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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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Commission File Number: 001-31369
CIT Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1 CIT Drive, Livingston, New Jersey 07039
(Address of registrant's principal (Zip Code)
executive offices)
(Registrant's telephone number including area code): (973) 740-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, par value $0.01 per share ........... New York Stock Exchange
5 7/8% Notes due October 15, 2008 ................. New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of voting common stock held by non-affiliates
of the registrant, based on the most recent New York Stock Exchange Composite
Transaction closing price of Common Stock ($20.61 per share, 211,447,100 common
stock outstanding), which occurred on November 15, 2002, was $4,357,924,731. For
purposes of this computation, all officers and directors of the registrant are
deemed to be affiliates. Such determination shall not be deemed an admission
that such officers and directors are, in fact, affiliates of the registrant. At
November 15, 2002, 211,573,200 shares of CIT's common stock, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List here under the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part 1, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
See pages 99 to 103 for the exhibit index.
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TABLE OF CONTENTS
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Form 10-K
Item No. Name of Item Page
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Part I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 6
Item 3. Legal Proceedings ................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders .............. 6
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 7
Item 6. Selected Financial Data .......................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and .................................. 10
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ........ 10
Item 8. Financial Statements and Supplementary Data ...................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 83
Part III
Item 10. Directors and Executive Officers of the Registrant ............... 84
Item 11. Executive Compensation ........................................... 87
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 96
Item 13. Certain Relationships and Related Transactions ................... 97
Item 14. Controls and Procedures .......................................... 99
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 100
Signatures ................................................................ 105
i
PART I
Item 1. Business
Overview
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"),
formerly known as Tyco Capital Corporation, and previously The CIT Group, Inc.,
is a leading independent commercial and consumer finance company. We are a
source of financing and leasing capital for companies in a wide variety of
industries, including many of today's leading industries and emerging
businesses, offering vendor, equipment, commercial, factoring, consumer, and
structured financing capabilities.
On July 8, 2002, our former parent, Tyco International Ltd. ("Tyco"), sold
100% of CIT's outstanding common stock in an initial public offering.
Immediately prior to the offering, a restructuring was effectuated whereby our
predecessor, CIT Group Inc., a Nevada corporation, was merged with and into its
parent Tyco Capital Holding, Inc. ("TCH") and that combined entity was further
merged with and into CIT Group Inc. (Del), a Delaware corporation. In connection
with the reorganization, CIT Group Inc. (Del) was renamed CIT Group Inc. As a
result of the reorganization, CIT is the successor to CIT Group Inc. (Nevada)'s
business, operations and obligations.
On June 1, 2001, The CIT Group, Inc. was acquired by TCH, a wholly-owned
subsidiary of Tyco, in a purchase business combination recorded under the
"push-down" method of accounting, resulting in a new basis of accounting for the
"successor" period beginning June 2, 2001. Information relating to all
"predecessor" periods prior to the acquisition is presented using CIT's
historical basis of accounting.
Following the acquisition by Tyco, we changed our fiscal year end from
December 31 to September 30 to conform to Tyco's. On November 5, 2002, our board
of directors approved returning to a calendar year end for financial reporting
effective December 31, 2002.
Founded in 1908, we have a broad array of "franchise" businesses that
focus on specific industries, asset types and markets, which are balanced by
client, industry and geographic diversification. Managed assets were $47.6
billion, owned financing and leasing assets were $36.4 billion and stockholders'
equity was $4.8 billion at September 30, 2002.
We offer commercial lending and leasing services, providing a wide range
of financing and leasing products to small, midsize and larger companies across
a wide variety of industries, including manufacturing, retailing,
transportation, aerospace, construction, technology, communication, and various
service-related industries. The secured lending, leasing and factoring products
include direct loans and leases, operating leases, leveraged and single investor
leases, secured revolving lines of credit and term loans, credit protection,
accounts receivable collection, import and export financing,
debtor-in-possession and turnaround financing, and acquisition and expansion
financing. Consumer lending is conducted in our Specialty Finance segment and
consists primarily of home equity lending to consumers originated largely
through a network of brokers and correspondents.
Transactions are generated through direct calling efforts with borrowers,
lessees, equipment end-users, vendors, manufacturers and distributors and
through referral sources and other intermediaries. In addition, our strategic
business units jointly structure certain transactions and refer or cross-sell
transactions to other CIT units to best meet our customers' overall financing
needs. We also buy and sell participations in and syndications of finance
receivables and/or lines of credit. From time to time in the normal course of
business, we purchase finance receivables in bulk to supplement our originations
and sell select finance receivables and equipment under operating leases for
risk and other balance sheet management purposes, or to improve profitability.
We conduct our operations through strategic business units that market
products and services to satisfy the financing needs of specific customers,
industries, vendors/manufacturers, and markets. Our four business segments are
as follows:
o Equipment Financing and Leasing
o Specialty Finance
o Commercial Finance
o Structured Finance
1
Equipment Financing and Leasing Segment
Our Equipment Financing and Leasing operations had total financing and
leasing assets of $14.3 billion at September 30, 2002, representing 39.2% of
total financing and leasing assets. Total Equipment Financing and Leasing
managed assets were $18.7 billion or 39.2% of total managed assets. We conduct
our Equipment Financing and Leasing operations through two strategic business
units:
o Equipment Financing offers secured equipment financing and leasing
and focuses on the broad distribution of its products through
manufacturers, dealers/distributors, intermediaries and direct
calling efforts primarily in manufacturing, construction, food
services/stores, transportation and other industries.
o Capital Finance offers secured equipment financing and leasing by
directly marketing customized transactions of commercial aircraft
and rail equipment.
Equipment Financing and Capital Finance personnel have extensive expertise
in managing equipment over its full life cycle, including purchasing new
equipment, maintaining equipment, estimating residual values and re-marketing
via re-leasing or selling equipment. Equipment Financing's and Capital Finance's
equipment and industry expertise enables them to effectively manage equipment
risk. For example, Capital Finance can reacquire commercial aircraft, if
necessary, obtain any required maintenance and repairs for such aircraft and
recertify such aircraft with appropriate authorities. We manage the equipment,
the residual value and the risk of equipment remaining idle for extended periods
of time and, where appropriate, we locate alternative equipment users or
purchasers.
Equipment Financing
Equipment Financing had total financing and leasing assets of $8.4 billion
at September 30, 2002, representing 23.1% of our total financing and leasing
assets. On a managed asset basis, Equipment Financing represents $12.8 billion
or 26.8% of total managed assets. Equipment Financing offers secured equipment
financing and leasing products, including loans, leases, wholesale and retail
financing for distributors and manufacturers, loans guaranteed by the U.S. Small
Business Administration, operating leases, sale and leaseback arrangements,
portfolio acquisitions, revolving lines of credit and in-house syndication
capabilities.
Equipment Financing is a diversified, middle-market, secured equipment
lender with a global presence and strong North American marketing coverage. At
September 30, 2002, its portfolio included significant financing and leasing
assets to customers in a number of different industries, with manufacturing
being the largest as a percentage of financing and leasing assets, followed by
construction and transportation, including business aircraft.
Products are originated through direct calling on customers and through
relationships with manufacturers, dealers, distributors and intermediaries that
have leading or significant marketing positions in their respective industries.
This provides Equipment Financing with efficient access to equipment end-users
in many industries across a variety of equipment types.
Capital Finance
Capital Finance had financing and leasing assets of $5.9 billion at
September 30, 2002, which represented 16.1% of our total financing and leasing
assets and 12.3% of managed assets. Capital Finance specializes in providing
customized leasing and secured financing primarily to end-users of commercial
aircraft and railcars, including operating leases, single investor leases,
equity portions of leveraged leases, sale and leaseback arrangements, as well as
loans secured by equipment. Typical customers are major domestic and
international airlines, North American railroad companies and middle-market to
larger-sized companies. New business is generated through direct calling efforts
supplemented with transactions introduced by intermediaries and other referral
sources.
Capital Finance has provided financing to commercial airlines for over
thirty years, and the commercial aerospace portfolio includes most of the
leading U.S. and foreign commercial airlines. As of September 30, 2002, the
commercial aerospace financing and leasing asset balance was $4.0 billion,
consisting of 77 accounts and 193 aircraft with an average age of approximately
7.4 years, and all comply with Stage III noise regulations.
2
Capital Finance has developed strong direct relationships with most major
airlines and major aircraft and aircraft engine manufacturers. This provides
Capital Finance with access to technical information, which enhances customer
service, and provides opportunities to finance new business. See
"Concentrations" section of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of our
aerospace portfolio.
Capital Finance has over 25 years of experience in financing the rail
industry, contributing to its knowledge of asset values, industry trends,
product structuring and customer needs. Capital Finance has a dedicated rail
equipment group, maintains relationships with several leading railcar
manufacturers and has a significant direct calling effort on railroads and rail
shippers in the United States. The Capital Finance rail portfolio includes loans
and/or leases to all of the U.S. and Canadian Class I railroads (which are
railroads with annual revenues of at least $250 million) and numerous shippers.
The operating lease fleet includes primarily covered hopper cars used to ship
grain and agricultural products, plastic pellets and cement; gondola cars for
coal, steel coil and mill service; open hopper cars for coal and aggregates;
center beam flat cars for lumber; and boxcars for paper and auto parts. Capital
Finance owns and manages a fleet totaling in excess of 35,000 railcars. Capital
Finance's owned railcars are relatively young with 62% built in 1994 or later.
Capital Finance also has a fleet of over 460 locomotives.
Specialty Finance Segment
At September 30, 2002, the Specialty Finance financing and leasing assets
totaled $10.1 billion, representing 27.8% of total financing and leasing assets.
Specialty Finance managed assets were $17.0 billion, representing 35.6% of total
managed assets. These assets include small ticket commercial financing and
leasing assets, vendor programs and consumer home equity. As part of our review
of non-strategic businesses, in fiscal 2001 we sold approximately $1.4 billion
of our manufactured housing loan portfolio, and are liquidating the remaining
assets. We also exited the recreational vehicle finance market by selling
approximately $700 million of receivables and placed the remaining portfolio in
liquidation status. The primary focus of the ongoing consumer business is home
equity lending.
Specialty Finance forms relationships with industry-leading equipment
vendors, including manufacturers, dealers and distributors, to deliver
customized asset-based sales and financing solutions in a wide array of vendor
programs. These alliances allow our vendor partners to better utilize core
competencies, reduce capital needs and drive incremental sales volume. As a part
of these programs, we offer (i) credit financing to the manufacturer's customers
for the purchase or lease of the manufacturer's products, and (ii) enhanced
sales tools to manufacturers and vendors, such as asset management services,
efficient loan processing and real-time credit adjudication. Higher-level
partnership programs provide integration with the vendor's business planning
process and product offering systems to improve execution and reduce cycle
times. Specialty Finance has significant vendor programs in information
technology and telecommunications equipment and serves many other industries
through its global network.
These vendor alliances feature traditional vendor finance programs, joint
ventures, profit sharing and other transaction structures entered into with
large, sales-oriented corporate vendor partners. In the case of joint ventures,
Specialty Finance and the vendor combine financing activities through a distinct
legal entity that is jointly owned. Generally, these arrangements are accounted
for on an equity basis, with profits and losses distributed according to the
joint venture agreement, and Specialty Finance purchases finance receivables
originated by the joint venture. Two of the key joint venture relationships are
with Dell Computer Corporation and Snap-on Incorporated. Specialty Finance also
utilizes "virtual joint ventures," whereby the assets are originated on
Specialty Finance's balance sheet, while profits and losses are shared with the
vendor. These types of strategic alliances are a key source of business for
Specialty Finance. New vendor alliance business is also generated through
intermediaries and other referral sources, as well as through direct end-user
relationships.
The Specialty Finance small-ticket commercial loan business is engaged
mainly in the leasing of office products, computers, point-of-sale equipment
and other technology products in the United States and Canada. Products are
originated through direct calling on customers and through relationships with
manufacturers, dealers, distributors and other intermediaries.
Home equity products include both fixed and variable-rate closed-end loans
and variable-rate lines of credit. This unit primarily originates, purchases and
services loans secured by first or second liens on detached, single-family,
residential properties. Customers borrow for the purpose of consolidating debts,
refinancing an existing mortgage, funding home improvements, paying education
expenses and, to a lesser extent, purchasing a home,
3
among other reasons. Specialty Finance primarily originates loans through
brokers and correspondents with a high proportion of home equity applications
processed electronically over the internet via BrokerEdgeSM using proprietary
systems. Through experienced lending professionals and automation, Specialty
Finance provides rapid turnaround time from application to loan funding, which
is critical to broker relationships.
Specialty Finance sells individual loans and portfolios of loans to banks,
thrifts and other originators of consumer loans to maximize the value of its
origination network and to improve overall profitability. Contract servicing for
securitization trusts and other third parties is provided through a centralized
consumer Asset Service Center. Commercial assets are serviced via several
centers in the United States, Canada and internationally. Our Asset Service
Center centrally services and collects substantially all of our consumer
receivables, including loans originated or purchased by our Specialty Finance
segment, as well as loans originated or purchased and subsequently securitized
with servicing retained. The servicing portfolio also includes loans owned by
third parties that are serviced by our Specialty Finance segment for a fee on a
"contract" basis. These third-party portfolios totaled $2.9 billion at September
30, 2002.
Commercial Finance Segment
At September 30, 2002, the financing and leasing assets of our Commercial
Finance segment totaled $8.9 billion, representing 24.5% of total financing and
leasing assets and 18.7% of managed assets. We conduct our Commercial Finance
operations through two strategic business units, both of which focus on accounts
receivable and inventories as the primary source of security for their lending
transactions.
o Commercial Services provides factoring and receivable/collection
management products and secured financing to companies in apparel,
textile, furniture, home furnishings and other industries.
o Business Credit provides secured financing to a full range of
borrowers from small to larger-sized companies.
Commercial Services
Commercial Services had total financing and leasing assets of $5.0 billion
at September 30, 2002, which represented 13.9% of our total financing and
leasing assets and 10.6% of managed assets. Commercial Services offers a full
range of domestic and international customized credit protection, lending and
outsourcing services that include working capital and term loans, factoring,
receivable management outsourcing, bulk purchases of accounts receivable, import
and export financing and letter of credit programs.
Financing is provided to clients through the purchase of accounts
receivable owed to clients by their customers, as well as by guaranteeing
amounts due under letters of credit issued to the clients' suppliers, which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable is traditionally known as "factoring" and results in the payment by
the client of a factoring fee which is commensurate with the underlying degree
of credit risk and recourse, and which is generally a percentage of the factored
receivables or sales volume. When Commercial Services "factors" (i.e.,
purchases) a customer invoice from a client, it records the customer receivable
as an asset and also establishes a liability for the funds due to the client
("credit balances of factoring clients"). Commercial Services also may advance
funds to its clients prior to collection of receivables, typically in an amount
up to 80% of eligible accounts receivable (as defined for that transaction),
charging interest on such advances (in addition to any factoring fees) and
satisfying such advances from receivables collections.
Clients use Commercial Services' products and services for various
purposes, including improving cash flow, mitigating or reducing the risk of
charge-offs, increasing sales and improving management information. Further,
with the TotalSourceSM product, clients can outsource bookkeeping, collection
and other receivable processing activities. These services are attractive to
industries outside the typical factoring markets, providing growth
opportunities.
Commercial Services generates business regionally from a variety of
sources, including direct calling efforts and referrals from existing clients
and other referral sources.
4
Business Credit
Financing and leasing assets of Business Credit totaled $3.9 billion at
September 30, 2002 and represented 10.6% of our total financing and leasing
assets and 8.1% of managed assets. Business Credit offers revolving and term
loans secured by accounts receivable, inventories and fixed assets to smaller
through larger-sized companies. Clients use such loans primarily for working
capital, growth, expansion, acquisitions, refinancings, debtor-in-possession
financing, reorganization and restructurings, and turnaround financings.
Business Credit sells and purchases participation interests in such loans to and
from other lenders.
Through its variable interest rate senior revolving and term loan
products, Business Credit meets its customers' financing needs that are
otherwise not met through bank or other unsecured financing alternatives.
Business Credit typically structures financings on a 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 the prime rate of interest.
Business is originated through direct calling efforts and intermediary and
referral sources, as well as through sales and regional offices. Business Credit
has focused on increasing the proportion of direct business origination to
improve its ability to capture or retain refinancing opportunities and to
enhance finance income. Business Credit has developed long-term relationships
with selected banks, finance companies and other lenders and with many
diversified referral sources.
Structured Finance Segment
Structured Finance had financing and leasing assets of $3.1 billion,
comprising 8.5% of our total financing and leasing assets and 6.5% of managed
assets at September 30, 2002. Structured Finance operates internationally
through operations in the United States, Canada and Europe. Structured Finance
provides specialized investment banking services to the international corporate
finance and institutional finance markets by providing asset-based financing for
large ticket asset acquisitions and project financing and related advisory
services to equipment manufacturers, corporate clients, regional airlines,
governments and public sector agencies. Communications (including
telecommunication), transportation, and the power and utilities sectors are
among the industries that Structured Finance serves.
Structured Finance also serves as an origination conduit to its lending
partners by seeking out and creating investment opportunities. Structured
Finance has established relationships with insurance companies and institutional
investors and can arrange financing opportunities that meet asset class, yield,
duration and credit quality requirements. Accordingly, syndication capability
and fee generation are key characteristics of Structured Finance's business.
Structured Finance utilizes special purpose entities ("SPEs") to record certain
individual structured leasing transactions, including leveraged leases. These
SPEs are generally accounted for as consolidated entities of CIT.
The segment has direct and private fund venture capital equity investments
totaling $341.7 million at September 30, 2002. In 2001, we ceased making new
venture capital investments beyond existing commitments, which totaled
approximately $176.6 million at September 30, 2002.
Other Segment and Concentration Data
The percentage of total segment operating margin for the period ended
September 30, 2002 by segment is as follows: Equipment Financing and Leasing
(27%), Specialty Finance (44%), Commercial Finance (23%) and Structured Finance
(6%). For the year ended September 30, 2002, 81% of our revenues were derived
from U.S. financing and leasing activities and 19% was derived from
International financing and leasing activities.
Further segment data, including certain income related balances, is
disclosed in Item 8. Financial Statements and Supplementary Data, Note 24.
See Item 8. Financial Statements and Supplementary Data, Note 7 and the
"Concentrations" section of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures about Market Risk, for a discussion on industry
concentration.
Competition
Our markets are highly competitive and are characterized by competitive
factors that vary based upon product and geographic region. Competitors include
captive and independent finance companies, commercial banks and
5
thrift institutions, industrial banks, leasing companies, manufacturers and
vendors with global reach. Substantial financial services operations with global
reach have been formed by bank holding, leasing, finance and insurance companies
that compete with us. On a local level, community banks and smaller independent
finance and mortgage companies are a competitive force. Some competitors have
substantial local market positions. Many of our competitors are large companies
that have substantial capital, technological and marketing resources. Some of
these competitors are larger than we are and may have access to capital at a
lower cost than we do. Competition has been enhanced in recent years by the
acquisition of many of our competitors by large financial institutions. Despite
the consolidation in the industry, the markets for many of our products are
characterized by a large number of competitors. However, with respect to some of
our products, competition is more concentrated.
We compete primarily on the basis of pricing, terms and structure. From
time to time, our competitors seek to compete aggressively on the basis of these
factors and we may lose market share to the extent we are unwilling to match
competitor pricing and terms in order to maintain interest margins and/or credit
standards.
Other primary competitive factors include industry experience, client
service and relationships. In addition, demand for our products with respect to
certain industries will be affected by demand for such industry's services and
products and by industry regulations.
Regulation
Our operations are subject, in certain instances, to supervision and
regulation by state, federal and various foreign governmental authorities and
may be subject to various laws and judicial and administrative decisions
imposing various requirements and restrictions, which, among other things, (i)
regulate credit granting activities, including establishing licensing
requirements, if any, in applicable jurisdictions, (ii) establish maximum
interest rates, finance charges and other charges, (iii) regulate customers'
insurance coverages, (iv) require disclosures to customers, (v) govern secured
transactions, (vi) set collection, foreclosure, repossession and claims handling
procedures and other trade practices, (vii) prohibit discrimination in the
extension of credit and administration of loans, and (viii) regulate the use and
reporting of information related to a borrower's credit experience. In addition
to the foregoing, CIT Bank, a Utah industrial loan corporation wholly owned by
CIT, is subject to regulation and examination by the Federal Deposit Insurance
Corporation and the Utah Department of Financial Institutions.
Employees
CIT employed approximately 5,850 people at September 30, 2002, of which
approximately 4,425 were employed in the United States and 1,425 were outside
the United States.
Item 2. Properties
CIT conducts its operations in the United States, Canada, Europe, Latin
America, Australia and the Asia-Pacific region. CIT occupies approximately 2.5
million square feet of office space, substantially all of which is leased. Such
leased office space is suitable and adequate for our needs and we utilize, or
plan to utilize, substantially all of our leased office space.
Item 3. Legal Proceedings
We are a defendant in various lawsuits arising in the ordinary course of
our business. We aggressively manage our litigation and evaluate appropriate
responses to our lawsuits in light of a number of factors, including the
potential impact of the actions on the conduct of our operations. In the opinion
of management, none of the pending matters is expected to have a material
adverse effect on our financial condition, results of operations or liquidity.
However, there can be no assurance that an adverse decision in one or more of
such lawsuits will not have a material adverse effect.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of security holders during the
fourth fiscal quarter of 2002.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York Stock Exchange. During the
period July 2, 2002 (the first day of trading subsequent to our initial public
offering) through September 30, 2002, the high and low last reported sales price
for our common stock was $23.80 and $17.98, respectively.
Following our initial public offering in November 1997 and prior to the
acquisition by Tyco, we paid a quarterly dividend of $0.10 per share, except for
the first quarter of 1998. During Tyco's ownership from June 2001 until July
2002, there were no cash dividends on our common stock. Following our July 2002
initial public offering, our policy will be to pay a dividend while retaining a
strong capital base. On October 28, 2002, our board of directors declared the
first such quarterly dividend of $0.12 per share, payable on November 27, 2002
to shareholders of record on November 15, 2002. Future dividends are subject to
the discretion of our board of directors. Any determination as to the payment of
dividends, including the level of dividends, will depend on, among other things,
general economic and business conditions, our strategic and operational plans,
our financial results and condition, contractual, legal and regulatory
restrictions on the payment of dividends by us, and such other factors as the
board of directors may consider to be relevant.
As of November 15, 2002, there were 25 stockholders of record of CIT.
At September 30, 2002, all equity compensation plans had received
shareholder approval, and 15,494,009 options to purchase shares of CIT common
stock had been awarded under such plans, with 9,980,944 options available for
future issuance. We had no equity compensation plans that were not approved by
shareholders. For further information on such plans, including the weighted
average exercise price, see Item 8. Financial Statements and Supplementary Data,
Note 18.
Item 6. Selected Financial Data
On June 1, 2001, The CIT Group, Inc. ("CIT") was acquired by a
wholly-owned subsidiary of Tyco, resulting in a new basis of accounting for the
"successor" period beginning June 2, 2001. Information relating to all
"predecessor" periods prior to the acquisition is presented using CIT's
historical basis of accounting. To assist in the comparability of our financial
results and discussions, results of operations for the nine months ended
September 30, 2001 include results for five months of the predecessor and four
months of the successor and are designated as "combined".
On July 8, 2002, our former parent, Tyco International Ltd. ("Tyco"),
completed a sale of 100% of CIT's outstanding common stock in an initial public
offering. Immediately prior to the offering, CIT was merged with its parent Tyco
Capital Holding, Inc. (TCH), a company used to acquire CIT. As a result of the
reorganization, the historical financial statements of TCH are included in the
historical consolidated CIT financial statements. Prior to the IPO of CIT on
July 8, 2002, the activity of TCH consisted primarily of interest expense to an
affiliate of Tyco, and the TCH accumulated net deficit was relieved via a
capital contribution from Tyco. There was no TCH activity subsequent to June 30,
2002. The results for both 2002 and 2001 include activity of TCH. Therefore,
certain previously reported CIT data may differ from the data presented below,
due primarily to the debt and the related interest expense payable to Tyco
subsidiaries and general operating expenses of TCH.
7
The following tables set forth selected consolidated financial information
regarding our results of operations and balance sheets.
The data presented below should be read in conjunction with Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 7A. Quantitative and Qualitative Disclosures about Market
Risk and Item 8. Financial Statements and Supplementary Data.
At or
At or for the
for the Nine Months At or For the Years Ended
Year Ended Ended December 31,
September 30, September 30, -------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ------------- ---------------------------
($ in millions) (successor) (combined) (predecessor) (predecessor) (predecessor)
- --------------
Results of Operations
Net finance margin .................. $ 1,662.5 $ 1,318.8 $ 1,469.4 $ 917.4 $ 804.8
Provision for credit losses ......... 788.3 332.5 255.2 110.3 99.4
Operating margin .................... 1,806.5 1,558.9 2,126.2 1,157.9 960.8
Salaries and general operating
expenses ......................... 946.4 794.5 1,035.2 516.0 407.7
Goodwill impairment ................. 6,511.7 -- -- -- --
Goodwill amortization ............... -- 97.6 86.3 25.7 10.1
Acquisition related costs ........... -- 54.0 -- -- --
Intercompany interest
expense -- TCH .................... 662.6 98.8 -- -- --
Net (loss) income ................... (6,698.7) 263.3 611.6 389.4 338.8
Net (loss) income per
share(1)-- basic and diluted ..... (31.66) 1.24 2.89 1.84 1.60
Dividends per share(1) .............. -- 0.25 0.50 0.31 0.23
Balance Sheet Data
Total finance receivables ........... $28,459.0 $31,879.4 $33,497.5 $31,007.1 $19,856.0
Reserve for credit losses ........... 777.8 492.9 468.5 446.9 263.7
Operating lease equipment, net ...... 6,567.4 6,402.8 7,190.6 6,125.9 2,774.1
Goodwill, net ....................... 384.4 6,547.5 1,964.6 1,850.5 216.5
Total assets ........................ 42,710.5 51,349.3 48,689.8 45,081.1 24,303.1
Commercial paper .................... 4,654.2 8,869.2 9,063.5 8,974.0 6,144.1
Variable-rate bank credit facilities 4,037.4 -- -- -- --
Variable-rate senior notes .......... 5,379.0 9,614.6 11,130.5 7,147.2 4,275.0
Fixed-rate senior notes ............. 18,385.4 17,113.9 17,571.1 19,052.3 8,032.3
Subordinated fixed-rate notes ....... -- 100.0 200.0 200.0 200.0
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company ........ 257.7 260.0 250.0 250.0 250.0
Stockholders' equity ................ 4,757.8 5,947.6 6,007.2 5,554.4 2,701.6
Selected Data and Ratios
Profitability
Net finance margin as a percentage
of average earning assets
("AEA")(2) ....................... 4.64% 4.34% 3.61% 3.59% 3.93%
Ratio of earnings to fixed charges(4) (9) 1.37x 1.39x 1.45x 1.49x
Salaries and general operating
expenses (excluding goodwill
amortization) as a percentage
of average managed assets
("AMA")(5) ....................... 2.01% 2.09% 2.01% 1.75% 1.78%
Efficiency ratio (excluding goodwill
amortization)(6) ................. 36.5% 42.0% 43.8% 41.3% 39.2%
8
At or
At or for the
for the Nine Months At or For the Years Ended
Year Ended Ended December 31,
September 30, September 30, -------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ------------- ---------------------------
($ in millions) (successor) (combined) (predecessor) (predecessor) (predecessor)
- --------------
Credit Quality
60+ days contractual delinquency as a
percentage of finance receivables .... 3.76% 3.46% 2.98% 2.71% 1.75%
Non-accrual loans as a percentage
of finance receivables ............... 3.43% 2.67% 2.10% 1.65% 1.06%
Net credit losses as a percentage of
average finance receivables .......... 1.67% 1.20% 0.71% 0.42% 0.42%
Reserve for credit losses as a
percentage of finance receivables .... 2.73% 1.55% 1.40% 1.44% 1.33%
Leverage
Total debt (net of overnight deposits) to
tangible stockholders' equity(3)(7) .. 6.54x 8.20x 8.78x 8.75x 6.82x
Tangible stockholders' equity(3) to
managed assets(8) .................... 9.9% 8.6% 7.8% 7.7% 10.4%
Other
Total managed assets(8) ................. $47,622.3 $50,877.1 $54,900.9 $51,433.3 $26,216.3
Employees ............................... 5,850 6,785 7,355 8,255 3,230
- --------------------------------------------------------------------------------
(1) Net (loss) income and dividend per share calculations assume that common
shares outstanding as a result of the July 2002 IPO were outstanding
during all historical periods presented.
(2) "AEA" means average earning assets which is the average of finance
receivables, operating lease equipment, finance receivables held for sale
and certain investments, less credit balances of factoring clients.
(3) Tangible stockholders' equity excludes goodwill and other intangible
assets and excludes TCH results.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, minority interest in
subsidiary trust holding solely debentures of the Company and one-third of
rent expense which is deemed representative of an interest factor.
(5) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us.
(6) Efficiency ratio is the ratio of salaries and general operating expenses
to the sum of operating revenue less minority interest in subsidiary trust
holding solely debentures of CIT.
