding, then in addition to such separate firm for the Underwriters and such 23 24 control persons of the Underwriters the Indemnifying Person shall be liable for the fees and expenses of not more than one separate firm (in addition to any local counsel) for J.P. Morgan in its capacity as a "qualified independent underwriter" and all persons, if any, who control J.P. Morgan, within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Any such separate firm for the Underwriters and such control persons of Underwriters shall be designated in writing by J.P. Morgan Securities Inc. and any such separate firm for the Company, its directors, officers who sign the Registration Statement and such control persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested an Indemnifying Person to reimburse the Indemnified Person for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Indemnifying Person agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in the first, second or third paragraphs of this Section 7 is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters or J.P. Morgan in its capacity as "qualified independent underwriter," as the case may be, on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportions as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters or J.P. 24 25 Morgan in its capacity as "qualified independent underwriter," as the case may be, on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Company and the total underwriting discounts and the commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, or the fee received by J.P. Morgan in its capacity as a "qualified independent underwriter," bear to the aggregate public offering price of the Shares. The relative fault of the Company on the one hand and the Underwriters or J.P. Morgan in its capacity as "qualified independent underwriter," as the case may be, on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters or J.P. Morgan in its capacity as "qualified independent underwriter," as the case may be, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of Shares set forth opposite their names in Schedule I or Schedule II hereto, and not joint. 25 26 The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any other person controlling the Company and (iii) acceptance of and payment for any of the Shares. 8. Notwithstanding anything herein contained, this Agreement (or the obligations of the several Underwriters with respect to the Option Shares) may be terminated in the absolute discretion of the Representatives, by notice given to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (or, in the case of the Option Shares, prior to the Additional Closing Date) (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers, Inc., (ii) trading of any securities of or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Representatives, is material and adverse and which, in the judgment of the Representatives, makes it impracticable to market the Shares being delivered at the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus. 9. This Agreement shall become effective upon the later of (x) execution and delivery hereof by the parties hereto and (y) release of notification of the effectiveness of the Registration Statement (or, if applicable, any post-effective amendment) by the Commission. If on the Closing Date or the Additional Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Shares to be purchased on such date, the other Underwriters obligated to purchase on such date shall be obligated severally in the proportions that the 26 27 number of Shares set forth opposite their respective names in Schedule I or Schedule II bears to the aggregate number of Underwritten Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 9 by an amount in excess of one-tenth of such number of Shares without the written consent of such Underwriter. If on the Closing Date or the Additional Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the applicable Representatives and the Company for the purchase of such Shares are not made within 36 hours after such default, this Agreement (or the obligations of the several Underwriters to purchase the Option Shares, as the case may be) shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date (or, in the case of the Option Shares, the Additional Closing Date), but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement or any condition of the Underwriters' obligations cannot be fulfilled, the Company agrees to reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and expenses of its counsel) reasonably incurred by the Underwriters in connection with this Agreement or the offering contemplated hereunder. 11. This Agreement shall inure to the benefit of and be binding upon the Company, the Underwriters, any controlling persons referred to herein and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No purchaser of Shares from 27 28 any Underwriter shall be deemed to be successor by reason merely of such purchase. 12. Any action by the Underwriters hereunder may be taken by J.P. Morgan Securities Inc. alone on behalf of the Representatives or Underwriters, and any such action taken by J.P. Morgan Securities Inc. alone shall be binding upon the Representatives or Underwriters. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New York 10260 (telefax: _________); Attention: Syndicate Department. Notices to the Company shall be given to it at ______________, ___________, ______________, (telefax: _________); Attention: ___________. 13. This Agreement may be signed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. 28 29 If the foregoing is in accordance with your understanding, please sign and return four counterparts hereof. Very truly yours, THE CIT GROUP INC. By:_____________________________________ Title: Accepted: ________, 1997 J.P. Morgan Securities Inc. Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Credit Suisse First Boston Corporation Lehman Brothers Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Brothers Inc UBS Securities LLC Acting severally on behalf of themselves and the several Underwriters listed in Schedule I hereto. By: J.P. Morgan Securities Inc. By:____________________________ Title: 29 30 SCHEDULE I
NUMBER OF UNDERWRITTEN SHARES UNDERWRITER TO BE PURCHASED - ----------- --------------- J.P. Morgan Securities Inc. Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Credit Suisse First Boston Corporation Lehman Brothers Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated Salomon Brothers Inc UBS Securities LLC -------- Total ========
30 EX-5 3 OPINION OF SCHULTE ROTH & ZABEL LLP 1 Exhibit 5 [Schulte Roth & Zabel LLP Letterhead] November 12, 1997 The CIT Group, Inc. 1211 Avenue of the Americas New York, New York 10036 Dear Sirs: We have acted as special counsel to The CIT Group, Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing by the Company with the Securities and Exchange Commission (the "Commission") of a Registration Statement on Form S-2, Commission file number 333-36435 (the "Registration Statement"), under the Securities Act of 1933, as amended (the "Securities Act"), relating to the offer and sale of a maximum of 36,225,000 shares of Class A Common Stock, par value $.01 per share, of the Company (the "Class A Common Stock," and the shares of Class A Common Stock covered by the Registration Statement are referred to herein as the "Shares"). The Shares are to be purchased by certain underwriters and offered for sale to the public pursuant to the terms of the Underwriting Agreement (the "Underwriting Agreement"), the form of which will be filed as an exhibit to the Registration Statement. In our capacity as special counsel to the Company in connection with the preparation and filing by the Company of the Registration Statement and the offer and sale of Shares contemplated thereby, we have examined originals, telecopies or copies, certified or otherwise identified to our satisfaction, of such records of the Company and all such agreements, certificates of public officials, certificates of officers or representatives of the Company and others, and such other documents, certificates and corporate or other records as we have deemed necessary or appropriate as a basis for this opinion. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons signing or delivering any instrument, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts material to this opinion that were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. We are attorneys admitted to practice in the State of New York and the opinion set forth below is limited to the laws of the State of New York and the Delaware General Corporation Law. Paul N. Roth, a member of this firm, is a director of the Company. 2 Based upon the foregoing, and having regard for such legal considerations as we deem relevant, we are of the opinion that, upon the filing in accordance with the Delaware General Corporation Law of the Amended and Restated Certificate of Incorporation of the Company filed as an Exhibit to the Registration Statement, the Shares will be duly authorized by the Company and, upon payment and delivery in accordance with the Underwriting Agreement, will be validly issued, fully paid and nonassessable. We have reviewed the discussion contained under the heading "Certain United States Tax Consequences to Non-United States Holders" in the Prospectus forming a part of the Registration Statement. In our opinion, such discussion sets forth the material U.S. federal income tax considerations applicable generally to non-U.S. holders of the Shares and to such holders' ownership and disposition of the Shares. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Prospectus which forms a part thereof. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, /s/ Schulte Roth & Zabel LLP ---------------------------- SCHULTE ROTH & ZABEL LLP EX-10.4 4 REGULATORY COMPLIANCE AGREEMENT 1 EXHIBIT 10.4 REGULATORY COMPLIANCE AGREEMENT THIS REGULATORY COMPLIANCE AGREEMENT (this "Agreement") is made and entered into as of this ____ day of __________, 1997 by and between THE DAI-ICHI KANGYO BANK, LIMITED, a Japanese bank (the "Bank"), and THE CIT GROUP, INC., a Delaware corporation ("CIT"). RECITALS WHEREAS, the Bank currently owns 80% of the outstanding common stock of CIT; WHEREAS, CIT is contemplating the issuance of shares of common stock in an initial public offering (the "Offering") and following the Offering, the Bank will be the beneficial and record owner of ________ shares of Class B common stock of CIT (the "Shares"); NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration had and received, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follow: 1. Restriction of CIT's Activities. (a) CIT and its Subsidiaries shall not engage in any Covered Activity (as defined in Section 5 below) without prior notice to and approval by the Bank in accordance with Section 1(e). (b) CIT and its Subsidiaries shall not engage in any Covered Activity without prior approval of (A) the Board of Governors of the Federal Reserve System (the "Board") and (B) the Ministry of Finance of Japan ("MOF") having been obtained by the Bank or any notice or filing required pursuant to Section 1(e) hereof having been given or made by the Bank and accepted, if applicable. (c) CIT and its Subsidiaries shall not engage in any activity that would cause the Bank, CIT or any Affiliate of the Bank or CIT to violate the Act (as defined in Section 5 below) or the Banking Law (as defined in Section 5 below). (d) In the event that, at any time, it is determined by the Bank that an activity then conducted by CIT or any Subsidiary of CIT, or any Covered Activity entered into by CIT or any Subsidiary of CIT, is prohibited by the Act or the Banking Law, CIT shall take, or cause the relevant Subsidiary to take, all reasonable steps to cease such activity or Covered Activity immediately. 2 (e) Following the receipt of a notice from CIT under Section 1(a), the Bank shall determine (i) whether the proposed Covered Activity is permissible pursuant to laws and regulations applicable to the Bank and its Affiliates, including without limitation the Act and the Banking Law, and (ii) whether applications, notices or other filings should be filed or made with the Board or MOF in connection with the proposed Covered Activity. If the Bank determines that such proposed Covered Activity is so permissible and does not require any application, notice or other filing with the Board or MOF, it shall so notify CIT and CIT may engage or cause its Subsidiaries to engage in such proposed Covered Activity. If the Bank determines that such proposed Covered Activity is not so permissible, CIT and its Subsidiaries shall not engage in such proposed Covered Activity. If the Bank determines that such proposed Covered Activity is permissible, but that an application, notice or other filing with the Board or MOF is required, the Bank shall notify CIT whether the Bank will make such application, notice or other filing and neither CIT nor any Subsidiary shall commence such proposed Covered Activity except upon compliance with this Section 1. (f) CIT and its Subsidiaries will comply with, and will assist the Bank to obtain, all approvals and consents as may be required by the Act or the Banking Law. 2. Term. The term of this Agreement shall commence on the date hereof and shall continue until the earlier of (i) the date on which the Bank owns none of the Shares or (ii) the date on which the Bank, after having in its sole discretion requested an opinion from regulatory counsel in the United States and Japan with respect thereto, shall have received a written opinion from such counsel (and delivered a copy of such opinion to CIT) that (i) the Bank is not required to receive prior approval from or give notice to or make filings with the Board or MOF under the Act and the Banking Law, as the case may be, as a result of CIT or any Subsidiary of CIT commencing or engaging in any Covered Activity, and (ii) the Bank and CIT are no longer subject to the jurisdiction of MOF or the Board, as the case may be, with respect to the activities and transactions in which CIT may engage. In the event that such opinion is delivered with respect to only one of the United States or Japan, this Agreement shall terminate only with respect to compliance with the applicable laws and regulations of such jurisdiction. 3. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York without regard to principles of conflict of laws. 4. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed by all of the parties to this Agreement, shall be deemed to be an original, and all of which counterparts together shall constitute one and the same instrument. 5. Definitions. Capitalized terms not otherwise herein defined shall be given the definitions in Regulation Y, 12 C.F.R. Section 225 et seq. A "Covered Activity" means any new activity or any activity or transaction for which (i) the Bank Holding Company Act of 1956, as amended (12 U.S.C. secs. 1841 et seq.) or any successor thereto, or any regulation, interpretation, policy, guideline, request, directive or order (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) made pursuant thereto (the "Act"), or -2- 3 (ii) the Japanese Banking Law, as amended (Law No. 59, June 1, 1981) or any successor thereto or any regulation, interpretation, policy, guideline, request, directive or order (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) made pursuant thereto (the "Banking Law"), requires the Bank to receive prior approval from or give notice to or make other filings with the Board or MOF, as the case may be. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date first written above. THE DAI-ICHI KANGYO BANK, LIMITED By: _________________________________ THE CIT GROUP, INC. By: _________________________________ -3- EX-10.5 5 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.5 REGISTRATION RIGHTS AGREEMENT by and between THE CIT GROUP, INC. and THE DAI-ICHI KANGYO BANK, LIMITED Dated as of November __, 1997 2 TABLE OF CONTENTS Page ---- 1. DEFINITIONS.......................................................1 2. REGISTRATION UNDER THE SECURITIES ACT..............................5 2.1 DEMAND REGISTRATION...........................................5 2.2 INCIDENTAL REGISTRATION.......................................8 2.3 SHELF REGISTRATION...........................................10 2.4 EXPENSES.....................................................11 2.5 UNDERWRITTEN OFFERINGS.......................................11 2.6 CONVERSIONS; EXERCISES......................................12 2.7 POSTPONEMENTS................................................12 3. HOLDBACK ARRANGEMENTS.............................................13 3.1 RESTRICTIONS ON SALE BY HOLDERS OF REGISTRABLE SECURITIES....13 3.2 RESTRICTIONS ON SALE BY THE COMPANY AND OTHERS...............13 4. REGISTRATION PROCEDURES...........................................14 4.1 OBLIGATIONS OF THE COMPANY...................................14 4.2 SELLER INFORMATION...........................................18 4.3 NOTICE TO DISCONTINUE........................................19 5. INDEMNIFICATION; CONTRIBUTION.....................................19 5.1 INDEMNIFICATION BY THE COMPANY...............................19 5.2 INDEMNIFICATION BY HOLDERS...................................20 5.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS.......................21 5.4 CONTRIBUTION.................................................22 5.5 OTHER INDEMNIFICATION........................................22 5.6 INDEMNIFICATION PAYMENTS.....................................23 6. GENERAL...........................................................23 6.1 REGISTRATION RIGHTS TO OTHERS................................23 6.2 AVAILABILITY OF INFORMATION; RULE 144; RULE 144A; OTHER EXEMPTIONS ...........................................23 6.3 AMENDMENTS AND WAIVERS.......................................23 6.4 NOTICES......................................................24 6.5 SUCCESSORS AND ASSIGNS.......................................25 6.6 COUNTERPARTS.................................................25 6.7 DESCRIPTIVE HEADINGS, ETC....................................26 6.8 SEVERABILITY.................................................26 6.09 GOVERNING LAW...............................................26 6.10 REMEDIES; SPECIFIC PERFORMANCE..............................26 6.11 ENTIRE AGREEMENT............................................27 6.12 NOMINEES FOR BENEFICIAL OWNERS..............................27 6.13 CONSENT TO JURISDICTION.....................................28 6.14 FURTHER ASSURANCES..........................................28 6.15 NO INCONSISTENT AGREEMENTS.................................28 6.16 CONSTRUCTION................................................28 3 REGISTRATION RIGHTS AGREEMENT (this or the "Agreement") dated as of November __, 1997, by and between The CIT Group, Inc. a Delaware corporation (the "Company") and The Dai-Ichi Kangyo Bank, Limited, a Japanese banking corporation (the "Initial Holder"). W I T N E S S E T H : WHEREAS, the Initial Holder owns all of the outstanding shares of Class B Common Stock of the Company; and WHEREAS, the Board of Directors of the Company has determined that it is in the best interest of the Company to provide the Initial Holder with certain registration rights upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "Affiliate" shall mean (i) with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person, and (ii) with respect to any individual, shall also mean the spouse, sibling, child, step-child, grandchild, niece, nephew or parent of such Person, or the spouse of any thereof. "Blackout Period" shall have the meaning set forth in Section 2.7. "Class A Common Stock" shall mean the Class A Common Stock of the Company, par value $.01 per share (and any other securities issued in respect thereof or in exchange therefor). "Class B Common Stock" shall mean the Class B Common Stock of the Company, par value $.01 per share (and any other securities issued in respect thereof or in exchange therefor). "Common Stock" means, together, the Class A Common Stock and the Class B Common Stock. "Demand Registration" shall mean a registration required to be effected by the Company pursuant to Section 2.1. "Demand Registration Statement" shall mean a registration statement of the Company which covers the Registrable Securities requested to be included therein 4 pursuant to the provisions of Section 2.1 and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference (or deemed to be incorporated by reference) therein. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder, or any similar or successor statute. "Holders" shall mean the Initial Holder for so long as it owns any Registrable Securities and such of its successors and permitted assigns (including any Permitted Transferees of Registrable Securities) who acquire or are otherwise the transferee of Registrable Securities, directly or indirectly, from such Initial Holder (or any subsequent Holder), for so long as such successors and permitted assigns own any Registrable Securities. For purposes of this Agreement, a Person will be deemed to be a Holder whenever such Person holds an option to purchase, or a security convertible into or exercisable or exchangeable for, Registrable Securities, whether or not such purchase, conversion, exercise or exchange has actually been effected and disregarding any legal restrictions upon the exercise of such rights. Registrable Securities issuable upon exercise of an option or upon conversion, exchange or exercise of another security shall be deemed outstanding for the purposes of this Agreement. "Holders' Counsel" shall mean one firm of counsel (per registration) to the Holders of Registrable Securities participating in such registration, which counsel shall be selected (i) in the case of a Demand Registration, by the Initiating Holders holding a majority of the Registrable Securities for which registration was requested in the Request, and (ii) in all other cases, by the Majority Holders of the Registration. "Incidental Registration" shall mean a registration required to be effected by the Company pursuant to Section 2.2. "Incidental Registration Statement" shall mean a registration statement of the Company which covers the Registrable Securities requested to be included therein pursuant to the provisions of Section 2.2 and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference (or deemed to be incorporated by reference) therein. "Initial Holder" shall have the meaning set forth in the preamble hereto. "Initiating Holders" shall mean, with respect to a particular registration, the Holders who initiated the Request for such registration. "Inspectors" shall have the meaning set forth in Section 4.1(g). "Majority Holders" shall mean one or more Holders of Registrable Securities who hold a majority of the Registrable Securities then outstanding. -2- 5 "Majority Holders of the Registration" shall mean, with respect to a particular registration, one or more Holders of Registrable Securities who hold a majority of the Registrable Securities to be included in such registration. "NASD" shall mean the National Association of Securities Dealers, Inc. "Permitted Transferee" shall mean any Person to which a Holder has assigned its rights and obligations hereunder, in accordance with Section 6.5 of this Agreement. "Person" shall mean any individual, firm, partnership, corporation, trust, joint venture, association, joint stock company, limited liability company, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof, and shall include any successor (by merger or otherwise) of such entity. "Prospectus" shall mean the prospectus included in a Registration Statement (including, without limitation, any preliminary prospectus and any prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), and any such Prospectus as amended or supplemented by any prospectus supplement, and all other amendments and supplements to such Prospectus, including post-effective amendments, and in each case including all material incorporated by reference (or deemed to be incorporated by reference) therein. "Registrable Securities" shall mean (i) all shares of Class A Common Stock which are issued or issuable upon the conversion of any shares of Class B Common Stock currently held or hereafter acquired by the Initial Holder or its successors or permitted assigns, (ii) all shares of Class A Common Stock at any time held by or acquired by the Initial Holder or its successors or permitted assigns, (iii) all shares of Class A Common Stock issued or issuable in exchange for or upon conversion of any other securities of the Company now held or hereafter acquired by the Initial Holder or its successors or permitted assigns and (iv) any other securities of the Company (or any successor or assign of the Company, whether by merger, consolidation, sale of assets or otherwise) which may be issued or issuable with respect to, in exchange for, or in substitution of, the Registrable Securities referenced in clauses (i) through (iii) above by reason of any dividend or stock split, combination of shares, merger, consolidation, recapitalization, reclassification, reorganization, sale of assets or similar transaction. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (A) a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities have been disposed of in accordance with such registration statement, (B) such securities are sold pursuant to Rule 144 (or any similar provisions then in force) under the Securities Act, (C) such securities have been otherwise transferred, a new certificate or other evidence of ownership for them not bearing the legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require -3- 6 registration under the Securities Act, or (D) such securities shall have ceased to be outstanding. "Registration Expenses" shall mean any and all expenses incident to the performance of or compliance with this Agreement by the Company and its subsidiaries, including, without limitation (i) all SEC, stock exchange, NASD and other registration, listing and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of any stock exchange (including fees and disbursements of counsel in connection with such compliance and the preparation of a blue sky memorandum and legal investment survey), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing, distributing, mailing and delivering any Registration Statement, any Prospectus, any underwriting agreements, transmittal letters, securities sales agreements, securities certificates and other documents relating to the performance of or compliance with this Agreement, (iv) the fees and disbursements of counsel for the Company, (v) the fees and disbursements of Holders' Counsel, (vi) the fees and disbursements of all independent public accountants (including the expenses of any audit and/or "cold comfort" letters) and the fees and expenses of other Persons, including experts, retained by the Company, (vii) the expenses incurred in connection with making road show presentations and holding meetings with potential investors to facilitate the distribution and sale of Registrable Securities which are customarily borne by the issuer, (viii) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, and (ix) premiums and other costs of policies of insurance against liabilities arising out of the public offering of the Registrable Securities being registered; provided, however, that Registration Expenses shall not include discounts and commissions payable to underwriters, selling brokers, dealer managers or other similar Persons engaged in the distribution of any of the Registrable Securities; and, provided further, that in any case where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, auditing fees, premiums or other expenses relating to liability insurance required by the underwriters of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business or which the Company would have incurred in any event. "Registration Statement" shall mean any registration statement of the Company which covers any Registrable Securities and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including all Prospectuses contained therein, all exhibits thereto and all material incorporated by reference (or deemed to be incorporated by reference) therein. "Request" shall have the meaning set forth in Section 2.1(a). "SEC" shall mean the Securities and Exchange Commission, or any successor agency having jurisdiction to enforce the Securities Act. -4- 7 "Securities Act" shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder, or any similar or successor statute. "Shelf Registration" shall have the meaning set forth in Section 2.1(a). "Underwriters" shall mean the underwriters, if any, of the offering being registered under the Securities Act. "Underwritten Offering" shall mean a sale of securities of the Company to an Underwriter or Underwriters for reoffering to the public. "Withdrawn Demand Registration" shall have the meaning set forth in Section 2.1(a). "Withdrawn Request" shall have the meaning set forth in Section 2.1(a). 2. REGISTRATION UNDER THE SECURITIES ACT. 2.1 Demand Registration. (a) Right to Demand Registration. Subject to the limitations set forth in this Section 2.1, at any time or from time to time, any Holder shall have the right to request in writing (a "Request") that the Company register all or any part of such Holder's Registrable Securities which are not at such time included in an effective Shelf Registration under Section 2.3 (which Request shall specify the amount of Registrable Securities intended to be disposed of by such Holders and the intended method of disposition thereof) by filing with the SEC a Demand Registration Statement. As promptly as practicable, but no later than 10 days after receipt of a Request, the Company shall give written notice of such requested registration to all Holders of Registrable Securities. Subject to Section 2.1(b), the Company shall include in a Demand Registration (i) the Registrable Securities intended to be disposed of by the Initiating Holders and (ii) the Registrable Securities intended to be disposed of by any other Holder which shall have made a written request (which request shall specify the amount of Registrable Securities to be registered and the intended method of disposition thereof) to the Company for inclusion of such Registrable Securities in such registration within 20 days after the receipt of such written notice from the Company. The Company shall, as expeditiously as possible following a Request, use its best efforts to cause to be filed with the SEC a Demand Registration Statement providing for the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register by all such Holders, to the extent necessary to permit the disposition of such Registrable Securities so to be registered in accordance with the intended methods of disposition thereof specified in such Request or further requests (including, without limitation, by means of a shelf registration pursuant to Rule 415 under the Securities Act (a "Shelf Registration") if so requested and if the Company is then eligible to use such a registration). The Company shall use its best efforts to have such Demand Registration Statement declared effective by the SEC as soon as practicable thereafter and to keep -5- 8 such Demand Registration Statement continuously effective for the period specified in Section 4.1(b). Notwithstanding the foregoing, the Company will not be required to file a Demand Registration Statement for Registrable Securities if the reasonably anticipated aggregate price to the public for such Registrable Securities would be less than $100 million. A Request may be withdrawn prior to the filing of the Demand Registration Statement by the Majority Holders of the Registration (a "Withdrawn Request") and a Demand Registration Statement may be withdrawn prior to the effectiveness thereof by the Majority Holders of the Registration (a "Withdrawn Demand Registration"). Any Holder requesting inclusion in a Demand Registration may, at any time prior to the effective date of the Demand Registration Statement (and for any reason) revoke such request by delivering written notice to the Company revoking such requested inclusion; provided, however, that if any Demand Registration Statement shall be withdrawn prior to the effectiveness thereof as a result of such Holder or Holders having revoked its or their request for inclusion in such Demand Registration Statement, such withdrawing Holder or Holders, on a pro rata basis, as the case may be, shall reimburse the Company for the reasonable out-of-pocket Registration Expenses relating to the preparation and filing of such Demand Registration Statement (to the extent actually incurred). The registration rights granted pursuant to the provisions of this Section 2.1 shall be in addition to the registration rights granted pursuant to the other provisions of Section 2 hereof. (b) Priority in Demand Registrations. If a Demand Registration involves an Underwritten Offering, and the sole or lead managing Underwriter, as the case may be, of such Underwritten Offering shall advise the Company in writing (with a copy to each Holder requesting registration) on or before the date that is five days prior to the date then scheduled for such offering that, in its opinion, the amount of Registrable Securities requested to be included in such Demand Registration exceeds the number which can be sold in such offering within a price range acceptable to the Majority Holders of the Registration (such writing to state the basis of such opinion and the approximate number of Registrable Securities which may be included in such offering), the Company shall include in such Demand Registration, to the extent of the number which the Company is so advised may be included in such offering, the Registrable Securities requested to be included in the Demand Registration by the Holders allocated pro rata in proportion to the number of Registrable Securities requested to be included in such Demand Registration by each of them. In the event the Company shall not, by virtue of this Section 2.1(b), include in any Demand Registration all of the Registrable Securities of any Holder requesting to be included in such Demand Registration, such Holder may, upon written notice to the Company given within five days of the time such Holder first is notified of such matter, reduce the amount of Registrable Securities it desires to have included in such Demand Registration, whereupon only the Registrable Securities, if any, it desires to have included will be so included and the Holders not so -6- 9 reducing shall be entitled to a corresponding increase in the amount of Registrable Securities to be included in such Demand Registration. (c) Limitations on Registrations. Until such time, if any, that the total number of shares of Class B Common Stock then outstanding represents less than 25% of the aggregate number of shares of Common Stock then outstanding, there shall be no limit on the number of occasions on which Holders of Registrable Securities may exercise their right to request registration under this Section 2.1. After such time, if any, as the total number of shares of Class B Common Stock then outstanding represents less than 25% of the aggregate number of shares of Common Stock then outstanding, Holders of Registrable Securities may exercise their rights under this Section 2.1 (through notice delivered by any Holder of Registrable Securities) on not more than four occasions in the aggregate for all such Holders; provided, however, that if the Initial Holder and/or its subsidiaries continue to hold any Registrable Securities after such four additional Demand Registrations, then the Initial Holder and/or its subsidiaries may, on up to two additional occasions, request the registration of all or any part of its or their remaining Registrable Securities under this Section 2.1. Notwithstanding anything herein to the contrary, the Company shall not be obligated to effect a Demand Registration unless 150 days have elapsed since the last day that a prior Demand Registration Statement remained effective (or, if earlier, the day on which the last of the Registrable Securities covered by such prior Demand Registration Statement was sold). (d) Underwriting; Selection of Underwriters. Notwithstanding anything to the contrary contained in Section 2.1(a), if the Initiating Holders holding a majority of the Registrable Securities for which registration was requested in the Request so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of a firm commitment Underwritten Offering; and such Initiating Holders may require that all Persons (including other Holders) participating in such registration sell their Registrable Securities to the Underwriters at the same price and on the same terms of underwriting applicable to the Initiating Holders. If any Demand Registration involves an Underwritten Offering, the sole or managing Underwriters and any additional investment bankers and managers to be used in connection with such registration shall be selected by the Initiating Holders holding a majority of the Registrable Securities for which registration was requested in the Request, subject to the approval of the Company (such approval not to be unreasonably withheld). (e) Registration of Other Securities. Whenever the Company shall effect a Demand Registration, no securities other than the Registrable Securities shall be covered by such registration unless the Majority Holders of the Registration shall have consented in writing to the inclusion of such other securities. (f) Effective Registration Statement; Suspension. A Demand Registration Statement shall not be deemed to have become effective (and the related registration will not be deemed to have been effected) (i) unless it has been declared effective by the SEC and remains effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such -7- 10 Demand Registration Statement for the time period specified in Section 4.1(b), (ii) if the offering of any Registrable Securities pursuant to such Demand Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, or (iii) if, in the case of an Underwritten Offering, the conditions to closing specified in an underwriting agreement to which the Company is a party are not satisfied other than by the sole reason of any breach or failure by the Holders of Registrable Securities or are not otherwise waived. (g) Other Registrations. During the period (i) beginning on the date of a Request and (ii) ending on the date that is 90 days after the date that a Demand Registration Statement filed pursuant to such Request has been declared effective by the SEC or, if the Holders shall withdraw such Request or such Demand Registration Statement, on the date of such Withdrawn Request or such Withdrawn Registration Statement, the Company shall not, without the consent of the Majority Holders of the Registration, file a registration statement pertaining to any other equity securities of the Company. (h) Registration Statement Form. Registrations under this Section 2.1 shall be on such appropriate registration form of the SEC (i) as shall be selected by the Initiating Holders holding a majority of the Registrable Securities for which registration was requested in the Request, and (ii) which shall be available for the sale of Registrable Securities in accordance with the intended method or methods of disposition specified in the requests for registration. The Company agrees to include in any such Registration Statement all information which any selling Holder, upon advice of counsel, shall reasonably request. 2.2 Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time or from time to time proposes to register any of its equity securities under the Securities Act (other than in a registration on Form S-4 or S-8 or any successor form to such forms and other than pursuant to Section 2.1 or 2.3) whether or not pursuant to registration rights granted to other holders of its securities and whether or not for sale for its own account, the Company shall deliver prompt written notice (which notice shall be given at least 30 days prior to such proposed registration) to all Holders of Registrable Securities of its intention to undertake such registration, describing in reasonable detail the proposed registration and distribution (including the anticipated range of the proposed offering price, the class and number of securities proposed to be registered and the distribution arrangements) and of such Holders' right to participate in such registration under this Section 2.2 as hereinafter provided. Subject to the other provisions of this paragraph (a) and Section 2.2(b), upon the written request of any Holder made within 20 days after the receipt of such written notice (which request shall specify the amount of Registrable Securities to be registered and the intended method of disposition thereof), the Company shall effect the registration under the Securities Act of all Registrable Securities requested by Holders to be so registered (an "Incidental Registration"), to the extent requisite to permit the disposition (in accordance with the intended methods -8- 11 thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the Registration Statement which covers the securities which the Company proposes to register and shall cause such Registration Statement to become and remain effective with respect to such Registrable Securities in accordance with the registration procedures set forth in Section 4. If an Incidental Registration involves an Underwritten Offering, immediately upon notification to the Company from the Underwriter of the price at which such securities are to be sold, the Company shall so advise each participating Holder. The Holders requesting inclusion in an Incidental Registration may, at any time prior to the effective date of the Incidental Registration Statement (and for any reason), revoke such request by delivering written notice to the Company revoking such requested inclusion. If at any time after giving written notice of its intention to register any securities and prior to the effective date of the Incidental Registration Statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and, thereupon, (A) in the case of a determination not to register, the Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses incurred in connection therewith), without prejudice, however, to the rights of Holders to cause such registration to be effected as a registration under Section 2.1 and (B) in the case of a determination to delay such registration, the Company shall be permitted to delay the registration of such Registrable Securities for the same period as the delay in registering such other securities; provided, however, that if such delay shall extend beyond 120 days from the date the Company received a request to include Registrable Securities in such Incidental Registration, then the Company shall again give all Holders the opportunity to participate therein and shall follow the notification procedures set forth in the preceding paragraph. There is no limitation on the number of such Incidental Registrations pursuant to this Section 2.2 which the Company is obligated to effect. The registration rights granted pursuant to the provisions of this Section 2.2 shall be in addition to the registration rights granted pursuant to the other provisions of Section 2 hereof. (b) Priority in Incidental Registration. If an Incidental Registration involves an Underwritten Offering (on a firm commitment basis), and the sole or the lead managing Underwriter, as the case may be, of such Underwritten Offering shall advise the Company in writing (with a copy to each Holder requesting registration) on or before the date that is five days prior to the date then scheduled for such offering that, in its opinion, the amount of securities (including Registrable Securities) requested to be included in such registration exceeds the amount which can be sold in such offering without materially interfering with the successful marketing of the securities being offered (such writing to state the basis of such opinion and the approximate number of such securities which may be included in such offering without such effect), the Company shall include in such registration, to the extent of the number which the Company is so advised may be -9- 12 included in such offering without such effect, (i) in the case of a registration initiated by the Company, (A) first, the securities that the Company proposes to register for its own account, (B) second, the Registrable Securities requested to be included in such registration by the Holders, allocated pro rata in proportion to the number of Registrable Securities requested to be included in such registration by each of them, and (C) third, other securities of the Company to be registered on behalf of any other Person, and (ii) in the case of a registration initiated by a Person other than the Company, (A) first, the Registrable Securities requested to be included in such registration by the Holders and by any Persons initiating such registration, allocated pro rata in proportion to the number of securities requested to be included in such registration by each of them, (B) second, the securities that the Company proposes to register for its own account, and (C) third, other securities of the Company to be registered on behalf of any other Person; provided, however, that in the event the Company will not, by virtue of this Section 2.2(b), include in any such registration all of the Registrable Securities of any Holder requested to be included in such registration, such Holder may, upon written notice to the Company given within three days of the time such Holder first is notified of such matter, reduce the amount of Registrable Securities it desires to have included in such registration, whereupon only the Registrable Securities, if any, it desires to have included will be so included and the Holders not so reducing shall be entitled to a corresponding increase in the amount of Registrable Securities to be included in such registration. (c) Selection of Underwriters. If any Incidental Registration involves an Underwritten Offering, the sole or managing Underwriter(s) and any additional investment bankers and managers to be used in connection with such registration shall be selected by the Company, subject to the approval of the Majority Holders of the Registration (such approval not to be unreasonably withheld). 2.3 Shelf Registration. If a request made pursuant to this Section 2 is for a Shelf Registration, the Company shall use its best efforts to keep the Shelf Registration continuously effective through the date on which all of the Registrable Securities covered by such Shelf Registration may be sold pursuant to Rule 144(k) under the Securities Act (or any successor provision having similar effect); provided, however, that prior to the termination of such Shelf Registration, the Company shall first furnish to each Holder of Registrable Securities participating in such Shelf Registration (i) an opinion, in form and substance satisfactory to the Majority Holders of the Registration, of counsel for the Company satisfactory to the Majority Holders of the Registration stating that such Registrable Securities are freely saleable pursuant to Rule 144(k) under the Securities Act (or any successor provision having similar effect) or (ii) a "No-Action Letter" from the staff of the SEC stating that the SEC would not recommend enforcement action if the Registrable Securities included in such Shelf Registration were sold in a public sale other than pursuant to an effective registration statement. 2.4 Expenses. The Company shall pay all Registration Expenses in connection with any Demand Registration, Incidental Registration or Shelf Registration, whether or not such registration shall become effective and whether or not all Registrable Securities originally requested to be included in such registration are withdrawn or -10- 13 otherwise ultimately not included in such registration, except as otherwise provided with respect to a Withdrawn Request and a Withdrawn Demand Registration in Section 2.1(a). Each Holder shall pay all discounts and commissions payable to underwriters, selling brokers, managers or other similar Persons engaged in the distribution of such Holder's Registrable Securities pursuant to any registration pursuant to this Section 2. 2.5 Underwritten Offerings. (a) Demand Underwritten Offerings. If requested by the sole or lead managing Underwriter for any Underwritten Offering effected pursuant to a Demand Registration, the Company shall enter into a customary underwriting agreement with the Underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to each Holder of Registrable Securities participating in such offering and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnification and contribution to the effect and to the extent provided in Section 5. (b) Holders of Registrable Securities to be Parties to Underwriting Agreement. The Holders of Registrable Securities to be distributed by the Underwriters in an Underwritten Offering contemplated by Section 2 shall be parties to the underwriting agreement between the Company and such Underwriters and may, at such Holders' option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such Underwriters shall also be made to and for the benefit of such Holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such Underwriters under such underwriting agreement be conditions precedent to the obligations of such Holders of Registrable Securities; provided, however, that the Company shall not be required to make any representations or warranties with respect to written information specifically provided by a selling Holder for inclusion in the Registration Statement. No Holder shall be required to make any representations or warranties to, or agreements with, the Company or the Underwriters other than representations, warranties or agreements regarding such Holder, such Holder's Registrable Securities and such Holder's intended method of disposition. (c) Participation in Underwritten Registration. Notwithstanding anything herein to the contrary, no Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell its securities on the same terms and conditions provided in any underwritten arrangements approved by the Persons entitled hereunder to approve such arrangement and (ii) accurately completes and executes in a timely manner all questionnaires, powers of attorney, indemnities, custody agreements, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 2.6 Conversions; Exercises. Notwithstanding anything to the contrary herein, in order for any Registrable Securities that are issuable upon the exercise of conversion rights, options or warrants to be included in any registration pursuant to -11- 14 Section 2 hereof, the exercise of such conversion rights, options or warrants must be effected no later than immediately prior to the closing of any sales under the Registration Statement pursuant to which such Registrable Securities are to be sold 2.7 Postponements. The Company shall be entitled to postpone a Demand Registration and to require the Holders of Registrable Securities to discontinue the disposition of their securities covered by a Shelf Registration during any Blackout Period (as defined below) (i) if the Board of Directors of the Company determines in good faith that effecting such a registration or continuing such disposition at such time would have a material adverse effect upon a proposed sale of all (or substantially all) of the assets of the Company or a merger, reorganization, recapitalization or similar current transaction materially affecting the capital structure or equity ownership of the Company, or (ii) if the Company is in possession of material information which the Board of Directors of the Company determines in good faith it is not in the best interests of the Company to disclose in a registration statement at such time; provided, however, that the Company may only delay a Demand Registration pursuant to this Section 2.7 by delivery of a Blackout Notice (as defined below) within 30 days of delivery of the request for such Registration under Section 2.1 or Section 2.3, as applicable, and may delay a Demand Registration and require the Holders of Registrable Securities to discontinue the disposition of their securities covered by a Shelf Registration only for a reasonable period of time not to exceed 90 days (or such earlier time as such transaction is consummated or no longer proposed or the material information has been made public) (the "Blackout Period"). There shall not be more than one Blackout Period in any 12-month period. The Company shall promptly notify the Holders in writing (a "Blackout Notice") of any decision to postpone a Demand Registration or to discontinue sales of Registrable Securities covered by a Shelf Registration pursuant to this Section 2.7 and shall include a general statement of the reason for such postponement, an approximation of the anticipated delay and an undertaking by the Company promptly to notify the Holders as soon as a Demand Registration may be effected or sales of Registrable Securities covered by a Shelf Registration may resume. In making any such determination to initiate or terminate a Blackout Period, the Company shall not be required to consult with or obtain the consent of any Holder, and any such determination shall be the Company's sole responsibility. Each Holder shall treat all notices received from the Company pursuant to this Section 2.7 in the strictest confidence and shall not disseminate such information. If the Company shall postpone the filing of a Demand Registration Statement, the Majority Holders of Registrable Securities who were to participate therein shall have the right to withdraw the request for registration. Any such withdrawal shall be made by giving written notice to the Company within 30 days after receipt of the Blackout Notice. The Company shall pay all Registration Expenses in connection with such withdrawn registration request. 