(7) Total debt excludes, and tangible stockholders' equity includes,
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company.
(8) "Managed assets" means owned assets and assets previously securitized and
still managed by us and include (i) financing and leasing assets, (ii)
certain investments and (iii) off-balance sheet finance receivables.
(9) Earnings were insufficient to cover fixed charges by $6,331.1 million in
the twelve months ended September 30, 2002. Earnings for the twelve months
ended September 30, 2002 included a non-cash goodwill impairment charge of
$6,511.7 million in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." The ratio of earnings to fixed charges included fixed
charges of $1,471.8 million and a loss before provision for income taxes
of $6,331.1 million resulting in a total loss provision for income taxes
and fixed charges of $(4,859.3) million.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
and
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Overview
The accompanying Consolidated Financial Statements include the
consolidated accounts of CIT Group Inc., a Delaware corporation ("we," "CIT" or
the "Company"), formerly known as CIT Group Inc., a Nevada corporation, and
previously The CIT Group, Inc. On July 8, 2002, our former parent, Tyco
International Ltd. ("Tyco"), completed a sale of 100% of CIT's outstanding
common stock in an initial public offering ("IPO"). Immediately prior to the
offering, our predecessor, CIT Group Inc., a Nevada corporation, was merged with
and into its parent Tyco Capital Holding, Inc. ("TCH") and that combined entity
was further merged with and into CIT Group Inc. (Del), a Delaware corporation.
In connection with the reorganization, CIT Group Inc. (Del) was renamed CIT
Group Inc. As a result of the reorganization, CIT is the successor to CIT Group
Inc. (Nevada)'s business, operations and obligations. As a result of the
reorganization, the financial results of TCH are included in the consolidated
CIT financial statements.
Prior to the IPO of CIT on July 8, 2002, the activity of TCH consisted
primarily of interest expense to an affiliate of Tyco, and the TCH accumulated
net deficit was relieved via a capital contribution from Tyco. The activity of
TCH consisted primarily of interest expense to an affiliate of Tyco during the
period from June 1, 2001 to June 30, 2002. TCH had no operations subsequent to
June 30, 2002. Although the audited financial statements and notes thereto
include the activity of TCH in conformity with accounting principles generally
accepted in the U.S., management believes that it is most meaningful to discuss
our financial results excluding TCH, due to its temporary status as a Tyco
acquisition company with respect to CIT. Therefore, throughout this section, in
order to provide comparability with current quarter and prospective results,
current year to date and prior year comparisons exclude the results of TCH.
Consolidating balance sheets and income statements for CIT, TCH and CIT
consolidated are displayed in Note 2 to the financial statements.
On June 1, 2001, The CIT Group, Inc. ("CIT") was acquired by Tyco,
resulting in a new basis of accounting for the "successor" period beginning June
2, 2001. Information relating to all "predecessor" periods prior to the
acquisition is presented using CIT's historical basis of accounting. To assist
in the comparability of our financial results and discussions, results of
operations for the nine months ended September 30, 2001 include results for five
months of the predecessor and four months of the successor and are designated as
"combined". Following the acquisition by Tyco, we changed our fiscal year end
from December 31 to September 30, to conform to Tyco's fiscal year end. On
November 5, 2002, the CIT Board of Directors approved the return to a calendar
year end effective December 31, 2002. To further assist in the comparability and
the analysis of results for the year ended September 30, 2002, results for the
twelve months ended September 30, 2001 are shown in addition to results for the
nine-month transition period ended September 30, 2001. The data for the twelve
months ended September 30, 2001 is derived from the quarters ended December 31,
2000, March 31, 2001 and September 30, 2001 plus the combined three months ended
June 30, 2001, which reflects CIT results subsequent to the purchase by Tyco on
June 1, 2001.
Key Business Initiatives and Trends
In late 2000, we initiated our plan to sell or liquidate approximately
$4.5 billion of lower return non-strategic assets. This followed the integration
of the 1999 acquisition of Newcourt Credit Group, which significantly increased
the company's size, broadened our asset and product base and established our
substantial international reach. Further, management set forth its plan to
strengthen its capital ratios.
In mid-2001, the initiative to sell or liquidate targeted lower return
non-strategic assets and improve leverage was broadened and accelerated because
the June 2001 acquisition by Tyco provided additional capital and support in
this regard. Management also initiated further business line consolidation and
operating expense cost reductions both in the corporate staff areas and in the
business units. In early to mid-2001, the e-commerce and telecommunications
industry downturns in the economy became evident. In light of this downturn, we
recognized impairment charges against earnings prior to the Tyco acquisition,
including equity interests related to e-commerce and telecommunications.
10
The targeted non-strategic business lines and products were sold or placed
in liquidation status to maximize value to the company, and we ceased
originating new business in these areas. Severance and other costs associated
with these initiatives were identified in plans that were approved by senior
management. These costs plus any adjustments to reduce the carrying values of
the targeted assets to fair value were provided for primarily through purchase
accounting (Tyco's acquisition of CIT, with the purchase accounting adjustments
"pushed -down" to CIT financials). In support of these initiatives, Tyco
provided nearly $900 million of additional capital to CIT from June through
December of 2001. We also decided to cease making new venture capital
investments and to run-off our existing portfolio.
As a result, the targeted lower return assets were as follows:
Balance Outstanding at
September 30, 2002
Portfolio Status ($ in billions)(1)
--------- ------ ------------------
Manufactured housing .......... $1.4 billion sold June 2001, remaining $0.6
portfolio placed in liquidation
Recreational vehicle .......... $700 million sold October 2001, remaining $0.1
portfolio placed in liquidation
Recreational marine ........... $600 million placed in liquidation $0.1
Wholesale inventory finance ... $250 million placed in liquidation $ --
Franchise finance ............. $750 million placed in liquidation, with $0.4
$200 million subsequently sold in August 2002
Owner-operator trucking ....... approximately $60 million of repossessed assets $0.3
rapidly liquidated in July-August 2001 and
$500 million of receivables placed in liquidation
Venture capital ............... $350 million placed in run-off status $0.3
----
$1.8
====
- --------------------------------------------------------------------------------
(1) On-balance sheet financing and leasing assets.
In early 2002, Tyco announced its break-up plan and intent to sell its
interest in CIT. Subsequent developments at Tyco prior to the separation of CIT
resulted in credit rating downgrades of Tyco and similar but more limited
actions for CIT. These rating actions caused significant disruption to our
historical funding base. As a result, the Company's access to the commercial
paper market was hindered, and the Company drew down on its existing backup
lines of credit to meet its financing requirements. Consequently, management
focused primarily on liquidity and capital as opposed to growth and
profitability. As a result of this focus, senior management met regularly to
discuss such topics as daily cash flow, forecasts and funding needs,
prioritization of liquidity to existing customers and tempering acquisition and
portfolio purchases. Significant initiatives were undertaken to fortify the
Company's liquidity position, to address bond holder protections, to reaccess
the commercial paper and term debt markets and to improve our balance sheet
strength. The steps taken are outline below.
In February 2002 we amended our bond indentures to prohibit or restrict
transactions with Tyco for as long as CIT was owned by Tyco. CIT completed a
$1.2 billion conduit financing backed by trade accounts receivable in order to
broaden funding access and repay term debt at the scheduled maturities. In March
2002, we completed a $1.0 billion securitization facility backed by home equity
loans to further broaden funding access. In April 2002, we completed a $2.5
billion unsecured debt offering comprised of $1.25 billion of 7.375% senior
notes due in April 2007, and $1.25 billion senior notes due in April 2012. In
May 2002, we executed a $1.1 billion public asset backed transaction, secured by
equipment collateral. In June 2002, we extended our existing $3 billion
equipment conduit facility and increased the facility size to $3.5 billion. Also
in June, we executed a $1 billion public asset backed transaction, secured by
Home Equity assets.
In July, we completed our 100% IPO, with the proceeds paid to our former
parent. CIT received over $250 million of additional capital shortly following
the IPO as the underwriters elected to exercise their over-allotment or "green
shoe" option, which enhanced our capital base.
11
Immediately following the Company's IPO and complete separation from Tyco,
debt credit ratings were upgraded by Standard & Poor's and Fitch. Shortly
thereafter, the Company commenced repayment of its drawn bank facilities, which
facilitated our re-entrance into the commercial paper markets. We re-launched
our commercial paper program, and achieved significant outstandings at
attractive pricing levels. We continued to pay down existing credit facilities,
maintaining back-stop liquidity to fully cover all outstanding commercial paper.
In October 2002, we made further improvements to our maturity profile. In July,
2002, we entered into an agreement with a financial institution to provide us
with an additional $250 million in backstop liquidity. The terms and conditions
of that agreement are substantially identical to those contained in our existing
credit agreements. We retired the $3.7 billion 364-day credit facility due in
March 2003 and negotiated a new $2.3 billion 364-day committed credit facility
which will expire in October 2003. Proceeds from the new facility along with
other liquidity sources were utilized to pay down the prior facility. The
Company had aggregate committed credit facilities of approximately $7.35
billion, with $4.735 billion available at September 30, 2002. Please refer to
Note 10 - Debt, for more detail on our credit facilities.
We demonstrated successful access to the term debt markets as well. Since
the IPO, we have issued in aggregate $3.8 billion in unsecured senior debt,
comprised of $2.7 billion in fixed-rate debt and $1.1 billion in floating-rate
debt. In October 2002, we established a retail debt program and have issued $0.6
billion under that program as of December 9, 2002. The weighted average rate on
the fixed rate issuance has been 5.85%, which is lower than the weighted average
of our outstanding debt portfolio, although the relative borrowing spreads are
higher than comparable borrowing spreads prior to the onset of events
surrounding our separation from Tyco. Further, in early December 2002, we
completed a 5 year-fixed rate transaction for $800 million at a spread of 235
basis points over U.S. Treasuries. In general, the spreads on interest rates for
corporate bonds have risen over the past year. We may use interest rate
derivatives to swap some of the aforementioned debt to floating to better match
our asset base and to minimize funding costs.
The events described resulted in an increased cost of funds due to sources
of financing being more expensive than our traditional financing sources, and
due to the Company maintaining excess cash liquidity levels. Management expects
that margin and earnings will continue to be similarly impacted for the
foreseeable future, as results in prospective quarters will reflect the
continued impact of the more expensive funding sources and excess liquidity.
The following table summarizes the trend in our quality spreads (interest
rate cost over U.S. Treasury rates) in relation to 5 year treasuries. Amounts
are in basis points and represent the average spread during the period ended:
September 30, June 30, September 30, December 31, December 31,
2002 2002 2001 2000 1999
------------- -------- ------------- ------------ ------------
Spread over U.S. Treasuries ..... 313 255 147 154 105
As management was executing its plan to dispose of targeted assets while
improving liquidity and capital, the U.S. and world economies slowed
drastically. The slowing economy dampened demand for new borrowings, which was
reflected in lower loan origination levels. In conjunction with the emphasis
placed on liquidating or selling targeted assets, and securitizing higher levels
of assets to meet liquidity needs, our on balance sheet owned assets decreased,
which in turn led to lower levels of net interest margin.
As the economy continued its slowdown, market interest rates continued to
decline in line with the various rate-easing moves effected by the Federal
Reserve Bank. However, given the weak economy, and difficult atmosphere created
by numerous corporate bankruptcies and financial reporting irregularities,
corporate bond quality spreads continued to increase, or "widen out", leading to
increased borrowing costs relative to U.S. Treasury securities and various
floating rate indexes for corporate borrowers, including CIT.
The poor economy also resulted in worsening borrower performance and a
decline in equipment values, leading to higher loss frequency and severity,
which lowered earnings. In response to increasing past due and non-performing
loan levels, management increased our balance sheet reserve for credit losses,
even as portfolio asset levels continued to decline. Our exposures to
telecommunications and Argentina were evaluated, with specific reserving actions
taken in the June 2002 quarter. These reserves were added to the balance sheet
reserve for credit losses and are separately identified and tracked in
relationship to the performance of the corresponding portfolios. These reserving
actions were consistent with our focus to improve balance sheet strength.
12
Management's current principle focus is on improving the credit quality of
our portfolio, lowering our quality spreads to decrease our cost of funds,
continuing to broaden our funding access, including securitization, increasing
new business origination volumes and prudently seeking opportunities to grow our
earning assets, while maintaining our expense discipline.
The following portions of the Management's Discussion and Analysis provide
greater detail regarding the effects on our financial results of the various
management initiatives, events and economic factors outlined above.
Income Statement and Balance Sheet Overview
The following table summarizes the effect for the respective reporting
periods of certain reserving actions and other charges, and TCH losses as well
as goodwill related items that affect the comparability of our financial results
under GAAP ($ in millions).
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Net (loss) income .................................. $(6,698.7) $ 423.4 $ 263.3 $ 611.6
Charges included in net (loss) income:
Goodwill impairment ............................. 6,511.7 -- -- --
Goodwill amortization ........................... -- 112.4 92.5 75.4
Reserving actions and other charges ............. 242.5 158.0 158.0 --
TCH losses ...................................... 723.5 70.5 70.5 --
--------- -------- -------- --------
Net income -- before charges ....................... $ 779.0 $ 764.3 $ 584.3 $ 687.0
========= ======== ======== ========
The reserving actions and other charges of $242.5 million includes the
following: a $136.4 million, after tax, provision to establish reserves
primarily relating to the telecommunications portfolio, notably CLEC exposures;
a $83.7 million after tax provision for the devaluation of the Argentine peso
brought on by economic reforms instituted by the Argentine government that
converted dollar-denominated receivables into peso denominated obligations and a
$22.4 million charge related to the run-off venture capital business, reflecting
continued deterioration in valuations, particularly investments in private
equity funds. The venture capital charge consisted of both realized losses and
write-downs for other than temporary declines in value and is included as a
reduction to other revenue. As a result of the adoption of Statement of
Financial Accounting Standards No. ("SFAS") 142, "Goodwill and Other Intangible
Assets" on October 1, 2001, there was no goodwill amortization for the current
year.
Net income for the nine months ended September 30, 2001 included a charge
of $221.6 million ($158.0 million after-tax) consisting of the following: a
provision of $89.5 million for certain under-performing equipment leasing and
loan portfolios, primarily in the telecommunications industry; write-downs of
$78.1 million for certain equity investments in the telecommunications industry
and e-commerce markets; and acquisition-related transaction costs of $54.0
million incurred by CIT prior to and in connection with its acquisition by Tyco.
The $78.1 million write-down is netted in other revenue in the Consolidated
Statement of Income and the impairment of portfolio assets of $89.5 million is
included in the provision for credit losses. The impairment and valuation
charges above relate to loans, leases and investments that are being liquidated.
Managed assets totaled $47.6 billion at September 30, 2002, $50.9 billion
at September 30, 2001, and $54.9 billion at December 31, 2000, while financing
and leasing portfolio assets totaled $36.4 billion, $40.7 billion, and $43.8
billion at September 30, 2002 and 2001, and December 31, 2000, respectively. The
decreases in both managed and portfolio assets during these periods reflect the
factors discussed in the key business initiatives and trends section, namely
lower origination volume brought upon by the slow economic conditions, growth
constraints caused by the disruption to our funding base in 2002 which increased
our funding costs (see Net Finance Margin and Liquidity sections for further
discussion), and the sales and continued liquidation of several product line
portfolios. See "Financing and Leasing Assets" for additional information.
13
Net Finance Margin
A comparison of finance income and net finance margin is set forth below
($ in millions).
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Finance income ....................................... $ 4,342.8 $ 5,366.5 $ 3,975.3 $ 5,248.4
Interest expense ..................................... 1,439.3 2,272.0 1,619.8 2,497.7
---------- ---------- ---------- ----------
Net finance income ................................ 2,903.5 3,094.5 2,355.5 2,750.7
Depreciation on operating lease equipment ............ 1,241.0 1,385.1 1,036.7 1,281.3
---------- ---------- ---------- ----------
Net finance margin ................................ $ 1,662.5 $ 1,709.4 $ 1,318.8 $ 1,469.4
========== ========== ========== ==========
Average earning assets ("AEA") ....................... $ 35,796.4 $ 40,644.5 $ 40,442.0 $ 40,682.5
========== ========== ========== ==========
As a % of AEA
Finance income ....................................... 12.13% 13.20% 13.10% 12.90%
Interest expense ..................................... 4.02% 5.59% 5.34% 6.14%
---------- ---------- ---------- ----------
Net finance income ................................ 8.11% 7.61% 7.76% 6.76%
Depreciation on operating lease equipment ............ 3.47% 3.40% 3.42% 3.15%
---------- ---------- ---------- ----------
Net finance margin ................................... 4.64% 4.21% 4.34% 3.61%
========== ========== ========== ==========
The net finance margin as a percentage of AEA was favorably impacted in
2002 by the liquidation or disposal of non-strategic and under-performing
businesses, the decline in market interest rates, the effect of fair value
adjustments in the new basis of accounting to reflect market interest rates on
debt and assets (including liquidating portfolios) and lower leverage. For the
twelve months ended September 30, 2002 and 2001, the impact on risk adjusted
interest margin due to fair value adjustments to mark receivables and debt to
market in conjunction with the Tyco acquisition was approximately 45 and 16
basis points, respectively. The favorable effect of this adjustment will decline
prospectively unless our debt quality spreads return to historical levels. See
the Key Business Initiatives and Trends section for further discussion of our
quality spreads. These favorable items were mitigated by the higher funding cost
associated with the draw down of bank facilities to pay off commercial paper,
the issuance of term debt at wider credit spreads in 2002 and higher levels of
excess cash maintained for liquidity purposes. AEA declined during 2002 due to
the factors discussed previously in the Key Business Initiatives and Trends
section. The 2001 results reflect asset levels comparable to 2000 and stable
yields, coupled with lower interest expense. Excluding higher operating lease
rentals, which were offset by higher depreciation expense, 2001 net finance
income as a percentage of AEA was essentially flat with 2000 reflecting the
disposition of non-strategic and lower margin businesses, the lower 2001
interest rate environment and the impact of the new basis method of accounting
to reflect market interest rates on debt and receivables at the time of the
acquisition.
Finance income (interest on loans and lease rentals) for the year ended
September 30, 2002 decreased 19.1%, which primarily reflected a decline of 11.9%
in AEA for the year ended September 30, 2002 compared to the twelve months ended
September 30, 2001. The decline in 2002 reflects the impact of portfolio mix
changes resulting from the sale and liquidation activities, as well as the
favorable impact of the new basis of accounting, which were offset by the
effects of lower market interest rates and lower rentals in the aerospace
portfolio due to the commercial airline industry downturn in 2001. Although
market interest rates were rising in 2000 and declining in 2001, the 2001
increase in yield over 2000 primarily reflects changes in product mix and the
sale or liquidation of non-strategic, lower yielding assets.
The 2002 lower interest expense both in dollars and as a percentage of AEA
compared to the same period of 2001 reflects the lower current period debt
levels associated with a lower asset base, decreased leverage, lower market
interest rates, and the effect of fair value adjustments in the new basis of
accounting, partially offset by higher credit spreads following the disruption
to our funding base. The 2001 decrease over 2000 reflected the decline in 2001
market interest rates, in contrast to the rising interest rate environment
throughout most of 2000.
14
We seek to mitigate interest rate risk by matching the re-pricing
characteristics of our assets with our liabilities, which is in part done
through portfolio management and the use of derivative financial instruments,
principally interest rate swaps. For further discussion, see "Risk Management."
The operating lease equipment portfolio was $6.6 billion at September 30,
2002, $6.4 billion at September 30, 2001 and $7.2 billion at December 31, 2000,
respectively. The decline in 2001 resulted from the growth constraints discussed
previously in the "Key Business Initiatives and Trends." The reduction during
2001 is due to a $0.4 billion rail sale-leaseback transaction, as well as
declining balances in various small ticket portfolios. The table below
summarizes operating lease margin for the respective periods.
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
As a % of Average Operating Lease Equipment:
Rental income ...................................... 26.4% 27.8% 27.6% 27.9%
Depreciation expense ............................... 18.9% 19.5% 19.4% 19.5%
------ ------ ------ ------
Operating lease margin ............................. 7.5% 8.3% 8.2% 8.4%
====== ====== ====== ======
The decline in rental income and depreciation expense from prior year
levels reflects a greater proportion of longer-term aircraft and rail assets in
the current period. Our depreciable assets range from smaller-ticket,
shorter-term leases (e.g. computers) to larger-ticket, longer-term leases (e.g.
commercial aircraft and rail assets).
Net Finance Margin after Provision for Credit Losses
The net finance margin after provision for credit losses (risk adjusted
interest margin) declined to $874.2 million for the year ended September 30,
2002 and was $1,313.1 million for the twelve months ended September 30, 2001,
$986.3 million for the nine months ended September 30, 2001 and $1,214.2 for the
year ended December 31, 2000. The 2002 decline is due to additional credit
provisions to establish reserves for the telecommunications and Argentine
exposures. Excluding these 2002 reserving actions and certain prior year
provisions, risk adjusted interest margin was $1,209.2 million (3.38% of AEA)
for the twelve months ended September 30, 2002 and $1,402.6 million (3.45%) for
the corresponding 2001 period. On this basis, excluding reserving actions, net
finance margin after provision for credit losses as a percentage of AEA was
3.54% for the nine months ended September 30, 2001 and 2.98% for the year ended
December 31, 2000.
We used discounted cash flow projection analysis to estimate the fair
value of our various liquidating portfolios by modeling the portfolio revenues,
credit costs, servicing costs and other related expenses over the remaining
lives of the portfolios, at the date of the Tyco acquisition. The resulting cash
flows were discounted to determine the estimated fair value of each portfolio,
which typically resulted in discounted values to the previously recorded book
values. These discounts are being accreted into income as the portfolios
liquidate. As loans in these liquidating portfolios are charged-off, the
corresponding reduction to the reserve for credit losses is replenished via the
provision for credit losses which is charged against current earnings. Actual
performance of the portfolios, including revenue, credit losses, and expenses,
is compared on a quarterly basis to the original discounted cash flow
projections to monitor portfolio performance to determine whether scheduled
accretion should be modified. The impact on risk-adjusted margin due to purchase
accounting fair value adjustments related to the liquidating portfolios for 2002
and 2001 was 13 and 5 basis points respectively.
Other Revenue
We continue to emphasize growth and diversification of other "non-spread"
revenues to improve our overall profitability. For the twelve months ended
September 30, 2002, other revenue increased 18.0% to $932.3 million from the
comparable period in 2001. The venture capital impairment valuations and
write-downs in 2002, as well as specific charges in 2001, consisting of
write-downs for other than temporary impairment of certain equity investments in
the telecommunications industry and e-commerce markets, were recorded as
reductions to other revenue. Excluding these charges in both years, other
revenue improved 12.1% from the comparable twelve-month period in 2001. On this
basis, other revenue as a percentage of AEA was 2.72% for the year ended
15
September 30, 2002, 2.14% for the twelve months ended September 30, 2001, 2.15%
(annualized) for the nine months ended September 30, 2001 and 2.24% for the year
ended December 31, 2000. The components of other revenue are set forth in the
following table ($ in millions).
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Fees and other income ................................ $644.5 $498.8 $387.2 $480.9
Factoring commissions ................................ 165.5 150.7 111.9 154.7
Gains on securitizations ............................. 149.0 138.3 97.7 109.5
Gains on sales of leasing equipment .................. 13.6 80.3 47.9 113.2
(Loss) gains on venture capital investments .......... (40.3) (0.1) 6.0 53.7
Specific charges ..................................... -- (78.1) (78.1) --
------ ------ ------ ------
Total ............................................. $932.3 $789.9 $572.6 $912.0
====== ====== ====== ======
Fees and other income, which includes servicing fees miscellaneous fees,
syndication fees and gains from asset sales, outpaced the 2001 amounts on
stronger fee income and commissions primarily in the Commercial Finance and
Equipment Financing and Leasing segments, as well as increased accretion on
securitization retained interests in 2002. Gains on equipment decreased in 2001
due to the impact of new basis accounting during the successor period, while
weaker economic conditions in 2002 resulted in significantly reduced venture
capital and equipment gains compared to 2001 and 2000.
The following table presents information regarding securitization gains
included in the table above ($ in millions):
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Volume securitized(1) ................................... $ 7,668.5 $ 4,497.5 $ 3,293.3 $ 4,129.2
Gains ................................................... 149.0 138.3 97.7 109.5
Gains as a percentage of volume securitized ............. 1.94% 3.08% 2.97% 2.65%
- --------------------------------------------------------------------------------
(1) Excludes short-term trade receivables securitized for liquidity purposes
during the quarter ended March 31, 2002 and subsequently repaid in the
quarter ended June 30, 2002.
During the year ended September 30, 2002, we securitized $2.7 billion of
home equity loans and $4.9 billion of equipment loans. The increased level of
securitizations were primarily to meet funding and liquidity needs. 2001 and
2000 volume securitized was entirely equipment loans. The reduction in the gains
as a percentage of volume during 2002 reflects the lower gain characteristics of
the 2002 home equity securitizations done for liquidity purposes, as well as mix
changes of commercial receivables securitized, including the sale of more
seasoned receivables in 2002.
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets "AMA" are two metrics that management uses to
monitor productivity and are set forth in the following table. The efficiency
ratio measures the level of expenses in relation to revenue earned, whereas the
AMA relationship measures expenses in relation to our managed asset base.
Twelve Months Ended Nine Months
September 30, Ended Year Ended
------------------------------ September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Efficiency ratio(1) .................................. 35.6% 41.8% 40.2% 43.8%
Salaries and general operating expenses
as a percentage of AMA(2) ......................... 1.96% 2.05% 2.07% 2.01%
Salaries and general operating expenses .............. $ 923.4 $1,044.2 $ 784.9 $1,035.2
- --------------------------------------------------------------------------------
(1) Efficiency ratio is the ratio of salaries and general operating expenses
to operating margin, excluding the provision for credit losses.
(2) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us.
16
The decreased expenses in 2002 are due to corporate staff reductions and
business restructurings effected in association with the 2001 acquisition of CIT
by Tyco, which were partially offset by higher collection repossession and loan
workout expenses in the latter part of 2001 through 2002. During the fourth
quarter of fiscal 2002, expenses rose by approximately $5 million due to our
return to public company status, including investor relations, advertising,
corporate governance, increased insurance premiums, and costs associated with
rebuilding our income tax function. These public company-related expenses are
expected to continue. Personnel decreased to approximately 5,850 at September
30, 2002 from 6,785 at September 30, 2001 and 7,355 at December 31, 2000.
The improvement in the efficiency ratio in 2002 over 2001 is a result of
strong fee income and cost reductions. We continue to target an efficiency ratio
in the mid 30% area. The lower efficiency (higher ratio) in 2000 reflects the
impact of the Newcourt acquisition, as historically, that company's efficiency
ratio was significantly higher than CIT's. The efficiency ratio improved in 2001
compared to 2000 because of integration cost savings and efficiency enhancements
implemented during the last two quarters of fiscal 2001.
Expenses are monitored closely by business unit management and are
reviewed monthly with our senior management as to trends and forecasts. To
ensure overall project cost control, an approval and review procedure is in
place for major capital expenditures, such as computer equipment and software,
including post-implementation evaluations.
Goodwill and Other Intangible Assets Impairment and Amortization
The Company periodically reviews and evaluates its goodwill and other
intangible assets for potential impairment. Effective October 1, 2001, the
beginning of CIT's 2002 fiscal year, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," under which goodwill is no longer amortized but
instead is assessed for impairment at least annually. As part of the adoption,
the Company allocated its existing goodwill to each of our reporting units as of
October 1, 2001. Under the transition provisions of SFAS No. 142, there was no
goodwill impairment as of October 1, 2001. Prior period goodwill and other
intangible assets amortization (pretax) was $97.6 million for the nine months
ended September 30, 2001 and $86.3 million for the year ended December 31, 2000.
During the quarter ended March 31, 2002, our former parent, Tyco,
experienced disruptions to its business surrounding its announced break-up plan,
downgrades in its credit ratings, and a significant decline in its market
capitalization. As a result of these events at Tyco, CIT also experienced credit
downgrades and a disruption to our funding base and ability to access capital
markets. Further, market-based information used in connection with our
preliminary consideration of an initial public offering for 100% of CIT
indicated that CIT's book value exceeded its estimated fair value as of March
31, 2002. As a result, management performed a Step 1 SFAS 142 impairment
analysis as of March 31, 2002 and concluded that an impairment charge was
warranted at that date.
Management's objective in performing the Step 1 SFAS 142 analysis was to
obtain relevant market-based data to calculate the fair value of each CIT
reporting unit as of March 31, 2002 based on each reporting unit's projected
earnings and market factors that would be used by market participants in
ascribing value to each of these reporting units in the planned separation of
CIT from Tyco. Management obtained relevant market data from our financial
advisors regarding the range of price to earnings multiples and market discounts
applicable to each reporting unit as of March 31, 2002 and applied this market
data to the individual reporting unit's projected annual earnings as of March
31, 2002 to calculate a fair value of each reporting unit. The fair values were
compared to the corresponding carrying value of each reporting unit at March 31,
2002, resulting in a $4.512 billion impairment charge as of March 31, 2002.
SFAS 142 requires a second step analysis whenever the reporting unit book
value exceeds its fair value. This analysis required the Company to determine
the fair value of each reporting unit's individual assets and liabilities to
complete the analysis of goodwill impairment as of March 31, 2002. During the
quarter ended June 30, 2002 we completed this analysis for each reporting unit
and determined that an additional Step 2 goodwill impairment charge of $132.0
million was required based on reporting unit level valuation data.
17
Subsequent to March 31, 2002, CIT experienced credit downgrades and the
business environment and other factors continued to negatively impact the
expected CIT IPO proceeds. As a result, we performed both Step 1 and Step 2
analysis as of June 30, 2002 in a manner consistent with the March 2002 process
described above. This analysis was based upon updated market data from our
financial advisors regarding the individual reporting units, and other relevant
market data at June 30, 2002 and through the period immediately following the
IPO of the Company, including the total amount of the IPO proceeds. This
analysis resulted in Step 1 and Step 2 incremental goodwill impairment charges
of $1.719 billion and $148.0 million, respectively, as of June 30, 2002, which
was recorded during the June quarter. Our remaining goodwill is substantially in
our commercial finance segment businesses.
Provision for Credit Losses
The provision for credit losses was $788.3 million for the year ended
September 30, 2002, $396.3 million for the twelve months ended September 30,
2001, $332.5 million for the combined nine months ended September 30, 2001, and
$255.2 million for the year ended December 31, 2000. The increased provision in
2002 reflects higher charge-off levels and reserving actions relating primarily
to Competitive Local Exchange Carriers ("CLEC") exposures in the
telecommunications portfolio ($200 million) and our Argentine exposure ($135
million) (detailed further below). The 2001 provision includes a provision for
credit losses of $89.5 million relating to the impairment of certain
under-performing equipment leasing and loan portfolios, primarily in the
Structured Finance telecommunications portfolio. Such under-performing loans and
leases are being liquidated, as collection efforts continue.
Our provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions).
For the For the
For the Nine Months Year
Year Ended Ended Ended
September 30, September 30, December 31,
2002 2001 2000
----------- ---------- -------------
(successor) (combined) (predecessor)
Balance beginning of period ................. $ 492.9 $ 468.5 $ 446.9
------- ------- -------
Provision for credit losses ................. 453.3 243.0 255.2
Provision for credit losses - specific
reserving actions(1) ...................... 335.0 89.5 --
Reserves relating to dispositions,
acquisitions, other ....................... (11.1) (16.3) 2.0
------- ------- -------
Additions to reserve for credit
losses ................................. 777.2 316.2 257.2
------- ------- -------
Net credit losses:
Equipment Financing and Leasing ............. 258.9 82.8 102.9
Specialty Finance - commercial .............. 80.3 57.0 31.7
Commercial Finance .......................... 88.2 38.9 46.2
Structured Finance .......................... 18.5 64.8 0.4
Specialty Finance - consumer ................ 46.4 48.3 54.4
------- ------- -------
Total net credit losses .................. 492.3 291.8 235.6
------- ------- -------
Balance end of period ....................... $ 777.8 $ 492.9 $ 468.5
======= ======= =======
Reserve for credit losses as a
percentage of finance receivables ......... 2.73% 1.55% 1.40%
======= ======= =======
Reserve for credit losses as a
percentage of past due receivables
(sixty days or more)(2) ................... 72.7% 44.7% 46.9%
======= ======= =======
- --------------------------------------------------------------------------------
(1) The 2002 amounts consist of reserving actions relating to
telecommunication ($200.0 million) and Argentine exposures ($135.0
million) while the 2001 amount consists of a provision for
under-performing loans and leases, primarily in the telecommunications
portfolio.
(2) The September 2002 percentage is 45.3% excluding the impact of
telecommunication and Argentine reserves and delinquency.
18
The following table sets forth our net charge-off experience in amount and
as a percent of average finance receivables by business segment ($ in millions):
For the For the
For the Twelve Months Nine Months For the
Year Ended Ended Ended Year Ended
September 30, September 30, September 30, December 31,
2002 2001 2001 2000
---------------- ---------------- ---------------- ---------------
(successor) (combined) (combined) (predecessor)
Equipment Financing and Leasing ................ $258.9 2.51% $104.8 0.85% $ 82.8 0.91% $102.9 0.71%
Specialty Finance-commercial ................... 80.3 1.26% 74.9 1.07% 57.0 1.11% 31.7 0.54%
Commercial Finance ............................. 88.2 1.13% 50.3 0.63% 38.9 0.66% 46.2 0.60%
Structured Finance ............................. 18.5 0.75% 64.8 3.59% 64.8 4.40% 0.4 0.03%
------ ------ ------ ------
Total Commercial Segments ................... 445.9 1.65% 294.8 1.01% 243.5 1.13% 181.2 0.62%
Specialty Finance-consumer ..................... 46.4 1.78% 57.1 1.55% 48.3 1.72% 54.4 1.32%
------ ------ ------ ------
Total .......................................... $492.3 1.67% $351.9 1.08% $291.8 1.20% $235.6 0.71%
====== ====== ====== ======
The increased net charge-offs in 2002 from 2001, both in amount and
percentage, reflect general economic weakness leading to higher net charge-offs
in virtually all of our business segments. In particular, soft collateral values
in the equipment financing and leasing segment have resulted in increased
frequency and severity of losses. The higher loss rates in the commercial
finance segment in 2002 reflect the bankruptcy of one large retailer and weaker
economic trends. The higher net charge-off percentages in relation to the prior
year also reflect higher charge-off rates associated with approximately $1.5
billion of receivables in liquidation status as of September 30, 2002, which
include owner-operator trucking, franchise, inventory finance, manufactured
housing and recreational vehicle receivables. The increase in commercial net
charge-offs during 2001 includes $79.5 million in charge-offs relating to
certain underperforming equipment leasing and loan portfolios as well as higher
charge-offs across a wide number of industries, including trucking, construction
and technology, as the economy slowed and non-performing assets increased.
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown for the liquidating and telecommunication, as well as all
other, portfolios for the year ended September 30, 2002 in the following table
($ in millions):
Year Ended September 30, 2002
-------------------------------------------------------------------------------
Excluding
Liquidating & Liquidating &
Telecommunications Telecommunications Total
--------------------- --------------------- ---------------------
Equipment Financing and Leasing ........ $168.6 1.83% $ 90.3 8.02% $258.9 2.51%
Specialty Finance-commercial ........... 70.7 1.14% 9.6 5.62% 80.3 1.26%
Commercial Finance ..................... 88.2 1.13% -- -- 88.2 1.13%
Structured Finance ..................... 0.1 0.01% 18.4 2.78% 18.5 0.75%
------ ------ ------
Total Commercial Segments ........... 327.6 1.31% 118.3 6.04% 445.9 1.65%
Specialty Finance-consumer ............. 24.4 1.33% 22.0 2.86% 46.4 1.78%
------ ------ ------
Total ............................... $352.0 1.32% $140.3 5.15% $492.3 1.67%
====== ====== ======
Reserve for Credit Losses
Excluding the 2002 specific Argentine and telecommunication reserving
action discussed below, the reserve for credit losses was $473.7 million (1.72%
of finance receivables) at September 30, 2002 compared to $492.9 million (1.55%)
at September 30, 2001 and $468.5 million (1.40%) at December 31, 2000. On this
basis, excluding the specific reserving actions, the reserve declined in total
dollars but increased as a percentage of finance receivables in 2002 due to
weaker economic conditions and lower 2002 asset levels. Although 2002
charge-offs excluding liquidating assets and telecommunications, increased to
1.32% of average finance receivables from 0.85% in 2001, 60 days or more past
due loans declined slightly from 2001 to 2002 and have remained at stable levels
in total dollars over recent 2002 quarters. Impairment included in the reserve
relating to SFAS 114 impaired loans (excluding telecommunications and Argentina)
declined to $109.0 million at September 30, 2002 from
19
$122.3 million at September 30, 2001. Management continues to believe that the
credit risk characteristics of the portfolio are well diversified by geography,
industry, borrower and equipment type. Refer to "Concentrations" for more
information.
The 2002 reserve increase, both on a dollar basis and as a percentage of
finance receivables, compared to the prior year periods is primarily due to
reserving actions taken during the current year in two areas. First, in light of
the continued deterioration in the telecommunications sector, particularly with
respect to our CLEC portfolio, we added $200.0 million to the reserve for credit
losses during the quarter ended June 30, 2002. This reserving action was based
on a review of the telecommunications portfolio, which totaled $707.2 million at
September 30, 2002, including $275.2 million in CLEC exposure. During the
quarter ended September 30, 2002 charges were taken totaling $30.9 million that
we considered in originally establishing this reserve as follows:
telecommunication loan charge-offs ($18.4 million) and equipment write-downs
($12.5 million). Second, following the Argentine government's action to convert
dollar-denominated loans to pesos, and continued weakness in the peso, we
recorded a $135.0 million provision in 2002. The increase in the 2001 ratio of
reserve to receivables from the preceding year is commensurate with management's
assessment of the relative risk of loss in the portfolio in light of weakening
economic fundamentals and higher past due loans.
Our consolidated reserve for credit losses is periodically reviewed for
adequacy based on portfolio collateral values and credit quality indicators,
including charge-off experience and levels of past due loans and non-performing
assets and economic conditions. We review finance receivables periodically to
determine the probability of loss, and record charge-offs after considering such
factors as delinquencies, the financial condition of obligors, the value of
underlying collateral, as well as third party credit enhancements such as
guarantees and recourse from manufacturers. This information is reviewed
formally on a quarterly basis with senior management, including the CEO, CFO,
Chief Risk Officer and Controller among others, in conjunction with setting the
reserve for credit losses.
The reserve for credit losses is developed based on three key components
(1) specific reserves for loans which are impaired under SFAS 114, (2) reserves
for estimated losses inherent in the portfolio based upon historical credit
trends adjusted for trend and loss outlook and, (3) general reserves for
estimation and economic risk. The level and trends over time of each of these
components are also reviewed with senior management as part of the formal
quarterly credit loss reserve process described above. The quarterly reserve
evaluation starts with our quarterly asset quality review (AQR) meetings led by
our Chief Risk Officer. Each business unit reviews its portfolio credit trends,
credit quality, exposures and risk mitigation strategies. Credit surveillance
loans greater than $500 thousand are individually reviewed and evaluated as to
risk of loss. We also consider the effect of purchase accounting discounts that
decrease the carrying value of the liquidating portfolios. It is management's
judgment that the consolidated reserve for credit losses is adequate to provide
for credit losses inherent in the portfolios.
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of finance receivables ($ in
millions):
At September 30, 2002 At September 30, 2001 At December 31, 2000
--------------------- --------------------- --------------------
Finance receivables ..... $473.7 1.72% $492.9 1.55% $468.5 1.40%
Telecommunications ...... 169.1 24.77%(1) -- --% -- --%
Argentina ............... 135.0 71.85%(2) -- --% -- --%
------ ------ ------
Total ................... $777.8 2.73% $492.9 1.55% $468.5 1.40%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral, among other things. Therefore, changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses.
20
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets (finance receivables on
non-accrual status and assets received in satisfaction of loans) and the related
percentages of finance receivables at September 30, 2002 and 2001 and December
31, 2000 ($ in millions).
At September 30, At September 30, At December 31,
2002 2001 2000
---------------- ---------------- ---------------
(successor) (successor) (predecessor)
Finance receivables, past due 60 days or more:
Equipment Financing and Leasing ................ $ 452.2 5.02% $ 466.5 4.08% $399.8 2.88%
Specialty Finance-commercial ................... 215.4 3.54% 259.5 3.97% 184.9 3.07%
Commercial Finance ............................. 209.4 2.35% 151.4 1.75% 107.9 1.40%
Structured Finance ............................. 65.8 2.45% 38.3 1.75% 96.2 5.59%
-------- -------- ------
Total Commercial Segments ...................... 942.8 3.53% 915.7 3.18% 788.8 2.69%
Specialty Finance-consumer ..................... 127.2 7.20% 188.2 6.12% 211.1 5.03%
-------- -------- ------
Total .......................................... $1,070.0 3.76% $1,103.9 3.46% $999.9 2.98%
======== ======== ======
Non-performing assets:
Equipment Financing and Leasing ................ $ 548.5 6.09% $ 459.1 4.02% $351.0 2.53%
Specialty Finance-commercial ................... 103.1 1.69% 124.2 1.90% 93.9 1.56%
Commercial Finance ............................. 176.1 1.98% 106.0 1.22% 65.3 0.85%
Structured Finance ............................. 172.2 6.40% 110.4 5.05% 118.6 6.90%
-------- -------- ------
Total Commercial Segments ...................... 999.9 3.75% 799.7 2.78% 628.8 2.15%
Specialty Finance-consumer ..................... 139.9 7.92% 170.0 5.53% 199.3 4.75%
-------- -------- ------
Total .......................................... $1,139.8 4.01% $ 969.7 3.04% $828.1 2.47%
======== ======== ======
Non accrual loans ................................. $ 976.6 $ 851.6 $704.2
Repossessed assets ................................ 163.2 118.1 123.9
-------- -------- ------
Total non-performing assets .................... $1,139.8 $ 969.7 $828.1
======== ======== ======
Past due loans decreased slightly during 2002 to $1,070.0 million,
notwithstanding the U.S. economy slowing to recessionary levels. Due to
increased securitization activity and declining asset levels, the percentage of
past due loans increased to 3.76% of finance receivables. Non-performing assets
increased during 2002, both in dollars and as a percentage of finance
receivables, due to: (1) increased telecommunications (CLEC exposure)
non-accrual accounts in Structured Finance (which were considered in a specific
reserving action), (2) one large transaction placed on nonaccrual status
collateralized by a municipal waste-to-energy project and underlying revenue
contracts in Equipment Financing and Leasing (3) increased non-accrual accounts
in the SBL unit of Equipment Financing and Leasing and (4) increased repossessed
assets in Equipment Financing and Leasing. Non-performing telecommunications
accounts totaled $137.0 million at September 30, 2002, up from $70.4 million
last year, of which CLEC accounts totaled $108.1 million and $43.8 million,
respectively.
After peaking in March 31, 2002, we have seen steady improvement in the
Specialty Finance - commercial Segment past dues over the past two quarters.
Similarly, non-performing accounts have trended downwards since December 2001,
reflecting improvement across the majority of our small-ticket businesses and
runoff of our liquidating portfolio assets. Two large customer balances account
for most of the increases during 2002 over 2001 in both past due and
non-performing assets of the Commercial Finance segment. The Specialty
Finance-consumer past due portfolio metrics are down in dollar terms, but up in
percentage to finance receivables due to the continued runoff of liquidating
portfolios and the home equity securitization activity, which lowered asset
levels during the year.
The increases in past due and non-performing assets at September 30, 2001
from December 31, 2000 was due to broad-based economic slowdown in 2001, led by
sharp downturns in telecommunications and technology, resulting in increases in
both past due loans and non-performing assets. The increase in commercial past
due loans and non-performing assets included trucking, construction, retail and
technology, as well as manufacturing-steel and machine tools. In Specialty
Finance-consumer, past due and non-performing loans declined. However, the
corresponding 2001 percentage of past due loans to finance receivables increased
due to significant sales and liquidation of non-strategic receivables.
21
Managed past due loans, which also include securitized loans, increased
slightly to 3.78% of managed financial assets (managed assets less operating
leases and venture capital investments) from 3.72% at September 30, 2001 as
shown in the table below ($ in millions). Managed past dues declined to $1.5
billion in total dollars, but increased as a percentage of managed assets due to
lower 2002 asset levels. The increase in managed delinquency as a percentage of
managed assets at September 30, 2002 is more modest than the comparable owned
delinquency trends due to the higher level of securitized assets at September
30, 2002.
September 30, 2002 September 30, 2001 December 31, 2000
------------------ ------------------ -----------------
(successor) (successor) (predecessor)
Managed Financial Assets, past due 60 days or more:
Equipment Financing and Leasing ....................... $ 710.6 5.27% $ 810.5 5.06% $ 661.3 3.21%
Specialty Finance-commercial .......................... 303.3 2.94% 386.4 3.57% 424.3 4.44%
Commercial Finance .................................... 209.4 2.35% 151.4 1.75% 113.3 1.47%
Structured Finance .................................... 65.8 2.45% 38.3 1.75% 96.2 4.10%
-------- -------- --------
Total Commercial ...................................... 1,289.1 3.64% 1,386.6 3.63% 1,295.1 3.22%
Specialty Finance-consumer ............................ 249.5 4.71% 253.2 4.32% 264.0 3.65%
-------- -------- --------
Total ................................................. $1,538.6 3.78% $1,639.8 3.72% $1,559.1 3.29%
======== ======== ========
In light of the weakness in the aerospace sector, and the circumstances
surrounding particular carriers as discussed in "Concentrations," past due
finance receivables and non-performing assets may increase from September 30,
2002 amounts.
Income Taxes
The provision for income taxes totaled $374.0 million for the year ended
September 30, 2002, $341.6 million for the twelve months ended September 30,
2001, $242.2 million for the combined nine months ended September 30, 2001, and
$381.2 million for the year ended December 31, 2000. The effective tax rate for
the twelve months ended September 30, 2002 and 2001, the combined nine months
ended September 30, 2001 and the year ended December 31, 2000 was (5.9)%, 44.0%,
47.1% and 37.9%, respectively. The effective tax rate, excluding the 2002
goodwill impairment, goodwill amortization and TCH expenses was 38.1% for the
year ended September 30, 2002, 38.5% for the twelve months ended September 30,
2001 and 39.6% for the combined nine months ended September 30, 2001. The
increases in 2001 were primarily the result of increased non-deductible goodwill
amortization, resulting from our acquisition by Tyco in 2001 and our acquisition
of Newcourt in November 1999. Management expects the prospective effective tax
rate to approximate 39% due to higher state and local and international tax
provisions in relation to 2002.
As of September 30, 2002 we had approximately $1,559.0 million of tax loss
carry-forwards, primarily related to U.S. Federal and state jurisdictions, which
expire at various dates beginning in 2010. These loss carry-forwards are
available to offset current federal income tax liabilities, subject to certain
limitations.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. In
connection with our 2002 IPO and separation from Tyco we are rebuilding our tax
functions, including hiring personnel, and rebuilding systems and processes.
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, the
allocation of most corporate expenses and the exclusion of TCH expenses ($ in
millions).
Twelve Months Ended Nine Months
September 30, Ended Year Ended
----------------------------- September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Net Income
Equipment Financing and Leasing .............. $ 202.0 $278.0 $215.1 $287.8
Specialty Finance ............................ 349.8 262.2 196.7 222.2
Commercial Finance ........................... 198.9 174.1 134.8 161.8
Structured Finance ........................... 65.2 20.1 45.8 65.4
--------- ------ ------ ------
Total Segments ............................ 815.9 734.4 592.4 737.2
Corporate, including certain charges .......... (6,791.1) (240.5) (258.6) (125.6)
--------- ------ ------ ------
Total ..................................... $(5,975.2) $493.9 $333.8 $611.6
========= ====== ====== ======
22
Twelve Months Ended Nine Months
September 30, Ended Year Ended
----------------------------- September 30, December 31,
2002 2001 2001 2000
----------- ---------- ---------- -------------
(successor) (combined) (combined) (predecessor)
Return on AEA
Equipment Financing and Leasing ................ 1.32% 1.51% 1.64% 1.42%
Specialty Finance .............................. 2.98% 1.89% 1.83% 1.73%
Commercial Finance ............................. 3.41% 3.05% 3.14% 3.03%
Structured Finance ............................. 2.47% 0.82% 2.37% 3.25%
Total Segments .............................. 2.29% 1.82% 1.97% 1.82%
Corporate, including certain charges ........... (18.98)% (0.60)% (0.87)% (0.32)%
Total ....................................... (16.69)% 1.22% 1.10% 1.50%
Net income sharply improved in the Specialty Finance segment during 2002
based on stronger margins and higher securitization gains. The Commercial
Finance segment also showed improvement from 2001 due to stronger factoring
revenues on increased business volume. The Equipment Financing and Leasing
segment reported reduced net income and return on assets due to a decline of 11%
in portfolio assets, higher charge-offs in the Equipment Financing business and
lower aerospace rentals in the Capital Finance business.
The corporate segment included the following items in 2002: (1) Goodwill
impairment of $6,511.7 million, (2) provision for telecommunications of $200.0
million ($124.0 million after tax), (3) Argentine provision of $135.0 million
($83.7 million after tax), (4) funding costs of $85.9 million ($53.2 million
after tax), and (5) unallocated corporate operating items totaling $7.2 million
pre-tax (income) or $3.9 million after tax. In 2001 and prior periods, the
corporate segment included funding costs and unallocated corporate operating
expenses. Corporate segment funding costs increased significantly in 2002 from
2001 reflecting management's decision to not allocate the incremental costs
relating to the disruption to our funding base and credit downgrades, discussed
previously. Such 2002 additional funding costs included higher debt quality
spreads, use of bank line versus commercial paper borrowings, incremental cost
of liquidity facilities, and excess cash held to enhance liquidity. Although
management chose to not allocate these incremental costs because they were
viewed as relating to temporary conditions, this allocation will be evaluated
prospectively. For all periods shown, corporate includes the results of the
Equity Investment/Venture Capital business.
All business segments reported improved earnings in 2001 compared to 2000
as a percentage of AEA, with the exception of Structured Finance. The 2001
returns in Equipment Financing and Leasing and Specialty Finance were driven
predominantly by stronger margins and other revenue, while the Specialty Finance
trends also reflected the reorganization of the higher return Vendor Technology
business into this segment and the exiting of non-strategic lower-return
businesses as described previously in the Key Business Initiatives and Trends
section. The Commercial Finance improvement over 2000 was primarily the result
of stronger results in factoring. The lower Structured Finance income in 2001 is
attributable primarily to significantly lower venture capital gains.
Financing and Leasing Assets
Managed assets, comprised of financing and leasing assets and finance
receivables securitized that we continue to manage, totaled $47.6 billion at
September 30, 2002, compared to $50.9 billion at September 30, 2001 and $54.9
billion at December 31, 2000. Owned financing and leasing portfolio assets
totaled $36.4 billion at September 30, 2002, compared to $40.7 billion at
September 30, 2001, and $43.8 billion at December 31, 2000.
The 2002 trend of declining asset levels reflects the previously discussed
factors in the "Key Business Initiatives and Trends" section. The liquidating
portfolios totaled $1.5 billion at September 30, 2002, down from $3.1 billion at
September 30, 2001. The September 30, 2002 liquidating portfolio balances were
as follows: manufactured housing $0.6 billion, franchise finance $0.4 billion,
owner-operator trucking $0.3 billion and other $0.2 billion. In addition, $7.7
billion of equipment and home equity receivables were securitized during the
year in the Equipment Financing business unit and Specialty Finance segment as
part of our program to broaden funding access and utilize cost effective funding
alternatives. While we did see improvement in fiscal fourth quarter volume
trends in comparison to 2001, new origination volume for the twelve months ended
September 30, 2002 (excluding factoring) was down by approximately 12% from the
comparable 2001 period. Within the Equipment Financing and Leasing segment,
Capital Finance grew during 2002 due to demand for its rail and aerospace
products, including placements of newly ordered commercial aircraft. The lower
asset levels at September 30, 2001 compared to
23
December 31, 2000 reflect the disposition of non-strategic businesses and our
focus on managing down our leverage ratios, coupled with disciplined pricing and
lower originations. The increase in Commercial Services assets reflects
short-term, seasonal calendar third quarter growth. Additionally, the trends by
business unit reflect the transfer of certain assets from Equipment Finance to
Specialty Finance-commercial in 2001.
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions).
At September 30, At December 31, % Change
-------------------------- --------------- -----------------------
Dollars in Millions 2002 2001 2000 '02 vs '01 '01 vs '00
--------- --------- --------- ---------- ----------
Equipment Financing:
Finance receivables ........................ $ 7,633.0 $ 9,782.0 $12,153.7 (22.0)% (19.5)%
Operating lease equipment, net ............. 765.8 1,281.7 2,280.7 (40.3) (43.8)
--------- --------- ---------
Total .................................... 8,398.8 11,063.7 14,434.4 (24.1) (23.4)
--------- --------- ---------
Capital Finance:
Finance receivables ........................ 1,479.5 1,773.0 2,049.0 (16.6) (13.5)
Operating lease equipment, net ............. 4,388.9 3,272.4 3,594.6 34.1 (9.0)
--------- --------- ---------
Total .................................... 5,868.4 5,045.4 5,643.6 16.3 (10.6)
--------- --------- ---------
Total Equipment Financing
and Leasing Segment .................... 14,267.2 16,109.1 20,078.0 (11.4) (19.8)
--------- --------- ---------
Specialty Finance:
Commercial:
Finance receivables ........................ 6,620.2 6,791.6 6,864.5 (2.5) (1.1)
Operating lease equipment, net ............. 1,353.2 1,796.1 1,256.5 (24.7) 42.9
--------- --------- ---------
Total commercial ......................... 7,973.4 8,587.7 8,121.0 (7.2) 5.7
--------- --------- ---------
Consumer:
Home equity ................................ 1,314.2 2,760.2 2,451.7 (52.4) 12.6
Other(1) ................................... 831.8 1,443.2 2,748.3 (42.4) (47.5)
--------- --------- ---------
Total consumer ........................... 2,146.0 4,203.4 5,200.0 (48.9) (19.2)
--------- --------- ---------
Total Specialty Finance Segment .......... 10,119.4 12,791.1 13,321.0 (20.9) (4.0)
--------- --------- ---------
Commercial Services ........................... 5,040.4 5,112.2 4,277.9 (1.4) 19.5
Business Credit ............................... 3,869.8 3,544.9 3,415.8 9.2 3.8
--------- --------- ---------
Total Commercial Finance Segment ......... 8,910.2 8,657.1 7,693.7 2.9 12.5
--------- --------- ---------
Structured Finance:
Finance receivables ........................ 2,689.6 2,777.1 2,347.3 (3.2) 18.3
Operating lease equipment, net ............. 59.5 52.6 58.8 13.1 (10.5)
Equity investments ......................... 341.7 342.2 285.8 (0.1) 19.7
--------- --------- ---------
Total Structured Finance Segment ......... 3,090.8 3,171.9 2,691.9 (2.6) 17.8
--------- --------- ---------
TOTAL FINANCING AND
LEASING PORTFOLIO ASSETS ............... 36,387.6 40,729.2 43,784.6 (10.7) (7.0)
--------- --------- ---------
Finance receivables securitized:
Equipment Financing ........................ 4,384.1 4,464.8 6,387.2 (1.8) (30.1)
Specialty Finance-commercial ............... 3,703.1 4,023.2 2,688.7 (8.0) 49.6
Specialty Finance- consumer ................ 3,147.5 1,659.9 2,040.4 89.6 (18.6)
--------- --------- ---------
Total .................................... 11,234.7 10,147.9 11,116.3 10.7 (8.7)
--------- --------- ---------
TOTAL MANAGED ASSETS(1) .................. $47,622.3 $50,877.1 $54,900.9 (6.4)% (7.3)%
========= ========= =========
- --------------------------------------------------------------------------------
(1) Managed assets is compromised of on-balance sheet financing and leasing
assets and finance receivables securitized that we continue to manage.
24
Concentrations
Our ten largest financing and leasing asset accounts in the aggregate
represented 4.8% of our total financing and leasing assets at September 30, 2002
(with the largest account representing less than 1%) and 3.7% at September 30,
2001. All ten accounts were commercial accounts and were secured by either
equipment, accounts receivable or inventory.
Geographic Composition
At September 30, 2002 and 2001 and December 31, 2000, our managed asset
geographic diversity did not differ significantly from our owned asset
geographic composition.
The following table summarizes state concentrations greater than 5.0% and
foreign concentrations in excess of 1.0% of financing and leasing portfolio
assets at September 30, 2002 and 2001 and December 31, 2000.
At September 30,
---------------------- At December 31,
2002 2001 2000
------- ------- ---------------
State
California .............. 10.0% 10.4% 10.4%
New York ................ 7.8% 8.8% 6.9%
Texas ................... 7.1% 7.7% 7.9%
Country
Canada .................. 4.6% 4.8% 5.4%
England ................. 3.1% 2.1% 2.8%
Australia ............... 1.3% (1) (1)
Germany ................. 1.2% (1) (1)
China ................... 1.1% (1) (1)
- --------------------------------------------------------------------------------
(1) The applicable balances are less than 1.0%.
Industry Composition
At September 30, 2002 our commercial aerospace portfolio in the Capital
Finance business unit consists of financing and leasing assets of $3,986.7
million covering 193 aircraft, with an average age of approximately 7.4 years.
The portfolio is spread over 77 accounts, with the majority placed with major
carriers. The commercial aircraft all comply with stage III noise regulations.