3. HOLDBACK ARRANGEMENTS. 3.1 Restrictions on Sale by Holders of Registrable Securities. Each Holder of Registrable Securities agrees, by acquisition of such Registrable Securities, if timely requested in writing by the sole or lead managing Underwriter in an Underwritten -12- 15 Offering of any Registrable Securities, not to make any short sale of, loan, grant any option for the purchase of or effect any public sale or distribution, including a sale pursuant to Rule 144 (or any successor provision having similar effect) under the Securities Act of any Registrable Securities or any other equity security of the Company (or any security convertible into or exchangeable or exercisable for any equity security of the Company) (except as part of such underwritten registration), during the nine business days (as such term is used in Regulation M under the Exchange Act) prior to, and during the time period reasonably requested by the sole or lead managing Underwriter not to exceed 90 days, beginning on the effective date of the applicable Registration Statement. 3.2 Restrictions on Sale by the Company and Others. The Company agrees that (i) if timely requested in writing by the sole or lead managing Underwriter in an Underwritten Offering of any Registrable Securities, not to make any short sale of, loan, grant any option for the purchase of or effect any public sale or distribution of any of the Company's equity securities (or any security convertible into or exchangeable or exercisable for any of the Company's equity securities) during the nine business days (as such term is used in Regulation M under the Exchange Act) prior to, and during the time period reasonably requested by the sole or lead managing Underwriter not to exceed 90 days, beginning on the effective date of the applicable Registration Statement (except as part of such underwritten registration or pursuant to registrations on Forms S-4 or S-8 or any successor form to such forms), and (ii) it will cause each holder of equity securities (or any security convertible into or exchangeable or exercisable for any of its equity securities) of the Company purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to so agree. 4. REGISTRATION PROCEDURES. 4.1 Obligations of the Company. Whenever the Company is required to effect the registration of Registrable Securities under the Securities Act pursuant to Section 2 of this Agreement, the Company shall, as expeditiously as possible: (a) prepare and file with the SEC (promptly, and in any event within 60 days after receipt of a request to register Registrable Securities) the requisite Registration Statement to effect such registration, which Registration Statement shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and the Company shall use its best efforts to cause such Registration Statement to become effective (provided, that the Company may discontinue any registration of its securities that are not Registrable Securities, and, under the circumstances specified in Section 2.2, its securities that are Registrable Securities); provided, however, that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, or comparable statements under securities or blue sky laws of any jurisdiction, the Company shall (i) provide Holders' Counsel and any other Inspector with an adequate and appropriate opportunity to participate in the preparation of such Registration Statement and each Prospectus included therein (and each amendment or supplement thereto or comparable statement) to be filed with the SEC, which documents shall be subject to the -13- 16 review and comment of Holders' Counsel, and (ii) not file any such Registration Statement or Prospectus (or amendment or supplement thereto or comparable statement) with the SEC to which Holder's Counsel, any selling Holder or any other Inspector shall have reasonably objected on the grounds that such filing does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (b) prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary (i) to keep such Registration Statement effective, and (ii) to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement, in each case until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller(s) thereof set forth in such Registration Statement; provided, that except with respect to any Shelf Registration, such period need not extend beyond nine months after the effective date of the Registration Statement; and provided, further, that with respect to any Shelf Registration, such period need not extend beyond the time period provided in Section 2.3, and which periods, in any event, shall terminate when all Registrable Securities covered by such Registration Statement have been sold (but not before the expiration of the 90 day period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable); (c) furnish, without charge, to each selling Holder of such Registrable Securities and each Underwriter, if any, of the securities covered by such Registration Statement, such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits), and the Prospectus included in such Registration Statement (including each preliminary Prospectus) in conformity with the requirements of the Securities Act, and other documents, as such selling Holder and Underwriter may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such selling Holder (the Company hereby consenting to the use in accordance with applicable law of each such Registration Statement (or amendment or post-effective amendment thereto) and each such Prospectus (or preliminary prospectus or supplement thereto) by each such selling Holder of Registrable Securities and the Underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Registration Statement or Prospectus); (d) prior to any public offering of Registrable Securities, use its best efforts to register or qualify all Registrable Securities and other securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as any selling Holder of Registrable Securities covered by such Registration Statement or the sole or lead managing Underwriter, if any, may reasonably request to enable such selling Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such selling Holder and to continue such registration or qualification in effect in each such jurisdiction for as long as such Registration Statement remains in effect (including through new filings or amendments or renewals), and do any and all other acts and things which may be necessary or advisable to enable any such selling -14- 17 Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such selling Holder; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 4.1(d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction; (e) use its reasonable best efforts to obtain all other approvals, consents, exemptions or authorizations from such governmental agencies or authorities as may be necessary to enable the selling Holders of such Registrable Securities to consummate the disposition of such Registrable Securities; (f) promptly notify Holders' Counsel, each Holder of Registrable Securities covered by such Registration Statement and the sole or lead managing Underwriter, if any: (i) when the Registration Statement, any pre-effective amendment, the Prospectus or any prospectus supplement related thereto or post-effective amendment to the Registration Statement has been filed and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any state securities or blue sky authority for amendments or supplements to the Registration Statement or the Prospectus related thereto or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation or threat of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose, (v) of the existence of any fact of which the Company becomes aware or the happening of any event which results in (A) the Registration Statement containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein not misleading, or (B) any Prospectus included in such Registration Statement containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein, in the light of the circumstances under which they were made, not misleading, (vi) if at any time the representations and warranties contemplated by Section 2.5(b) cease to be true and correct in all material respects, and (vii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate or that there exists circumstances not yet disclosed to the public which make further sales under such Registration Statement inadvisable pending such disclosure and post-effective amendment; and, if the notification relates to an event described in any of the clauses (ii) through (vii) of this Section 4.1(f), the Company shall promptly prepare a supplement or post-effective amendment to such Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that (1) such Registration Statement shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (2) as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in -15- 18 the light of the circumstances under which they were made not misleading (and shall furnish to each such Holder and each Underwriter, if any, a reasonable number of copies of such Prospectus so supplemented or amended); and if the notification relates to an event described in clause (iii) of this Section 4.1(f), the Company shall take all reasonable action required to prevent the entry of such stop order or to remove it if entered; (g) make available for inspection by any selling Holder of Registrable Securities, any sole or lead managing Underwriter participating in any disposition pursuant to such Registration Statement, Holders' Counsel and any attorney, accountant or other agent retained by any such seller or any Underwriter (each, an "Inspector" and, collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and any subsidiaries thereof as may be in existence at such time (collectively, the "Records") as shall be necessary, in the opinion of such Holders' and such Underwriters' respective counsel, to enable them to exercise their due diligence responsibility and to conduct a reasonable investigation within the meaning of the Securities Act, and cause the Company's and any subsidiaries' officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspectors in connection with such Registration Statement; (h) obtain an opinion from the Company's counsel and a "cold comfort" letter from the Company's independent public accountants who have certified the Company's financial statements included or incorporated by reference in such Registration Statement, in each case dated the effective date of such Registration Statement (and if such registration involves an Underwritten Offering, dated the date of the closing under the underwriting agreement), in customary form and covering such matters as are customarily covered by such opinions and "cold comfort" letters delivered to underwriters in underwritten public offerings, which opinion and letter shall be reasonably satisfactory to the sole or lead managing Underwriter, if any, and to the Majority Holders of the Registration, and furnish to each Holder participating in the offering and to each Underwriter, if any, a copy of such opinion and letter addressed to such Holder (in the case of the opinion) and Underwriter (in the case of the opinion and the "cold comfort" letter); (i) provide a CUSIP number for all Registrable Securities and provide and cause to be maintained a transfer agent and registrar for all such Registrable Securities covered by such Registration Statement not later than the effectiveness of such Registration Statement; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC and any other governmental agency or authority having jurisdiction over the offering, and make available to its security holders, as soon as reasonably practicable but no later than 90 days after the end of any 12-month period, an earnings statement (i) commencing at the end of any month in which Registrable Securities are sold to Underwriters in an Underwritten Offering and (ii) commencing with the first day of the Company's calendar month next succeeding each sale of Registrable -16- 19 Securities after the effective date of a Registration Statement, which statement shall cover such 12-month periods, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (k) use its best efforts to cause all such Registrable Securities to be listed (i) on each national securities exchange on which the Company's securities are then listed or (ii) if securities of the Company are not at the time listed on any national securities exchange (or if the listing of Registrable Securities is not permitted under the rules of each national securities exchange on which the Company's securities are then listed), on a national securities exchange designated by the Majority Holders of the Registration; (l) keep each selling Holder of Registrable Securities advised in writing as to the initiation and progress of any registration under Section 2 hereunder; (m) enter into and perform customary agreements (including, if applicable, an underwriting agreement in customary form) and provide officers' certificates and other customary closing documents; (n) cooperate with each selling Holder of Registrable Securities and each Underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD and make reasonably available its employees and personnel and otherwise provide reasonable assistance to the Underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any Underwritten Offering; (o) furnish to each Holder participating in the offering and the sole or lead managing Underwriter, if any, without charge, at least one manually-signed copy of the Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those deemed to be incorporated by reference); (p) cooperate with the selling Holders of Registrable Securities and the sole or lead managing Underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement prior to any sale of Registrable Securities to the Underwriters or, if not an Underwritten Offering, in accordance with the instructions of the selling Holders of Registrable Securities at least three business days prior to any sale of Registrable Securities; (q) if requested by the sole or lead managing Underwriter or any selling Holder of Registrable Securities, immediately incorporate in a prospectus supplement or post-effective amendment such information concerning such Holder of Registrable Securities, the Underwriters or the intended method of distribution as the sole -17- 20 or lead managing Underwriter or the selling Holder of Registrable Securities reasonably requests to be included therein and as is appropriate in the reasonable judgment of the Company, including, without limitation, information with respect to the number of shares of the Registrable Securities being sold to the Underwriters, the purchase price being paid therefor by such Underwriters and with respect to any other terms of the Underwritten Offering of the Registrable Securities to be sold in such offering; make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; and supplement or make amendments to any Registration Statement if requested by the sole or lead managing Underwriter of such Registrable Securities; and (r) use its reasonable best efforts to take all other steps necessary to expedite or facilitate the registration and disposition of the Registrable Securities contemplated hereby. 4.2 Seller Information. The Company may require each selling Holder of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such Holder, such Holder's Registrable Securities and such Holder's intended method of disposition as the Company may from time to time reasonably request in writing; provided, that such information shall be used only in connection with such registration. If any Registration Statement or comparable statement under blue sky laws refers to any Holder by name or otherwise as the Holder of any securities of the Company, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such Holder and the Company, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Company, and (ii) in the event that such reference to such Holder by name or otherwise is not in the judgment of the Company, as advised by counsel, required by the Securities Act or any similar federal statute or any state blue sky or securities law then in force, the deletion of the reference to such Holder. 4.3 Notice to Discontinue. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4.1(f)(ii) through (vii), such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4.1(f) and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period -18- 21 referred to in Section 4.1(b)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 4.1(f) to and including the date when the Holder shall have received the copies of the supplemented or amended Prospectus contemplated by and meeting the requirements of Section 4.1(f). 5. INDEMNIFICATION; CONTRIBUTION. 5.1 Indemnification by the Company. The Company agrees to indemnify and hold harmless, to the fullest extent permitted by law, each Holder of Registrable Securities, its officers, directors, partners, members, shareholders, employees, Affiliates and agents (collectively, "Agents") and each Person who controls such Holder (within the meaning of the Securities Act) and its Agents with respect to each registration which has been effected pursuant to this Agreement, against any and all losses, claims, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, and expenses (as incurred or suffered and including, but not limited to, any and all expenses incurred in investigating, preparing or defending any litigation or proceeding, whether commenced or threatened, and the reasonable fees, disbursements and other charges of legal counsel) in respect thereof (collectively, "Claims"), insofar as such Claims arise out of or are based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto) related to any such registration or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, or any qualification or compliance incident thereto; provided, however, that the Company will not be liable in any such case to the extent that any such Claims arise out of or are based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact so made in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically stating that it was expressly for use therein. The Company shall also indemnify any Underwriters of the Registrable Securities, their Agents and each Person who controls any such Underwriter (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Person who may be entitled to indemnification pursuant to this Section 5 and shall survive the transfer of securities by such Holder or Underwriter. 5.2 Indemnification by Holders. Each Holder, if Registrable Securities held by it are included in the securities as to which a registration is being effected, agrees to, severally and not jointly, indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors and officers, each other Person who participates as an Underwriter in the offering or sale of such securities and its Agents and each Person who controls the Company or any such Underwriter (within the meaning of the Securities Act) -19- 22 and its Agents against any and all Claims, insofar as such Claims arise out of or are based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto) related to any such registration, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically stating that it was expressly for use therein; provided, however, that the aggregate amount which any such Holder shall be required to pay pursuant to this Section 5.2 shall in no event be greater than the amount of the net proceeds received by such Holder upon the sale of the Registrable Securities pursuant to the Registration Statement giving rise to such Claims less all amounts previously paid by such Holder with respect to any such Claims. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified party and shall survive the transfer of such securities by such Holder or Underwriter. 5.3 Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party of notice of any Claim or the commencement of any action or proceeding involving a Claim under this Section 5, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 5, (i) notify the indemnifying party in writing of the Claim or the commencement of such action or proceeding; provided, that the failure of any indemnified party to provide such notice shall not relieve the indemnifying party of its obligations under this Section 5, except to the extent the indemnifying party is materially and actually prejudiced thereby and shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 5, and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any indemnified party shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (A) the indemnifying party has agreed in writing to pay such fees and expenses, (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such indemnified party within 10 days after receiving notice from such indemnified party that the indemnified party believes it has failed to do so, (C) in the reasonable judgment of any such indemnified party, based upon advice of counsel, a conflict of interest may exist between such indemnified party and the indemnifying party with respect to such claims (in which case, if the indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such indemnified party) or (D) such indemnified party is a defendant in an action or proceeding which is also brought against the indemnifying party and reasonably shall have concluded that there may be one or more legal defenses available to such indemnified party which are not available to the -20- 23 indemnifying party. No indemnifying party shall be liable for any settlement of any such claim or action effected without its written consent, which consent shall not be unreasonably withheld. In addition, without the consent of the indemnified party (which consent shall not be unreasonably withheld), no indemnifying party shall be permitted to consent to entry of any judgment with respect to, or to effect the settlement or compromise of any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim), unless such settlement, compromise or judgment (1) includes an unconditional release of the indemnified party from all liability arising out of such action or claim, (2) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, and (3) does not provide for any action on the part of any party other than the payment of money damages which is to be paid in full by the indemnifying party. 5.4 Contribution. If the indemnification provided for in Section 5.1 or 5.2 from the indemnifying party for any reason is unavailable to (other than by reason of exceptions provided therein), or is insufficient to hold harmless, an indemnified party hereunder in respect of any Claim, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claim in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and the indemnified party, on the other hand, in connection with the actions which resulted in such Claim, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. If, however, the foregoing allocation is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative faults but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5.4 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by a party as a result of any Claim referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in Section 5.3, any legal or other fees, costs or expenses reasonably incurred by such party in connection with any investigation or proceeding. Notwithstanding anything in this Section 5.4 to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 5.4 to contribute any amount in excess of the net proceeds received by such indemnifying party from the sale of the Registrable Securities pursuant to the Registration Statement giving rise to such Claims, less all amounts previously paid by such indemnifying party -21- 24 with respect to such Claims. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 5.5 Other Indemnification. Indemnification similar to that specified in the preceding Sections 5.1 and 5.2 (with appropriate modifications) shall be given by the Company and each selling Holder of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority, other than the Securities Act. The indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract. 5.6 Indemnification Payments. The indemnification and contribution required by this Section 5 shall be made by periodic payments of the amount thereof during the course of any investigation or defense, as and when bills are received or any expense, loss, damage or liability is incurred. 6. GENERAL. 6.1 Registration Rights to Others. The Company has not previously entered into an agreement with respect to its securities granting any registration rights to any Person. If the Company shall at any time hereafter provide to any holder of any securities of the Company rights with respect to the registration of such securities under the Securities Act, (i) such rights shall not be in conflict with or adversely affect any of the rights provided in this Agreement to the Holders and (ii) if such rights are provided on terms or conditions more favorable to such holder than the terms and conditions provided in this Agreement, then this Agreement shall automatically be deemed amended or supplemented to the extent necessary to provide to the Holders such more favorable terms or conditions and the Company shall provide such documentation (including an amendment to this Agreement or other writing) as any Holder shall at any time reasonably request to evidence such amendment. 6.2 Availability of Information; Rule 144; Rule 144A; Other Exemptions. The Company covenants that it shall timely file any reports required to be filed by it under the Securities Act or the Exchange Act (including, but not limited to, the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 under the Securities Act), and that it shall take such further action as any Holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 and Rule 144A under the Securities Act, as such rules may be amended from time to time, or (ii) any other rule or regulation now existing or hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. -22- 25 6.3 Amendments and Waivers. The provisions of this Agreement may not be amended, modified, supplemented or terminated, and waivers or consents to departures from the provisions hereof may not be given, without the written consent of the Company and the Holders of not less than 50% of the Registrable Securities then outstanding; provided, however, that no such amendment, modification, supplement, waiver or consent to departure shall reduce the aforesaid percentage of Registrable Securities without the written consent of all of the Holders of Registrable Securities; and provided further, that nothing herein shall prohibit any amendment, modification, supplement, termination, waiver or consent to departure the effect of which is limited only to those Holders who have agreed to such amendment, modification, supplement, termination, waiver or consent to departure. 6.4 Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, telecopier or electronic mail, any courier guaranteeing overnight delivery or first class registered or certified mail, return receipt requested, postage prepaid, addressed to the applicable party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties in accordance with the provisions of this Section: (i) If to the Company, to: The CIT Group, Inc. 650 CIT Drive Livingston, NJ 07039-5795 Attention: Ernest D. Stein, Esq. Fax: (973) 740-5264 Telephone: (973) 740-5013 Electronic Mail: jshanahan@cit.com (ii) If to the Initial Holder, to: The Dai-Ichi Kangyo Bank, Limited CIT Office-International Planning and Coordination Division 1-5, Uchisaiwaicho, 1-chome Chiyoda-ku Tokyo 100, Japan Attention: Senior Manager Telephone: (813) 3596-2420 Fax: (813) 3596-2259 Electronic Mail: akihiko.komuro@kks1.ho.dkb.co.jp (iii) If to any subsequent Holder, to the address of such Person set forth in the records of the Company. -23- 26 (iv) In each case, with a copy to: Schulte Roth & Zabel 900 Third Avenue New York, NY 10002 Attention: Paul N. Roth, Esq. Fax: (212) 593-5955 Telephone: (212) 756-2450 Electronic Mail: paul.roth@srz.com All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when receipt is acknowledged, if telecopied or sent by electronic mail; the fourth business day following the date delivered to a courier; and ten days after being deposited in the mail, if sent first class or certified mail, return receipt requested, postage prepaid. 6.5 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors and permitted assigns (including any Permitted Transferee of Registrable Securities). Any Holder may assign its rights and obligations under this Agreement to any transferee of its Registrable Securities representing at least 4% of the outstanding shares of Class A Common Stock in one transaction or a series of transactions (other than a transferee that acquires such Registrable Securities in a registered public offering or pursuant to a sale under Rule 144 of the Securities Act (or any successor rule)); provided, however, if any transferee shall take and hold Registrable Securities, such transferee shall promptly notify the Company and by taking and holding such Registrable Securities such transferee shall automatically be entitled to receive the benefits of and be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement as if it were a party hereto (and shall, for all purposes, be deemed a Holder under this Agreement). If the Company shall so request, any successor or permitted assign (in accordance with the foregoing) shall agree in writing to acquire and hold the Registrable Securities subject to all of the terms hereof. For purposes of this Agreement, "successor" for any entity other than a natural person shall mean a successor to such entity as a result of such entity's merger, consolidation, liquidation, dissolution, sale of substantially all of its assets, or similar transaction. Except as provided above or otherwise permitted by this Agreement, neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any Holder or by the Company without the consent of the other parties hereto. 6.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which, when so executed and delivered, shall be deemed to be an original, but all of which counterparts, taken together, shall constitute one and the same instrument. 6.7 Descriptive Headings, Etc. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms -24- 27 contained herein. Unless the context of this Agreement otherwise requires: (1) words of any gender shall be deemed to include each other gender; (2) words using the singular or plural number shall also include the plural or singular number, respectively; (3) the words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and paragraph references are to the Sections and paragraphs of this Agreement unless otherwise specified; (4) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless otherwise specified; (5) "or" is not exclusive; and (6) provisions apply to successive events and transactions. 6.8 Severability. In the event that any one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, paragraph, word, clause, phrase or sentence in every other respect and of the other remaining provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 6.09 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York (without giving effect to the conflict of laws principles thereof). 6.10 Remedies; Specific Performance. The parties hereto acknowledge that money damages would not be an adequate remedy at law if any party fails to perform in any material respect any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to seek to compel specific performance of the obligations of any other party under this Agreement, without the posting of any bond, in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. Except as otherwise provided by law, a delay or omission by a party hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy shall be exclusive of any other remedy. All available remedies shall be cumulative. The failure to file a Demand Registration Statement within 60 days of a Request under Section 2.1 or 2.3 shall constitute, in the absence of an injunction, a stop order or a Blackout Period having been imposed or a Withdrawn Request, a breach of this Agreement entitling the Holders to remedies hereunder. 6.11 Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises or undertakings, other than those set -25- 28 forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the Company and the other parties to this Agreement with respect to such subject matter. 6.12 Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. -26- 29 6.13 Consent to Jurisdiction. Each party to this Agreement hereby irrevocably and unconditionally agrees that any legal action, suit or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby may be brought in any federal court of the Southern District of New York or any state court located in New York County, State of New York, and hereby irrevocably and unconditionally expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and hereby irrevocably and unconditionally waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Agreement or the subject matter may not be enforced in or by such court. Each party hereby irrevocably and unconditionally consents to the service of process of any of the aforementioned courts in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth or provided for in Section 6.4 of this Agreement, such service to become effective 10 days after such mailing. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or commence legal proceedings or otherwise proceed against any other party in any other jurisdiction to enforce judgments obtained in any action, suit or proceeding brought pursuant to this Section. 6.14 Further Assurances. Each party hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 6.15 No Inconsistent Agreements. The Company will not hereafter enter into any agreement which is inconsistent with the rights granted to the Holders in this Agreement. 6.16 Construction. The Company and the Initial Holder acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement with its legal counsel and that this Agreement shall be construed as if jointly drafted by the Company and the Initial Holder. -27- 30 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. THE CIT GROUP, INC. THE DAI-ICHI KANGYO BANK, LIMITED By: By: ---------------------------- ------------------------------- Name: Name: Title: Title: -28- EX-10.6 6 EMPLOYMENT AGREEMENT OF ALBERT R. GAMPER, JR. 1 Exhibit 10.6 THE CIT GROUP, INC. April 1, 1997 Mr. Albert R. Gamper, Jr. 650 CIT Drive Livingston, New Jersey 07039 Dear Al: Reference is made to your employment agreement, dated December 29, 1989 (the "Employment Agreement"), with The CIT Group Holdings, Inc. (the "Company"), as amended by letter agreements dated November 16, 1992 and December 20, 1994. The Board of Directors (the "Board") of The CIT Group Holdings, Inc. (the "Company"), is pleased to extend your employment agreement with the Company on the following terms and conditions, all other terms and conditions being null and void: 1. TERM. This letter agreement will be effective as of April 1, 1997. The term of this Agreement (the "Term") will be for a period of thirty-three months beginning on April 1, 1997 and, except as otherwise provided in paragraph 4 below, ending on December 31, 1999. This letter agreement and the Term may be extended for one or more additional periods as provided in paragraph 7 or by written agreement signed by you and the Company at any time prior to the end of the Term then in effect. 2. DUTIES AND AUTHORITY. During the Term, you shall serve as the Chief Executive Officer, President, Chairman of the Executive Committee and member of the Board of the Company. Subject to the overall direction and control of the Board, as Chief Executive Officer and President, you shall have general charge and control of the business and affairs of the Company, which shall include but shall not be limited to responsibility for overall policy making as well as day-to-day operations (including hiring and firing of personnel, establishing credit policy, personnel compensation and the nature and pricing of the business of the Company). You agree to devote substantially all of your business time and energies to the business of the Company and to faithfully, diligently and competently perform your duties hereunder, except that you may devote a reasonable amount of time to serving as a director of not-for-profit institutions, and with the approval of the Board, of business corporations. You shall not be assigned any duties that are inconsistent with your status as Chief Executive Officer and President of the Company. 2 3. COMPENSATION AND BENEFITS. In full consideration for all services rendered by you in all capacities during the Term, you will receive the following compensation and benefits: (a) BASE SALARY. An annual base salary of 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 Board during the Term pursuant to normal Company practices. Your Base Salary may be increased (but not reduced) by the Board from time to time, based upon your performance and responsibilities, pursuant to the Company's standard procedures for salary adjustments. (b) BONUSES. You will participate in all executive bonus and incentive compensation plans (collectively, "Incentive Plans") now or hereafter maintained by the Company for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such Incentive Plans. (c) EXPENSE REIMBURSEMENT. The Company will reimburse you for your ordinary and necessary business and travel expenses incurred by you in the performance of your duties. When traveling on Company business, you shall be authorized for security reasons to travel on CIT's corporate aircraft or when flying on commercial airlines, first class is authorized. (d) OTHER BENEFITS. You will be eligible to participate in all employee retirement and welfare benefit plans now or hereafter maintained by or on behalf of the Company, including the Company's Executive Retirement Program and receive all fringe benefits and vacations, for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such plans. In addition, the Company will provide you with (i) a supplemental pension benefit and (ii) a supplemental savings benefit, in each case in an amount equal to the value of the benefit you would be entitled to receive under the Company's Retirement Plan or Savings Incentive Plan, as the case may be, but for the limitations on the amount of such benefits imposed by Internal Revenue Code Sections 415 and 401(a)(17). In connection with your benefits under the Company's Executive Retirement Program, the Company will not unreasonably withhold its consent to your retirement. (e) ADDITIONAL BENEFITS. In addition to the benefits described above, the Company shall provide the following special benefits to you: (1) Attorney and Accountant Expense Reimbursement. The Company shall reimburse you for up to $25,000 annually for attorneys' fees and disbursements incurred by you for tax advice or other legal counsel and for accounting fees incurred by you for tax advice or other financial planning; (2) Office and Staff. The Company shall provide you with suitable offices located in northern New Jersey, and you shall not be required to -2- 3 relocate your residence from the New Jersey area. You may also employ secretaries and assistants of your own selection as you deem appropriate or necessary. The Company shall also provide you with a car and driver substantially equivalent to that enjoyed by you under your past employment agreement. (3) Dues. The Company shall reimburse you for the full cost (annual dues plus initiation fees) of one country club or luncheon club membership of your choice; and (4) Indemnification and Insurance. The Company will provide you with suitable director's and officer's liability insurance to the extent available on commercially reasonable terms. The Company shall not amend the provisions of Article ELEVENTH and TWELFTH of its Restated Certificate of Incorporation or Article X of its By-Laws in any manner adverse to you without your consent. (f) MODIFICATIONS. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plans or programs provided hereunder for any reason and without your consent; provided that, without your consent, the Company may not reduce the aggregate value of the benefits provided to the Executive hereunder, or administer the Company Executive Retirement Program in a manner substantially inconsistent with past practices. 4. TERMINATION OF THE EXECUTIVE'S EMPLOYMENT. (a) BY THE COMPANY. The Board by majority vote may terminate your employment in its sole discretion at any time during the Term, with or without Cause, upon written notice by the Company to you, and your employment will terminate on the date notice is given. For purposes of this letter agreement, "Cause" means (A) your gross negligence, recklessness or malfeasance in the performance of your duties hereunder, (B) your committing any criminal act, act of fraud or other misconduct resulting or intending to result directly or indirectly in gain or personal enrichment at the expense of the Company, or (C) your willfully engaging in any conduct relating to the business of the Company that could reasonably be expected to have a materially detrimental effect on the business of financial condition of the Company. For purposes hereof, you will be deemed to have committed an act if, based upon the Company's investigation of the facts, the Board reasonably concludes that you committed such an act. (b) BY YOU. You may terminate your employment with the Company at any time during the Term, with or without Good Reason, upon written notice by you to the Company, and your employment will terminate on the date such notice is given. For purposes of this letter agreement, "Good Reason" means the assignment to you of duties and responsibilities not commensurate with your status as Chief Executive Officer of the Company, the failure of the Company to provide compensation and benefits to you at the levels required herein or the failure of the Company to adhere in any substantial manner to any of its other covenants herein. Termination of your -3- 4 employment by you following the completion of a Change of Control contract extension as provided in 7a will be deemed a "Good Reason" termination entitling you to the benefits and payments covered in paragraph 5. 5. SEVERANCE PAYMENT. (a) WITHOUT CAUSE AND GOOD REASON TERMINATION. If during the Term the Company terminates your employment without Cause or you terminate your employment for Good Reason, all compensation payable to you under paragraph 3 hereof will cease as of the effective date of notice of such termination (the "Termination Date") and the Company will pay to you, subject to paragraph 6, the following sums: (1) Your Base Salary on the Termination Date for the greater of 36 months or the remainder of the Term, payable in 24 equal installments at the end of each of the 24 months following the Termination Date. If, however, prior to the second anniversary of the Termination Date, you violate the noncompetition provisions of paragraph 6(b)(A), then the Company will have no obligation to make any of the payments that remain payable by the Company under this paragraph 5(a)(1) on or after the date of such violation. (2) All previously earned and accrued entitlements and benefits from the Company, including any such entitlements and benefits under the Company's pension, disability and life insurance plans, policies and programs. (3) Full benefit coverage under all of the Company's life insurance, health, disability, dental, accidental death and dismemberment and other employee welfare programs, plans and policies. In the event that your participation in any such employee welfare program, plan or policy is barred, by law or otherwise, the Company shall at its election arrange to provide you with benefits substantially similar to those which you are entitled to receive under such program, plan or policy or the Company shall pay you the after-tax economic equivalent thereof. For purposes of the preceding sentence, after tax economic equivalent shall be deemed to be the cost that would be incurred by you in obtaining such -4- 5 benefit at the lowest available individual basis. The Company's obligation to provide benefit coverage under such employee benefit programs, plans and policies shall cease in the event that you receive comparable coverage from any subsequent employer. (4) The reasonable costs of outplacement services, including a fully equipped office and secretary to be utilized by you for up to one year. (5) Any awards due to you under the terms of the Company's "Career Incentive Plan" (Long Term Incentive) or any plan as may have been hereafter adopted by the Company. Upon such payment, all of your rights under all such plans will then terminate. (6) All benefits payable to you under the terms and conditions of the company's Executive Benefits Program, if any. All of the amounts and benefits to be provided pursuant to clauses (3), (4), (5) and (6) above shall be provided without duplication for the amounts and benefits to be provided pursuant to clause (2) above. (b) FOR CAUSE TERMINATION - OR TERMINATION BY YOU WITHOUT GOOD REASON. If your employment is terminated by the Company for Cause or if you terminate your employment for any reason other than Good Reason, you will receive only the amounts specified in paragraph 5(a)(2). In the event you are eligible under the terms and conditions of the Company's various executive benefit plans, if any, you will also receive the benefits specified in paragraph 5(a)(6) provided you are not in breach of this Agreement. (c) DEATH OR DISABILITY In the event of your death or your disability due to physical or mental illness or other disability which renders you unable, on other than a temporary basis, to perform the duties of your employment, the Employment Term will terminate as of the date of your death or disability and you will receive the benefits specified in paragraph 5(a)(2) and (6) plus an amount equal to your Base Salary on such date for three years. Disability will be determined by the Board in a manner consistent with the Company's Long Term Disability Plan. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITY. (a) You acknowledge that you have acquired and will continue to acquire during the Term, confidential information regarding the business of the Company, Dai-Ichi Kangyo Bank (DKB), Chase Manhattan Corporation (CMC) 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 -5- 6 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, DKB or CMC and their respective subsidiaries and affiliates, except for specific items which have become publicly available other than as a result of your breach of this letter agreement. (b) During the Term and, if you resign with or without Good Reason or your employment is terminated by the Company with or without Cause prior to the end of the Term, or if the Term expires without renewal, then for two years after the Termination Date, you will not, without the written consent of the Board, directly or indirectly, (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Termination Date by the Company or any of its subsidiaries; provided that if your employment has been terminated by the Company without Cause or you have terminated your employment with the Company for Good Reason (except in the event of a Change of Control), you may so compete from and after the six month anniversary of the Termination Date in which event you shall forfeit your right to receive future severance payments pursuant to paragraph 5(a)(1) hereof, and (B) whether or not your termination of employment occurred without Cause or for Good Reason, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company DKB or CMC and their respective subsidiaries and affiliates, to terminate such relationship or to refrain from extending or renewing the same. Nothing herein, however, will prohibit you from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle you to no more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. Notwithstanding anything in the foregoing to the contrary, in the event of a Change of Control, the provisions of clause (A) and clause (B) shall apply for the two-year period following termination of your employment for any reason. (c) REMEDY FOR BREACH. You hereby acknowledge that the provisions of this paragraph 6 are reasonable and necessary for the protection of the Company, DKB, CMC and their respective subsidiaries and affiliates. In addition, you further acknowledge that the Company, DKB, CMC and their respective subsidiaries and affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, you agree that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining you from an actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by you of such -6- 7 covenants, the Company will have no obligation to pay any of the amounts that remain payable by the Company under paragraph 5(a)(1). 