The following table summarizes the composition of the commercial aerospace
portfolio as of September 30, 2002 ($ in millions):
Net Number of
Investment Planes
---------- ---------
By Geography:
Europe .................................. $1,586.9 55
North America ........................... 1,025.9 76
Asia Pacific ............................ 813.4 31
Latin America ........................... 483.3 27
Africa / Middle East .................... 77.2 4
-------- ---
Total ...................................... $3,986.7 193
======== ===
By Manufacturer:
Boeing .................................. $2,439.6 137
Airbus .................................. 1,507.7 38
Other ................................... 39.4 18
-------- ---
Total ...................................... $3,986.7 193
======== ===
By Body Type(1):
Narrow body ............................. $2,723.3 141
Intermediate ............................ 849.0 16
Wide body ............................... 375.0 18
Other ................................... 39.4 18
-------- ---
Total ...................................... $3,986.7 193
======== ===
- --------------------------------------------------------------------------------
(1) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglass DC10
series aircraft.
25
Operating leases represent approximately 74% of the portfolio, with the
remainder consisting of capital leases or loans. Of the 193 aircraft, 9 are
off-lease, 4 of which have been remarketed and have leases pending.
The regional aircraft portfolio at September 30, 2002 consists of 94
planes and a net investment of $301.0 million, primarily in the Structured
Finance segment. The planes are primarily located in North America and Europe.
Operating leases account for about 19% of the portfolio, with the rest capital
leases or loans. There are 5 aircraft in this portfolio that are off-lease.
On August 11, 2002, U.S. Airways announced its Chapter 11 bankruptcy
filing. CIT's outstandings are approximately $70 million to this carrier as of
September 30, 2002, secured primarily by five narrow-body 737's. On November 6,
2002 National Airlines announced that it would cease operations effective
November 6, 2002, after the carrier, which was operating in bankruptcy, was
unable to complete a previously announced agreement to the satisfaction of it's
senior management, board of directors, lessors and other key creditors. Our
outstandings to National Airlines are approximately $39 million as of September
30, 2002 secured by two narrow-body Boeing 757 aircraft. We have repossessed the
two aircraft and are pursuing remarketing efforts. On December 9, 2002, UAL
Corp., the parent of United Airlines, announced its Chapter 11 bankruptcy
filing. Under existing agreements, CIT has capital leases where United Airlines
is the lessee of four narrow body (2 Boeing 757 aircraft and 2 Boeing 737
aircraft), CIT-owned aircraft, for a total exposure of $96 million.
Additionally, CIT holds $41 million in Senior A tranche Enhanced Equipment Trust
Certificates (EETCs) issued by United Airlines, which are debt instruments
collateralized by aircraft operated by United Airlines. CIT also leases a
variety of other equipment to UAL, aggregating $4.6 million. In connection with
United Airlines' filing under Chapter 11, CIT is a co-arranger in a $1.2 billion
secured revolving and term loan facility with a commitment of $300 million. This
debtor-in-possession facility is secured by, among other collateral,
unencumbered aircraft. The credit facility is subject to court approval and
other conditions. Future revenues and aircraft values could be impacted by the
actions of the carriers, management's actions with respect to re-marketing the
aircraft, airline industry performance and aircraft utilization.
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in the Note 7 to the Consolidated Financial
Statements. This portfolio totals approximately $707.2 million at September 30,
2002, or approximately 1.9% of total financing and leasing assets. The portfolio
consists of 52 accounts with an average balance of approximately $13.6 million.
The 10 largest accounts in the portfolio aggregate $265.3 million with the
largest single account totaling $34.1 million. Non-performing accounts totaled
$137.0 million (11 accounts) or 19.4% of this portfolio. The telecommunications
portfolio includes CLECs, wireless, and towers with the largest group being CLEC
accounts, which totaled $275.2 million, or 38.9% of the telecommunications
portfolio at September 30, 2002. Non-performing accounts totaled $108.1 million
(7 accounts) or 39.3% of the CLEC portfolio. Many of these CLEC accounts are
still in the process of building out their networks and developing their
customer bases. Our telecommunications transactions are collateralized by the
assets of the customer (equipment, receivables, cash, etc.) and typically are
also secured by a pledge of the stock of non-public companies. Weak economic
conditions and industry overcapacity have driven down values in this sector. As
discussed in "Provision and Reserve for Credit Losses," $169.1 million of
previously recorded reserves remain, for telecommunication exposures. As
management continues the evaluation and work out of the individual accounts in
this portfolio, charge-offs will likely be recorded against this reserve in
subsequent periods. Continued weakness in this sector could result in additional
losses or require additional reserves.
Direct and private fund venture capital equity investments totaled $341.7
million at September 30, 2002. This portfolio is comprised of direct investments
of approximately $196.6 million in 60 companies and $145.1 million in 52 private
equity funds. These investments are principally in emerging growth enterprises
in selected industries, including industrial buyout, information technology,
life science and consumer products. In 2001, we ceased making new venture
capital investments beyond existing commitments, which totaled approximately
$176.6 million at September 30, 2002. These commitments, which are mainly to
private equity funds, may, or may not, be drawn. Performance of our direct and
fund investments will depend upon individual performance of the underlying
companies, the economy and the venture capital and private equity markets.
At September 30, 2002, we had approximately $180 million of U.S.
dollar-denominated loans and assets outstanding to customers located or doing
business in Argentina. During 2002, the Argentine government instituted economic
reforms, including the conversion of certain dollar-denominated loans into
pesos. Due to these actions and the weakness of the peso, we established a
reserve of $135.0 million during the year. The underlying portfolio continues to
perform as to collection, but payments are now in pesos. Therefore, our exposure
is primarily currency related.
26
Management strives to maximize the profitability of the lease equipment
portfolio by balancing equipment utilization levels with market rental rates and
lease term. Substantially all equipment was subject to lease agreements
throughout 2002, 2001 and 2000. Equipment not subject to lease agreements were
$267.3 million, $247.2 million and $351.0 million at September 30, 2002,
September 30, 2001, and December 31, 2000, respectively. The current weakness in
the commercial airline industry and the slower economy could adversely impact
both rental and utilization rates going forward.
See Note 7 -- "Concentrations" of Item 8. Financial Statements and
Supplementary Data for further discussion on concentrations.
Other Assets
Other assets totaled $4.8 billion, $3.8 billion and $3.0 billion at
September 30, 2002 and 2001 and December 31, 2000. The increase in other assets
at September 2002 from September 2001 was primarily due to a $0.3 billion
increase in securitization assets, reflecting the increased use of
securitization, and a $0.3 billion increase in receivables from derivative
counterparties.
Other assets primarily consisted of the following at September 30, 2002:
securitization assets, including interest-only strips, retained subordinated
securities, cash reserve accounts and servicing assets of $1.4 billion,
investments in and receivables from non-consolidated subsidiaries of $0.7
billion, accrued interest and receivables from derivative counterparties of $0.7
billion, deposits on commercial aerospace flight equipment of $0.3 billion,
direct and private fund equity investments of $0.3 billion, repossessed assets
of $0.2 billion, prepaid expenses of $0.1 billion and investment in aerospace
securities of $0.1 billion. The remaining balance includes furniture and
fixtures, miscellaneous receivables and other assets.
Risk Management
We performed additional risk management procedures in 2002 in light of the
factors discussed previously in the "Key Business Initiatives and Trends"
section. Our ongoing risk management activities, beyond these special liquidity
and capital measures, are described more fully in the sections that follow.
Our business activities involve various elements of risk. We consider the
principal types of risk to be credit risk (including credit, collateral and
equipment risk) and market risk (including interest rate, foreign currency and
liquidity risk.)
We consider the management of risk essential to conducting our commercial
and consumer businesses and to maintaining profitability. Accordingly, our risk
management systems and procedures are designed to identify and analyze risks, to
set appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
We review and monitor credit exposures, both owned and managed, on an
ongoing basis to identify, as early as possible, those customers that may be
experiencing declining creditworthiness or financial difficulty, and
periodically evaluate our finance receivables across the entire organization. We
monitor concentrations by borrower, industry, geographic region and equipment
type, and we adjust limits as conditions warrant to minimize the risk of
substantial credit loss. We have maintained a standard practice of reviewing our
aerospace portfolio regularly and, in accordance with SFAS 13 and SFAS 144 we
test for asset impairment based upon projected cash flows and relevant market
data, with any impairment in value charged to operating earnings. Given the
developments in the aerospace sector during the year, performance, profitability
and residual values relating to aerospace assets were reviewed more frequently
with the Executive Credit Committee during 2002.
Our Asset Quality Review Committee is comprised of members of senior
management, including the Chief Risk Officer, the Chief Financial Officer, the
Controller and the Director of Credit Audit. Periodically, the Committee meets
with senior executives of our strategic business units and corporate credit risk
management group to review portfolio status and performance, as well as the
status of individual financing and leasing assets, owned and managed, to
obligors with higher risk profiles. In addition, this committee periodically
meets with the Chief Executive Officer of CIT to review overall credit risk,
including geographic, industry and customer concentrations, and the reserve for
credit losses.
27
Credit Risk Management
We have developed systems specifically designed to manage credit risk in
each of our business segments. We evaluate financing and leasing assets for
credit and collateral risk during the credit granting process and periodically
after the advancement of funds. The Corporate credit risk management group,
which reports to the Chief Risk Officer, oversees and manages credit risk
throughout CIT. This group includes senior credit executives aligned with each
of the business units, as well as a senior executive with corporate-wide asset
recovery and work-out responsibilities. In addition, our Executive Credit
Committee, which includes the Chief Executive Officer, the Chief Risk Officer,
members of the corporate credit risk management group and group Chief Executive
Officers, approve large transactions and transactions which are outside of
established target market definitions and risk acceptance criteria or which
exceed the strategic business units' credit authority. The credit risk
management group also includes an independent credit audit function.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These guidelines set forth risk
acceptance criteria for:
o acceptable maximum credit lines;
o selected target markets and products;
o creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow, financial performance and quality
of management; and
o the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
Compliance with established corporate policies and procedures and the
credit management processes at each strategic business unit are reviewed by the
credit audit group. The credit audit group examines adherence with established
credit policies and procedures and tests for inappropriate credit practices,
including whether potential problem accounts are being detected and reported on
a timely basis.
Commercial
The commercial credit management 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 review each potential borrower's financial condition,
results of operations, management, industry, customer base, operations,
collateral and other data, such as third party credit reports, to thoroughly
evaluate the customer's borrowing and repayment ability. Borrowers are graded
according to credit quality based upon our uniform credit grading system, which
considers both the borrower's financial condition and the underlying collateral.
Credit facilities are subject to approval within our overall credit approval and
underwriting guidelines and are issued commensurate with the credit evaluation
performed on each borrower.
Consumer and Small Ticket Leasing
We employ proprietary automated credit scoring models by loan type that
include both customer demographics and credit bureau characteristics in our
Specialty Finance segment. The profiles emphasize, among other things, occupancy
status, length of residence, length of employment, debt to income ratio (ratio
of total installment debt and housing expenses to gross monthly income), bank
account references, credit bureau information and combined loan to value ratio.
The models are used to assess a potential borrower's credit standing and
repayment ability considering the value or adequacy of property offered as
collateral. Our credit criteria include reliance on credit scores, including
those based upon both our proprietary internal credit scoring model and external
credit bureau scoring, combined with judgment. The credit scoring models are
regularly reviewed for effectiveness utilizing statistical tools. We regularly
evaluate the consumer loan portfolio using past due, vintage curve and other
statistical tools to analyze trends and credit performance by loan type,
including analysis of specific credit characteristics and other selected subsets
of the portfolios. Adjustments to credit scorecards and lending programs are
made when deemed appropriate. Individual underwriters are assigned credit
authority based
28
upon their experience, performance and understanding of the underwriting
policies and procedures of our consumer and small-ticket leasing operations. A
credit approval hierarchy also exists to ensure that all applications are
reviewed by an underwriter with the appropriate level of authority.
See "Provision for Credit Losses."
Equipment/Residual Risk Management
We have developed systems, processes and expertise to manage the equipment
and residual risk in our commercial segments. Our process consists of the
following: 1) setting residual value at deal inception; 2) systematic residual
reviews; and 3) monitoring of residual realizations. Reviews for impairment are
performed at least annually. Residual realizations, by business unit and
product, are reviewed as part of our ongoing financial and asset quality review,
both within the business units and by senior management.
Market Risk Management
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk, foreign exchange risk,
derivative credit risk and liquidity risk. We engage in transactions in the
normal course of business that expose us to market risks. However, we maintain
what we believe are appropriate management practices and policies designed to
effectively mitigate such risks. The objectives of our market risk management
efforts are to preserve company value by hedging changes in future expected net
cash flows and to decrease the cost of capital. Strategies for managing market
risks associated with changes in interest rates and foreign exchange rates are
an integral part of the process, because those strategies affect our future
expected cash flows as well as our cost of capital.
Our Capital Committee sets policies, oversees and guides the interest rate
and currency risk management process, including establishment and monitoring of
risk metrics, and ensures the implementation of those policies. Other risks
monitored by the Capital Committee include derivative credit risk and liquidity
risk. The Capital Committee meets periodically and includes members of senior
management, including the Chief Executive Officer, the Chief Financial Officer,
the Treasurer, and the Controller, with business unit executives serving on a
rotating basis.
Interest Rate and Foreign Exchange Risk Management -- We offer a variety
of financing products to our customers, including fixed and floating-rate loans
of various maturities and currency denominations, and a variety of leases,
including operating leases. Changes in market interest rates, relationships
between short-term and long-term market interest rates, or relationships between
different interest rate indices (i.e., basis risk) can affect the interest rates
charged on interest-earning assets differently than the interest rates paid on
interest-bearing liabilities, and can result in an increase in interest expense
relative to finance income. We measure our asset/liability position in economic
terms through duration measures and sensitivity analysis, and we measure it's
periodic effect on earnings using maturity gap analysis.
A matched asset/liability position is generally achieved through a
combination of financial instruments, including commercial paper, medium-term
notes, long-term debt, interest rate and currency swaps, foreign exchange
contracts, and through asset syndication and securitization. We do not speculate
on interest rates or foreign exchange rates, but rather seek to mitigate the
possible impact of such rate fluctuations encountered in the normal course of
business. This process is ongoing due to prepayments, refinancings and actual
payments varying from contractual terms, as well as other portfolio dynamics.
We periodically enter into structured financings (involving both the
issuance of debt and an interest rate swap with corresponding notional principal
amount and maturity) to manage liquidity and reduce interest rate risk at a
lower overall funding cost than could be achieved by solely issuing debt.
CIT uses derivatives for hedging purposes only, and does not enter into
derivative financial instruments for trading or speculative purposes. As part of
managing the exposure to changes in market interest rates, CIT, as an end-user,
enters into various interest rate swap transactions in the over-the-counter
markets, with other financial institutions acting as principal counterparties.
To ensure both appropriate use as a hedge and hedge accounting treatment, all
derivatives entered into are designated according to a hedge objective against a
specified liability, including long term debt, bank credit facilities, and
commercial paper. CIT's primary hedge objectives include the conversion of
variable-rate liabilities to fixed rates, and the conversion of fixed-rate
liabilities to variable rates. The notional amounts, rates, indices and
maturities of CIT's derivatives are required to closely match the related terms
of CIT's hedged liabilities.
29
Interest rate swaps with notional principal amounts of $7.1 billion at
September 30, 2002, $6.9 billion at September 30, 2001 and $9.9 billion at
December 31, 2000 were designated as hedges against outstanding debt and were
principally used to convert the interest rate on variable-rate debt to a
fixed-rate, establishing a fixed-rate term debt borrowing cost for the life of
the swap. These hedges reduce our exposure to rising interest rates, but also
reduce the benefits of lower interest rates.
A comparative analysis of the weighted average principal outstanding and
interest rates on our debt before and after the effect of interest rate swaps is
shown in the following table ($ in millions).
Year Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
2002 2001 2000
-------------------- -------------------- ---------------------
(successor) (combined) (predecessor)
Before Swaps
Commercial paper, variable-rate senior notes
and bank credit facilities ..................... $17,087.2 2.34% $20,373.6 4.91% $19,848.6 6.53%
Fixed-rate senior and subordinated notes .......... 16,764.8 6.11% 17,078.6 4.63% 17,689.7 6.72%
--------- --------- ---------
Composite ......................................... $33,852.0 4.21% $37,452.2 4.14% $37,538.3 6.62%
========= ========= =========
After Swaps
Commercial paper, variable-rate senior notes
and bank credit facilities ..................... $14,813.2 2.55% $14,209.8 4.97% $14,762.1 6.74%
Fixed-rate senior and subordinated notes .......... 19,038.8 5.90% 23,242.4 4.71% 22,776.2 6.67%
--------- --------- ---------
Composite ......................................... $33,852.0 4.43% $37,452.2 4.34% $37,538.3 6.70%
========= ========= =========
The weighted average composite interest rate after swaps in each of the
years presented increased from the composite interest rate before swaps
primarily because a larger proportion of our debt, after giving effect to
interest rate swaps, was subject to a fixed interest rate. However, the weighted
average interest rates before swaps do not necessarily reflect the interest
expense that would have been incurred over the life of the borrowings had we
chosen to manage interest rate risk without the use of such swaps. Derivatives
are discussed further in Note 10 -- "Derivative Financial Instruments" of Item
8. Financial Statements and Supplementary Data.
We regularly monitor and simulate through computer modeling our degree of
interest rate sensitivity by measuring the repricing characteristics of
interest-sensitive assets, liabilities, and derivatives. The Capital Committee
reviews the results of this modeling periodically. The interest rate sensitivity
modeling techniques employed by us include the creation of prospective twelve
month "baseline" and "rate shocked" net interest income simulations. At the date
that interest rate sensitivity is modeled, "baseline" net interest income is
derived considering the current level of interest-sensitive assets and related
run-off (including both contractual repayment and historical prepayment
experience), the current level of interest-sensitive liabilities and related
maturities and the current level of derivatives. The "baseline" simulation
assumes that, over the next successive twelve months, market interest rates (as
of the date of simulation) are held constant and that no new loans or leases are
extended. Once the "baseline" net interest income is calculated, market interest
rates, which were previously held constant, are raised 100 basis points
instantaneously and parallel across the entire yield curve, and a "rate shocked"
simulation is run. Interest rate sensitivity is then measured as the difference
between calculated "baseline" and "rate shocked" net interest income. An
immediate hypothetical 100 basis point parallel change in the yield curve on
October 1, 2002 would affect net income by an estimated $12 million after-tax
over the next twelve months. A similar 100 basis point change in yield curve on
October 1, 2001 would have affected net income by an estimated $17 million after
tax. Although management believes that this measure provides a meaningful
estimate of our interest rate sensitivity, it does not account for potential
changes in the credit quality, size, composition and prepayment characteristics
of the balance sheet and other business developments that could affect net
income. Accordingly, no assurance can be given that actual results would not
differ materially from the potential outcome simulated by our computer modeling.
Further, it does not necessarily represent management's current view of future
market interest rate movements.
We also utilize foreign currency exchange forward contracts to hedge
currency risk underlying our net investments in foreign operations and cross
currency interest rate swaps to hedge both foreign currency and interest rate
risk underlying foreign debt. At September 30, 2002, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $3.1 billion
and maturities ranging from 2003 to 2006. CIT was also party to cross currency
interest rate swaps with notional amounts totaling $1.7 billion and maturities
ranging from 2003
30
to 2027. At September 30, 2001, $3.3 billion in notional principal amount of
foreign currency exchange forward contracts and $1.7 billion in notional
principal amount of cross-currency swaps were designated as currency-related
debt hedges. At December 31, 2000, $2.9 billion in notional principal amount of
foreign currency exchange forward contracts and $1.2 billion in notional
principal amount of cross-currency swaps were designated as currency-related
debt hedges. Translation gains and losses of the underlying foreign net
investment, as well as offsetting derivative gains and losses on designated
hedges, are reflected in other comprehensive income in the Consolidated Balance
Sheet.
Derivative Risk Management -- We enter into interest rate and currency
swaps and foreign exchange forward contracts as part of our overall market risk
management practices. We assess and manage the external and internal risks
associated with these derivative instruments in accordance with the overall
operating goals established by our Capital Committee. External risk is defined
as those risks outside of our direct control, including counterparty credit
risk, liquidity risk, systemic risk, legal risk and market risk. Internal risk
relates to those operational risks within the management oversight structure and
includes actions taken in contravention of CIT policy.
The primary external risk of derivative instruments is counterparty credit
exposure, which is defined as the ability of a counterparty to perform its
financial obligations under a derivative contract. We control the credit risk of
our derivative agreements through counterparty credit approvals, pre-established
exposure limits and monitoring procedures.
The Capital Committee approves each counterparty and establishes exposure
limits based on credit analysis and market value. All derivative agreements are
with major money center financial institutions rated investment grade by
nationally recognized rating agencies, with the majority of our counterparties
rated "AA" or better. Credit exposures are measured based on the market value of
outstanding derivative instruments. Exposures are calculated for each derivative
contract to monitor counterparty credit exposure.
Liquidity Risk Management -- Liquidity risk refers to the risk of CIT
being unable to meet potential cash outflows promptly and cost effectively.
Factors that could cause such a risk to arise might be a disruption of a
securities market or other source of funds. We actively manage and mitigate
liquidity risk by maintaining diversified sources of funding. The primary
funding sources are commercial paper (U.S.) long term debt (U.S., International)
and asset-backed securities (U.S. and Canada). Included as part of our
securitization programs are committed asset-backed commercial paper programs in
the U.S. and Canada. We also maintain committed bank lines of credit to provide
back-stop support of commercial paper borrowings and local bank lines to support
our international operations. Additional sources of liquidity are loan and lease
payments from customers, whole loan asset sales and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability. Among
the target ratios are maximum percentage of outstanding commercial paper to
total debt and minimum percentage of committed bank line coverage to outstanding
commercial paper.
Liquidity
We successfully launched our dealer based commercial paper program during
the final fiscal quarter of 2002 and quickly reached $4.7 billion outstanding at
September 30, 2002. In addition, existing bank facilities were paid down,
maintaining back-stop liquidity to fully cover all outstanding commercial paper.
These events followed the draw down in February 2002 of our $8.5 billion
unsecured credit facilities, which have historically been maintained as
liquidity support for our commercial paper programs. The proceeds were used to
satisfy our outstanding commercial paper obligations as they came due.
At September 30, 2002, we had $4,037.4 million in drawn credit facilities.
We renegotiated a new 364-day credit facility during October 2002 and used the
proceeds from the new facility, along with other liquidity sources, to pay down
the prior 364-day facility. As of October 15, 2002, we have total credit
facilities of $7,350.0 million. Of this total, we have undrawn and available
credit facilities of $4,735.0 million, of which $3,720.0 million expires March
2005, and the remainder expires periodically during 2003. We have drawn a
$2,300.0 million 364-day facility expiring October 2003 and a C$500 million
facility (approximately $315.0 million U.S. dollar) maturing March 2003.
To further strengthen our funding flexibility, we maintain committed asset
backed facilities which cover a range of assets from equipment to real estate
assets, and trade accounts receivable. While these facilities are
31
predominately in the U.S., we also maintain facilities for Canadian domiciled
assets. As of September 30, 2002, we had in aggregate $7.9 billion in committed
facilities.
In addition to the commercial paper markets, CIT maintains access to the
unsecured term debt markets. During the fiscal year ended September 2002, we
issued $4.6 billion of term debt and securitized $7.7 billion of financing and
leasing assets.
From time to time, CIT files registration statements for debt securities,
which it may sell in the future. At September 30, 2002, we had $10.6 billion of
registered, but unissued, debt securities available under a shelf registration
statement. In addition, we have approximately $2.0 billion of availability in
our committed asset-backed facilities and $4.4 billion of registered, but
unissued, securities available under public shelf registration statements
relating to our asset-backed securitization program.
Our credit ratings are shown for September 30, 2002, June 30, 2002 and
September 30, 2001 in the following table.
At September 30, 2002 At June 30, 2002 At September 30, 2001 At December 31, 2000
--------------------- ---------------- --------------------- --------------------
Short Long Short Long Short Long Short Long
Term Term Term Term Term Term Term Term
----- ---- ----- ---- ----- ---- ----- ----
Moody's .............. P-1 A2 P-1 A2 P-1 A2 P-1 A1
Standard & Poor's .... A-1 A A-2 BBB+ A-1 A+ A-1 A+
Fitch ................ F1 A F2 BBB F1 A+ F1 A+
The security ratings stated above are not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal by the assigning
rating organization. Each rating should be evaluated independently of any other
rating.
In early 2002, in order to protect our bondholders, we amended our public
indenture agreements to prohibit or restrict transactions with Tyco, our former
parent. While we have minimal material covenants within our legal documents that
govern our funding sources, some do exist. The most significant covenant in CITs
indentures and credit agreements is a negative pledge provision which allows for
exceptions for certain ordinary course liens needed in order to operate our
business. Various credit agreements also contain a minimum net worth test of
$3.75 billion.
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of September 30, 2002
($ in millions).
Payments by Period
-------------------------------------------------------------
Due in Due in Due in Due in Due After
Contractual Obligations 2003 2004 2005 2006 2006 Total
- ----------------------- ------ ------ ------ ------ --------- -----
Commercial paper ............................. $ 4,654.2 $ -- $ -- $ -- $ -- $ 4,654.2
Bank credit facilities ....................... 4,037.4 -- -- -- -- 4,037.4
Variable-rate term debt ...................... 3,910.3 1,247.0 23.4 25.0 173.3 5,379.0
Fixed-rate term debt ......................... 2,784.9 4,321.5 4,704.1 1,179.1 5,395.8 18,385.4
Lease rental expense ......................... 67.1 56.7 49.4 37.9 66.4 277.5
--------- --------- --------- -------- -------- ---------
Total contractual obligations ............. 15,453.9 5,625.2 4,776.9 1,242.0 5,635.5 32,733.5
--------- --------- --------- -------- -------- ---------
Finance receivables(1) ....................... 13,136.8 3,541.2 2,624.5 1,751.2 7,405.3 28,459.0
Operating lease rental income ................ 1,177.6 736.7 447.4 279.9 638.0 3,279.6
Finance receivables held for sale(2) ......... 1,019.5 -- -- -- -- 1,019.5
Cash-- current balance ....................... 2,274.4 -- -- -- -- 2,274.4
--------- --------- --------- -------- -------- ---------
Total projected cash availability(3) ...... 17,608.3 4,277.9 3,071.9 2,031.1 8,043.3 35,032.5
--------- --------- --------- -------- -------- ---------
Net projected cash inflow (outflow) .......... $ 2,154.4 $(1,347.3) $(1,705.0) $ 789.1 $2,407.8 $ 2,299.0
========= ========= ========= ======== ======== =========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amount could differ due to prepayments,
chargeoffs and other factors.
(2) Based upon management's intent to sell rather than contractual maturities
of underlying assets.
(3) Excludes projected proceeds from sale of operating lease equipment
portfolio, interest revenue from finance receivables, debt interest
expense and other items.
32
Commitment Expiration by Period
---------------------------------------------------------
Due in Due in Due in Due in Due After
Contractual Commitments 2003 2004 2005 2006 2006 Total
- ----------------------- ------ ------ ------ ------ ------ -----
Credit extensions ....................... $2,395.0 $ 64.3 $ 27.9 $13.7 $167.4 $2,668.3
Letters of credit ....................... 1,105.5 4.4 -- -- -- 1,109.9
Acceptances ............................. 8.4 -- -- -- -- 8.4
Guarantees .............................. 724.5 -- -- -- -- 724.5
Venture capital fund commitments ........ -- -- -- -- 176.6 176.6
Aircraft purchases ...................... 660.0 979.0 1,444.0 640.0 184.0 3,907.0
-------- -------- -------- ------ ------ --------
Total Commitments .................... $4,893.4 $1,047.7 $1,471.9 $653.7 $528.0 $8,594.7
======== ======== ======== ====== ====== ========
See the "-- Overview" and "-- Net Finance Margin" sections for information
regarding the impact of our liquidity and capitalization plan on results of
operations.
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and to provide an additional
source of liquidity, we use an array of securitization programs to access both
the public and private asset-backed securitization markets. Current products in
these programs include receivables and leases secured by equipment as well as
consumer loans secured by residential real estate. During the fiscal year ended
September 30, 2002, we securitized $7.7 billion of financing and leasing assets
and the outstanding securitized asset balance at September 30, 2002 was $11.2
billion or 23.6% of our total managed assets. Beginning in the quarter ended
March 31, 2002, we experienced a disruption to our funding base, which was
prompted by Tyco's announcement to dispose of CIT and subsequent credit rating
downgrades of both Tyco and CIT. As a result, during the March and June 2002
quarters, we relied more heavily on securitization as a funding source. In
addition to our conventional securitization programs, we also completed a
conduit facility backed by trade accounts receivable in order to further broaden
our funding access.
Under our typical asset-backed securitization, we sell a "pool" of secured
loans or leases to a special-purpose entity, typically a trust. The
special-purpose entity, in turn, issues certificates and/or notes that are
collateralized by the pool and entitle the holders thereof to participate in
certain pool cash flows. We retain the servicing of the securitized contracts,
for which we earn a servicing fee. We also participate in certain "residual"
cash flows (cash flows after payment of principal and interest to certificate
and/or note holders, servicing fees and other credit-related disbursements). At
the date of securitization, we estimate the "residual" cash flows to be received
over the life of the securitization, record the present value of these cash
flows as a retained interest in the securitization (retained interests can
include bonds issued by the special-purpose entity, cash reserve accounts on
deposit in the special-purpose entity or interest only receivables) and
typically recognize a gain.