7. CHANGE OF CONTROL. (a) TERMINATION/CONTRACT EXTENSION. If during the Term, a "Change of Control" occurs as defined hereafter, the Term of your employment shall automatically be extended until the first anniversary date of such Change of Control, provided however, that if such anniversary date occurs prior to December 31, 1999, you may elect to serve out the remainder of your contract term. In the event that you serve out the remainder of the current term following a Change of Control, you may elect to terminate your employment at any time during the period commencing with the first anniversary of Change of Control and ending with the current contract termination date and have such termination deemed "Good Reason" (except under Section 6(b) hereof) provided you have given 90 days notice of termination. (b) SPECIAL PAYMENT. In addition to the compensation and benefits already required under the provisions of your Employment Agreement, if a Change of Control should occur on or prior to December 31, 1999, you will receive a special payment (the "Special Payment"). The amount of such Special Payment shall equal the sum of your prior four years' annual bonuses under The CIT Group Bonus Plan and will be payable over a one-year period as follows: 1/2 of the payment shall be paid to you within 30 days after the date of the Change of Control; 1/2 shall be paid to you on or before the first anniversary date of such Change of Control: Notwithstanding the foregoing provisions of this paragraph, all or any part of such Special Payment shall not be payable to you: if during the one-year period commencing on the date of a Change of Control, and ending on the first anniversary of such date: (i) your employment is involuntarily terminated by the Company for "Cause" as defined in the Employment Agreement; (ii) you voluntarily terminate employment with the Company for any reason other than "Good Reason" as defined in the Employment Agreement; or (iii) you breach any non-competition or confidentiality covenant under Section 6 of the Employment Agreement. For purposes of this Paragraph (b) "Special Payment", a termination of your employment on account of your death, disability or retirement on or after age 55 under the terms of the Company's retirement plan (provided such is consistent with Section 7(a)) shall constitute a termination for "Good Reason." In the absence of a separate beneficiary designation, your beneficiary under the Group Life Insurance Plan will receive any Special Payment remaining to be paid upon your death. (c) CHANGE OF CONTROL DEFINED. For purposes of this letter agreement, a "Change of Control" shall be deemed to have occurred if: (1) any Person or Group other than DKB or CMC or their Affiliates becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated -7- 8 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 or CMC shall not require the extension of the Term hereunder. 8. MISCELLANEOUS. (a) SURVIVAL; NOTICES. The obligations of the Company in paragraph 5 and your obligations in paragraph 6 will survive the termination of this letter agreement. Any notice, consent or other communication made or given in connection with this letter agreement will be in writing and will be deemed to have been duly given when delivered or five days after mailed by United States registered or certified mail, return receipt requested, to the parties at the address set forth on the first page of this letter agreement (attention: General Counsel, if to the Company). (b) ENTIRE AGREEMENT. This letter agreement supersedes any and all existing agreements between you and the Company or any of its subsidiaries or affiliates relating to the terms of your employment. (c) AMENDMENTS AND WAIVERS. No provisions of this letter agreement may be amended, modified, waived or discharged except as agreed to in writing by you and the Company. The failure of a party to insist upon strict adherence to any term of this letter agreement on any occasion will not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this letter agreement. (d) SUCCESSORS. This letter agreement shall be binding upon and inure to the benefit of you and the Company and its successors and permitted assigns. Neither this letter agreement nor any of the rights of the parties hereunder may be assigned by either party hereto except that the Company may assign its rights and obligations hereunder to a corporation or other entity that acquires substantially all of its assets. Any assignment or transfer of this letter agreement in violation of the foregoing provisions will be void. (e) GOVERNING LAW. This letter agreement will be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in that State. (f) LEGAL COUNSEL; OFFSETS AND REDUCTIONS. In the event you obtain legal counsel to enforce your rights under this letter agreement, the Company will pay you reasonable legal fees if you recover any amount on such claim. Except as provided in paragraph 6, if your employment is terminated by the Company, your -8- 9 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 the provision of this letter agreement is invalid or unenforceable, the balance of this letter agreement will remain in effect, and if such provision is inapplicable to any person or circumstance, it will nevertheless remain applicable to all other persons and circumstances. (h) WITHHOLDINGS. The Company is authorized to withhold from any benefit provided or payment due hereunder the amount of withholding taxes due any federal, state, or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such withholding taxes. (i) TAX GROSS-UP. In the event that any payment made to you pursuant to this employment agreement with The CIT Group Holdings, Inc. (the "Company") becomes subject to excise taxes under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company will pay to you the amount of such excise taxes plus all federal, state and local taxes applicable to the Company's payment of such excise taxes including any additional excise taxes due under Section 4999 of the Code with respect to payments made pursuant to this letter agreement. The determination of amounts required to be paid under this letter agreement shall be made by an independent auditor selected and paid by the Company. Such independent auditor shall be a nationally recognized United States public accounting firm, which may be the independent accounting firm used by the Company to audit its financial statements. If you are in agreement with the terms of this letter, please so indicate by signing and returning the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement between you and the Company. Very truly yours, THE CIT GROUP HOLDINGS, INC. By: ___________________________ Name: Title: Agreed: __________________________________ -9- EX-10.7 7 EMPLOYMENT AGREEMENT OF JOSEPH M. LEONE 1 EXHIBIT 10.7 THE CIT GROUP, INC. December 6, 1996 Mr. Joseph M. Leone 650 CIT Drive Livingston, NJ 07039 Dear Joe: Reference is made to your employment agreement, dated December 29, 1989 (the "Employment Agreement"), with The CIT Group Holdings, Inc. (the "Company), as amended by letter agreements dated November 16, 1992 and December 20, 1994. The Board of Directors (the "Board") of The CIT Group Holdings, Inc. (the "Company"), is pleased to extend your employment agreement with the Company on the following terms and conditions, all other terms and conditions being null and void: 1. TERM. This letter agreement will be effective as of January 1, 1997. The term of this Agreement (the "Term") will be for a period of twenty-four months beginning on January 1, 1997 and, except as otherwise provided in paragraph 4 below, ending on December 31, 1998. This letter agreement and the Term may be extended for one 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 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 2 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 Program and receive all fringe benefits and vacations, for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such plans. In addition, the Company will provide you with (i) a supplemental pension benefit and (ii) a supplemental savings benefit, in each case in an amount equal to the value of the benefit you would be entitled to receive under the Company's Retirement Plan or Savings Incentive Plan, as the case may be, but for the limitations on the amount of such benefits imposed by Internal Revenue Code Sections 415 and 401(a) (17). In connection with your benefits under the Company's Executive Retirement Program, the Company will not unreasonably withhold its consent to your retirement. (e) MODIFICATIONS. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plans or programs provided hereunder for any reason and without your consent; provided that, without your consent, the Company may not reduce the aggregate value of the benefits provided to the Executive hereunder, or administer the Company Executive Retirement Program in a manner substantially inconsistent with past practices. 4. TERMINATION OF THE EXECUTIVE'S EMPLOYMENT. (a) BY THE COMPANY. The Company may terminate your employment in its sole discretion at any time during the Term, with or without Cause, upon written notice by the Company to you, and your employment will terminate on the date such notice is given. For purposes of this letter agreement, "Cause" means (1) Nonperformance, defined as your substantial failure to perform your duties or responsibilities, as determined by the CEO, or (2) Malfeasance, defined as (A) your gross negligence, recklessness or malfeasance in the performance of your duties hereunder, (B) your committing any criminal act, act or fraud or other misconduct resulting or intending to result directly or indirectly in gain or personal enrichment at the expense of the Company, or (C) your engaging in any conduct relating to the business of the Company that could reasonably be expected to have a materially detrimental effect on the business or financial condition of the Company. For purposes hereof, you will be deemed to have committed an act if, based upon the Company's investigation of the facts, it reasonably concludes that you committed such an act. (b) BY YOU. You may terminate your employment with the Company at any time during the Term, with or without Good Reason, upon written notice by you to the Company, and your employment will terminate on the date such notice is given. For purposes of this letter agreement, "Good Reason" means the assignment to you of duties and responsibilities -2- 3 not commensurate with your status as a senior executive of the Company, the failure of the Company to provide compensation and benefits to you at the levels required herein or 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 notice of such termination (the "Termination Date") and the Company will pay to you, subject to paragraph 6, the following sums: 1) Your Base Salary on the Termination Date for the greater of 24 months or the remainder of the Term, payable 50% in 12 equal installments at the end of each of the 12 months following the Termination Date, and 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)(A), then the Company will have no obligation to make any of the payments that remain payable by the Company under this paragraph 5(a)(1) on or after the date of such violation. 2) All previously earned and accrued entitlements and benefits from the Company, including any such entitlements and benefits under the Company's pension, disability and life insurance plans, policies and programs. 3) Continued participation for eighteen months under the Company's welfare benefit plans in which you participated immediately prior to the Termination Date. 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 "Career Incentive Plan" (Long Term Incentive) or any plan as may have been hereafter adopted by the Company. Upon such payment, all of your rights under all such plans will then terminate. 6) All benefits payable to you under the terms and conditions of the Company's Executive Benefits Program, if any. -3- 4 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. (b) FOR CAUSE TERMINATION - NONPERFORMANCE. 1) If your employment is terminated by the Company for Cause based on Nonperformance, as determined by the current CEO (Albert R. Gamper, Jr.), you will promptly receive the amounts and benefits specified in paragraphs 5(a)(2), (3) and (4) above. In addition, you will receive an amount equal to your Base Salary on the Termination Date for 12 months, payable in 12 equal installments at the end of each of the 12 months following the Termination Date. 2) If your employment is terminated by the Company for Cause based on Nonperformance, as determined by the CEO (if other than Albert R. Gamper, Jr.), you will promptly receive the amounts and benefits specified in paragraph 5(a)(2), (3) and (4) above. In addition, you will receive an amount equal to your Base Salary on the Termination Date for 24 months, payable 50% in 12 equal installments at the end of each of the 12 months following the Termination Date, and 50% in a lump sum on the anniversary of the Termination Date. (c) FOR CAUSE TERMINATION - MALFEASANCE OR TERMINATION BY YOU WITHOUT GOOD REASON. If your employment is terminated by the Company for Cause based on Malfeasance 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) (d) DEATH OR DISABILITY. In the event of your death or your disability due to physical or mental illness or other disability which renders you unable, on other than a temporary basis, to perform the duties of your employment, the Employment Term will terminate as of the date of your death or disability and you will receive the benefits specified in paragraph 5(a)(2) and (6) plus an amount equal to your Base Salary on such date for one year. Disability will be determined by the CEO or pursuant to his delegation in a manner consistent with the Company's Long Term Disability Plan. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITY. (a) You acknowledge that you have acquired and will continue to acquire during the Term, confidential information regarding the business of the Company, Dai-Ichi Kangyo Bank (DKB), Chase Manhattan Corporation (CMC) 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 -4- 5 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, DKB or CMC and their respective subsidiaries and affiliates, except for specific items which have become publicly available other than as a result of your breach of this letter agreement. (b) During the Term and, if you resign with or without Good Reason or your employment is terminated by the Company with or without Cause prior to the end of the Term, then for one year after the Termination Date, in the case of clause (A) below, and for two years after the Termination Date, in the case of clause (B) below, you will not, without the written consent of the Board, directly or indirectly, (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the New York metropolitan area 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 (B) whether or not your termination of employment occurred without Cause or for Good Reason, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company, DKB or CMC and their respective subsidiaries and affiliates, to terminate such relationship or to refrain from extending or renewing the same. Nothing herein, however, will prohibit you from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle you to no more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (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, CMC and their respective subsidiaries and affiliates. In addition, you further acknowledge that the Company, DKB, CMC 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). -5- 6 7. CHANGE OF CONTROL. (a) CONTRACT EXTENSION. If during the Term, a "Change of Control" occurs as defined hereafter, 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 a Change of Control should occur on or prior to December 31, 1998, you will receive a special payment (the "Special Payment"). The amount of such Special Payment shall equal the sum of your prior two years' annual bonuses under The CIT Group Bonus Plan and will be payable over a two-year period as follows: 1/3 of the payment shall be paid to you within 30 days after the date of the Change of Control; 1/3 shall be paid to you on or before the first anniversary date of such Change of Control; and 1/3 shall be paid to you on or before the second anniversary date of such Change of Control. Notwithstanding the foregoing provisions of this paragraph, all or any part of such Special Payment shall not be payable to you: (1) to the extent that such Special Payment or any part thereof, when aggregated with any other benefit or compensation payment due or owing to you, on account of a Change of Control, under the Employment Agreement or any other benefit program maintained by the Company, would cause you to be subject to taxation under Section 4999 of the Internal Revenue Code of 1986, as amended, or (2) if during the two-year period commencing on the date of a Change of Control, and ending on the second anniversary of such date: (i) your employment is involuntarily terminated by the Company for "Cause" as defined in the Employment Agreement; (ii) you voluntarily terminate employment with the Company for any reason other than "Good Reason" as defined in the Employment Agreement; or (iii) you breach any noncompetition or confidentiality covenant under Section 6 of the Employment Agreement. For purposes of this Paragraph (b) "Special Payment", a termination of your employment on account of your death, disability or retirement on or after age 55 under the terms of the Company's retirement plan shall constitute a termination for "Good Reason." In the absence of a separate beneficiary designation, your beneficiary under the Group Life Insurance Plan will receive any Special Payment remaining to be paid upon your death. (c) CHANGE OF CONTROL DEFINED. For purposes of this letter agreement, a "Change of Control" shall be deemed to have occurred if: (1) any Person or Group other than DKB or CMC or their Affiliates becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (2) as a result of a cash tender offer, merger or other business 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 or CMC shall not require the extension of the Term hereunder. -6- 7 8. MISCELLANEOUS. (a) SURVIVAL; NOTICES. The obligations of the Company in paragraph 5 and your obligations in paragraph 6 will survive the termination of this letter agreement. Any notice, consent or other communication made or given in connection with this letter agreement will be in writing and will be deemed to have been duly given when delivered or five days after mailed by United States registered or certified mail, return receipt requested, to the parties at the address set forth on the first page of this letter agreement (attention: General Counsel, if to the Company). (b) ENTIRE AGREEMENT. This letter agreement supersedes any and all existing agreements between you and the Company or any of its subsidiaries or affiliates relating to the terms of your employment. (c) AMENDMENTS AND WAIVERS. No provisions of this letter agreement may be amended, modified, waived or discharged except as agreed to in writing by you and the Company. The failure of a party to insist upon strict adherence to any term of this letter agreement on any occasion will not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this letter agreement. (d) SUCCESSORS. This letter agreement shall be binding upon and inure to the benefit of you and the Company and its successors and permitted assigns. Neither this letter agreement nor any of the rights of the parties hereunder may be assigned by either party hereto except that the Company may assign its rights and obligations hereunder to a corporation or other entity that acquires substantially all of its assets. Any assignment or transfer of this letter agreement in violation of the foregoing provisions will be void. (e) GOVERNING LAW. This letter agreement will be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in that State. (f) LEGAL COUNSEL; OFFSETS AND REDUCTIONS. In the event you obtain legal counsel to enforce your rights under this letter agreement, the Company will pay you reasonable legal fees if you recover any amount on such claim. Except as provided in paragraph 6, if your employment is terminated by the Company, your severance shall not be subject to any offsets or reductions for your subsequently earned income or reduction by reason of any claim by the Company. (g) SEVERABILITY. If the provision of this letter agreement is invalid or unenforceable, the balance of this letter agreement will remain in effect, and if such provision is inapplicable to any person or circumstance, it will nevertheless remain applicable to all other persons and circumstances. (h) WITHHOLDING. The Company is authorized to withhold from any benefit provided or payment due hereunder the amount of withholding taxes due any federal, -7- 8 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. 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 HOLDINGS, INC. By: ------------------------------- Name: Title: Agreed: - ------------------------ -8- EX-10.12 8 CIT GROUP HOLDINGS, INC. EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.12 EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. Effective as of January 1, 1995 2 EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. ESTABLISHMENT The CIT Group Holdings, Inc. (the "Company") hereby establishes, effective as of January 1, 1995, an unfunded, nonqualified deferred compensation plan for a select group of key management or highly compensated employees. All benefits under the Plan shall be paid out of the general assets of the Company. The Company may establish and fund a grantor trust to provide benefits under the Plan. 3 EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. ARTICLE 1. DEFINITIONS 1.1 "BASE COMPENSATION" means (i) only the basic cash remuneration paid to an employee for services rendered to the Company determined prior to any reduction in compensation for elective contributions (within the meaning of Section 401(k) of the Code), salary reductions (within the meaning of Section 125 of the Code), and any amounts deferred pursuant to any other deferred compensation arrangement sponsored by the Company, and (ii) with respect to a period of disability for sickness or accident (other than long-term disability), the salary or wages used by the Company as a basis for determining benefits payable for such period but excluding: (a) commissions, overtime pay and any bonuses or special pay and incentive compensation; (b) any payment made in connection with the relocation of such Participants; (c) any severance award, recruitment award, tuition refund, suggestion award, director's fees, deferred compensation and expense allowance paid to such Participant or any other reimbursement of expenses; and (d) any other payment as determined by the Company in accordance with any uniform rules which it may adopt, which shall at the time be in force, and which shall be applied in a nondiscriminatory manner. 1.2 "BENEFICIARY" means any person, persons, or entity designated by a Participant to receive any benefits payable in the event of the Participant's death. If no valid Beneficiary designation is in effect at the Participant's death, or if no person, persons or entity so designated survives the Participant, or if each surviving validly designated Beneficiary is legally impaired or prohibited from taking, the Participant's Beneficiary shall be his surviving spouse, if any, or if the Participant has no surviving spouse, then his estate. If the Committee is in doubt as to the right of any person to receive such amount, it may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may pay such amount into any court of competent jurisdiction and such payment shall be a complete discharge of the liability of the Plan. 1.3 "BENEFIT SERVICE" means a Participant's "Period of Benefit Service" as defined under the Retirement Plan. -2- 4 1.4 "BOARD" means the Board of Directors of the Company or any committee thereof which may be delegated responsibility with respect to the Plan. 1.5 "CAUSE" means the Participant's (i) substantial failure to perform his duties or responsibilities, as determined by the CEO, (ii) gross negligence, recklessness or malfeasance in the performance of his duties, (iii) commission of any criminal act, act of fraud or other misconduct resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company, or (iv) engagement in any conduct relating to the business of the Company that could reasonably be expected to have a materially detrimental effect on the business or financial condition of the Company. For purposes hereof, the Participant will be deemed to have committed an act if, based upon the Company's investigation of the facts, it reasonably concludes that the Participant committed such an act. 1.6. "CEO" means the Chief Executive Officer of the Company. 1.7 "CODE" means the Internal Revenue Code of 1986, as amended. 1.8 "COMMITTEE" means the members of the Employee Benefit Plans Committee under the Retirement Plan. 1.9 "COMPANY" means The CIT Group Holdings, Inc. or any successor thereto. 1.10 "EARLY RETIREMENT DATE" means the first day of a month following a Participant's termination of employment on or after he has attained age 55 and completed at least 10 years of Benefit Service. 1.11 "EFFECTIVE DATE" means January 1, 1995. 1.12 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.13 "FINAL BASE COMPENSATION" means Base Compensation in excess of the amount of Base Compensation used to determine benefits under the Permanent Life Insurance Plan of The CIT Group Holdings, Inc. 1.14 "GOOD REASON" means the assignment of duties and responsibilities not commensurate with the Participant's status as a senior executive of the Company, the failure of the Company to provide compensation and benefits to the Participant at the levels required under the terms of the Participant's employment contract with the Company, or the failure of the Company to adhere in any substantial manner to any of its other obligations to the Participant under the terms of his employment with the Company. 