In estimating residual cash flows and the value of the retained interests,
we make a variety of financial assumptions, including pool credit losses,
prepayment speeds and discount rates. These assumptions are supported by both
our historical experience and anticipated trends relative to the particular
products securitized. Subsequent to recording the retained interests, we review
them quarterly for impairment based on estimated fair value. These reviews are
performed on a disaggregated basis. Fair values of retained interests are
estimated utilizing current pool demographics, actual note/certificate
outstandings, current and anticipated credit losses, prepayment speeds and
discount rates.
During the twelve months ended September 30, 2002, we recorded
securitization gains of $149.0 million on $7.7 billion of financing and leasing
assets securitized, which equates to 16.9% of pretax income, excluding TCH and
goodwill impairment charges. During the same period in 2001, we recorded
securitization gains of $138.3 million on $4.5 billion of financing and leasing
assets securitized, which equated to 15.6% of pretax income (excluding TCH
losses). Absent funding source disruptions, management targets a maximum of 15%
of pre-tax income from securitization gains. Our retained interests had a
carrying value at September 30, 2002 of $1,313.7 million, including interests in
commercial securitized assets of $1,039.7 million and consumer securitized
assets of $274.0 million. The total retained interest as of September 30, 2002
is comprised of $658.9 million in over-collateralization, $362.2 million of
interest only strips, and $292.6 million of cash reserve accounts. Retained
interests are subject to credit and prepayment risk. Our interests relating to
commercial securitized assets are
33
generally subject to lower prepayment risk because of the contractual terms of
the underlying receivables. These assets are subject to the same credit granting
and monitoring processes which are described in the "Credit Risk Management"
section.
Capitalization
On July 2, 2002, the underwriters sold 200 million shares of CIT's stock
in the Company's initial public offering. The net proceeds were paid to Tyco,
the selling stockholder. On July 12, 2002, as part of CIT's IPO, the
underwriters exercised a portion of their over-allotment option to purchase an
additional 11.6 million shares of CIT stock from the Company, increasing capital
by approximately $255 million.
During the year ended September 30, 2002, our managed assets declined by
$3.3 billion (6.4%) and our owned assets declined by $4.3 billion (10.7%). We
continued to sell or liquidate various portfolios we had previously ceased
originating new business in: owner-operator trucking, franchise, manufactured
housing, recreational vehicle and inventory finance. In all, these portfolios
declined from approximately $3.1 billion at September 30, 2001 to $1.5 billion
at September 30, 2002 due to liquidation and sales. Our additions to retained
earnings and our asset runoff continued to improve our capitalization and
leverage ratios. The following table presents information regarding our capital
structure ($ in millions).
September 30, 2002 September 30, 2001 December 31, 2000
------------------ ------------------ -----------------
(successor) (successor) (predecessor)
Commercial paper ....................................... $ 4,654.2 $ 8,869.2 $ 9,063.5
Bank credit facilities ................................. 4,037.4 -- --
Term debt .............................................. 23,764.4 26,828.5 28,901.6
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the Company ("Preferred
Capital Securities") ................................ 257.7 260.0 250.0
Stockholders' equity(1) ................................ 4,857.3 10,661.4(2) 6,007.2
--------- --------- ---------
Total capitalization ................................... 37,571.0 46,619.1 44,222.3
Goodwill and other intangible assets ................... (384.4) (6,569.5) (1,964.6)
--------- --------- ---------
Total tangible capitalization .......................... $37,186.6 $40,049.6 $42,257.7
========= ========= =========
Tangible stockholders' equity(1) and Preferred Capital
Securities to managed assets ........................ 9.93% 8.55%(2) 7.82%
Total debt (excluding overnight deposits) to tangible
stockholders' equity(1) and Preferred Capital
Securities .......................................... 6.54x 8.20x(2) 8.78x
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 10 to the Consolidated
Financial Statements and certain unrealized gains or losses on retained
interests and investments.
(2) Excludes equity deficit relating to TCH that was relieved via capital
contributed from Tyco as of June 30, 2002.
The Company-obligated mandatorily redeemable preferred securities are
7.70% Preferred Capital Securities issued in 1997 by CIT Capital Trust I, a
wholly-owned subsidiary. CIT Capital Trust I invested the proceeds of that issue
in Junior Subordinated Debentures of CIT having identical rates and payment
dates.
See `Liquidity Risk Management' for discussion on risks impacting our
liquidity and capitalization.
Securitization and Joint Venture Activities
We utilize special purpose entities (SPE's) and joint ventures in the
normal course of business to execute securitization transactions and conduct
business in key vendor relationships.
Securitization Transactions -- SPE's are used to achieve "true sale" and
bankruptcy remote requirements for these transactions in accordance with SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." Pools of assets are originated and sold to
special purpose entities, which in turn issue debt securities to investors
solely backed by asset pools. Accordingly, CIT has no legal obligations to repay
the investment certificates in the event of a default by the Trust. CIT retains
the servicing rights and participates in certain cash flows of the pools. The
present value of expected net cash flows that exceeds the estimated cost of
servicing is recorded in other assets as a "retained interest." Assets
securitized are shown in our managed assets and our capitalization ratios on
managed assets.
34
Joint Ventures -- We utilize joint ventures to conduct financing
activities with certain strategic vendor partners. Receivables are originated by
the joint venture and purchased by CIT. These distinct legal entities are
jointly owned by the vendor partner and CIT, and there is no third-party debt
involved. These arrangements are accounted for using the equity method, with
profits and losses distributed according to the joint venture agreement.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to use judgment in making
estimates and assumptions that affect 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. The following accounting policies include inherent risks and
uncertainties related to judgments and assumptions made by management.
Management's estimates are based on the relevant information available at the
end of each period.
Investments -- Investments for which the Company does not have the ability
to exercise significant influence and for which there is not a readily
determinable market value are accounted for under the cost method. Management
uses judgment in determining when an unrealized loss is deemed to be other than
temporary, in which case such loss is charged to earnings.
Charge-off of Finance Receivables -- Finance receivables are reviewed
periodically to determine the probability of loss. Charge-offs are taken after
considering such factors as the borrower's financial condition and the value of
underlying collateral and guarantees (including recourse to dealers and
manufacturers).
Impaired Loans -- Loan impairment is defined as any shortfall between the
estimated value and the recorded investment in the loan, with the estimated
value determined using the fair value of the collateral and other cash flows, if
the loan is collateral dependent, or the present value of expected future cash
flows discounted at the loan's effective interest rate.
Reserve for Credit Losses -- On a quarterly basis, the reserve for credit
losses is set and reviewed by senior management for adequacy considering
economic conditions, collateral values and credit quality indicators, including
historical and expected charge-off experience and levels of past-due loans and
non-performing assets. Management uses judgment in determining the level of the
consolidated reserve for credit losses and in evaluating the adequacy of the
reserve. The reserve for credit losses is set and recorded based on the
establishment of three components - specific reserves for collateral dependent
loans which are impaired under SFAS 114, reserves for estimated losses inherent
in the portfolio based upon historic credit trends and general reserves for
"estimation" risk. As of September 30, 2002, the reserve for credit losses was
$777.8 million or 2.73% of finance receivables and 72.7% of past due
receivables. A $10.0 million change in the reserve for credit losses equates to
the following variances: 4 basis points (0.04%) in the percentage of reserves to
finance receivables; 93 basis points (0.93%) in the percentage of reserves to
past due receivables and $0.03 in earnings per share.
Retained Interests in Securitizations -- Significant financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates, are utilized to determine the fair values of retained interests, both at
the date of the securitization and in the subsequent quarterly valuations of
retained interests. Any resulting losses, representing the excess of carrying
value over estimated fair value, are recorded against current earnings. However,
unrealized gains are reflected in stockholders' equity as part of other
comprehensive income.
Lease Residual Values -- Operating lease equipment is carried at cost less
accumulated depreciation and is depreciated to estimated residual value using
the straight-line method over the lease term or projected economic life of the
asset. Direct financing leases are recorded at the aggregated future minimum
lease payments plus estimated residual values less unearned finance income.
Management performs periodic reviews of the estimated residual values, with
impairment, other than temporary, recognized in the current period. As of
September 30, 2002, our direct financing lease residual balance was $2,273
million and our operating lease equipment balance was $6,567 million. A 10 basis
points (0.1%) fluctuation in the combination of these amounts equates to $0.02
in earnings per share.
35
Goodwill -- CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001, the beginning of CIT's fiscal 2002. The
Company determined that there was no impact of adopting this new standard under
the transition provisions of SFAS No. 142. Since adoption, goodwill is no longer
amortized, but instead will be assessed for impairment at least annually. During
this assessment, management relies on a number of factors including operating
results, business plans, economic projections, anticipated future cash flows,
and transactions and market place data. See "--Goodwill and Other Intangible
Assets Amortization" above for a discussion of our recent impairment analysis.
Accounting and Technical Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. We are currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model for
impairment of long-lived assets and retain the requirements of SFAS 121 to
recognize an impairment loss when the carrying amount of a long-lived asset can
not be recovered from its undiscounted cash flows and to measure the loss based
upon fair values. Because the provisions of this pronouncement with respect to
individual asset impairment are consistent with our current accounting policy,
the adoption of SFAS 144 is not expected to have a significant impact on our
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which is effective for fiscal years beginning after May 15, 2002.
This statement rescinds the above mentioned statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS 145 is
not expected to have a significant impact on our financial position or results
of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities that are
initiated after December 31, 2002. SFAS 146 is not expected to have a
significant impact on our financial position or results of operations.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 supercedes specialized accounting guidance
in SFAS No. 72 in order to conform the accounting for certain acquisitions of
Banking or Thrift institutions to SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 147 is not expected to impact our financial position or results of
operations.
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements contained herein, in
press releases, written statements or other documents filed with the Securities
and Exchange Commission or in communications and discussions with investors and
analysts in the normal course of business through meetings, webcasts, phone
calls and conference calls, concerning our operations, economic performance and
financial condition are subject to known and unknown risks, uncertainties and
contingencies. Forward-looking statements are included, for example, in the
discussions about:
o our liquidity risk management,
o our credit risk management,
o our asset/liability risk management,
36
o our capital, leverage and credit ratings,
o our operational and legal risks,
o our commitments to extend credit or purchase equipment, and
o how we may be affected by legal proceedings.
All forward-looking statements involve risks and uncertainties, many of
which are beyond our control, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Also, forward-looking statements are based upon management's
estimates of fair values and of future costs, using currently available
information. Therefore, actual results may differ materially from those
expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o risks of economic slowdown, downturn or recession,
o industry cycles and trends,
o risks inherent in changes in market interest rates and quality
spreads,
o funding opportunities and borrowing costs,
o changes in funding markets, including commercial paper, term debt
and the asset-backed securitization markets,
o uncertainties associated with risk management, including credit,
prepayment, asset/liability, interest rate and currency risks,
o adequacy of reserves for credit losses,
o risks associated with the value and recoverability of leased
equipment and lease residual values,
o changes in laws or regulations governing our business and
operations,
o changes in competitive factors, and
o future acquisitions and dispositions of businesses or asset
portfolios.
37
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIT Group Inc.
In our opinion, the accompanying consolidated balance sheets as of
September 30, 2002 and 2001, and the related consolidated statements of income,
of stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of CIT Group Inc. (formerly Tyco Capital
Corporation) and its subsidiaries at September 30, 2002 and 2001, and the
results of their operations and their cash flows for the fiscal year ended
September 30, 2002 and for the period from June 2, 2001 through September 30,
2001 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," on June 2, 2001, the Company
changed its basis of accounting for purchased assets and liabilities, and on
October 1, 2001 the Company implemented the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
New York, New York
October 29, 2002
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIT Group Inc.
In our opinion, the accompanying consolidated statements of income, of
stockholder's equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of CIT Group Inc. (formerly Tyco
Capital Corporation) and its subsidiaries for the period from January 1, 2001
through June 1, 2001 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
New York, New York
October 18, 2001, except as to
the fifth paragraph of Note 23
and first paragraph of Note 1,
which are as of February 11, 2002
and July 1, 2002, respectively.
39
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
The CIT Group, Inc.:
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity, and cash flows of The CIT Group, Inc. and
subsidiaries for the year ended December 31, 2000. These consolidated financial
statements are the responsibility of CIT's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the cash
flows of The CIT Group, Inc. and subsidiaries for the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Short Hills, New Jersey
January 25, 2001
40
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
September 30, September 30,
2002 2001
------------- -------------
ASSETS
Financing and leasing assets:
Finance receivables ......................................................... $28,459.0 $31,879.4
Reserve for credit losses ................................................... (777.8) (492.9)
--------- ---------
Net finance receivables ..................................................... 27,681.2 31,386.5
Operating lease equipment, net .............................................. 6,567.4 6,402.8
Finance receivables held for sale ........................................... 1,019.5 2,014.9
Cash and cash equivalents ...................................................... 2,274.4 808.0
Goodwill, net .................................................................. 384.4 6,547.5
Receivables from Tyco affiliates ............................................... -- 362.7
Other assets ................................................................... 4,783.6 3,826.9
--------- ---------
Total Assets ................................................................... $42,710.5 $51,349.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ............................................................ $ 4,654.2 $ 8,869.2
Variable-rate bank credit facilities ........................................ 4,037.4 --
Variable-rate senior notes .................................................. 5,379.0 9,614.6
Fixed-rate senior notes ..................................................... 18,385.4 17,113.9
Subordinated fixed-rate notes ............................................... -- 100.0
--------- ---------
Total debt ..................................................................... 32,456.0 35,697.7
Note payable to Tyco affiliates ................................................ -- 5,017.3
Credit balances of factoring clients ........................................... 2,513.8 2,392.9
Accrued liabilities and payables ............................................... 2,725.2 2,033.8
--------- ---------
Total Liabilities .............................................................. 37,695.0 45,141.7
--------- ---------
Commitments and contingencies (Note 21)
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company ............................... 257.7 260.0
Stockholders' Equity:
Preferred stock, $0.01 par value, 100,000,000 authorized, none issued ....... -- --
Common stock, $0.01 par value, 600,000,000 authorized 211,573,200
issued and outstanding ..................................................... 2.1 --
Paid-in capital, net of deferred compensation of $6.4 ....................... 10,674.8 --
Contributed capital ......................................................... -- 5,842.5
Accumulated (deficit) earnings .............................................. (5,722.8) 181.9
Accumulated other comprehensive loss ........................................ (196.3) (76.8)
--------- ---------
Total Stockholders' Equity ..................................................... 4,757.8 5,947.6
--------- ---------
Total Liabilities and Stockholders' Equity ..................................... $42,710.5 $51,349.3
========= =========
See Notes to Consolidated Financial Statements.
41
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Year Ended June 2 through January 1 through Year Ended
September 30, September 30, June 1, December 31,
2002 2001 2001 2000
------------- -------------- ---------------- ------------
(successor) (successor) (predecessor) (predecessor)
Finance income ...................................... $ 4,342.8 $1,676.5 $2,298.8 $5,248.4
Interest expense .................................... 1,439.3 597.1 1,022.7 2,497.7
--------- -------- -------- --------
Net finance income .................................. 2,903.5 1,079.4 1,276.1 2,750.7
Depreciation on operating lease equipment ........... 1,241.0 448.6 588.1 1,281.3
--------- -------- -------- --------
Net finance margin .................................. 1,662.5 630.8 688.0 1,469.4
Provision for credit losses ......................... 788.3 116.1 216.4 255.2
--------- -------- -------- --------
Net finance margin after provision for
credit losses .................................... 874.2 514.7 471.6 1,214.2
Other revenue ....................................... 932.3 335.1 237.5 912.0
--------- -------- -------- --------
Operating margin .................................... 1,806.5 849.8 709.1 2,126.2
--------- -------- -------- --------
Salaries and general operating expenses ............. 946.4 348.5 446.0 1,035.2
Intercompany interest expense - TCH ................. 662.6 97.7 1.1 --
Goodwill impairment ................................. 6,511.7 -- -- --
Goodwill amortization ............................... -- 59.8 37.8 86.3
Acquisition-related costs ........................... -- -- 54.0 --
--------- -------- -------- --------
Operating expenses .................................. 8,120.7 506.0 538.9 1,121.5
--------- -------- -------- --------
(Loss) income before provision for
income taxes ..................................... (6,314.2) 343.8 170.2 1,004.7
Provision for income taxes .......................... (374.0) (157.4) (84.8) (381.2)
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax ...... (10.5) (3.6) (4.9) (11.9)
--------- -------- -------- --------
Net (loss) income ................................... $(6,698.7) $ 182.8 $ 80.5 $ 611.6
========= ======== ======== ========
Net (loss) income per basic share ................... $ (31.66) $ 0.86 $ 0.38 $ 2.89
========= ======== ======== ========
Net (loss) income per diluted share ................. $ (31.66) $ 0.86 $ 0.38 $ 2.89
========= ======== ======== ========
Note: Per share calculations assume that current period shares are outstanding
for all periods presented.
See Notes to Consolidated Financial Statements.
42
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated Total
Common Paid-in Contributed Treasury Earnings Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income (Loss) Equity
------ ------- ----------- -------- ----------- ------------- -------------
December 31, 1999 (predecessor) .......... $ 2.7 $ 3,521.8 $ -- $ (70.5) $ 2,097.6 $ 2.8 $ 5,554.4
Net income ............................... 611.6 611.6
Foreign currency translation
adjustments ............................ 4.3 4.3
Unrealized gain on equity and
securitization investments, net ........ 4.6 4.6
---------
Total comprehensive income ............... 620.5
---------
Cash dividends ........................... (105.9) (105.9)
Repurchase of common stock ............... (67.2) (67.2)
Restricted common stock grants ........... 5.4 5.4
----- --------- ---------- ------- --------- ------- ---------
December 31, 2000 (predecessor) .......... 2.7 3,527.2 -- (137.7) 2,603.3 11.7 6,007.2
Net income ............................... 80.5 80.5
Foreign currency translation
adjustments ............................ (33.7) (33.7)
Cumulative effect of new accounting
principle .............................. (146.5) (146.5)
Change in fair values of derivatives
qualifying as cash flow hedges ......... 0.6 0.6
--------
Total comprehensive loss ................. (99.1)
--------
Cash dividends ........................... (52.9) (52.9)
Issuance of treasury stock ............... 27.6 27.6
Restricted common stock grants ........... 12.4 12.4
Merger of TCH ............................ (4,579.9) (4,579.9)
----- --------- ---------- ------- --------- ------- ---------
June 1, 2001 (predecessor) ............... 2.7 3,539.6 (4,579.9) (110.1) 2,630.9 (167.9) 1,315.3
Recapitalization at acquisition .......... -- (3,539.6) 3,539.6 -- -- -- --
Effect of push-down accounting of
Tyco's purchase price on CIT's
net assets ............................. (2.7) -- 5,945.1 110.1 (2,631.7) 167.9 3,588.7
----- --------- ---------- ------- --------- ------- ---------
June 1, 2001 (successor) ................. -- -- 4,904.8 -- (0.8) -- 4,904.0
Net income ............................... 182.8 182.8
Foreign currency translation
adjustments ............................ (13.4) (13.4)
Change in fair values of derivatives
qualifying as cash flow hedges ......... (63.4) (63.4)
--------
Total comprehensive income ............... 106.0
--------
Cash dividends ........................... (0.1) (0.1)
Tax benefit on stock transactions ........ 39.4 39.4
Capital contribution from Tyco ........... -- 898.3 898.3
----- --------- ---------- ------- --------- ------- ---------
September 30, 2001 (successor) ........... -- -- 5,842.5 $ -- 181.9 (76.8) 5,947.6
Net loss ................................. (6,698.7) (6,698.7)
Foreign currency translation
adjustments ............................ (62.4) (62.4)
Change in fair values of derivatives
qualifying as cash flow hedges ......... (57.1) (57.1)
Unrealized gain on equity and
securitization investments, net ........ 21.0 21.0
Minimum pension liability
adjustment ............................. (21.0) (21.0)
--------
Total comprehensive loss ................. (6,818.2)
--------
Issuance of common stock in connection
with the initial public offering ....... 2.0 10,420.4 (10,422.4) --
Common stock issued - overallotment ...... 0.1 249.2 249.3
Capital contribution from Tyco for TCH ... 4,579.9 794.0 5,373.9
Restricted common stock grants ........... -- 5.2 -- -- -- -- 5.2
----- --------- ---------- ------- --------- ------- ---------
September 30, 2002 ....................... $ 2.1 $10,674.8 $ -- $ -- $(5,722.8) $(196.3) $ 4,757.8
===== ========= ========== ======= ========= ======= =========
See Notes to Consolidated Financial Statements.
43
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended June 2 through January 1 through Year Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31,2000
------------------ ------------------ ----------------- ----------------
(successor) (successor) (predecessor) (predecessor)
Cash Flows From Operations:
Net (loss) income ................................. $ (6,698.7) $ 182.8 $ 80.5 $ 611.6
Adjustments to reconcile net (loss) income to
net cash flows from operations:
Goodwill impairment ............................ 6,511.7 -- -- --
Provision for credit losses .................... 788.3 116.1 216.4 255.2
Depreciation and amortization .................. 1,286.5 521.3 642.4 1,408.7
Provision for deferred federal income
taxes ........................................ 276.9 113.6 63.7 211.5
Gains on equipment, receivable and
investment sales, net ........................ (203.1) (119.1) (18.2) (371.8)
(Decrease) increase in accrued liabilities
and payables ................................. 57.0 (349.8) (28.2) 449.0
(Increase) decrease in other assets ............ (626.7) (429.7) 69.9 (690.9)
Other .......................................... (32.3) (70.6) 36.0 31.9
---------- ---------- ---------- ----------
Net cash flows provided by (used for)
operations ..................................... 1,359.6 (35.4) 1,062.5 1,905.2
---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Loans extended .................................... (48,300.6) (15,493.1) (20,803.0) (49,275.8)
Collections on loans .............................. 42,584.2 12,750.6 18,520.2 41,847.5
Proceeds from asset and receivable sales .......... 10,992.4 5,213.0 2,879.6 7,055.4
Purchases of assets to be leased .................. (1,877.2) (756.9) (694.0) (2,457.6)
Purchases of finance receivable portfolios ........ (372.7) -- -- (1,465.6)
Net increase in short-term factoring
receivables .................................... (651.9) (471.2) (131.0) (175.4)
Other ............................................. (52.5) 3.2 (24.4) (79.4)
---------- ---------- ---------- ----------
Net cash flows provided by (used for)
investing activities ........................... 2,321.7 1,245.6 (252.6) (4,550.9)
---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from the issuance of variable and
fixed rate notes ............................... 13,093.4 1,000.0 6,246.6 12,645.3
Repayments of variable and fixed-rate notes ....... (12,148.8) (3,272.2) (6,491.5) (10,143.2)
Net (decrease) increase in commercial paper ....... (4,186.2) (1,007.8) 813.6 89.5
Net repayments of non-recourse
leveraged lease debt ........................... (187.7) (26.6) (8.7) (31.2)
Capital contributions from former Parent .......... 923.5 744.7 0.8 --
Proceeds from issuance of common stock ............ 254.6
Cash dividends paid ............................... -- -- (52.9) (105.9)
Issuance (purchase) of treasury stock ............. -- -- 27.6 (67.2)
---------- ---------- ---------- ----------
Net cash flows (used for) provided by
financing activities ........................... (2,251.2) (2,561.9) 535.5 2,387.3
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents .................................... 1,430.1 (1,351.7) 1,345.4 (258.4)
Exchange rate impact on cash ...................... 36.3 3.3 (1.1) (2.9)
Cash and cash equivalents, beginning of
period ......................................... 808.0 2,156.4 812.1 1,073.4
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period .......... $ 2,274.4 $ 808.0 $ 2,156.4 $ 812.1
========== ========== ========== ==========
Supplementary Cash Flow Disclosure:
Interest paid ..................................... $ 1,713.9 $ 652.9 $ 1,067.6 $ 2,449.7
Federal, foreign and state and local income
taxes (refunded) paid - net .................... $ (43.9) $ 31.4 $ 14.7 $ 28.4
Supplementary Non-cash Disclosure:
Push-down of purchase price by Parent ............. -- $ 9,484.7 -- --
See Notes to Consolidated Financial Statements.
44
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Business and Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"),
formerly known as Tyco Capital Corporation, and previously The CIT Group, Inc.,
is a leading independent source of financing and leasing capital for companies
in a wide variety of industries, including many of today's leading industries
and emerging businesses, offering vendor, equipment, commercial, factoring,
consumer, and structured financing capabilities. CIT operates primarily in North
America, with locations in Europe, Latin America, Australia and the Asia-Pacific
region.
Basis of Presentation
The Consolidated Financial Statements include the results of CIT and its
subsidiaries and have been prepared in U.S. dollars, unless indicated otherwise,
in accordance with accounting principles generally accepted in the United
States. Prior period amounts have been reclassified to conform to the current
presentation. On June 1, 2001, The CIT Group, Inc. was acquired by a
wholly-owned subsidiary of Tyco International Ltd. ("Tyco"), in a purchase
business combination recorded under the "push-down" method of accounting,
resulting in a new basis of accounting for the "successor" period beginning June
2, 2001. Information relating to all "predecessor" periods prior to the
acquisition is presented using CIT's historical basis of accounting. On July 8,
2002, our former parent, Tyco International Ltd. ("Tyco") completed a sale of
100% of CIT's outstanding common stock in an initial public offering ("IPO").
Immediately prior to the offering, CIT was merged with its parent Tyco Capital
Holding, Inc. (TCH), a company used to acquire CIT. As a result, the historical
financial results of TCH are included in the historical consolidated CIT
financial statements.
CIT consolidates entities in which it owns or controls more than fifty
percent of the voting shares, unless control is likely to be temporary. Entities
that are twenty to fifty percent owned by CIT are included in other assets and
presented at the corresponding share of equity plus loans and advances. Entities
in which CIT owns less than twenty percent of the voting shares, and over which
the Company has no significant influence, are included in other assets at cost,
less declines in value that are other than temporary. In accordance with SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", Qualifying Special Purpose Entities (QSPE's)
utilized in securitizations are not consolidated. Interests in securitizations
are included in other assets. All significant intercompany transactions have
been eliminated.
Financing and Leasing Assets
CIT provides funding through a variety of financing arrangements,
including term loans, lease financing and operating leases. The amounts
outstanding on loans and leases are referred to as finance receivables and, when
combined with finance receivables held for sale, net book value of operating
lease equipment, and certain investments, represent financing and leasing
assets.
At the time of designation for sale, securitization or syndication by
management, assets are classified as finance receivables held for sale. These
assets are carried at the lower of aggregate cost or market value.
Income Recognition
Finance income includes interest on loans, the accretion of income on
direct financing leases, and rents on operating leases. Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is
recognized on an accrual basis commencing in the month of origination using
methods that generally approximate the interest method. Leveraged lease income
is recognized on a basis calculated to achieve a constant after-tax rate of
return for periods in which CIT has a positive investment in the transaction,
net of related deferred tax liabilities. Rental income on operating leases is
recognized on an accrual basis.
The accrual of finance income on commercial finance receivables is
generally suspended and an account is placed on non-accrual status when payment
of principal or interest is contractually delinquent for 90 days or more, or
earlier when, in the opinion of management, full collection of all principal and
interest due is doubtful. Given
45
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the nature of revolving credit facilities, including those combined with term
loan facilities (advances and interest accruals increase revolving loan balances
and payments reduce revolving loan balances), the placement of revolving credit
facilities on non-accrual status includes the review of other qualitative and
quantitative credit-related factors, and generally does not result in the
reversal of significant amounts of accrued interest. To the extent the estimated
fair value of collateral does not satisfy both the principal and accrued
interest outstanding, accrued but uncollected interest at the date an account is
placed on non-accrual status is reversed and charged against income. Subsequent
interest received is applied to the outstanding principal balance until such
time as the account is collected, charged-off or returned to accrual status. The
accrual of finance income on consumer finance receivables is suspended, and all
previously accrued but uncollected income is reversed, when payment of principal
and/or interest is contractually delinquent for 90 days or more.
Other revenue includes the following: (1) factoring commissions, (2)
commitment, facility, letters of credit and syndication fees, (3) servicing
fees, (4) gains and losses from sales of leasing equipment, venture capital
investments and sales and securitizations of finance receivables, and (5) equity
in earnings of joint ventures and unconsolidated subsidiaries.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. Lease
receivables include leveraged leases, for which a major portion of the funding
is provided by third party lenders on a nonrecourse basis, with CIT providing
the balance and acquiring title to the property. Leveraged leases are recorded
at the aggregate value of future minimum lease payments plus estimated residual
value, less nonrecourse third party debt and unearned finance income. Management
performs periodic reviews of the estimated residual values with impairment,
other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables
The consolidated reserve for credit losses is periodically reviewed for
adequacy considering economic conditions, collateral values and credit quality
indicators, including historical and expected charge-off experience and levels
of and trends in past due loans and non-performing assets. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses. In management's judgment, the consolidated reserve for credit losses is
adequate to provide for credit losses inherent in the portfolio.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance receivables. To the extent that
an unrecovered balance remains due, a final charge-off is taken at the time
collection efforts are deemed no longer useful. Charge-offs are recorded on
consumer and certain small ticket commercial finance receivables beginning at
180 days of contractual delinquency based upon historical loss severity.