1.15 "NORMAL RETIREMENT DATE" means the first day of the month coincident with or next following the later of the date of the (i) Participant's attainment of age 65, or (ii) Participant's completion of 10 years of Benefit Service. -3- 5 1.16 "PARTICIPANT" means a key executive or highly compensated, employee of the Company designated by the Committee to participate in the Plan as designated on Appendix A. 1.17 "PLAN" means the Executive Retirement Plan of The CIT Group Holdings, Inc. 1.18 "RETIREMENT PLAN" means The CIT Group Holdings, Inc. Retirement Plan or any successor thereto. -4- 6 ARTICLE 2. PARTICIPATION 2.1 PARTICIPATION The Committee shall, in its sole discretion, select those employees who shall be Participants in the Plan. Such employees shall become Participants under the Plan effective on the date designated by the Committee. The determination of the Committee with respect to participation under the Plan shall be final. 2.2 TERMINATION OF PARTICIPATION Subject to Section 5.10, a Participant shall no longer be eligible to participate in the Plan upon the earlier of the (i) revocation of his status as a Participant under the Plan by the Committee, or (ii) termination of his employment with the Company as provided under Article 4. -5- 7 ARTICLE 3. ACCRUED BENEFITS 3.1 DETERMINATION OF ACCRUED BENEFIT As of any date, a Participant's accrued benefit shall be an annual benefit in the form of a straight life annuity equal to 40% of Final Base Compensation. 3.2 NORMAL RETIREMENT (a) A Participant may retire on his Normal Retirement Date. (b) Subject to Article 4, a Participant who retires on his Normal Retirement Date shall be entitled to receive a benefit equal to his accrued benefit as determined under Section 3.1 commencing on his Normal Retirement Date and ending with the payment due for the month in which the Participant dies. 3.3 EARLY RETIREMENT (a) A Participant may retire on his Early Retirement Date. (b) Subject to Article 4, a Participant who retires on his Early Retirement Date shall be entitled to receive, commencing on his Early Retirement Date and ending with the payment due for the month in which the Participant dies, a benefit equal to the benefit determined under Section 3.1 as of his Early Retirement Date, reduced by one-half of 1 % for each month, if any, by which commencement of his retirement benefit precedes the first day of the month following the month in which his 60th birthday occurs. 3.4 FORM OF BENEFIT In the absence of a valid election under Section 3.5, the Participant's retirement benefits under the Plan shall be paid in a straight life annuity for the Participant's life, payable in 12 equal monthly installments per year, ending with the payment due for the month in which the Participant dies. 3.5 OPTIONAL FORMS OF BENEFIT PAYMENT (a) Subject to Article 4, a Participant may elect to receive his retirement benefit in any form permitted by the Retirement Plan, excluding any options listed under Section 6.3 of the Retirement Plan, provided that the Committee receives an irrevocable election of such optional form from the Participant at least 90 days (or within such other period permitted by the Committee) prior to his becoming a Retiree. A Participant who fails to elect an optional form of benefit payment in a timely manner shall automatically receive his retirement benefit in accordance with Section 3.4 above. (b) If a Participant elects to receive his retirement benefit in the form of a joint and survivor annuity and his joint annuitant dies before the Participant's benefit payments have commenced, then the Participant's election under this Section 3.5 shall be null -6- 8 and void and a Participant may elect to receive his retirement benefit in any of the other optional forms of benefit available under Retirement Plan (excluding any options provided under Section 6.3 of the Retirement Plan), provided, however, that the retirement benefit under such optional forms shall be the actuarial equivalent of the retirement benefit described in Section 3.1 using the same actuarial adjustments and assumptions used to make pension calculations under the Retirement Plan. 3.6 RESTORATION TO SERVICE If a Participant retires from active service and begins to receive payment of his retirement benefit and again becomes an employee of the Company, the payments under the Plan shall be discontinued and, upon subsequent retirement from employment with the Company, the Participant's benefits under the Plan shall be recomputed in accordance with the provisions of this Article 3, as applicable, and shall again become payable to such Participant in accordance with the provisions of the Plan. The amount of any benefit payable pursuant to the preceding sentence shall be offset by the actuarial equivalent of the benefit that the Participant received from the Plan using the same actuarial adjustments and assumptions used to make pension calculations under the Retirement Plan. -7- 9 ARTICLE 4. EFFECT OF TERMINATION OF EMPLOYMENT 4.1 DEATH If termination of employment occurs by reason of the death of the Participant while the Participant is in active service of the Company, such Participant's Beneficiary shall not be eligible for any benefit under the Plan, except for any life insurance benefits which may be payable under a separate arrangement set forth in Appendix B. 4.2 DISABILITY A Participant who is disabled and receiving payments under the Company's Long-Term Disability Plan shall continue to accrue periods of Benefit Service under the Plan until the earlier of (i) the date his long-term disability benefit terminates, or (ii) his Normal Retirement Date. No benefit under this Plan shall be payable to a Participant while he is receiving such long-term disability benefit payments. 4.3 WITHOUT CAUSE OR FOR GOOD REASON If a Participant is terminated by the Company without Cause or a Participant terminates his employment for Good Reason, the Participant shall be eligible for the following benefits under the Plan: (a) If a Participant is 55 years of age or older on the date of termination with the Company, he shall be eligible to receive a benefit as described in Section 3.2 or 3.3 (as applicable) in the form of a single life annuity, as soon as practicable following the Participant's date of termination. (b) If a Participant is less than 55 years of age on the date of termination with the Company, he shall be eligible to receive a lump sum payment equal to an amount which represents the equivalent of the net after tax present value to the Participant of the single life annuity that would have been payable to the Participant at age 55. Such amount shall be calculated in accordance with uniform methodology adopted by the Committee. 4.4 WITHOUT GOOD REASON PRIOR TO EARLY RETIREMENT If a Participant terminates his employment with the Company for any reason other than Good Reason and is not eligible to receive a retirement benefit in accordance with Article 3, such Participant shall forfeit all benefits under the Plan. The provisions of this Section 4.4 shall not apply if the Plan is terminated by the Board or any successor thereto pursuant to the provisions of Section 5.10. 4.5 TERMINATION OF THE PLAN If the Plan is terminated by the Board (or any successor thereto) pursuant to Section 5.10 hereto, each Participant shall be deemed vested in his retirement benefit and shall be eligible to receive payment of his retirement benefit in accordance with the terms of the -8- 10 Plan, provided that such benefit shall be computed based on the Participant's Final Base Compensation on the date of termination of the Plan. 4.6 FOR CAUSE If a Participant is terminated by the Company for Cause, such Participant shall forfeit all benefits under the Plan regardless of his eligibility to receive such benefits under the Plan. -9- 11 ARTICLE 5. GENERAL PROVISIONS 5.1 ADMINISTRATION The Committee shall have full power and authority to administer and interpret the Plan. The Committee may from time to time establish rules for the administration of the Plan that are consistent with the provisions of the Plan. 5.2 CLAIMS PROCEDURE All claims for benefits under the Plan shall be administered in the same manner as provided under the Retirement Plan and the Committee shall have the same powers and authority with respect to the disposition of claims under this Plan that the Employee Benefit Plans Committee has under the Retirement Plan. The determination of the Committee as to any disputed questions arising under this Plan including, but not limited to, claims for benefits and questions of construction and interpretation shall be final, binding and conclusive upon all persons. 5.3 ARBITRATION If a Participant has exhausted his remedies with respect to a claim for benefits under Section 5.2, such Participant may seek review of the Committee's determinations with respect thereto through binding arbitration in New York City, New York, in accordance with the rules and constitution of the American Arbitration Association. Notwithstanding the foregoing, any final determination of the Committee pursuant to Section 5.2 shall be binding unless the arbitrator determines that such determination was arbitrary and capricious. Judgment upon any such arbitration award may be entered in a court of competent jurisdiction in New York City, New York, and the Participant submits to the jurisdiction of such court. 5.4 FUNDING (a) All amounts payable in accordance with the Plan shall constitute general unsecured obligations of the Company. Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company unless the provisions of paragraph (b) below are applicable. (b) The Board may, for administrative reasons, establish a grantor trust to fund benefits payable under the Plan and/or administrative costs relating to the Plan. The assets of said trust will be held separate and apart from other Company funds and shall be used exclusively for the purposes set forth in the Plan and the applicable trust agreement, subject to the following conditions: (i) the creation of said trust shall not cause the Plan to be other than "unfunded" for purposes of ERISA; -10- 12 (ii) the Company shall be treated as the "grantor" of said trust for purposes of Sections 671 and 677 of the Code; and (iii) said trust agreement shall provide that the trust fund assets may be used to satisfy claims of the Company's general creditors, provided that the rights of such general creditors are enforceable under federal law. 5.5 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY THE PLAN Nothing contained in this Plan shall be construed as a contract of employment; nor shall the Plan or its establishment confer any legal rights upon any employee or other person for a continuation of employment with the Company, nor interfere with the rights of the Company to discharge any employee and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant of the Plan. The terms of the Plan shall govern all benefits payable under the Plan and shall supersede any contractual obligations the Company may have with respect to the payment of benefits under this Plan. 5.6 FACILITY OF PAYMENT If the Committee shall find that any person to whom any amount is payable under the Plan is found by a court of competent jurisdiction unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due him or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so elects, be paid to his spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Plan therefor. 5.7 WITHHOLDING TAXES The Company shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. 5.8 NONALIENATION Subject to applicable law, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void, nor shall any such benefit be in any manner liable for or subject to garnishment, attachment, execution or levy, or liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participants. 5.9 CONSTRUCTION (a) The Plan is intended to be an unfunded deferred compensation arrangement for a select group of management or highly compensated employees and therefore -11- 13 exempt from the requirements or Sections 201, 301 and 401 of ERISA. All rights hereunder shall be governed by and construed in accordance with the laws of the State of New York. (b) The masculine pronoun shall mean the feminine wherever appropriate. 5.10 AMENDMENT OR TERMINATION The Board may amend, modify or terminate the Plan at any time. No such amendment shall diminish the rights of any Participant with respect to benefits due him under the terms of the Plan at the time of its modification amendment or termination. -12- 14 APPENDIX A PARTICIPATION The following employees have been designated by the Committee to participate in the Plan effective as of January 1, 1995. (1) (2) (3) -13- 15 APPENDIX B DEATH BENEFIT -14- 16 NEW EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. Effective as of January 1, 1995 17 NEW EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. ESTABLISHMENT The CIT Group Holdings, Inc. (the "Company") hereby establishes, effective as of January 1, 1995, an unfunded, nonqualified deferred compensation plan for a select group of key management or highly compensated employees. All benefits under the Plan shall be paid out of the general assets of the Company. The Company may establish and fund a grantor trust to provide benefits under the Plan. 18 NEW EXECUTIVE RETIREMENT PLAN OF THE CIT GROUP HOLDINGS, INC. ARTICLE 1. DEFINITIONS 1.1 "BASE COMPENSATION" means (i) only the basic cash remuneration paid to an employee for services rendered to the Company determined prior to any reduction in compensation for elective contributions within the meaning of Section 401(k) of the Code or salary reductions, (within the meaning of Section 125 of the Code) and any amounts deferred pursuant to any other deferred compensation arrangement sponsored by the Company, and (ii) with respect to a period of disability for sickness or accident (other than long-term disability), the salary or wages used by the Company as a basis for determining benefits payable for such period but excluding: (a) commissions, overtime pay and any bonuses or special pay and incentive compensation; (b) any payment made in connection with the relocation of such Participants; (c) any severance award, recruitment award, tuition refund, suggestion award, director's fees, deferred compensation and expense allowance paid to such Participant or any other reimbursement of expenses; and (d) any other payment as determined by the Company in accordance with any uniform rules which it may adopt, which shall at the time be in force, and which shall be applied in a nondiscriminatory manner. 1.2 "BENEFICIARY" means any person, persons, or entity designated by a Participant to receive any benefits payable in the event of the Participant's death. If no valid Beneficiary designation is in effect at the Participant's death, or if no person, persons or entity so designated survives the Participant, or if each surviving validly designated Beneficiary is legally impaired or prohibited from taking, the Participant's Beneficiary shall be his surviving spouse, if any, or if the Participant has no surviving spouse, then his estate. If the Committee is in doubt as to the right of any person to receive such amount, it may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may pay such amount into any court of competent jurisdiction and such payment shall be a complete discharge of the liability of the Plan. 1.3 "BENEFIT SERVICE" means a Participant's Period of Benefit Service as defined under the Retirement Plan. 1.4 "BOARD" means the Board of Directors of the Company or any committee thereof which may be delegated responsibility with respect to the Plan. -2- 19 1.5 "CAUSE" means the Participant's (i) substantial failure to perform his duties or responsibilities, as determined by the CEO, (ii) gross negligence, recklessness or malfeasance in the performance of his duties, (iii) commission of any criminal act, act of fraud or other misconduct resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company, or (iv) engagement in any conduct relating to the business of the Company that could reasonably be expected to have a materially detrimental effect on the business or financial condition of the Company. For purposes hereof, the Participant will be deemed to have committed an act if, based upon the Company's investigation of the facts, it reasonably concludes that the Participant committed such an act. 1.6 "CEO" means the Chief Executive Officer of the Company. 1.7 "CHANGE OF CONTROL" shall be deemed to have occurred if (i) any person or group other than DKB or Chemical or their Affiliates becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) or (ii) as a result of a cash tender offer, merger or other business combination, sale 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 or Chemical shall not require the payment of any benefits as provided in Section 4.5. 1.8 "CODE" means the Internal Revenue Code of 1986, as amended. 1.9 "COMMITTEE" means the Employee Benefit Plans Committee under the Retirement Plan. 1.10 "COMPANY" means The CIT Group Holdings, Inc. or any successor thereto. 1.11 "EARLY RETIREMENT DATE" means the first day of a month following a Participant's termination of employment on or after he has attained age 55 and completed at least 10 years of Benefit Service. 1.12 "EFFECTIVE DATE" means January 1, 1995. 1.13 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.14 "FINAL BASE COMPENSATION" means highest Base Compensation received for any 12-consecutive-month-period during any of the five-consecutive-12-month periods ending on a Participant's retirement date. -3- 20 1.15 "GOOD REASON" means the assignment of duties and responsibilities not commensurate with the Participant's status as a senior executive of the Company, the failure of the Company to provide compensation and benefits to the Participant at the levels required under the terms of the Participant's employment contract with the Company, or the failure of the Company to adhere in any substantial manner to any of its other obligations to the Participant under the terms of his employment with the Company. 1.16 "NORMAL RETIREMENT DATE" means the first day of the month coincident with or next following the later of date of the (i) Participant's attainment of age 65, or (ii) Participant's completion of 10 years of Benefit Service. 1.17 "PARTICIPANT" means a key executive or highly compensated employee of the Company designated by the Committee to participate in the Plan as designated on Appendix A. 1.18 "PLAN" means the New Executive Retirement Plan of The CIT Group Holdings, Inc. 1.19 "RETIREMENT PLAN" means The CIT Group Holdings, Inc. Retirement Plan or any successor thereto. -4- 21 ARTICLE 2. PARTICIPATION 2.1 PARTICIPATION The Committee shall, in its sole discretion, select those employees who shall be Participants in the Plan. Such employees shall become Participants under the Plan effective on the date designated by the Committee. The determination of the Committee with respect to participation under the Plan shall be final. 2.2 TERMINATION OF PARTICIPATION Subject to Section 5.10, a Participant shall no longer be eligible to participate in the Plan upon the earlier of the (i) revocation of his status as a Participant under the Plan by the Committee, or (ii) termination of his employment with the Company as provided under Article 4. -5- 22 ARTICLE 3. ACCRUED BENEFITS 3.1 DETERMINATION OF ACCRUED BENEFIT As of any date, a Participant's accrued benefit shall be an annual benefit in the form of a straight life annuity equal to the product of his Final Base Compensation multiplied by the sum of (i) 50% for the first 10 years of Benefit Service, and (ii) 2% for each of the following 20 years of Benefit Service and such product shall be reduced by the following offset amounts, on account of benefits payable to the Participant, determined as of the date of retirement: (1) the annual single life pension payable from the Retirement Plan, (2) the benefit payable from The CIT Group Holdings, Inc. Supplemental Retirement Plan converted to an annual single life annuity, (3) the benefit payable from the Flexible Retirement Contribution Account (FRA) of The CIT Group Holdings, Inc. Savings Incentive Plan converted to an annual single life annuity, (4) the benefit payable from the nonqualified FRA in The CIT Group Holdings, Inc. Supplemental Savings Incentive Plan converted to an annual single life annuity, and (5) any annual single life pension payable under the Split Dollar Insurance Plan of The CIT Group Holdings, Inc. For purposes of determining the converted single life annuities payable as described in (2), (3) and (4) above, the same procedures and assumptions as used for the Retirement Plan for similar conversions will be applied. 3.2 NORMAL RETIREMENT (a) A Participant may retire on his Normal Retirement Date. (b) Subject to Article 4, a Participant who retires on his Normal Retirement Date shall be entitled to receive a benefit equal to his accrued benefit as determined under Section 3.1 commencing on his Normal Retirement Date and ending with the payment due for the month in which the Participant dies. 3.3 EARLY RETIREMENT (a) A Participant may retire on his Early Retirement Date. (b) Subject to Article 4, a Participant who retires on his Early Retirement Date shall be entitled to receive, commencing on his Early Retirement Date and -6- 23 ending with the payment due for the month in which the Participant dies, a benefit equal to the benefit determined under Section 3.1 as of his Early Retirement Date, reduced by one-half of 1% for each month, if any, by which commencement of his retirement benefit precedes the first day of the month following the month in which his 60th birthday occurs. 3.4 FORM OF BENEFIT In the absence of a valid election under Section 3.5, the Participant's retirement benefits under the Plan shall be paid in a straight life annuity for the Participant's life, payable in 12 equal monthly installments per year, ending with the payment due for the month in which the Participant dies. 3.5 OPTIONAL FORMS OF BENEFIT PAYMENT (a) Subject to Article 4, a Participant may elect to receive his retirement benefit in any form permitted by the Retirement Plan, excluding any options listed under Section 6.3 of the Retirement Plan, provided that the Committee receives an irrevocable election of such optional form from the Participant at least 90 days (or within such other period permitted by the Committee) prior to his becoming a Retiree. A Participant who fails to elect an optional form of benefit payment in a timely manner shall automatically receive his retirement benefit in accordance with Section 3.4 above. (b) If a Participant elects to receive his retirement benefit in the form of a joint and survivor annuity and his joint annuitant dies before the Participant's benefit payments have commenced, then the Participant's election under this Section 3.5 shall be null and void and a Participant may elect to receive his retirement benefit in any of the other optional forms of benefit available under the Retirement Plan (excluding any options provided under Section 6.3 of the Retirement Plan); provided, however, that the retirement benefit under such optional forms shall be the actuarial equivalent of the retirement benefit described in Section 3.1 using the same actuarial adjustments and assumptions used to make pension calculations under the Retirement Plan. 3.6 RESTORATION TO SERVICE If a Participant retires from active service and begins to receive payment of his retirement benefit and again becomes an employee of the Company, the payments under the Plan shall be discontinued and, upon subsequent retirement from employment with the Company, the Participant's benefits under the Plan shall be recomputed in accordance with the provisions of this Article 3, as applicable, and shall again become payable to such Participant in accordance with the provisions of the Plan. The amount of any benefit payable pursuant to the preceding sentence shall be offset by the actuarial equivalent of the benefit that the Participant received from the Plan using the same actuarial adjustments and assumptions used to make pension calculations under the Retirement Plan. -7- 24 ARTICLE 4. EFFECT OF TERMINATION OF EMPLOYMENT 4.1 DEATH If termination of employment occurs by reason of the death of the Participant while the Participant is in active service of the Company, such Participant's Beneficiary shall not be eligible for any benefit under the Plan, except for any life-insurance benefits which may be payable under a separate arrangement set forth in Appendix B. 4.2 DISABILITY A Participant who is disabled and receiving payments under the Company's Long-Term Disability Plan shall continue to accrue periods of Benefit Service under the Plan until the earlier of (i) the date his long-term disability benefit terminates, or (ii) his Normal Retirement Date. No benefit under this Plan shall be payable to a Participant while he is receiving such long-term disability benefit payments. 4.3 WITHOUT CAUSE OR FOR GOOD REASON If a Participant has attained 10 years of Benefit Service and is terminated by the Company without Cause or a Participant terminates his employment for Good Reason, the Participant shall be eligible for the following benefits under the Plan: (a) If a Participant is 55 years of age or older on the date of termination with the Company, he shall be eligible to receive a benefit as described in Section 3.2 or 3.3 (as applicable) in the form of a single life annuity, as soon as practicable following the Participant's date of termination. (b) If a Participant is less than 55 years of age on the date of termination with the Company, he shall be eligible to receive a lump sum payment equal to an amount which represents the equivalent of the net after tax present value to the Participant of the single life annuity that would have been payable to the Participant at age 55. Such amount shall be calculated in accordance with uniform methodology adopted by the Committee. (c) If a Participant has not completed 10 years of Benefit Service at the time of his termination of employment without cause or for Good Reason, such Participant shall not be eligible to receive any benefits under the Plan. 4.4 TERMINATION OF THE PLAN If the Plan is terminated by the Board (or any successor thereto) pursuant to Section 5.10 hereto, each Participant shall be deemed vested in his retirement benefit and shall be eligible to receive payment of his retirement benefit in accordance with the terms of the Plan, provided, that such benefit shall be computed based on the Participant's Final Base Compensation and years of Benefit Service on the date of termination of the Plan; and provided, further, that if a Participant has less than 10 years of Benefit Service at the time of termination of -8- 25 the Plan, he shall be eligible to receive an annual benefit in the form of a straight life annuity equal to 5% of Final Base Compensation for each year of Benefit Service accrued through the date of termination of the Plan and reduced by the sum of the offset amounts set forth in Section 3.1 above. Notwithstanding the foregoing, if a Participant has less than 5 years of Benefit Service on the date of termination of the Plan, no benefit shall be payable to him under the Plan. 4.5 CHANGE OF CONTROL If a Participant's employment is terminated by the Company (or any successor thereto) without Cause or the Participant terminates employment for Good Reason within 3 years following the date of the "Change of Control," then notwithstanding the Participant's period of Benefit Service, he shall be eligible to receive a retirement benefit based on his Final Base Compensation and years of Benefit Service accrued through the date of his termination which amount shall be payable in accordance with Section 4.3 above. For purposes of this Section 4.5, a Participant with less than 10 years of Benefit Service shall be eligible to receive an annual benefit in the form of a straight life annuity equal to 5% of Final Base Compensation for each year of Benefit Service accrued through the date of termination of employment reduced by the sum of the offset amounts set forth in Section 3.1 above. Notwithstanding the foregoing, however, if a Participant has less than 5 years of Benefit Service on the date of termination of employment, no benefit shall be payable to him under the Plan. 4.6 WITHOUT GOOD REASON PRIOR TO EARLY RETIREMENT If a Participant terminates his employment with the Company for any reason other than Good Reason and is not eligible to receive a retirement benefit in accordance with Article 3, such Participant shall forfeit all benefits under the Plan. The provisions of this Section 4.6 shall not apply in the event the Plan is terminated by the Board or any successor thereto pursuant to the provisions of Section 5.10. 4.7 FOR CAUSE If a Participant is terminated by the Company for Cause such Participant shall forfeit all benefits under the Plan regardless of his eligibility to receive such benefits under the Plan. -9- 26 ARTICLE 5. GENERAL PROVISIONS 5.1 ADMINISTRATION The Committee shall have full power and authority to administer and interpret the Plan. The Committee may from time to time establish rules for the administration of the Plan that are consistent with the provisions of the Plan. 5.2 CLAIMS PROCEDURE All claims for benefits under the Plan shall be administered in the same manner as provided under the Retirement Plan and the Committee shall have the same powers and authority with respect to the disposition of claims under this Plan that the Employee Benefit Plans Committee has under the Retirement Plan. The determination of the Committee as to any disputed questions arising under this Plan including, but not limited to, claims for benefits and questions of construction and interpretation shall be final, binding and conclusive upon all persons. 5.3 ARBITRATION If a Participant has exhausted his remedies with respect to a claim for benefits under Section 5.2, such Participant may seek review of the Committee's determinations with respect thereto through binding arbitration in New York City, New York, in accordance with the rules and constitution of the American Arbitration Association. Notwithstanding the foregoing, any final determination of the Committee pursuant to Section 5.2 shall be binding unless the arbitrator determines that such determination was arbitrary and capricious. Judgment upon any such arbitration award may be entered in a court of competent jurisdiction in New York City, New York, and the Participant submits to the jurisdiction of such court. 5.4 FUNDING (a) All amounts payable in accordance with the Plan shall constitute general unsecured obligations of the Company. Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company unless the provisions of paragraph (b) below are applicable. (b) The Board may, for administrative reasons, establish a grantor trust to fund benefits payable under the Plan and/or administrative costs relating to the Plan. The assets of said trust will be held separate and apart from other Company funds and shall be used exclusively for the purposes set forth in the Plan and the applicable trust agreement, subject to the following conditions: (i) the creation of said trust shall not cause the Plan to be other than "unfunded" for purposes of ERISA; -10- 27 (ii) the Company shall be treated as the "grantor" of said trust for purposes of Sections 671 and 677 of the Code; and (iii) said trust agreement shall provide that the trust fund assets may be used to satisfy claims of the Company's general creditors, provided that the rights of such general creditors are enforceable under federal law. 5.5 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY THE PLAN Nothing contained in this Plan shall be construed as a contract of employment; nor shall the Plan or its establishment confer any legal rights upon any employee or other person for a continuation of employment with the Company, nor interfere with the rights of the Company to discharge any employee and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant of the Plan. The terms of the Plan shall govern all benefits payable under the Plan and shall supersede any contractual obligations the Company may have with respect to the payment of benefits under this Plan. 5.6 FACILITY OF PAYMENT If the Committee shall find that any person to whom any amount is payable under the Plan is found by a court of competent jurisdiction unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due him or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so elects, be paid to his spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Plan therefor. 5.7 WITHHOLDING TAXES The Company shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. 5.8 NONALIENATION Subject to applicable law, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void, nor shall any such benefit be in any manner liable for or subject to garnishment, attachment, execution or levy, or liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participants. 5.9 CONSTRUCTION (a) The Plan is intended to be an unfunded deferred compensation arrangement for a select group of management or highly compensated employees and therefore -11- 28 exempt from the requirements or Sections 201, 301 and 401 of ERISA. All rights hereunder shall be governed by and construed in accordance with the laws of the State of New York. (b) The masculine pronoun shall mean the feminine wherever appropriate. 5.10 AMENDMENT OR TERMINATION The Board may amend, modify or terminate the Plan at any time. No such amendment shall diminish the rights of any Participant with respect to benefits due him under the terms of the Plan at the time of its modification amendment or termination. -12- 29 APPENDIX A PARTICIPATION The following employees have been designated by the Committee to participate in the Plan effective as of January 1, 1995. (1) (2) (3) -13- 30 APPENDIX B DEATH BENEFIT -14- EX-10.13 9 CIT GROUP, INC. LONG-TERM EQUITY COMP. PLAN 1 EXHIBIT 10.13 THE CIT GROUP, INC. LONG-TERM EQUITY COMPENSATION PLAN November 1, 1997 2 TABLE OF CONTENTS Page Article 1. Establishment, Objectives, and Duration.........................1 1.1. Establishment of the Plan.......................................1 1.2. Objectives of the Plan..........................................1 1.3. Duration of the Plan............................................1 Article 2. Definitions.....................................................1 2.1. "Annual Incentive Award"........................................1 2.2. "Award".........................................................2 2.3. "Award Agreement"...............................................2 2.4. "Beneficial Owner" or "Beneficial Ownership"....................2 2.5. "Board" or "Board of Directors".................................2 2.6. "Change of Control".............................................2 2.7. "Code"..........................................................2 2.8. "Committee".....................................................2 2.9. "Company".......................................................2 2.10. "Director".....................................................2 2.11. "Disability"...................................................3 2.12. "Effective Date"...............................................3 2.13. "Employee".....................................................3 2.14. "Exchange Act".................................................3 2.15. "Fair Market Value"............................................3 2.16. "Freestanding SAR".............................................3 2.17. "Incentive Stock Option" or "ISO"..............................3 2.18. "Insider"......................................................3 2.19. "Nonemployee Director".........................................3 2.20. "Nonqualified Stock Option" or "NQSO"..........................3 2.21. "Option".......................................................3 2.22. "Option Price".................................................3 2.23. "Participant"..................................................4 2.24 "Performance Share".............................................4 2.25 "Performance Unit"..............................................4 2.26 "Period of Restriction".........................................4 2.27 "Person"........................................................4 2.28 "Plan"...........................................................4 2.29 "Restricted Stock"...............................................4 2.30 "Retirement"....................................................4 2.31 "Shares"........................................................4 2.32 "Stock Appreciation Right" or "SAR".............................4 2.33 "Subsidiary"....................................................4 2.34. "Tandem SAR"...................................................4 i 3 Page Article 3. Administration..................................................5 3.1. The Administrator...............................................5 3.2. Authority of the Board..........................................5 3.3. Decisions Binding...............................................5 Article 4. Shares Subject to the Plan and Maximum Awards...................5 4.1. Number of Shares Available for Grants...........................5 4.2. Lapsed Awards...................................................5 4.3. Adjustments in Authorized Shares................................6 4.4. Maximum Awards..................................................6 Article 5. Eligibility and Participation...................................7 5.1. Eligibility.....................................................7 5.2. Actual Participation............................................7 Article 6. Annual Incentive Awards.........................................7 6.1. General.........................................................7 6.2. Performance Measures and Targets................................7 6.3. Determination of Annual Incentive Awards........................7 6.4. Payment of Annual Incentive Awards..............................7 6.5. Termination of Employment.......................................7 6.6. Nontransferability of Annual Incentive Award.....................8 Article 7. Stock Options...................................................8 7.1. Grant of Options................................................8 7.2. Award Agreement.................................................8 7.3. Option Price....................................................8 7.4. Duration of Options.............................................8 7.5. Exercise of Options.............................................8 7.6. Payment.........................................................9 7.7. Restrictions on Share Transferability...........................9 7.8. Termination of Employment.......................................9 7.9. Nontransferability of Options...................................9 Article 8. Stock Appreciation Rights......................................10 8.1. Grant of SARs..................................................10 8.2. Exercise of Tandem SARs........................................10 8.3. Exercise of Freestanding SARs..................................10 8.4. SAR Agreement..................................................11 8.5. Term of SARs...................................................11 8.6. Payment of SAR Amount..........................................11 8.7. Rule 16b-3 Requirements........................................11 8.8. Termination of Employment......................................11 8.9. Nontransferability of SARs.....................................11 Article 9. Restricted Stock...............................................12 ii 4 Page 9.1. Grant of Restricted Stock......................................12 9.2. Restricted Stock Agreement.....................................12 9.3. Transferability................................................12 9.4. Other Restrictions.............................................12 9.5. Voting Rights..................................................12 9.6. Dividends and Other Distributions..............................12 9.7. Termination of Employment......................................13 Article 10. Performance Units and Performance Shares......................13 10.1. Grant of Performance Units/Shares.............................13 10.2. Value of Performance Units/Shares.............................13 10.3. Earning of Performance Units/Shares...........................13 10.4. Payment of Performance Shares/Units...........................13 10.5. Termination of Employment.....................................14 10.6. Nontransferability............................................14 Article 11. Performance Measures..........................................14 Article 12. Beneficiary Designation.......................................14 Article 13. Deferrals.....................................................15 Article 14. Termination of Employment After a Change of Control...........15 14.1. Treatment of Outstanding Awards...............................15 14.2. Treatment of Options and Restricted Stock Granted in Consideration of the Termination of the CIT Career Incentive Plan or Granted in Consideration of the CIT Initial Public Offering.......................................15 14.3. Termination, Amendment, and Modifications of Change of Control Provisions......................................................16 Article 15. Amendment, Adjustment, and Termination........................16 15.1. Amendment and Termination.....................................16 15.2. Adjustment of Awards..........................................16 15.3. Awards Previously Granted.....................................16 15.4. Compliance with Code Section 162(m)...........................17 Article 16. Withholding...................................................17 16.1. Tax Withholding...............................................17 16.2. Share Withholding.............................................17 Article 17. Successors....................................................17 Article 18. Legal Construction............................................17 18.1. Gender and Number.............................................17 18.2. Severability..................................................17 18.3. Requirements of Law...........................................18 18.4. Securities Law Compliance.....................................18 iii 5 Page 18.5. Governing Law.................................................18 18.6. Special Compensation..........................................18 18.7. Incompetent Payee.............................................18 18.8. Plan Not an Employment Contract...............................18 iv 6 THE CIT GROUP, INC. LONG-TERM EQUITY COMPENSATION PLAN ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION 1.1. ESTABLISHMENT OF THE PLAN. The CIT Group, Inc., a Delaware corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as "The CIT Group, Inc. Long-Term Equity Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares and Performance Units. Subject to approval by the Company's Board of Directors, the Plan shall become effective as of November 1, 1997 (the "Effective Date") and shall remain in effect as provided in Section 1.3 hereof. 1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the profitability and growth of the Company through incentives which are consistent with the Company's goals and which link the personal interests of Participants to those of the Company's stockholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants who make significant contributions to the Company's success and to allow Participants to share in the success of the Company. 1.3. DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 15 hereof, until all Awards granted hereunder are satisfied by the issuance of Shares and/or the payment of cash. However, in no event may an Award be granted under the Plan on or after the tenth anniversary of the Effective Date. ARTICLE 2. DEFINITIONS Except where the context otherwise indicates, any masculine term used herein shall include the feminine, the plural shall include the singular, and the singular shall include the plural. Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized: 2.1. "ANNUAL INCENTIVE AWARD" means annual incentive compensation awarded under Article 6. 7 2.2. "AWARD" means, individually or collectively, a grant under this Plan of Annual Incentive Awards, Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Performance Units. 2.3. "AWARD AGREEMENT" means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to an Award. 2.4. "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 2.5. "BOARD" or "BOARD OF DIRECTORS" means the board of directors of the Company. 2.6. "CHANGE OF CONTROL" will be deemed to have occurred as of the first day any one (1) or more of the following paragraphs shall have been satisfied: a) Any Person or Group other than Dai-Ichi Kangyo Bank, Limited ("DKB") or an Affiliate (as such term is defined under Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of DKB 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; (b) 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, the Company's initial public offering shall not constitute a Change of Control for the purposes of this Plan. 2.7. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 2.8. "COMMITTEE" means the Compensation Committee of the Board or such other Committee appointed by the Board pursuant to Section 3.1 to administer the Plan with respect to grants of Awards. 2.9. "COMPANY" means The CIT Group, Inc., a Delaware corporation, and any successor thereto, or any Subsidiary, division or affiliate thereof. 2.10. "DIRECTOR" means any individual who is a member of the Board of Directors. 2 8 2.11. "DISABILITY" means a physical or mental impairment sufficient to make an individual eligible for benefits under the Company's Long-Term Disability Plan. 2.12. "EFFECTIVE DATE" shall have the meaning ascribed to such term in Section 1.1 hereof. 2.13. "EMPLOYEE" means any individual who is an employee of the Company or any Subsidiary. 2.14. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor thereto. 2.15. "FAIR MARKET VALUE" means the closing sale price at which Shares were sold regular way on the relevant date on the principal securities exchange on which Shares were traded on such date or, if there was no sale on the relevant date, then on the last previous day on which there was such a sale; provided that "Fair Market Value" for any Awards made concurrent with or contingent upon the consummation of the initial public offering of Shares in 1997 means the initial public offering price of Shares covered by such initial public offering. 2.16. "FREESTANDING SAR" means an SAR that is granted independently of any Options, as described in Article 8 herein. 2.17. "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares granted under Article 7 herein and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Code Section 422. 2.18. "INSIDER" shall mean an individual who is, on the relevant date, an officer, Director or Beneficial Owner of ten percent (10%) or more of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act and the General Rules and Regulations promulgated thereunder. 2.19. "NONEMPLOYEE DIRECTOR" means a Director who is not an Employee of the Company or any Subsidiary or of the Dai-Ichi Kangyo Bank, Limited or any of its direct or indirect subsidiaries. 2.20. "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase Shares granted under Article 7 herein which is not intended to be treated as an "incentive stock option" under Code Section 422. 2.21. "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. 2.22. "OPTION PRICE" means the price at which a Share may be purchased by a Participant pursuant to an Option. 3 9 2.23. "PARTICIPANT" means an Employee or Director designated by the Board to participate in the Plan. 2.24. "PERFORMANCE SHARE" means an Award granted to a Participant, as described in Article 10 herein. 2.25. "PERFORMANCE UNIT" means an Award granted to a Participant, as described in Article 10 herein. 2.26. "PERIOD OF RESTRICTION" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Board, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 9 herein. 2.27. "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as described in Section 13(d) thereof. 2.28. "PLAN" means The CIT Group, Inc. Long-Term Equity Compensation Plan. 2.29. "RESTRICTED STOCK" means an Award of Shares granted to a Participant pursuant to Article 9 herein. 2.30. "RETIREMENT" shall have the meaning ascribed to such term in The CIT Group, Inc. Retirement Plan. 2.31. "SHARES" means the shares of Class A common stock of the Company par value $.01 per Share. 2.32. "STOCK APPRECIATION RIGHT" or "SAR" means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 8 herein. An SAR may be either a Freestanding SAR or a Tandem SAR. 2.33. "SUBSIDIARY" means any corporation, partnership, joint venture, or other entity in which the Company has a direct or indirect majority voting interest (including all divisions, affiliates, and related entities), provided that for ISOs, "Subsidiary" has the meaning set forth in Code Section 422. 2.34. "TANDEM SAR" means an SAR that is granted in connection with a related Option pursuant to Article 8 herein, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled). 4 10 ARTICLE 3. ADMINISTRATION 3.1. THE ADMINISTRATOR. The Plan shall be administered by the Board or a Committee appointed by the Board. 3.2. AUTHORITY OF THE BOARD. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions of the Plan, the Board shall have full power and authority, in its sole discretion, to (a) select Participants from among all eligible Employees and Directors and determine the nature, amount, terms and conditions of Awards in a manner consistent with the Plan; (b) make Awards to Participants; (c) construe and interpret the Plan and any agreement or instrument entered into under the Plan; (d) adopt, amend, waive or rescind such rules and regulations as the Board may deem appropriate for the proper administration or operation of the Plan; (e) subject to the provisions of Article 15, amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Board as provided in the Plan; and (f) make all other determinations and take all other actions as may be necessary, appropriate or advisable for the administration or operation of the Plan. As permitted by law, the Board may delegate to the Committee or any other individual or committee (including a Committee of Nonemployee Directors, to the extent that the Committee shall not be so constituted) its authority, or any part thereof, as it deems necessary, appropriate or advisable for proper administration or operation of the Plan. 3.3. DECISIONS BINDING. All determinations, interpretations, decisions or other actions made or taken by the Board pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding for all purposes and upon all persons, including without limitation the Company, its stockholders, Directors, Employees, Participants, and Participants' estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS 4.1. NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in Section 4.3 herein, the maximum number of Shares with respect to which Awards may be granted to Participants under the Plan shall be twelve million five hundred and three thousand (12,503,000) of the Company's total outstanding shares of all classes of common stock of the Company. Shares issued under the Plan may be either authorized but unissued Shares, treasury Shares or any combination thereof. 