Collections on accounts previously charged off are recorded as increases to the
reserve for credit losses.
Impaired Loans
Impaired loans include any loans for $500 thousand or greater, outside of
homogeneous pools of loans, that are placed on non-accrual status or any
troubled debt restructuring that is subject to periodic individual review by
CIT's Asset Quality Review Committee ("AQR"). The AQR, which is comprised of
members of senior management, reviews overall portfolio performance, as well as
individual accounts meeting certain credit risk grading parameters. Excluded
from impaired loans are: 1) certain individual commercial non-accrual loans for
46
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which the collateral value supports the outstanding balance and the continuation
of earning status, 2) consumer loans, which are subject to automatic charge-off
procedures, and 3) short-term factoring customer receivables, which generally
have terms of no more than 30 days. Loan impairment is defined as any shortfall
between the estimated value and the recorded investment in the loan, with the
estimated value determined using the fair value of the collateral and other cash
flows if the loan is collateral dependent, or the present value of expected
future cash flows discounted at the loan's effective interest rate.
Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease
equipment, is performed at least annually and whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Recoverability of assets is measured by comparing the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Goodwill and Other Identified Intangibles
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets acquired, less the fair value of liabilities assumed from
business combinations. CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. The Company determined that there was no
impact of adopting this new standard under the transition provisions of SFAS No.
142. Since adoption, goodwill is no longer amortized, but instead is assessed
for impairment at least annually. During this assessment, management relies on a
number of factors, including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data. See Note 16-Accounting Change-Goodwill.
Securitizations
Pools of assets are originated and sold to special purpose entities which,
in turn, issue debt securities or sell undivided interests in the assets to
investors backed by the asset pools. CIT retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected
net cash flows (after payment of principal and interest to certificate and/or
note holders and credit-related disbursements) that exceeds the estimated cost
of servicing is recorded at the time of sale as a "retained interest." Retained
interests in securitized assets are included in other assets and classified as
available-for-sale securities under SFAS 115. CIT, in its estimation of those
net cash flows and retained interests, employs a variety of financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates. These assumptions are supported by both CIT's historical experience,
market trends and anticipated performance relative to the particular assets
securitized. Subsequent to the recording of retained interests, CIT reviews such
values quarterly. Fair values of retained interests are calculated utilizing
current and anticipated credit losses, prepayment speeds and discount rates and
are then compared to the respective carrying values. Unrealized losses,
representing the excess of carrying value over estimated current fair value, are
recorded as an impairment. Unrealized gains are not credited to current earnings
but are reflected in stockholders' equity as part of other comprehensive income.
Other Assets
Assets received in satisfaction of loans are carried at the lower of
carrying value or estimated fair value less selling costs, with write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets, which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.
Realized and unrealized gains (losses) on marketable equity securities
included in CIT's venture capital investment companies are recognized currently
in operations. Unrealized gains and losses, representing the difference between
carrying value and estimated current fair market value, for all other debt and
marketable equity securities are recorded in other comprehensive income, a
separate component of equity.
47
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments in joint ventures are accounted for using the equity method,
whereby the investment balance is carried at cost and adjusted for the
proportionate share of undistributed earnings or losses. Unrealized intercompany
profits and losses are eliminated until realized, as if the joint venture were
consolidated.
Investments in debt and equity securities of non-public companies are
carried at cost. These valuations are periodically reviewed and a write-down is
recorded if a decline in value is considered other than temporary. Gains and
losses are recognized upon sale or write-down of these investments as a
component of other revenues.
Derivative Financial Instruments
CIT uses interest rate swaps, currency swaps and foreign exchange forward
contracts as part of a worldwide market risk management program to hedge against
the effects of future interest rate and currency fluctuations. CIT does not
enter into derivative financial instruments for trading or speculative purposes.
On January 1, 2001, CIT adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative instruments are recognized in
the balance sheet at their fair values in other assets and accrued liabilities
and payables, and changes in fair values are recognized immediately in earnings,
unless the derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in accumulated other comprehensive income as
a separate component of equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any
ineffective portion of a hedge is reported in current earnings. Amounts
accumulated in other comprehensive income are reclassified to earnings in the
same period that the hedged transaction impacts earnings.
The net interest differential, including premiums paid or received, if
any, on interest rate swaps, is recognized on an accrual basis as an adjustment
to finance income or as interest expense to correspond with the hedged position.
In the event that early termination of a derivative instrument occurs, the gain
or loss remains in accumulated other comprehensive income until the hedged
transaction is recognized in earnings.
CIT utilizes foreign exchange forward contracts or cross-currency swaps to
convert U.S. dollar borrowings into local currency in such instances that local
borrowings are not cost effective or available. CIT also utilizes foreign
exchange forward contracts to hedge its net investments in foreign operations.
These instruments are designated as hedges and resulting gains and losses are
reflected in accumulated other comprehensive income as a separate component of
equity.
Stock-Based Compensation
Stock option plans are accounted for in accordance with Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25"). In accordance with APB 25, no compensation expense is recognized for stock
options issued. Compensation expense associated with restricted stock awards is
recognized over the associated vesting periods.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is usually
the local currency. The value of the assets and liabilities of these operations
is translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenue and expense items are translated at the average exchange
rates effective during the year. The resulting foreign currency translation
gains and losses, as well as offsetting gains and losses on hedges of net
investments in foreign operations, are reflected in accumulated other
comprehensive (loss) income.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been reflected in the Consolidated
Financial Statements. Deferred tax liabilities and assets are determined based
on the differences between the book values and the tax basis of particular
assets and liabilities, using tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided to offset
any net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
48
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
borrowed in the commercial paper market and maintained for liquidity purposes.
Cash inflows and outflows from commercial paper borrowings and most factoring
receivables are presented on a net basis in the Statements of Cash Flows, as
their original term is generally less than 90 days.
Other Comprehensive Income/Loss
Other comprehensive income/loss includes unrealized gains on
securitization retained interests and other investments, foreign currency
translation adjustments pertaining to both the net investment in foreign
operations and the related derivatives designated as hedges of such investments,
and the changes in fair values of derivative instruments designated as hedges of
future cash flows and minimum pension liability adjustments.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make extensive use of 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.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. In addition, companies are required to
review goodwill and intangible assets reported in connection with prior
acquisitions, possibly disaggregate and report separately previously identified
intangible assets and possibly reclassify certain intangible assets into
goodwill. SFAS No. 142 establishes new guidelines for accounting for goodwill
and other intangible assets. CIT implemented the provisions of SFAS No. 142 on
October 1, 2001. Since adoption, existing goodwill is no longer amortized but
instead is assessed for impairment at least annually. See Note 16-Accounting
Change-Goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. CIT is currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model for
impairment of long-lived assets and retain the requirements of SFAS 121 to
recognize an impairment loss when the carrying amount of a long-lived asset can
not be recovered from its undiscounted cash flows and to measure the loss based
upon fair values. Because the provisions of this pronouncement with respect to
individual asset impairment are consistent with our current accounting policy,
the adoption of SFAS 144 is not expected to have a significant impact on our
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which is effective for fiscal years beginning after May 15, 2002.
This statement rescinds the above mentioned statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS 145 is
not expected to have a significant impact on our financial position or results
of operations.
In July 2002, the FASB issue SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities that are
initiated after December 31, 2002. SFAS 146 is not expected to have a
significant impact on our financial position or results of operations.
49
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 supercedes specialized accounting guidance
in SFAS No. 72 in order to conform the accounting for certain acquisitions of
Banking or Thrift institutions to SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 147 is not expected to impact CIT.
Note 2 -- Consolidating Financial Statements -- Tyco Capital Holding Inc. (TCH)
(unaudited)
September 30, 2001 (1)
--------------------------------------------------------------
CIT TCH Eliminations Consolidated
--- --- ------------ ------------
ASSETS
Financing and leasing assets:
Finance receivables ................................... $31,879.4 $ -- $ -- $31,879.4
Reserve for credit losses ............................. (492.9) -- -- (492.9)
--------- --------- ---------- ---------
Net finance receivables ............................... 31,386.5 -- -- 31,386.5
Operating lease equipment, net ........................ 6,402.8 -- -- 6,402.8
Finance receivables held for sale ..................... 2,014.9 -- -- 2,014.9
Cash and cash equivalents ................................ 808.0 -- -- 808.0
Goodwill, net ............................................ 6,547.5 -- -- 6,547.5
Receivables from Tyco affiliates ......................... 200.0 362.7 (200.0) 362.7
Investment in subsidiaries ............................... -- 10,598.0 (10,598.0) --
Other assets ............................................. 3,627.3 199.6 -- 3,826.9
--------- --------- ---------- ---------
Total Assets ............................................. $50,987.0 $11,160.3 $(10,798.0) $51,349.3
========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ...................................... $ 8,869.2 $ -- $ -- $ 8,869.2
Variable-rate senior notes ............................ 9,614.6 -- -- 9,614.6
Fixed-rate senior notes ............................... 17,113.9 -- -- 17,113.9
Subordinated fixed-rate notes ......................... 100.0 -- -- 100.0
--------- --------- ---------- ---------
Total debt ............................................... 35,697.7 -- -- 35,697.7
Notes and payables to Tyco affiliates .................... 7.6 5,209.7 (200.0) 5,017.3
Credit balances of factoring clients ..................... 2,392.9 -- -- 2,392.9
Accrued liabilities and payables ......................... 2,030.8 3.0 -- 2,033.8
--------- --------- ---------- ---------
Total Liabilities ........................................ 40,129.0 5,212.7 (200.0) 45,141.7
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely debentures of the Company ...................... 260.0 -- -- 260.0
Stockholders' Equity:
Contributed capital ................................... 10,422.4 5,842.5 (10,422.4) 5,842.5
Accumulated (deficit) earnings ........................ 252.4 181.9 (252.4) 181.9
Accumulated other comprehensive (loss) income ......... (76.8) (76.8) 76.8 (76.8)
--------- --------- ---------- ---------
Total Stockholders' Equity ............................... 10,598.0 5,947.6 (10,598.0) 5,947.6
--------- --------- ---------- ---------
Total Liabilities and Stockholders' Equity ............... $50,987.0 $11,160.3 $(10,798.0) $51,349.3
========= ========= ========== =========
- --------------------------------------------------------------------------------
(1) The 2001 balance sheet includes the activity of TCH. TCH was a
wholly-owned subsidiary of a Tyco affiliate domiciled in Bermuda. TCH's
activity was in connection with its capacity as the holding company for
the acquisition of CIT by Tyco, which included an outstanding loan from
and related interest expense payable to an affiliate of Tyco. Immediately
prior to the IPO of CIT on July 8, 2002, the activity of TCH (accumulated
net deficit) was relieved via a capital contribution from Tyco.
50
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year Ended For the Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------------- --------------------------------------
CIT TCH(1) Consolidated CIT TCH(1) Consolidated
--- ------ ------------ --- ------ ------------
(successor) (combined)
Finance income ......................... $ 4,342.8 $ -- $ 4,342.8 $3,975.3 $ -- $3,975.3
Interest expense ....................... 1,439.3 -- 1,439.3 1,619.8 -- 1,619.8
--------- ------- --------- -------- ------- --------
Net finance income ..................... 2,903.5 -- 2,903.5 2,355.5 -- 2,355.5
Depreciation on operating lease
equipment ........................... 1,241.0 -- 1,241.0 1,036.7 -- 1,036.7
--------- ------- --------- -------- ------- --------
Net finance margin ..................... 1,662.5 -- 1,662.5 1,318.8 -- 1,318.8
Provision for credit losses ............ 788.3 -- 788.3 332.5 -- 332.5
--------- ------- --------- -------- ------- --------
Net finance margin after provision
for credit losses ................... 874.2 -- 874.2 986.3 -- 986.3
Other revenue .......................... 932.3 -- 932.3 572.6 -- 572.6
--------- ------- --------- -------- ------- --------
Operating margin ....................... 1,806.5 -- 1,806.5 1,558.9 -- 1,558.9
--------- ------- --------- -------- ------- --------
Salaries and general operating
expenses ............................ 923.4 23.0 946.4 784.9 9.6 794.5
Inter-company interest
expense-- TCH ....................... -- 662.6 662.6 -- 98.8 98.8
Goodwill impairment .................... 6,511.7 -- 6,511.7 -- -- --
Goodwill amortization .................. -- -- -- 97.6 -- 97.6
Acquisition related costs .............. -- -- -- 54.0 -- 54.0
--------- ------- --------- -------- ------- --------
Operating expenses ..................... 7,435.1 685.6 8,120.7 936.5 108.4 1,044.9
--------- ------- --------- -------- ------- --------
(Loss) income before provision for
income taxes ........................ (5,628.6) (685.6) (6,314.2) 622.4 (108.4) 514.0
(Provision) benefit for income taxes ... (336.1) (37.9) (374.0) (280.1) 37.9 (242.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax .................. (10.5) -- (10.5) (8.5) -- (8.5)
--------- ------- --------- -------- ------- --------
Net (loss) income ...................... $(5,975.2) $(723.5) $(6,698.7) $ 333.8 $ (70.5) $ 263.3
========= ======= ========= ======== ======= ========
- --------------------------------------------------------------------------------
(1) TCH was a wholly-owned subsidiary of a Tyco affiliate domiciled in Bermuda
and was the holding company for the acquisition of CIT by Tyco, which
included an outstanding loan from and related interest expense payable to
an affiliate of Tyco. Immediately prior to the IPO of CIT on July 8, 2002,
the prior activity of TCH (accumulated net deficit) was relieved via a
capital contribution from Tyco. The consolidated financial statements of
CIT were not impacted by TCH subsequent to June 30, 2002. The eliminating
entries, including TCH's investment in CIT, are included within the TCH
column.
Note 3-- Initial Public Offering and Acquisition by Tyco International Ltd.
On July 8, 2002, our former parent, Tyco International Ltd. ("Tyco")
completed a sale of 100% of CIT's outstanding common stock in an initial public
offering ("IPO"). All proceeds from the IPO were collected by Tyco. Immediately
prior to the offering, a restructuring was effectuated whereby our predecessor,
CIT Group Inc., a Nevada corporation, was merged with and into its parent Tyco
Capital Holding, Inc. ("TCH") and that combined entity was further merged with
and into CIT Group Inc. (Del), a Delaware corporation. In connection with the
reorganization, CIT Group Inc. (Del) was renamed CIT Group Inc. As a result of
the reorganization, CIT is the successor to CIT Group Inc. (Nevada)'s business,
operations, and obligations. On July 12, 2002, the underwriters of the IPO
exercised a portion of their over-allotment option to purchase an additional
11.6 million shares of the Company's Common Stock from CIT at the IPO price of
$23.00 per share, before underwriting discounts and commissions. CIT received
the funds from this sale.
The purchase price paid by Tyco for CIT was valued at approximately $9.5
billion. The $9.5 billion value consisted of the following: the issuance of
approximately 133.0 million Tyco common shares valued at $6,650.5 million on
June 1, 2001 in exchange for approximately 73% of the outstanding CIT common
stock (including exchangeable shares of CIT Exchangeco, Inc.); the payment of
$2,486.4 million in cash to the Dai-Ichi Kangyo Bank, Limited ("DKB") on June 1,
2001 for approximately 27% of the outstanding CIT common stock; options for Tyco
common shares valued at $318.6 million issued in exchange for CIT stock options;
and
51
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$29.2 million in acquisition-related costs incurred by Tyco. In addition, $22.3
million in acquisition-related costs incurred by Tyco were paid and have been
reflected in CIT's equity as an additional capital contribution. The purchase of
the CIT common stock held by DKB, which was contingent upon the satisfaction of
the conditions of the merger, took place immediately prior to the closing of the
merger on June 1, 2001. Additionally, Tyco made capital contributions totaling
$898.3 million for the period June 2, 2001 through September 30, 2001, including
a note receivable of $200.0 million paid by Tyco during the first fiscal quarter
of 2002. Except for the capital contribution used to unwind the activity of TCH,
there were no further capital contributions from Tyco subsequent to September
30, 2001.
In connection with the acquisition by Tyco, CIT recorded acquired assets
and liabilities at their estimated June 1, 2001 fair values. During the first
six months of fiscal 2002, CIT recorded additions to goodwill of $348.6 million.
Goodwill adjustments related to fair value adjustments to purchased assets and
liabilities, and accruals relating to severance, facilities or other expenses
incurred as a result of the purchase transaction. The accruals recorded during
the six months ended March 31, 2002 related to finalizing integration and
consolidation plans for the elimination of additional corporate administrative
and other personnel located primarily in North America and Europe. These
accruals resulted in additional purchase accounting liabilities, which also
increased goodwill and deferred tax assets. The severance reserve established at
the acquisition date was primarily related to corporate administrative personnel
in North America. The other reserve established consisted primarily of
acquisition-related costs incurred by Tyco.
The following table summarizes purchase accounting liabilities (pre-tax)
related to severance of employees and closing facilities and current year
utilization that were recorded in connection with the acquisition by Tyco ($ in
millions).
Severance Facilities
------------------------------------ -------------------------------
Number of Number of Other Total
Employees Reserve Facilities Reserve Reserve Reserve
--------- ------- ---------- ------- ------- -------
Reserves established ........................ 671 $ 45.8 -- $ -- $ 55.9 $101.7
Fiscal 2001 utilization ..................... (408) (20.2) -- -- (51.5) (71.7)
---- ------ --- ----- ------ ------
Ending balance at September 30, 2001 ........ 263 25.6 -- -- 4.4 30.0
Fiscal 2002 acquisition reserves ............ 826 58.4 29 20.7 -- 79.1
Fiscal 2002 utilization ..................... (808) (60.8) (5) (6.5) (4.4) (71.7)
---- ------ --- ----- ------ ------
Balance September 30, 2002 .................. 281 $ 23.2 24 $14.2 $ -- $ 37.4
==== ====== === ===== ====== ======
Note 4 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables ($ in millions).
September 30, September 30,
2002 2001
------------- -------------
Loans ...................................... $19,886.2 $23,590.9
Leases(1) .................................. 8,572.8 8,288.5
--------- ---------
Finance receivables ...................... $28,459.0 $31,879.4
========= =========
- --------------------------------------------------------------------------------
(1) Includes $2.3 billion and $2.6 billion in equipment residual values at
September 30, 2002 and 2001.
Included in lease receivables at September 30, 2002 and 2001 are leveraged
leases of $1.1 billion and $1.0 billion, respectively. Leveraged leases exclude
the portion funded by third party non-recourse debt payable of $3.6 billion at
September 30, 2002 and $2.4 billion at September 30, 2001.
Additionally, at September 30, 2002 and 2001, finance receivables
previously securitized totaling $11.2 billion and $10.1 billion, respectively,
were still managed by CIT.
52
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the contractual maturities of finance
receivables ($ in millions).
At September 30, At September 30,
2002 2001
------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Due within one year ............................... $13,136.8 46.2% $14,212.6 44.6%
Due within one to two years ....................... 3,541.2 12.4 5,233.5 16.4
Due within two to four years ...................... 4,375.7 15.4 4,515.2 14.2
Due after four years .............................. 7,405.3 26.0 7,918.1 24.8
--------- ----- --------- -----
Total ......................................... $28,459.0 100.0% $31,879.4 100.0%
========= ===== ========= =====
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth the information regarding total non-performing assets ($ in millions):
At September 30, At September 30,
2002 2001
---------------- ----------------
Non-accrual finance receivables ......................................... $ 976.6 $851.6
Assets received in satisfaction of loans ................................ 163.2 118.1
-------- ------
Total non-performing assets ........................................... $1,139.8 $969.7
-------- ------
Percentage of finance receivables ....................................... 4.01% 3.04%
======== ======
At September 30, 2002 and 2001, the recorded investment in loans
considered for impairment totaled $1,001.2 million and $555.3 million,
respectively. Loans whose estimated fair market value is less than current
recorded value totaled $449.8 million and $304.1 million at September 30, 2002
and 2001, respectively, and have corresponding specific reserve for credit loss
allocations of $197.4 million (or $111.7 million excluding $85.7 million
relating to telecommunications) and $122.3 million included in the reserve for
credit loss. The average monthly recorded investment in loans considered for
impairment was $818.9 million (including $185.5 million relating to
telecommunications), $409.8 million and $256.6 million for the year ended
September 30, 2002, combined nine months ended September 30, 2001 and the year
ended December 31, 2000, respectively. After being classified as impaired, there
was no finance income recognized on these loans because our definition of an
impaired loan is linked to non-accrual classification. The amount of finance
income that would have been recorded under contractual terms for impaired loans
would have been $65.2 million, $46.1 million, and $38.1 million for the year
ended September 30, 2002, the nine months ended September 30, 2001, and for the
year ended December 31, 2000, respectively.
Note 5 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
Twelve June 2 January 1 Twelve
Months Ended through through Months Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31, 2000
------------------ ------------------ ------------ -----------------
(successor) (successor) (predecessor) (predecessor)
Balance, beginning of period .................. $492.9 $462.7 $468.5 $446.9
------ ------ ------ ------
Provision for credit losses ................... 453.3 116.1 126.9 255.2
Provision for credit losses - specific
reserving actions(1) ........................ 335.0 -- 89.5 --
Reserves relating to dispositions,
acquisitions, other ......................... (11.1) 0.9 (17.2) 2.0
------ ------ ------ ------
Additions to the reserve for credit losses .. 777.2 117.0 199.2 257.2
------ ------ ------ ------
Finance receivables charged-off ............... (539.1) (93.7) (215.8) (255.8)
Recoveries on finance receivables
previously charged-off ...................... 46.8 6.9 10.8 20.2
------ ------ ------ ------
Net credit losses ........................... (492.3) (86.8) (205.0) (235.6)
------ ------ ------ ------
Balance, end of period ........................ $777.8 $492.9 $462.7 $468.5
====== ====== ====== ======
Reserve for credit losses as a percentage of
finance receivables ......................... 2.73% 1.55% 1.50% 1.40%
====== ====== ====== ======
- ----------
(1) The 2002 amounts consist of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million), while the 2001 amount consists of a provision for
under-performing loans and leases, primarily in the telecommunications
portfolio.
53
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of approximately $1.2 billion and $0.4 billion) of
operating lease equipment by equipment type at September 30, 2002 and 2001 ($ in
millions).
At September 30, At September 30,
2002 2001
---------------- ----------------
Commercial aircraft .................. $3,005.5 $2,017.2
Railcars and locomotives ............. 1,373.9 1,242.5
Communications ....................... 554.5 799.5
Information technology ............... 370.3 702.1
Business aircraft .................... 341.3 359.6
Other ................................ 921.9 1,281.9
-------- --------
Total .............................. $6,567.4 $6,402.8
======== ========
Included in the preceding table is equipment not currently subject to
lease agreements of $267.3 million and $247.2 million at September 30, 2002 and
2001, respectively.
Rental income on operating leases, which is included in finance income,
totaled $1.7 billion for the year ended September 30, 2002, $1.5 billion for the
nine combined months ended September 30, 2001, and $1.8 billion for the year
ended December 31, 2000. The following table presents future minimum lease
rentals on non-cancelable operating leases as of September 30, 2002. Excluded
from this table are variable rentals calculated on the level of asset usage,
re-leasing rentals, and expected sales proceeds from remarketing operating lease
equipment at lease expiration, all of which are components of operating lease
profitability ($ in millions).
Years Ended September 30, Amount
--------
2003 ...................................................... $1,177.6
2004 ...................................................... 736.7
2005 ...................................................... 447.4
2006 ...................................................... 279.9
2007 ...................................................... 212.0
Thereafter ................................................ 426.0
--------
Total .................................................... $3,279.6
========
Note 7 -- Concentrations
The following table summarizes the geographic and industry compositions of
financing and leasing portfolio assets at September 30, 2002 and 2001 ($ in
millions):
At September 30, 2002 At September 30, 2001
--------------------- ---------------------
Geographic (by obligor) Amount Percent Amount Percent
------ ------- ------ -------
North America:
Northeast ...................................... $ 8,047.0 22.1% $9,117.9 22.4%
West ........................................... 6,339.1 17.4 7,561.7 18.6
Midwest ........................................ 5,941.0 16.3 6,957.3 17.0
Southeast ...................................... 4,854.1 13.3 5,505.4 13.5
Southwest ...................................... 3,932.0 10.8 4,708.1 11.6
Canada ......................................... 1,688.4 4.7 1,952.4 4.8
--------- ----- --------- -----
Total North America ............................ 30,801.6 84.6 35,802.8 87.9
Other foreign .................................. 5,586.0 15.4 4,926.4 12.1
--------- ----- --------- -----
Total .......................................... $36,387.6 100.0% $40,729.2 100.0%
========= ===== ========= =====
54
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 2002 At September 30, 2001
--------------------- ---------------------
Industry (by obligor) Amount Percent Amount Percent
------ ------- ------ -------
Manufacturing(1) (no industry greater
than 3.5%) ....................................... $ 7,446.2 20.5% $ 8,442.2 20.7%
Retail(2) ........................................ 4,939.4 13.6 5,020.9 12.3
Commercial airlines (including regional
airlines) ...................................... 4,285.3 11.8 3,412.3 8.4
Transportation(3) ................................ 2,665.8 7.3 2,675.8 6.6
Communications(4) ................................ 1,840.1 5.1 1,590.3 3.9
Construction equipment ........................... 1,760.2 4.8 2,273.7 5.6
Services ......................................... 1,533.4 4.2 1,755.3 4.3
Home mortgage .................................... 1,314.2 3.6 2,760.2 6.8
Wholesaling ...................................... 1,245.5 3.4 1,435.7 3.5
Other (no industry greater than 3.1%)(5).......... 9,357.5 25.7 11,362.8 27.9
--------- ----- --------- -----
Total .......................................... $36,387.6 100.0% $40,729.2 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (5.3%) and general merchandise (4.4%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes $707.2 million and $637.7 million of telecommunication related
assets at September 30, 2002 and 2001, respectively.
(5) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $869.2 million or 2.4% of total
financing and leasing assets at September 30, 2002. This amount includes
approximately $520 million in project financing and $225 million in rail
cars on lease.
Note 8 -- Investments in Debt and Equity Securities
Investments in debt and equity securities designated as available for sale
totaled $1,410.4 million and $972.6 million at September 30, 2002 and 2001,
respectively, and are included in other assets in the Consolidated Balance
Sheets. Such investments include retained interests in commercial securitized
loans of $1,039.7 million and consumer securitized loans of $274.0 million at
September 30, 2002 and commercial securitized loans of $843.6 million and
consumer securitized loans of $126.5 million at September 30, 2001. Retained
interests include interest-only strips, retained subordinated securities, and
cash reserve accounts related to securitizations as of September 30, 2002. These
components were $362.2 million, $658.9 million, and $292.6 million,
respectively. The carrying value of the retained interests in securitized assets
is reviewed quarterly for valuation impairment. During fiscal 2002, net
accretion of $97.1 million was recognized in pretax earnings, including $49.9
million of impairment charges. Unrealized gains of $25.8 million net of tax were
recorded during 2002 and are reflected in stockholders' equity as a part of
other comprehensive income.
The securitization programs cover a wide range of products and collateral
types with significantly different prepayment and credit risk characteristics.
The prepayment speed, in the tables below, is based on Constant Prepayment Rate
("CPR") which expresses payments as a function of the declining amount of loans
at a compound annual rate. Weighted average expected credit losses are expressed
as annual loss rates.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2002 were as follows:
Commercial Equipment
-------------------------------------
Equipment Finance Consumer
Specialty Finance & Leasing Home Equity
----------------- ----------------- -----------
Weighted average prepayment speed ............................. 19.49% 13.65% 26.09%
Weighted average expected credit losses ....................... 0.75% 1.01% 1.03%
Weighted average discount rate ................................ 11.01% 9.00% 11.25%
Weighted average life (in years) .............................. 1.40 1.66 2.86
55
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at September 30, 2002 were as
follows:
Commercial Equipment Consumer
------------------------ ------------------------------
Equipment Manufactured Recreational
Specialty Financing & Housing & Home Vehicle &
Finance Leasing Equity Boat
--------- ----------- --------------- ------------
Weighted average prepayment speed .................. 19.91% 12.27% 26.38% 17.87%
Weighted average expected credit losses ............ 1.26% 2.44% 0.99% 0.62%
Weighted average discount rate ..................... 11.39% 12.68% 12.83% 14.30%
Weighted average life (in years) ................... 1.09 1.49 3.09 3.26
The impact of 10 percent and 20 percent adverse changes to the key assumptions
on the fair value of retained interests as of September 30, 2002 is shown in the
following tables ($ in millions).
Consumer
------------------------------
Manufactured
Commercial Housing & Recreational
Equipment Home Equity Vehicle & Boat
--------- ----------- --------------
Prepayment speed:
10 percent adverse change ..................................... $ (8.3) $ (8.7) $(1.7)
20 percent adverse change ..................................... (15.3) (16.2) (3.3)
Expected credit losses:
10 percent adverse change ..................................... (16.9) (4.6) (1.7)
20 percent adverse change ..................................... (33.7) (9.2) (3.4)
Weighted average discount rate:
10 percent adverse change ..................................... (11.9) (4.5) (2.2)
20 percent adverse change ..................................... (23.5) (8.9) (4.3)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumptions to
the change in fair value may not be linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption. In reality, changes in one
factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments and increased credit losses),
which might magnify or counteract the sensitivities.
The following tables summarize static pool credit losses, which represent
the sum of actual losses (life-to-date) and projected future credit losses,
divided by the original balance of each pool of the respective assets for the
securitizations during the periods.
Commercial Equipment Securitizations During
-------------------------------------------
2002 2001 2000
---- ---- ----
(successor) (combined) (predecessor)
Actual and projected losses at:
September 30, 2002 .......................................... 1.92% 2.87% 4.34%
September 30, 2001 .......................................... -- 1.92% 3.43%
December 31, 2000 ........................................... -- -- 1.83%
Home Equity Securitizations During
-------------------------------------------
2002 2001 2000
---- ---- ----
(successor) (combined) (predecessor)
Actual and projected losses at:
September 30, 2002 ........................................... 2.68% -- --
September 30, 2001 ........................................... -- -- --
December 31, 2000 ............................................ -- -- --
56
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tables that follow summarize the roll-forward of retained interest
balances and certain cash flows received from and paid to securitization trusts
for the twelve months ended September 30, 2002 ($ in millions).
Retained Interests Amount
- ------------------ ------
Retained interest at September 30, 2001 ........................... $ 970.1
New sales ......................................................... 792.9
Distributions from Trusts ......................................... (512.6)
Other, including net accretion, and clean-up calls ................ 20.2
Unrealized gains .................................................. 43.1
--------
Retained interest at September 30, 2002 ........................... $1,313.7
========
Cash Flows During the Twelve Months Ended September 30, 2002 Amount
- ------------------------------------------------------------ ------
Proceeds from new securitizations ................................. $6,603.9
Other cash flows received on retained interests ................... 551.5
Servicing fees received ........................................... 72.3
Repurchases of delinquent or foreclosed assets
and ineligible contracts ........................................ (104.7)
Purchases of contracts through clean up calls ..................... (456.9)
Reimbursable servicing advances, net .............................. (21.9)
Guarantee draws ................................................... (1.2)
--------
Total, net ...................................................... $6,643.0
========
Total charge-offs for the twelve months ended September 30, 2002 and the
combined nine months ended September 30, 2001, and receivables past due 60 days
or more at September 30, 2002 and 2001 are set forth below, for both finance
receivables and managed receivables. In addition to finance receivables, managed
receivables include finance receivables previously securitized and still managed
by us, but exclude operating leases and equity investments ($ in millions).
Charge-offs for the Charge-offs for the Combined
Twelve Months Ended September 30, 2002 Nine Months Ended September 30, 2001
----------------------------------------- -----------------------------------------
Finance Receivables Managed Receivables Finance Receivables Managed Receivables
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
Commercial ..................... $445.9 1.65% $701.6 2.71% $243.5 1.13% $351.6 1.87%
Consumer ....................... 46.4 1.78% 78.8 1.35% 48.3 1.72% 71.5 1.04%
------ ------ ------ ------
Total ........................ $492.3 1.67% $780.4 1.94% $291.8 1.19% $423.1 1.64%
====== ====== ====== ======
Past Due 60 Days or Past Due 60 Days or
More at September 30, 2002 More at September 30, 2001
----------------------------------------- -----------------------------------------
Finance Receivables Managed Receivables Finance Receivables Managed Receivables
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
Commercial ..................... $ 942.8 3.53% $1,289.1 3.64% $ 915.7 3.18% $1,386.6 3.63%
Consumer ....................... 127.2 7.20% 249.5 4.71% 188.2 6.12% 253.2 4.32%
-------- -------- -------- --------
Total ........................ $1,070.0 3.76% $1,538.6 3.78% $1,103.9 3.46% $1,639.8 3.72%
======== ======== ======== ========
Note 9 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
At September 30, At September 30, At December 31,
2002 2001 2000
---------------- ---------------- ---------------
(successor) (successor) (predecessor)
Borrowings outstanding .................................. $4,654.2 $8,869.2 $9,063.5
Weighted average interest rate .......................... 1.87% 3.37% 6.57%
Weighted average remaining days to maturity ............. 37 days 31 days 37 days
57
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year Ended For the Nine Months For the Year Ended
September 30, 2002 Ended September 30, 2001 December 31, 2000
------------------ ------------------------ -----------------
(successor) (combined) (predecessor)
Daily average borrowings ..................... $ 4,564.7 $10,142.5 $10,565.1
Maximum amount outstanding ................... $10,713.5 $11,726.4 $12,868.2
Weighted average interest rate ............... 2.25% 4.67% 6.23%
The consolidated weighted average interest rates on variable-rate senior
notes at September 30, 2002 and September 30, 2001 were 2.31% and 3.49%,
respectively. Fixed-rate senior debt outstanding at September 30, 2002 matures
at various dates through 2028, with interest rates ranging from 3.25% to 8.26%.
The consolidated weighted-average interest rates on fixed-rate senior debt at
September 30, 2002 and 2001 were 6.82% and 6.72%, respectively. Foreign
currency-denominated debt (stated in U.S. Dollars) totaled $1,627.9 million at
September 30, 2002, of which $1,290.5 million was fixed-rate and $337.4 million
was variable-rate debt. Foreign currency-denominated debt (stated in U.S.
Dollars) totaled $1,306.1 million at September 30, 2001, of which $1,286.1
million was fixed rate and $20.0 million was variable-rate debt. The following
tables present fiscal year contractual maturities and the current year high and
low interest rates for total variable and fixed rate debt at September 30, 2002
and 2001 ($ in millions).
At September 30, 2002
---------------------------------------------------
Commercial Variable-rate Bank Credit At September 30,
Variable-Rate Paper Senior Notes Facilities Total 2001
- ------------- ---------- ------------- ----------- --------- ----------------
Due in 2002 ............................................ $ -- $ -- $ -- $ -- $14,594.2
Due in 2003 (rates ranging from 1.72% to 4.55%) ........ 4,654.2 3,910.3 4,037.4 12,601.9 3,889.6
Due in 2004 (rates ranging from 2.00% to 3.32%) ........ -- 1,247.0 -- 1,247.0 --
Due in 2005 (rates ranging from 2.61% to 2.63%) ........ -- 23.4 -- 23.4 --
Due in 2006 (rates ranging from 2.61% to 2.63%) ........ -- 25.0 -- 25.0 --
Due in 2007 and thereafter (rates ranging
from 2.61% to 2.63%) .................................. -- 173.3 -- 173.3 --
-------- -------- -------- --------- ---------
$4,654.2 $5,379.0 $4,037.4 $14,070.6 $18,483.8
======== ======== ======== ========= =========
At September 30,
-------------------------
Fixed-Rate 2002 2001
- ---------- --------- ---------
Due in 2002 ..................................................................... $ -- $ 2,456.4
Due in 2003 (rates ranging from 4.90% to 8.25%) ................................. 2,784.9 2,889.0
Due in 2004 (rates ranging from 4.41% to 7.13%) ................................. 4,321.5 4,391.9
Due in 2005 (rates ranging from 5.50% to 8.26%) ................................. 4,704.1 4,593.6
Due in 2006 (rates ranging from 3.25% to 6.80%) ................................. 1,179.1 1,175.8
Due in 2007 (rates ranging from 5.75% to 7.38%) ................................. 2,307.1 86.8
Due after 2007 (rates ranging from 5.88% to 8.25%) .............................. 3,088.7 1,620.4
--------- ---------
Total ......................................................................... $18,385.4 $17,213.9
========= =========
At September 30, 2002, there remained $10.6 billion of registered, but
unissued debt securities under a shelf registration statement.
58
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table represents information on unsecured committed lines of
credit to support commercial paper borrowings at September 30, 2002 ($ in
millions).
Maturity Date for
Expiration of Commitment Total Drawn Amounts Drawn Available
- ------------------------ ----- ----------------- ----- ---------
March 2002(1) ...................................... $4,037.4 March 2003 $4,037.4 $ --
April 2003 ......................................... 765.0 April 2003 -- 765.0
July 2003 .......................................... 250.0 July 2003 -- 250.0
March 2005 ......................................... 3,720.0 March 2005 -- 3,720.0
-------- -------- --------
Total credit lines ............................... $8,772.4 $4,037.4 $4,735.0
======== ======== ========
- ----------
(1) The facilities commitment expired in March 2002 and no additional sums may
be borrowed under the facilities after that date. All sums outstanding at
the time of expiration are due and payable one year after expiration,
March 2003.
The credit line agreements contain clauses that permit extensions of the
commitments beyond the expiration dates upon written consent from the
participating lenders. Certain foreign operations utilize local financial
institutions to fund operations. At September 30, 2002, local credit facilities
totaled $201.0 million, of which $169.4 million was undrawn and available.
Note 10 -- Derivative Financial Instruments
CIT adopted SFAS 133 on January 1, 2001 and recorded a $146.5 million, net
of tax, cumulative effect adjustment to Accumulated Other Comprehensive Loss,
for derivatives qualifying as hedges of future cash flows, in accordance with
this accounting standard. The components of the adjustment to Accumulated Other
Comprehensive Loss for derivatives qualifying as hedges of future cash flows as
of September 30, 2002 and 2001 are presented in the following table ($ in
millions).
Adjustment of
Fair Value of Income Tax Total Unrealized
Derivatives Effects Loss
----------- ---------- ----------------
Balance at September 30, 2001 ........................................ $102.3 $(38.9) $ 63.4
Changes in values of derivatives qualifying as cash flow hedges ...... 92.1 (35.0) 57.1
------ ------ ------
Balance at September 30, 2002 ........................................ $194.4 $(73.9) $120.5
====== ====== ======
The unrealized loss as of September 30, 2002, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, and lower market interest rates. For the
twelve months ended September 30, 2002, the ineffective portion of changes in
the fair value of cash flow hedges amounted to $1.4 million and has been
recorded as an increase to interest expense. Assuming no change in interest
rates, $70.8 million, net of tax, of Accumulated Other Comprehensive Loss is
expected to be reclassified to earnings over the next twelve months as
contractual cash payments are made. The Accumulated Other Comprehensive Loss
(along with the corresponding swap liability) will be adjusted as market
interest rates change over the remaining life of the swaps.
As part of managing the exposure to changes in market interest rates, CIT,
as an end-user, enters into various interest rate swap transactions, all of
which are transacted in over-the-counter markets with other financial
institutions acting as principal counterparties. We use derivatives for hedging
purposes only, and do not enter into derivative financial instruments for
trading or speculative purposes. To ensure both appropriate use as a hedge and
hedge accounting treatment, derivatives entered into are designated according to
a hedge objective against a specific liability, including commercial paper, or a
specifically underwritten debt issue. The notional amounts, rates, indices and
maturities of our derivatives are required to closely match the related terms of
our hedged liabilities. CIT exchanges variable-rate interest on certain debt
instruments for fixed-rate amounts. These interest rate swaps are designated as
cash flow hedges. We also exchange fixed-rate interest on certain of our debt
for variable-rate amounts. These interest rate swaps are designated as fair
value hedges.
59
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position at September
30, 2002.
Notional Amount
Interest Rate Swaps in Millions Comments
- ------------------- ----------- --------
Floating to fixed-rate swaps - cash Effectively converts the interest rate on an equivalent
flow hedges ........................... $3,585.8 amount of commercial paper and variable-rate notes to a fixed rate.
Fixed to floating-rate swaps - fair Effectively converts the interest rate on an equivalent
value hedges .......................... 3,479.8 amount of fixed-rate notes to a variable rate.
--------
Total interest rate swaps ............... $7,065.6
========
Foreign exchange forward contracts or cross-currency swaps are used to
convert U.S. dollar borrowings into local currency to the extent that local
borrowings are not cost effective or available. We also use foreign exchange
forward contracts to hedge our net investment in foreign operations.
CIT is exposed to credit risk to the extent that the counterparty fails to
perform under the terms of a derivative instrument. This risk is measured as the
market value of interest rate swaps or foreign exchange forwards with a positive
fair value, which totaled $532.7 million at September 30, 2002, reduced by the
effects of master netting agreements as presented in Note 22-"Fair Values of
Financial Instruments." We manage this credit risk by requiring that all
derivative transactions be conducted with counterparties rated investment grade
by nationally recognized rating agencies, with the majority of the
counterparties rated "AA" or higher, and by setting limits on the exposure with
any individual counterparty. Accordingly, counterparty credit risk at September
30, 2002 is not considered significant.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid of U.S.
dollar interest rate swaps at September 30, 2002 ($ in millions).
Maturity Weighted Average Weighted Average
- -------- --------------------------------- --------------------------------
Floating to Fixed-rate Fixed to Floating-rate
--------------------------------- --------------------------------
Years Ending Notional Receive Pay Notional Receive Pay
September 30, Amount Rate Rate Amount Rate Rate
- ------------- -------- ------- ----- -------- ------- ----
2003 ............................ $1,345.4 1.81% 5.99% 11.0 7.85% 2.56%
2004 ............................ 342.6 1.83% 4.75% 311.0 7.15% 3.73%
2005 ............................ 357.6 1.83% 4.42% 257.8 6.92% 2.97%
2006 ............................ 111.5 1.88% 4.63% -- -- --
2007 ............................ 78.9 1.91% 5.72% 1,250.0 7.38% 5.31%
2008 - Thereafter ............... 1,018.8 1.84% 6.21% 1,650.0 7.30% 3.42%
-------- --------
Total ......................... $3,254.8 1.83% 5.70% $3,479.8 7.29% 4.09%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid of foreign
currency interest rate swaps that converted floating-rate debt to fixed rate
debt at September 30, 2002 ($ in million).
Weighted Average
---------------------------------------------------------------
Foreign Currency Notional Amount Received Rate Pay Rate Maturity Range
- ---------------- --------------- ------------- -------- --------------
Canadian Dollar .......................... $240.6 3.00% 6.21% 2003 - 2009
Australian Dollar ........................ $75.4 5.18% 6.05% 2003 - 2006
British Pound ............................ $15.0 3.94% 5.43% 2024
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
60
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the maturity, notional principal amounts of
foreign exchange forwards, and cross currency swaps at September 30, 2002 ($ in
millions).
Notional Principal Amount
-----------------------------------
Maturity Years Ended Foreign Exchange Cross-Currency
September 30, Forwards Swaps
- -------------------- ---------------- --------------
2003 ..................................... $2,704.2 $ 124.0
2004 ..................................... 376.3 127.5
2005 ..................................... 38.5 1,361.4
2006 ..................................... 12.4 51.2
2007 ..................................... - 10.9
2008 - Thereafter ........................ - 65.5
-------- --------
Total .................................. $3,131.4 $1,740.5
======== ========
Note 11 -- Preferred Capital Securities
In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned
subsidiary of CIT, issued in a private offering $250.0 million liquidation value
of 7.70% Preferred Capital Securities (the "Capital Securities"), which were
subsequently registered with the Securities and Exchange Commission pursuant to
an exchange offer. Each capital security was recorded at the liquidation value
of $1,000. The Trust subsequently invested the offering proceeds in $250.0
million principal amount Junior Subordinated Debentures (the "Debentures") of
CIT, having identical rates and payment dates. The Debentures of CIT represent
the sole assets of the Trust. Holders of the Capital Securities are entitled to
receive cumulative distributions at an annual rate of 7.70% through either the
redemption date or maturity of the Debentures (February 15, 2027). Both the
Capital Securities issued by the Trust and the Debentures of CIT owned by the
Trust are redeemable in whole or in part on or after February 15, 2007 or at any
time in whole upon changes in specific tax legislation, bank regulatory
guidelines or securities law at the option of CIT at their liquidation value or
principal amount. The securities are redeemable at a specified premium through
February 15, 2007, at which time the redemption price will be at par, plus
accrued interest. Distributions by the Trust are guaranteed by CIT to the extent
that the Trust has funds available for distribution. CIT records distributions
payable on the Capital Securities as an operating expense in the Consolidated
Statements of Income. The Capital Securities were valued at $260.0 million on
June 1, 2001, the date of acquisition by Tyco, in new basis accounting and the
current balance reflects accretion of the premium.
Note 12 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Year Ended June 2 through January 1 through Year Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31, 2000
------------------ ------------------ --------------- -----------------
(successor) (successor) (predecessor) (predecessor)
Fees and other income ................. $644.5 $212.3 $174.9 $480.9
Factoring commissions ................. 165.5 50.7 61.2 154.7
Gains on securitizations .............. 149.0 59.0 38.7 109.5
Gains on sales of leasing equipment ... 13.6 14.2 33.7 113.2
(Losses) gains on venture capital
investments ......................... (40.3) (1.1) 7.1 53.7
Write-down of equity investments(1) ... -- -- (78.1) --
------ ------ ------ ------
Total ............................... $932.3 $335.1 $237.5 $912.0
====== ====== ====== ======
- ----------
(1) During the period January 1 through June 1, 2001, the Company recorded
write-downs of $78.1 million for certain equity investments in the
telecommunications industry and e-commerce markets.
61
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The computation is also
relevant for the quarter ended September 30, 2002, given the timing of the
Initial Public Offering and is shown in addition to the annual and transition
periods below. The diluted EPS computation includes the potential impact of
dilutive securities, including stock options and restricted stock grants. The
dilutive effect of stock options is computed using the treasury stock method,
which assumes the repurchase of common shares by CIT at the average market price
for the period. Options that have an anti-dilutive effect are not included in
the denominator and averaged approximately 15.6 million shares for the year
ended September 30, 2002.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the quarter ended September 30, 2002 ($ in
millions, except per share amounts).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
For the quarter ended September 30, 2002
Basic EPS:
Income available to common shareholders ..................... $134.7 211,573 $0.64
Effect of Dilutive Securities:
Restricted shares ........................................... -- 122 --
Stock options ............................................... -- -- --
------ ------- -----
Diluted EPS ................................................... $134.7 211,695 $0.64
====== ======= =====
The following table summarizes the earnings per share amounts for the year
ended September 30, 2002, the period June 2 through September 30, 2001, the
period January 1 through June 1, 2001 and the year ended December 31, 2000,
assuming that the current period shares were outstanding for all historical
periods ($ in millions except per share amounts).
Net (Loss) Diluted
Income Basic EPS EPS
--------- ------- ------
Year ended September 30, 2002 (successor) .................... $(6,698.7) $(31.66) $(31.66)
June 2 through September 30, 2001 (successor) ................ $ 182.8 $ 0.86 $ 0.86
January 1 through June 1, 2001 (predecessor) ................. $ 80.5 $ 0.38 $ 0.38
Year ended December 31, 2000 (predecessor) ................... $ 611.6 $ 2.89 $ 2.89
Note 14 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Year Ended June 2 through January 1 through Year Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31, 2000
------------------ ------------------ ----------------- -----------------
(successor) (successor) (predecessor) (predecessor)
Salaries and employee benefits ............ $517.4 $204.7 $262.0 $ 600.7
Other operating expenses-- CIT ............. 406.0 134.2 184.0 434.5
Other operating expenses-- TCH ............. 23.0 9.6 -- --
------ ------ ------ --------
Total .................................... $946.4 $348.5 $446.0 $1,035.2
====== ====== ====== ========
Note 15 -- Acquisition-Related Costs
For the combined nine months ended September 30, 2001, acquisition-related
costs of $54.0 million, consisting primarily of investment banking and other
professional fees, were incurred by CIT prior to and in connection with the
acquisition of CIT by Tyco.
Note 16 -- Accounting Change-Goodwill
The Company periodically reviews and evaluates its goodwill and other
intangible assets for potential impairment. Effective October 1, 2001, the
beginning of CIT's 2002 fiscal year, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," under which goodwill is no longer amortized but
instead is
62
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assessed for impairment at least annually. As part of the adoption, the Company
allocated its existing goodwill to each of the reporting units as of October 1,
2001. Under the transition provisions of SFAS No. 142, there was no goodwill
impairment as of October 1, 2001. Prior period goodwill and other intangible
assets amortization (pretax) was $97.6 million for the combined nine months
ended September 30, 2001 and $86.3 million for the year ended December 31, 2000.
During the quarter ended March 31, 2002, our former parent, Tyco,
experienced disruptions to its business surrounding its announced break-up plan,
downgrades in its credit ratings, and a significant decline in its market
capitalization. As a result of these events at Tyco, CIT also experienced credit
downgrades and a disruption to our funding base and ability to access capital
markets. Further, market-based information used in connection with our
preliminary consideration of an initial public offering for 100% of CIT
indicated that CIT's book value exceeded its estimated fair value as of March
31, 2002. As a result, management performed a Step 1 SFAS 142 impairment
analysis as of March 31, 2002 and concluded that an impairment charge was
required at that date.
Management's objective in performing the Step 1 SFAS 142 analysis was to
obtain relevant market-based data to calculate the fair value of each CIT
reporting unit as of March 31, 2002 based on each reporting unit's projected
earnings and market factors that would be used by market participants in
ascribing value to each of these reporting units in the planned separation of
CIT from Tyco. Management obtained relevant market data from our financial
advisors regarding the range of price to earnings multiples and market discounts
applicable to each reporting unit as of March 31, 2002 and applied this market
data to the individual reporting unit's projected annual earnings as of March
31, 2002 to calculate a fair value of each reporting unit. The fair values were
compared to the corresponding carrying value of each reporting unit at March 31,
2002, resulting in a $4.513 billion impairment charge as of March 31, 2002.
SFAS 142 requires a second step analysis whenever the reporting unit book
value exceeds its fair value. This analysis required the Company to determine
the fair value of each reporting unit's individual assets and liabilities to
complete the analysis of goodwill impairment as of March 31, 2002. During the
quarter ended June 30, 2002 we completed this analysis for each reporting unit
and determined that an additional Step 2 goodwill impairment charge of $132.0
million was required based on reporting unit level valuation data.
Subsequent to March 31, 2002, CIT experienced credit downgrades and the
business environment and other factors continued to negatively impact the
expected CIT IPO proceeds. As a result, we performed both Step 1 and Step 2
analysis as of June 30, 2002 in a manner consistent with the March 2002 process
described above. This analysis was based upon updated market data from our
financial advisors regarding the individual reporting units, and other relevant
market data at June 30, 2002 and through the period immediately following the
IPO of the Company, including the total amount of the IPO proceeds. This
analysis resulted in Step 1 and Step 2 incremental goodwill impairment of $1.719
billion and $148.0 million, respectively, as of June 30, 2002, which was
recorded during the June quarter. Our remaining goodwill is substantially all
allocated to our commercial finance segment businesses.
The changes in the carrying amount of goodwill for the twelve months ended
September 30, 2002 are as follows ($ in millions):
Equipment
Financing and Specialty Commercial Structured
Leasing Finance Finance Finance Total
------- ------- ------- ------- -----
Balance as of September 30, 2001 ........... $2,070.7 $2,572.3 $1,863.1 $63.4 $6,569.5
Reclassification of intangible assets
to other assets .......................... -- -- (22.0) -- (22.0)
--------- --------- --------- ------ ---------
Balances as of September 30, 2001
after reclassification ................... 2,070.7 2,572.3 1,841.1 63.4 6,547.5
Goodwill adjustments related to our
acquisition by Tyco ...................... 163.8 178.0 4.1 2.7 348.6
Goodwill impairment ........................ (2,234.5) (2,736.3) (1,474.8) (66.1) (6,511.7)
--------- --------- --------- ------ ---------
Balance as of September 30, 2002 ........... $ -- $ 14.0 $ 370.4 $ -- $ 384.4
========= ========= ========= ====== =========
63
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a reconciliation of previously reported net income to net
income excluding goodwill amortization ($ in millions):
Year Ended June 2 through January 1 through Year Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31, 2000
------------------ ------------------ ----------------- -----------------
(successor) (successor) (predecessor) (predecessor)
Net (loss) income as reported ......... $(6,698.7) $182.8 $ 80.5 $611.6
Goodwill amortization, net of tax ..... -- 59.8 32.7 75.4
--------- ------ ------ ------
Net (loss) income as adjusted ......... $(6,698.7) $242.6 $113.2 $687.0
========= ====== ====== ======
Net (loss) income as adjusted per
share -- basic and fully diluted .... $ (31.66) $ 1.15 $ 0.53 $ 3.25
========= ====== ====== ======
Other intangible assets, net, comprised primarily of proprietary computer
software and related transaction processes, totaled $17.6 million and $22.0
million at September 30, 2002 and September 30, 2001, respectively, and are
included in Other Assets on the Consolidated Balance Sheets. These assets are
being amortized over a five year period on a straight-line basis, resulting in
an annual amortization of $4.4 million.
Note 17 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows.
Percentage of Pretax Income
--------------------------------------------------------------
Year Ended June 2 through January 1 Year Ended
September 30, September 30, through December 31,
2002 2001 June 1, 2001 2000
------------- -------------- ------------ ------------
(successor) (successor) (predecessor) (predecessor)
Federal income tax rate ............................. 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
Goodwill impairment ................................. (36.1) -- -- --
Intercompany interest expense-- TCH ................. (4.2) -- -- --
Goodwill amortization ............................... -- 6.2 7.8 3.0
Foreign income taxes ................................ (0.4) 2.2 2.2 2.0
State and local income taxes, net of
federal income tax benefit ......................... (0.3) 2.2 2.2 1.6
Other ............................................... 0.1 0.2 2.6 (3.7)
---- ---- ---- ----
Effective tax rate .................................. (5.9)% 45.8% 49.8% 37.9%
==== ==== ==== ====
The provision for income taxes is comprised of the following ($ in
millions):
Year Ended June 2 through January 1 Year Ended
September 30, September 30, through December 31,
2002 2001 June 1, 2001 2000
------------- -------------- ------------ ------------
(successor) (successor) (predecessor) (predecessor)
Current federal income tax provision ............... $ -- $ -- $ -- $ 31.9
Deferred federal income tax provision .............. 276.9 113.6 63.7 211.5
------ ------ ----- ------
Total federal income taxes ....................... 276.9 113.6 63.7 243.4
Foreign income taxes ............................... 66.7 32.1 15.4 113.2
State and local income taxes ....................... 30.4 11.7 5.7 24.6
------ ------ ----- ------
Total provision for income taxes ................. $374.0 $157.4 $84.8 $381.2
====== ====== ===== ======
64
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred federal and foreign income tax assets and liabilities
are presented below.
At September 30,
---------------------------
2002 2001
(successor) (successor)
Assets:
Accrued liabilities and reserves ................ $ 310.7 $ 282.8
Net operating loss carryforwards ................ 612.4 524.2
Purchase price adjustments ...................... 778.8 877.9
Provision for credit losses ..................... 206.2 95.5
Alternative minimum tax credits ................. 85.7 85.7
Other ........................................... 267.3 83.5
--------- ---------
Total deferred tax assets ..................... 2,261.1 1,949.6
--------- ---------
Liabilities:
Leasing transactions ............................ (2,007.8) (1,679.2)
Securitization transactions ..................... (419.7) (371.4)
Market discount income .......................... (36.2) (35.2)
--------- ---------
Total deferred tax liabilities ................ (2,463.7) (2,085.8)
--------- ---------
Net deferred tax(liability) ............... $ (202.6) $ (136.2)
========= =========
The classification of deferred tax assets and liabilities at September 30,
2001 has been adjusted to reflect the change of certain assumptions previously
made by our former parent that were changed to reflect our independent public
company status.
At September 30, 2002, the Company had net operating losses of
approximately $1,559.0 million, primarily related to US Federal and state
jurisdictions. Utilization of net operating losses, which begin to expire at
various times starting in 2010, may be subject to certain limitations under
Section 382 of the Internal Revenue Code of 1986, as amended, and other
limitations under state tax laws.
Note 18 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
CIT has a number of defined benefit retirement plans covering certain of
its U.S. and non-U.S. employees, designed in accordance with conditions and
practices in the countries concerned. The retirement benefits under the defined
benefit plans are based on the employee's age, years of benefit service and
qualifying compensation. Funded plans' assets consist of marketable securities,
including common stock and government and corporate debt securities. CIT's
funding policy is to make contributions to the extent such contributions are tax
deductible as actuarially determined. Contributions are charged to the salaries
and employee benefits expense on a systematic basis over the expected average
remaining service period of employees expected to receive benefits.
The largest plan is the CIT Group Inc. Retirement Plan (the "Plan"), which
accounts for 77% of the total Benefit Obligation at September 30, 2002. The Plan
covers U.S. employees of CIT who have completed one year of service and have
attained the age of 21. The Company also maintains a Supplemental Retirement
Plan for employees whose benefit in the Retirement Plan is subject to the
Internal Revenue Code limitations.
The Plan was revised with a new "cash balance" formula which became
effective January 1, 2001. Certain eligible members had the option of remaining
under the Plan formula as in effect prior to January 1, 2001. Under the new
formula, the member's accrued benefits as of December 31, 2000 were converted to
a lump sum amount and each year thereafter the balance is to be credited with a
percentage (5% to 8%) of the member's "Benefits Pay" (comprised of base salary,
plus certain annual bonuses, sales incentive and commissions) depending on years
of service.