4.2. LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason without the issuance of Shares or payment in respect thereof (with the exceptions of the termination of a Tandem SAR upon exercise of the related Option, or the termination of a related Option upon exercise of the corresponding Tandem SAR), any Shares subject to such Award again shall be available for the grant of an Award under the Plan to the fullest extent permitted under Rule 16b-3 of the Exchange Act and Sections 422 and 162(m) of the Code. 5 11 4.3. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in corporate capitalization, such as a stock split, stock dividend or combination of shares or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368), or any partial or complete liquidation of the Company, an adjustment shall be made in the number and class of Shares which may be delivered under Section 4.1, in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and in the Awards limits set forth in subsections 4.4 (a), (b), (c), (d) and (e) as may be determined to be appropriate and equitable by the Board, in its sole discretion, to prevent dilution or enlargement of rights, provided, however, that the number of Shares subject to any Award shall always be a whole number. 4.4. MAXIMUM AWARDS. The following rules shall apply to grants of such Awards under the Plan: (a) ANNUAL INCENTIVE AWARDS: The maximum aggregate payout with respect to Annual Incentive Awards granted in any one fiscal year to any one Participant shall be 25% of the aggregate Annual Incentive Award pool established by the Committee. (b) STOCK OPTIONS: The maximum aggregate number of Shares that may be granted in the form of Stock Options, pursuant to any Award granted in any one fiscal year to any one single Participant shall be 100% of the maximum number of Shares provided under Section 4.1. (c) SARs: The maximum aggregate number of Shares that may be granted in the form of Stock Appreciation Rights, pursuant to any Award granted in any one fiscal year to any one single Participant shall be 100% of the maximum number of Shares provided under Section 4.1. (d) RESTRICTED STOCK: The maximum aggregate grant with respect to Awards of Restricted Stock granted in any one fiscal year to any one Participant shall be 100% of the maximum number of Shares provided under Section 4.1. (e) PERFORMANCE SHARES/PERFORMANCE UNITS: The maximum aggregate payout with respect to Awards of Performance Shares or Performance Units granted in any one fiscal year to any one Participant shall be 100% of the total remaining Shares at the end of the "Performance Period", as such term is defined under Section 10.1. 6 12 ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1. ELIGIBILITY. Persons eligible to participate in this Plan include Directors and all Employees of the Company and its Subsidiaries, including Employees who are members of the Board. 5.2. ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Board may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature, amount and terms and conditions of each Award. ARTICLE 6. ANNUAL INCENTIVE AWARDS 6.1. GENERAL. Subject to the provisions of the Plan, the Board may grant Annual Incentive Awards to Participants at any time and from time to time in such amount and upon such terms and conditions as the Board may determine. 6.2. PERFORMANCE MEASURES AND TARGETS. The Board may establish each year, within the first 90 days of such year, performance targets that must be achieved in order for Annual Incentive Awards to be payable to Participants. Such performance targets shall be based upon one or more performance measures, which the Board shall select (concurrent with establishing each year's performance targets). At the same time the Board selects performance measures and specifies performance targets, the Board shall also determine the manner in which such performance measure(s) shall be calculated or measured, including the extent to which such measure(s) shall be adjusted to take into account certain factors over which Participants have no or limited control, including, without limitation, changes in accounting principles and extraordinary charges to income. 6.3. DETERMINATION OF ANNUAL INCENTIVE AWARDS . The Board shall determine the Annual Incentive Award, if any, subject to the maximum Annual Incentive Award limit specified in Section 4.4, payable to each Participant 6.4. PAYMENT OF ANNUAL INCENTIVE AWARDS. Annual Incentive Awards shall be payable to Participants at such time(s) and in cash or in Shares of equivalent value or in some combination thereof, as the Board shall determine. 6.5. TERMINATION OF EMPLOYMENT. (a) Subject to Section 6.5(b) hereto and the provisions of Article 14, if a Participant's employment with the Company is terminated prior to the payment by the Company of an Annual Incentive Award for any Plan year, such Award shall be forfeited and shall not be payable to the Participant. (b) In the event of the Participant's death, Disability or Retirement in the Plan year, the Board may grant and authorize payment of an Award for such Plan year to the Participant or, in the event of death, the Participant's 7 13 beneficiary as designated under Article 12 hereto, in such amount as the Board in its discretion deems appropriate. 6.6. NONTRANSFERABILITY OF ANNUAL INCENTIVE AWARD. No right to a Annual Incentive Award may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. ARTICLE 7. STOCK OPTIONS 7.1. GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Employees in such number, and upon such terms, and at any time and from time to time as shall be determined by the Board, provided however, in the case of ISOs, the aggregate Fair Market Value (determined at the time the ISO is granted) of the Shares with respect to which ISOs are exercisable for the first time by any optionee during any calendar year (under all plans of the Company and any Subsidiary) shall not exceed $100,000. 7.2. AWARD AGREEMENT. Each Option granted shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Board shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO whose grant is intended not to fall under the provisions of Code Section 422. 7.3. OPTION PRICE. The Option Price for each grant of an Option under this Plan shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted except that (i) initial grants of NQSOs made under the Plan concurrent with or contingent upon the consummation of the initial public offering of Shares in 1997 may be granted with an exercise price equal to the initial public offering price of Shares covered by such initial public offering and (ii) and in the case of an ISO granted to an Employee owning (actually or constructively under Code Section 424(d)) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of a Subsidiary, the Option Price shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Shares on the date of grant. 7.4. DURATION OF OPTIONS. Each Option granted to a Participant shall expire at such time as the Board shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant and no ISO granted to a five percent (5%) shareholder of the Company shall be exercisable later than the fifth anniversary of the date of grant. 7.5. EXERCISE OF OPTIONS. Options granted under this Article 7 shall be exercisable at such times and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for each Award or for each Participant. 8 14 7.6. PAYMENT. Options granted under this Article 7 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Board also may allow cashless exercise as permitted under the Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Board determines to be consistent with the Plan's purpose and applicable law. Subject to any governing rules or regulations, as soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s); provided, however, that if the Board permits cashless exercise of Options, a Participant may elect to receive the cash proceeds from the cashless exercise in lieu of Shares. 7.7. RESTRICTIONS ON SHARE TRANSFERABILITY. The Board may impose such restrictions on the transfer of any Shares acquired pursuant to the exercise of an Option granted under this Article 7 as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 7.8. TERMINATION OF EMPLOYMENT. Subject to the provisions of Article 14, each Participant's Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment with the Company or any Subsidiary. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 7, and may reflect distinctions based on the reasons for termination of employment. 7.9. NONTRANSFERABILITY OF OPTIONS. (a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or in the event of the Participant's legal incapacity, the Participant's legal guardian or representative. 9 15 (b) NONQUALIFIED STOCK OPTIONS. Except as otherwise provided in a Participant's Award Agreement, no NQSO granted under this Article 7 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all NQSOs granted to a Participant under this Article 7 shall be exercisable during his or her lifetime only by such Participant or in the event of the Participant's legal incapacity, the Participant's legal guardian or representative. ARTICLE 8. STOCK APPRECIATION RIGHTS 8.1. GRANT OF SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Board. The Board may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SAR. The Board shall have complete discretion in determining the number of SARs granted to each Participant and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. The grant price of a Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem SARs shall equal the Option Price of the related Option. 8.2. EXERCISE OF TANDEM SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. 8.3. EXERCISE OF FREESTANDING SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Board, in its sole discretion, imposes upon them. 10 16 8.4. SAR AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Board shall determine. 8.5. TERM OF SARs. The term of an SAR granted under the Plan shall be determined by the Board, in its sole discretion; provided, however, that such term shall not exceed ten (10) years. 8.6. PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the grant price by (b) The number of Shares with respect to which the SAR is exercised. At the discretion of a Participant, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof, subject to the availability of Shares to the Company. 8.7. RULE 16b-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Board may impose such conditions on exercise of an SAR (including, without limitation, the right of the Board to limit the time of exercise to specified periods) as may be required to satisfy the requirements of any exemption from the liability provisions of Section 16 of the Exchange Act (or any successor rule). 8.8. TERMINATION OF EMPLOYMENT. Subject to the provisions of Article 14, each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's employment with the Company or a Subsidiary. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with a Participant, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment. 8.9. NONTRANSFERABILITY OF SARs. Except as otherwise provided in a Participant's Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or in the event of the Participant's legal incapacity, the Participant's legal guardian or representative. 11 17 ARTICLE 9. RESTRICTED STOCK 9.1. GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Board, at any time and from time to time, may grant Shares of Restricted Stock to Employees in such amounts as the Board shall determine. 9.2. RESTRICTED STOCK AGREEMENT. Each Restricted Stock Award shall be evidenced by a Restricted Stock Award Agreement that shall specify the restrictions, including restrictions creating a substantial risk of forfeiture, the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and as such other provisions as the Board shall determine. Restrictions on Restricted Stock shall lapse at such time(s) and in such manner and subject to such conditions as the Board shall in each instance determine, which need not be the same for each Award or for each Participant. 9.3. TRANSFERABILITY. Except as provided in this Article 9, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Board and specified in the Restricted Stock Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Board in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant, or in the event of the Participant's legal incapacity, to the Participant's legal guardian or representative. 9.4. OTHER RESTRICTIONS. Subject to Article 11 herein, the Board shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable Federal or state securities laws. The Company or its designee shall retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Article 9, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction. 9.5. VOTING RIGHTS. During the Period of Restriction, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 9.6. DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may be credited with regular cash dividends paid with respect to the underlying Shares while they are so held. The Board may 12 18 apply any restrictions to the dividends that the Board deems appropriate. In the event that any dividend constitutes a "derivative security" within the meaning of Rule 16a-1 of the General Rules and Regulations promulgated under the Exchange Act or an "equity security" within the meaning of Section 3(a)(11) of the Exchange Act, such dividend shall be subject to a period of restriction equal to the remaining Period of Restriction applicable to the Restricted Stock with respect to which the dividend has been paid. 9.7. TERMINATION OF EMPLOYMENT. Subject to the provisions of Article 14, each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares following termination of the Participant's employment with the Company or any Subsidiary. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment. ARTICLE 10. PERFORMANCE UNITS AND PERFORMANCE SHARES 10.1. GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan, Performance Units and/or Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Board. Each Award of Performance Shares and/or Performance Units shall be evidenced by an Award Agreement that shall specify the initial value of such Performance Shares and/or Performance Units, the time period during which pre-established performance goals must be met (the "Performance Period"), the performance goals upon which payment of such Performance Shares and/or Performance Units depends (the "Performance Goals"), the number of Performance Shares and/or Performance Units awarded and such other terms and conditions as the Board may determine. 10.2. VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have an initial value that is established by the Board at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. 10.3. EARNING OF PERFORMANCE UNITS/SHARES. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive payout on the number and value of Performance Units/Shares earned by the Participant over the Performance Period, to be determined, as a function of the extent to which the corresponding performance goals have been achieved. 10.4. PAYMENT OF PERFORMANCE SHARES/UNITS. As soon as practicable after the end of a Performance Period, if the applicable Performance Goals for that Performance Period have been achieved (as determined by the Board pursuant to this Article 10), the Company shall deliver to a Participant payment for such Participant's Performance Shares and/or Performance Units in an amount determined, as specified in such Participant's Performance Share and/or Unit Award Agreement, on the last day of the Performance Period by reference to the achievement of the applicable Performance Goals. The Board may permit a Participant to elect payment of the aggregate value of such Participant's Performance Shares and/or Performance Units in cash or in 13 19 Shares of equivalent value or in some combination thereof, subject to the availability of Shares to the Company. If, and to the extent that, dividends with respect to Shares are declared or paid during the Performance Period, the Board may direct payment of dividend equivalents to a Participant in an amount equal to the dividends that such Participant would receive or have received if such Participant's Performance Shares were Shares; provided, however, that such dividend equivalents shall be subject to the same restrictions as apply to dividends payable with respect to Restricted Stock pursuant to Section 9.4. 10.5. TERMINATION OF EMPLOYMENT. Subject to the provisions of Article 14, each Participant's Performance Share and/or Unit Award Agreement shall set forth if, and the extent to which, the Participant shall have the right to receive payment of Performance Shares and/or Performance Units following termination of the Participant's employment with the Company or any Subsidiary. Such terms and conditions shall be determined in the sole discretion of the Board, need not be uniform among all Performance Share and/or Performance Unit Awards and may reflect distinctions based on the reasons for termination of employment. 10.6. NONTRANSFERABILITY. Except as otherwise provided in a Participant's Award Agreement, Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or, in the event of the Participant's legal incapacity, the Participant's legal representative. ARTICLE 11. PERFORMANCE MEASURES The performance measure(s) to be used for purposes of the Awards shall be chosen from among net earnings, operating earnings or income, net income, absolute and/or relative return on equity, capital invested or assets, earnings per share, cash flow, profits, earnings growth, share price, total shareholder return, economic value added, expense reduction, customer satisfaction, and any combination of the foregoing measures as the Board deems appropriate. The Board shall have the discretion to adjust the determinations of the degree of attainment of the preestablished Performance Goals. ARTICLE 12. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of a valid designation or if no validly designated beneficiary survives the Participant or if each surviving validly designated beneficiary is legally impaired or prohibited from taking, then the Participant's beneficiary shall be the Participant's estate. 14 20 ARTICLE 13. DEFERRALS The Board may permit or require a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or goals with respect to Performance Units/Shares. If any such deferral election is required or permitted, the Board shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 14. TERMINATION OF EMPLOYMENT AFTER A CHANGE OF CONTROL 14.1. TREATMENT OF OUTSTANDING AWARDS. If a Participant'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: (a) Any and all SARs and Options granted hereunder, 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; (b) 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; and (c) The target payout opportunities attainable under all outstanding Awards of Annual Incentive Awards, Restricted Stock, Performance Units and Performance Shares shall be deemed to have been fully earned for the entire Performance Period(s) as of the date of the Participant's termination of employment with the Company. The vesting of all Awards denominated in Shares shall be accelerated as of the date of the Participant's termination of employment with the Company, and there shall be paid out in cash to Participants within thirty (30) days following the date of the Participant's termination of employment with the Company a pro rata amount based upon an assumed achievement of all relevant Performance Goals and upon the length of time of the Performance Period which has elapsed prior to such date of the Participant's termination of employment with the Company, as determined by the Board. 14.2. TREATMENT OF OPTIONS AND 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 a Participant's employment with the Company is terminated by 15 21 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 fifth anniversary of the Effective Date: (a) 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 (b) 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. 14.3. TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE OF CONTROL PROVISIONS. Notwithstanding any other provision of this Plan or any Award Agreement provision, the provisions of this Article 14 may not be terminated, amended, or modified on or after the date of Change of Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to said Participant's outstanding Awards; provided, however, the Board of Directors, upon recommendation of the Board, may terminate, amend, or modify this Article 14 at any time and from time to time prior to the date of a Change of Control. ARTICLE 15. AMENDMENT, ADJUSTMENT, AND TERMINATION. 15.1. AMENDMENT AND TERMINATION. Subject to Section 15.3, the Board may at any time, and from time to time, in its sole discretion alter, amend, suspend or terminate the Plan in whole or in part for any reason or for no reason; provided, however, that no amendment or other action that requires stockholder approval in order for the Plan to continue to comply with applicable law shall be effective unless such amendment or other action shall be approved by the requisite vote of stockholders of the Company entitled to vote thereon. 15.2. ADJUSTMENT OF AWARDS. Subject to Section 15.3, the Board may make adjustments to Awards and in the terms and conditions of, and the criteria included in, Award Agreements in recognition of (a) unusual or nonrecurring events (including, without limitation, the events described in Section 4.3) affecting the Company or the financial statements of the Company, and/or (b) changes in applicable laws, regulations or accounting principles whenever the Board determines that such adjustments are appropriate. 15.3. AWARDS PREVIOUSLY GRANTED. No alteration, amendment, suspension or termination of the Plan shall adversely affect in any material way any Award previously made under the Plan without the written consent of the affected Participant; provided, however, that the Board may modify, without a Participant's consent, any Award previously made to a Participant who is a foreign national or employed outside the United States to recognize differences in local law, tax policy or custom. 16 22 15.4. COMPLIANCE WITH CODE SECTION 162(m). At all times when Code Section 162(m) is applicable, all Awards granted under this Plan shall comply with the requirements of Code Section 162(m); provided, however, that in the event the Board determines that such compliance is not desired with respect to any Award or Awards available for grant under the Plan, then compliance with Code Section 162(m) will not be required. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Board may, subject to this Article 15, make any adjustments it deems appropriate. ARTICLE 16. WITHHOLDING. 16.1. TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan. 16.2. SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Board, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the statutory total tax (using the Federal Supplemental wage rate, and state or local equivalent as well as any FICA or Medicare taxes) which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Board, in its sole discretion, deems appropriate. ARTICLE 17. SUCCESSORS. All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18. LEGAL CONSTRUCTION 18.1. GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 18.2. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17 23 18.3. REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 18.4. SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Board fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board. 18.5. GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the state of New York. 18.6. SPECIAL COMPENSATION. Except as otherwise required by law or as specifically provided in any plan or program maintained by the Company, no payment under the Plan shall be included or taken into account in determining any benefit under any pension, thrift, profit sharing, group insurance, or other benefit plan maintained by the Company. 18.7. INCOMPETENT PAYEE. If the Board shall find that any individual to whom any amount is payable under the Plan is found by a court of competent jurisdiction to be unable to care for his affairs because of illness or accident, or is a minor, or has died, then the payment due him or his estate (unless a prior claim thereof has been made by a duly appointed legal representative) may, if the Board so elects, be paid to his spouse, a child, a relative, an institution maintaining or having custody of such individual, or any other individual deemed by the Board to be a proper recipient on behalf of such individual otherwise entitled to payment. Any such payment shall constitute a complete discharge of all liability of the Plan thereof. 18.8. PLAN NOT AN EMPLOYMENT CONTRACT. This 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 his employer's employ or to in any way limit or restrict his employer'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. 18 EX-23.1 10 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.1 Independent Auditors' Consent The Board of Directors The CIT Group, Inc. We consent to the use of our report dated January 17, 1997, except as to note 21 which is as of February 21, 1997 and note 22 which is as of September 26, 1997, relating to the consolidated balance sheets of The CIT Group, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, included in this Amendment No. 2 to this Registration Statement on Form S-2 of The CIT Group, Inc., and to the reference to our firm under the heading "Experts" in the Registration Statement. KPMG Peat Marwick LLP Short Hills, New Jersey November 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----