65
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These balances also receive annual interest credits, subject to certain
government limits. For 2001, the interest credit was 7.00% and for 2002 it is
5.76%. Upon termination after five years of employment or retirement, the amount
credited to a member is to be paid in a lump sum or converted into an annuity.
CIT also provides certain health care and life insurance benefits to
eligible retired employees. Salaried participants generally become eligible for
retiree health care benefits after reaching age 55 with 11 years of continuous
CIT service immediately prior to retirement. Generally, the medical plans pay a
stated percentage of most medical expenses reduced by a deductible as well as by
payments made by government programs and other group coverage. The plans are
funded on a pay as you go basis.
66
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the change in benefit obligation, plan
assets and funded status of the plans as well as the net periodic benefit cost
($ in millions). Prior periods presented have been conformed to the current year
presentation, which include amounts and assumptions relating to the Plan, as
well as the unfunded Supplemental Retirement Plans and various international
plans.
Retirement Benefits
------------------------------------------------------
Year Ended June 2 through January 1 through
September 30, September 30, June 1,
2002 2001 2001
------------- -------------- -----------------
(successor) (successor) (predecessor)
Change in Benefit Obligations
Benefit obligation at beginning
of period ............................................. $184.4 $185.2 $176.3
Service cost ............................................ 12.6 4.1 5.5
Interest cost ........................................... 13.0 4.3 5.1
Actuarial loss (gain) ................................... 15.6 (1.6) 3.4
Benefits paid ........................................... (4.2) (1.2) (1.2)
Plan settlements ........................................ (7.1) (6.8) (8.5)
Plan curtailments ....................................... (0.5) -- --
Plan amendments ......................................... -- -- 5.5
Other ................................................... 0.6 0.4 (0.9)
------ ------ ------
Benefit obligation at end of period ..................... $214.4 $184.4 $185.2
====== ====== ======
Change in Plan Assets
Fair value of plan assets at
beginning of period ................................... $126.5 $145.4 $154.4
Actual return on plan assets ............................ (12.7) (13.9) 1.0
Employer contributions .................................. 16.9 2.8 0.3
Plan settlements ........................................ (7.1) (6.8) (8.5)
Benefits paid ........................................... (4.2) (1.2) (1.2)
Other ................................................... 0.2 0.2 (0.6)
------ ------ ------
Fair value of plan assets at
end of period ......................................... $119.6 $126.5 $145.4
====== ====== ======
Reconciliation of Funded Status
Funded status ........................................... $(94.8) $(57.9) $(39.9)
Unrecognized net loss ................................... 54.7 15.1 13.2
Unrecognized net transition obligation .................. -- -- 11.2
Unrecognized prior service cost ......................... -- -- --
------ ------ ------
Prepaid (accrued) benefit cost .......................... $(40.1) $(42.8) $(15.5)
====== ====== ======
Amounts Recognized in the Statement
of Financial Position
Prepaid benefit cost .................................... $ -- $ -- $ 2.3
Accrued benefit liability ............................... (75.0) (42.8) (24.0)
Intangible asset ........................................ -- -- 3.5
Accumulated other comprehensive
income ................................................ 34.9 -- 2.7
------ ------ ------
Net amount recognized ................................... $(40.1) $(42.8) $(15.5)
====== ====== ======
Weighted-average Assumptions
Discount rate ........................................... 6.68% 7.40% 7.40%
Rate of compensation increase ........................... 4.22% 4.70% 4.56%
Expected return on plan assets .......................... 7.90% 9.93% 9.93%
Components of Net Periodic
Benefit Cost
Service cost ............................................ $ 12.6 $ 4.2 $ 5.5
Interest cost ........................................... 13.0 4.3 5.1
Expected return on plan assets .......................... (11.9) (4.6) (5.7)
Amortization of losses (gains) .......................... 0.3 -- 0.4
Amortization of prior service cost ...................... -- -- 0.4
------ ------ ------
Total net periodic expense .............................. $ 14.0 $ 3.9 $ 5.7
====== ====== ======
67
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $202.0 million, $172.7 million and $114.6 million,
respectively, at September 30, 2002.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $12.4 million, $11.9 million and $5.0
million, respectively, at September 30, 2002.
Postretirement Benefits
-----------------------------------------------------
Year Ended June 2 through January 1 through
September 30, September 30, June 1,
2002 2001 2001
------------- -------------- -----------------
(successor) (successor) (predecessor)
Change in Benefit Obligations
Benefit obligation at beginning of period ................. $ 39.5 $ 37.0 $ 36.3
Service cost .............................................. 1.2 0.4 0.5
Interest cost ............................................. 2.9 0.9 1.1
Actuarial loss ............................................ 5.3 2.1 0.1
Net benefits paid ......................................... (2.2) (0.9) (1.0)
Plan amendments ........................................... -- -- --
------ ------ ------
Benefit obligation at end of period ....................... $ 46.7 $ 39.5 $ 37.0
====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning
of period ............................................... $ -- $ -- $ --
Benefits paid ............................................. (2.2) (0.9) (1.0)
Employer contributions .................................... 2.2 0.9 1.0
------ ------ ------
Fair value of plan assets at end of period ................ $ -- $ -- $ --
====== ====== ======
Reconciliation of Funded Status
Funded status ............................................. $(46.7) $(39.5) $(37.0)
Unrecognized net loss (gain) .............................. 5.2 -- (2.9)
Unrecognized net transition obligation .................... -- -- 11.4
------ ------ ------
Prepaid (accrued) benefit cost ............................ $(41.5) $(39.5) $(28.5)
====== ====== ======
Weighted-average Assumptions
Discount rate ............................................. 6.75% 7.50% 7.50%
Rate of compensation increase ............................. 4.25% 4.50% 4.50%
Components of Net Periodic Benefit Cost
Service cost .............................................. $ 1.2 $ 0.4 $ 0.5
Interest cost ............................................. 2.9 0.9 1.1
Amortization of transition obligation ..................... -- -- 0.4
Amortization of gains ..................................... 0.1 -- --
------ ------ ------
Total net periodic expense ................................ $ 4.2 $ 1.3 $ 2.0
====== ====== ======
For the period ended September 30, 2002, the assumed health care cost
trend rates decline to an ultimate level of 5.00% in 2008 for all retirees; for
the period ended September 30, 2001, 5.00% in 2008; for the period ended June 1,
2001, 5.25% in 2006; and for the period ended December 31, 2000, 5.25% in 2006.
68
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects ($ in
millions).
Postretirement Benefits
------------------------------------------------------
Year Ended June 2 through January 1 through
September 30, September 30, June 1,
2002 2001 2001
------------- -------------- -----------------
(successor) (successor) (predecessor)
Effect of One-percentage Point
Increase on:
Period end benefit obligation .............. $ 2.2 $ 1.2 $ 1.4
Total of service and interest
cost components .......................... $ 0.1 $ 0.1 $ 0.2
Effect of One-percentage Point
Decrease on:
Period end benefit obligation .............. $(2.1) $(1.1) $(1.3)
Total of service and interest
cost components .......................... $(0.1) $(0.1) $(0.1)
Savings Incentive Plan
Certain employees of CIT participate in the CIT Group Savings Incentive
Plan. This plan qualifies under section 401(k) of the Internal Revenue Code. CIT
expense is based on specific percentages of employee contributions and plan
administrative costs and aggregated $14.5 million and $13.7 million for the year
ended September 30, 2002 and the combined nine months ended September 30, 2001.
Corporate Annual Bonus Plan
The CIT Group Bonus Plan ("Bonus Plan") is an annual bonus plan covering
certain executive officers and other employees. The amount of awards depend on a
variety of factors, including corporate performance and individual performance
during the fiscal period for which awards are made and is subject to approval by
the Compensation Committee of the Board of Directors. For the fiscal period
ended September 30, 2002, expenses for the Bonus Plan amounted to $25.0 million.
Certain senior executive officers received a portion of their corporate bonus in
the form of restricted stock based on the closing price of CIT shares on the
date of approval. Such restricted shares vest over a one-year period. Cash
bonuses were also paid under a quarterly corporate bonus plan that was
discontinued after the CIT IPO. The initial measurement period for the CIT Bonus
Plan will be for the six months ended December 31, 2002.
Long-Term Equity Compensation Plan
CIT sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP
allows CIT to issue to employees up to 26,000,000 shares of common stock through
grants of annual incentive awards, incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares and performance
units. Common stock issued under the ECP may be either authorized but unissued
shares, treasury shares or any combination thereof. All options granted have
10-year terms from the original grant dates and are issued with exercise prices
equal to the market value of the common stock on the date of grant. Options
granted in 2002 as part of the IPO have a one to four year vesting schedule,
depending on the level of the recipient in the organization.
69
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Data for the stock option plans is summarized as follows.
For the Year Ended
September 30, 2002
-------------------------------
Weighted
Average Option
Shares Price Per Share
---------- ---------------
Outstanding at beginning of year -- --
Converted Tyco Options ...................... 4,808,585 $56.20
Granted-- IPO ............................... 10,823,631 $23.00
Granted-- other ............................. 52,258 $22.20
Exercised ................................... -- --
Forfeited ................................... (190,465) $35.50
----------
Outstanding at end of year .................. 15,494,009 $33.15
==========
Options exercisable at end of year .......... 4,020,790 $59.06
==========
In July 2002, 10,823,631 IPO options were granted to all employees as part
of a broad-based incentive program. In addition, 4,808,585 CIT options were
granted in replacement of Tyco options forfeited upon the date of the CIT IPO.
The conversion formula was such that the intrinsic values of the CIT options and
the former Tyco options were converted at equal value as of the IPO. The CIT
options that were granted to replace Tyco options will become vested and
exercisable in accordance with the original grant schedules.
The weighted average fair value of new options granted in 2002 is $5.77.
The fair value of new options granted in 2002 was determined at the date of
grant using the Black-Scholes option-pricing model, which assumed the following.
Due to limited Company history, no forfeiture rate was used.
Option Expected Average Expected Risk Free
Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
-------- ----------------- -------------- ---------------- -------------------
July, 2002 (Tyco replacement) ..... 3.6-5.6 years 2.09% 32.3%-33.2% 3.43%-4.11%
July, 2002 (IPO) .................. 3-6 years 2.09% 32.3%-33.2% 3.24%-4.22%
July, 2002 (other) ................ 10 years 2.09% 27.8% 5.21%
August, 2002 (other) ............. 3-5 years 2.09% 32.5%-33.2% 2.47%-3.19%
August, 2002 (other) .............. 10 years 2.16% 27.8% 4.57%
The following table summarizes information about stock options outstanding
and options exercisable at September 30, 2002.
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
----- ----------- ----------- -------------- ----------- --------------
$ 22.20 - $ 33.30 10,747,669 9.8 $ 23.00 1,850 $ 23.00
$ 33.31 - $ 49.96 1,722,555 8.6 $ 36.98 995,155 $ 34.87
$ 49.97 - $ 74.95 2,795,937 6.1 $ 62.78 2,795,937 $ 62.78
$ 74.96 - $112.44 61,152 6.5 $ 88.37 61,152 $ 88.37
$112.45 - $168.67 166,696 5.3 $130.71 166,696 $130.71
---------- ---------
Totals 15,494,009 4,020,790
========== =========
Employee Stock Purchase Plan
In October 2002, CIT's Employee Stock Purchase Plan (the "ESPP") was
effective for all employees customarily employed at least 20 hours per week. The
ESPP is available to employees in the United States and to certain international
employees. Under the ESPP, CIT is authorized to issue up to 1,000,000 shares of
common stock to eligible employees. Employees can choose to have between 1% and
10% of their base salary withheld to
70
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase shares quarterly at a purchase price equal to 85% of the fair market
value of our common stock on either the first business day or the last business
day of the quarterly offering period, whichever is lower. The amount of common
stock that may be purchased by a participant through the plan is generally
limited to $25,000 per year. The first purchase will take place on December 31,
2002.
Restricted Stock
In August 2002, CIT issued 204,617 restricted shares in lieu of a cash
payment to certain senior executives in connection with the Bonus Plan. In
addition, two outside members of the Board of Directors, who elected to receive
shares in lieu of cash compensation for their retainer, were each granted 2,064
shares. All shares were issued at a fair market value of $22.20. These
restricted shares vest on the first anniversary of the grant (August 2003).
On July 2, 2002, CIT issued 316,302 restricted shares in replacement of
forfeited Tyco shares. The shares were issued at market value equivalent to the
canceled shares based on the closing price of Tyco shares on the day prior to
the IPO ($13.75 per share). All restricted shares under this grant vest 50% on
each of the second and third anniversary of the June 1, 2001 grant date, except
for 179,348 shares, which vest 100% on the third anniversary date of the June 1,
2001 grant date.
The holder of restricted stock generally has the rights of a stockholder
of CIT, including the right to vote and to receive cash dividends. Restricted
stock of 525,047 shares was outstanding at September 30, 2002.
Accounting for Stock-Based Compensation Plans
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). in accounting for its stock-based compensation
plans. Under APB 25, CIT does not recognize compensation expense on the issuance
of its stock options because the option terms are fixed and the exercise price
equals the market price of the underlying stock on the grant date. As required
by SFAS 123, CIT has determined the pro forma information as if CIT had
accounted for stock options granted under the fair value method of SFAS 123. Had
the compensation cost of CIT's stock-based compensation plans been determined
based on the operational provisions of SFAS 123, CIT's net loss for 2002 and net
loss per diluted share would have been $(6,704.4) million, or $(31.69) per
share, compared to $(6,698.7) million, or $(31.66) per share, as reported.
Note 19 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at September 30, 2002 ($
in millions).
Years Ended September 30, Amount
- ------------------------- ------
2003 ...................................................... $ 67.1
2004 ...................................................... 56.7
2005 ...................................................... 49.4
2006 ...................................................... 37.9
2007 ...................................................... 32.6
Thereafter ................................................ 33.8
------
Total .................................................. $277.5
======
In addition to fixed lease rentals, leases generally require payment of
maintenance expenses and real estate taxes, both of which are subject to rent
escalation provisions. Minimum payments have not been reduced by minimum
sublease rentals of $65.1 million due in the future under noncancellable
subleases.
71
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
For the Twelve
Months Ended June 2 through January 1 through Years Ended
September 30, 2002 September 30, 2001 June 1, 2001 December 31, 2000
------------------ ------------------ ------------ -----------------
(successor) (successor) (predecessor) (predecessor)
Premises $38.4 $14.8 $19.0 $47.7
Equipment 8.4 3.0 3.7 11.1
Less sublease income (9.0) (2.7) (3.4) (5.7)
----- ----- ----- -----
Total $37.8 $15.1 $19.3 $53.1
===== ===== ===== =====
Note 20 -- Legal Proceedings
In the ordinary course of business, there are various legal proceedings
pending against CIT. Management believes that the aggregate liabilities, if any,
arising from such actions will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Note 21 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments. These financial instruments
generate fees and involve, to varying degrees, elements of credit risk in excess
of the amounts recognized in the Consolidated Balance Sheets. To minimize
potential credit risk, CIT generally requires collateral and other
credit-related terms and conditions from the customer. At the time
credit-related commitments are granted, the fair value of the underlying
collateral and guarantees typically approximates or exceeds the contractual
amount of the commitment. In the event a customer defaults on the underlying
transaction, the maximum potential loss will generally be limited to the
contractual amount outstanding less the value of all underlying collateral and
guarantees.
The accompanying table summarizes the contractual amounts of
credit-related commitments ($ in millions).
At
September 30,
At September 30, 2002 2001
----------------------------------------- -------------
Due to Expire
-------------------------
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
(successor) (successor)
Unused commitments to extend credit:
Financing and leasing assets .................. $2,395.0 $273.3 $2,668.3 $2,386.8
Letters of credit and
acceptances:
Standby letters of credit ..................... 465.3 3.7 469.0 196.5
Other letters of credit ....................... 640.2 0.7 640.9 437.8
Acceptances ................................... 8.4 -- 8.4 9.1
Guarantees ...................................... 724.5 -- 724.5 714.5
Venture capital fund commitments ................ -- 176.6 176.6 225.2
As of September 30, 2002, commitments to purchase commercial aircraft from
both Airbus Industries and The Boeing Company totaled 82 units through 2007 at
an approximate value of $3.9 billion as detailed below.
Calendar Year: Amount Number
- -------------- ------ ------
2002 - Fourth quarter ..................................... $0.1 3
2003 ...................................................... 0.8 19
2004 ...................................................... 1.2 25
2005 ...................................................... 1.2 25
2006 ...................................................... 0.5 9
2007 ...................................................... 0.1 1
---- --
Total ..................................................... $3.9 82
==== ==
72
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The order amounts are based on current appraised values in 2002 base
dollars and exclude CIT's options to purchase 10 planes ($0.6 billion). The 2002
and eleven of the 2003 units have lessees in place.
Outstanding commitments to purchase equipment, other than the planes
described above, and railcars totaled $76.3 million.
Note 22 -- Fair Values of Financial Instruments
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the estimated fair value of CIT's financial instruments,
excluding leasing transactions accounted for under SFAS 13. The fair value
estimates are made at a discrete point in time based on relevant market
information and information about the financial instrument, assuming adequate
market liquidity. Because no established trading market exists for a significant
portion of CIT's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involving uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations, management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.
Actual fair values in the marketplace are affected by other significant
factors, such as supply and demand, investment trends and the motivations of
buyers and sellers, which are not considered in the methodology used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing financial instruments without attempting to estimate the
value of future business transactions and the value of assets and liabilities
that are part of CIT's overall value but are not considered financial
instruments. Significant assets and liabilities that are not considered
financial instruments include customer base, operating lease equipment, premises
and equipment, assets received in satisfaction of loans, and deferred tax
balances. In addition, tax effects relating to the unrealized gains and losses
(differences in estimated fair values and carrying values) have not been
considered in these estimates and can have a significant effect on fair value
estimates. The carrying amounts for cash and cash equivalents approximate fair
value because they have short maturities and do not present significant credit
risks. Credit-related commitments, as disclosed in Note 19-"Commitments and
Contingencies", 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.
73
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments at September 30, 2002 and 2001 are
set forth below ($ in millions).
2002 2001
--------------------------- ----------------------------
Asset (Liability) Asset (Liability)
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ----------- ----------
(successor) (successor)
Finance receivables-loans(1) ................... $19,342.7 $19,456.2 $23,226.2 $23,683.9
Finance receivables held for sale .............. 1,019.5 1,019.5 2,014.9 2,014.9
Other assets(2) ................................ 2,747.8 2,768.8 2,474.8 2,474.8
Commercial paper(3) ............................ (4,654.2) (4,654.2) (8,869.2) (8,869.2)
Fixed-rate senior notes and subordinated
fixed-rate notes(4) .......................... (18,718.8) (18,844.7) (17,471.4) (17,937.9)
Variable-rate bank credit facilities(4) ........ (4,040.0) (4,040.0) -- --
Variable-rate senior notes(4) .................. (5,392.4) (5,361.5) (9,672.9) (9,658.5)
Credit balances of factoring clients and
other liabilities(4)(5) ...................... (4,682.1) (4,682.1) (4,024.4) (4,024.4)
Company-obligated mandatorily redeemable
preferred securities of
subsidiary trust holding solely debentures
of the Company(6) ............................ (257.7) (262.7) (260.0) (260.0)
Derivative financial instruments:(7)
Interest rate swaps, net ..................... (16.3) (16.3) (243.5) (243.5)
Cross-currency swaps, net .................... 142.2 142.2 93.0 93.0
Foreign exchange forwards, net ............... (43.3) (43.3) 111.8 111.8
- --------------------------------------------------------------------------------
(1) 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 4.91% to 7.52% for 2002 and 7.26% to 8.57%
for 2001. The maturities used represent the average contractual maturities
adjusted for prepayments. For floating-rate loans that reprice frequently
and have no significant change in credit quality, fair value approximates
carrying value. The net carrying value of lease finance receivables not
subject to fair value disclosure totaled $8.3 billion in 2002 and $8.2
billion in 2001.
(2) Other assets subject to fair value disclosure include accrued interest
receivable, retained interests in securitizations and investment
securities. The carrying amount of accrued interest receivable
approximates fair value. Investment securities actively traded in a
secondary market were valued using quoted available market prices.
Investments not actively traded in a secondary market include our venture
capital portfolio with a book value that reflects both realized losses and
unrealized losses that are other than temporary. The carrying value of
other assets not subject to fair value disclosure totaled $2,035.8 at
September 30, 2002 and $1,352.1 million at September 30, 2001.
(3) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(4) The carrying value of fixed-rate senior notes and subordinated fixed-rate
notes includes $333.4 million and $257.5 million of accrued interest at
September 30, 2002 and 2001, respectively. The variable-rate bank credit
facilities include $2.6 million of accrued interest at September 30, 2002.
The variable-rate senior notes include $13.4 million and $58.3 million of
accrued interest at September 30, 2002 and 2001, respectively. These
amounts are excluded from the other liabilities balances in this table.
Fixed-rate notes were valued using a present value discounted cash flow
analysis with a discount rate approximating current market rates for
issuances by CIT of similar term debt at the end of the year. Discount
rates used in the present value calculation ranged from 2.23% to 7.61% in
2002 and 2.59% to 5.89% in 2001.
(5) The estimated fair value of credit balances of factoring clients
approximates carrying value due to their short settlement terms. Other
liabilities include accrued liabilities and deferred federal income taxes.
Accrued liabilities and payables with no stated maturities have an
estimated fair value that approximates carrying value. The carrying value
of other liabilities not subject to fair value disclosure totaled $207.5
million in 2002 and $86.5 million in 2001.
(6) Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trust holding solely debentures of the Company were valued
using a present value discounted cash flow analysis with a discount rate
approximating current market rates of similar issuances at the end of the
year.
(7) CIT enters into derivative financial instruments for hedging purposes
only. The estimated fair values are obtained from dealer quotes and
represent the net amount receivable or payable to terminate the agreement,
taking into account current market interest rates and counter-party credit
risk. See Note 10-"Derivative Financial Instruments" for notional
principal amounts associated with the instruments.
Note 23 -- Certain Relationships and Related Transactions
On September 30, 2002, certain subsidiaries of Tyco sold receivables
totaling $350.0 million to CIT in a factoring transaction. At various times
during the year ended September 30, 2002 CIT and Tyco engaged in similar
factoring transactions, the highest amount of which was $384.4 million.
74
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We have entered into a number of equipment loans and leases with
affiliates of Tyco. Lease terms generally range from 3 to 12 years. Tyco has
guaranteed payment and performance obligations under each loan and lease
agreement. At September 30, 2002, the aggregate amount outstanding under these
equipment loans and leases was approximately $29.3 million.
On May 1, 2002, CIT assumed a third-party corporate aircraft lease
obligation from Tyco. The assumed lease obligation is approximately $16.0
million and extends for 134 months beginning on May 1, 2002. Prior to Tyco's
acquisition of the Company, CIT had an agreement to purchase this aircraft
directly from the previous owner.
On September 30, 2001, CIT sold at net book value certain international
subsidiaries to a non-U.S. subsidiary of Tyco. As a result of this sale, there
were receivables from affiliates totaling $1,440.9 million, representing the
debt investment in these subsidiaries. CIT charged arm's length, market-based
interest rates on these receivables, and recorded $19.0 million of interest
income, as an offset to interest expense, related to those notes for the quarter
ended December 31, 2001. A note receivable issued at the time of this
transaction of approximately $295 million was collected.
Following Tyco's announcement on January 22, 2002 that it planned to
separate into four independent, publicly traded companies, CIT repurchased at
net book value the international subsidiaries on February 11, 2002. In
conjunction with this repurchase, the receivables from affiliates of $1,588.1
million at December 31, 2001 was satisfied.
While CIT was an indirect subsidiary of Tyco, certain of CIT's expenses,
such as third party consulting and legal fees, were paid by Tyco and billed to
CIT. The payables were subsequently satisfied.
CIT is a partner with Dell Computer Corporation ("Dell") in Dell Financial
Services L.P. ("DFS"), a joint venture which offers Dell customers financing
services. The joint venture provides Dell with financing and leasing
capabilities that are complementary to its product offerings and provides CIT
with a steady source of new financings. CIT regularly purchases finance
receivables from DFS at a premium, a portion of which are normally securitized
within 90 days of purchase from DFS. CIT has recourse back to DFS on delinquent
contracts. In accordance with the joint venture agreement, net income generated
by DFS is allocated 70% to Dell and 30% to CIT, after CIT has recovered any
cumulative losses. Any losses generated by DFS are allocated to CIT. DFS is not
consolidated in CIT's financial statements and is accounted for under the equity
method. Financing and leasing assets and managed assets related to receivables
originated by DFS were $1.5 billion and $3.3 billion at September 30, 2002, and
$1.4 billion and $3.2 billion at September 30, 2001.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on delinquent receivables. In
accordance with the joint venture agreement, net income / loss is allocated 50%
to CIT and 50% to Snap-on. The Snap-on joint venture is accounted for under the
equity method and is not consolidated in CIT's financial statements. The related
financing and leasing assets and managed assets were $0.9 billion and $1.0
billion at September 30, 2002, and $0.8 billion and $0.9 billion at September
30, 2001.
Note 24 -- Business Segment Information
Management's Policy in Identifying Reportable Segments
CIT's reportable segments are comprised of strategic business units
aggregated into segments based upon the commonality of their products,
customers, distribution methods, operations and servicing, and the nature of
their regulatory environment.
Types of Products and Services
CIT has four reportable segments: Equipment Financing and Leasing,
Specialty Finance, Commercial Finance and Structured Finance. Equipment
Financing and Leasing, Specialty Finance and Structured Finance offer secured
lending and leasing products to midsize and larger companies across a variety of
industries,
75
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
including aerospace, construction, rail, machine tool, business aircraft,
technology, manufacturing and transportation. The Commercial Finance segment
offers secured lending and receivables collection as well as other financial
products to small and midsize companies. These include secured revolving lines
of credit and term loans, credit protection, accounts receivable collection,
import and export financing and factoring, debtor-in-possession and turnaround
financing. The Specialty Finance segment also offers home equity products to
consumers primarily through a network of brokers and correspondents. The
Specialty Finance segment resulted from the combination of the former Vendor
Technology Finance and Consumer segments in fiscal 2001, consistent with how
activities are reported internally to management since June 30, 2001. CIT has
reclassified comparative prior period information to reflect this change. Also
in fiscal 2001, CIT transferred financing and leasing assets from Equipment
Financing to Specialty Finance. Prior year segment balances have not been
restated to conform to the current year asset transfers as it is impractical to
do so.
Segment Profit and Assets
Because CIT generates a majority of its revenue from interest, fees and
asset sales, management relies primarily on operating revenues to assess the
performance of the segment. CIT also evaluates segment performance based on
profit after income taxes, as well as asset growth, credit risk management and
other factors.
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated managed asset totals at or for the year ended
September 30, 2002, at or for the combined nine months ended September 30, 2001
and at or for the year ended December 31, 2000. The results presented are based
upon a fixed leverage ratio across business units and the allocation of most of
the corporate expenses. The additional borrowing costs resulting from the
disruption to our funding base was not allocated to business segments. Corporate
and Other includes the telecommunication and Argentine reserving actions in
fiscal 2002, and other portfolio write-downs recorded in conjunction with the
Tyco acquisition in fiscal 2001, as well as goodwill impairment charges (2002)
and goodwill amortization (2001 and 2000). Corporate and Other also includes the
results of the Equity Investment/Venture Capital business for all periods shown
($ in millions).
Equipment Corporate
Financing Specialty Commercial Structured Total and
& Leasing Finance Finance Finance Segments Other Consolidated
--------- ------- ------- ------- -------- ----- ------------
September 30, 2002
(successor)
Operating margin ................. $ 563.6 $ 932.1 $ 474.9 $ 132.8 $ 2,103.4 $ (296.9) $ 1,806.5
Income taxes ..................... 123.9 214.4 121.9 40.0 500.2 (126.2) 374.0
Net income ....................... 202.0 349.8 198.9 65.2 815.9 (7,514.6) (6,698.7)
Total financing and leasing assets 14,267.2 10,119.4 8,910.2 3,090.8 36,387.6 -- 36,387.6
Total managed assets ............. 18,651.3 16,970.0 8,910.2 3,090.8 47,622.3 -- 47,622.3
September 30, 2001
(combined)
Operating margin ................. $ 552.3 $ 649.4 $ 343.2 $ 36.0 $ 1,580.9 $ (22.0) $ 1,558.9
Income taxes ..................... 111.1 119.7 86.3 26.0 343.1 (100.9) 242.2
Net income ....................... 215.1 196.7 134.8 45.8 592.4 (329.1) 263.3
Total financing and leasing assets 16,109.1 12,791.1 8,657.1 3,171.9 40,729.2 -- 40,729.2
Total managed assets ............. 20,573.9 18,474.2 8,657.1 3,171.9 50,877.1 -- 50,877.1
December 31, 2000
(predecessor)
Operating margin ................. $ 897.7 $ 668.3 $ 449.8 $ 128.8 $ 2,144.6 $ (18.4) $ 2,126.2
Income taxes ..................... 147.3 139.9 109.2 35.9 432.3 (51.1) 381.2
Net income ....................... 287.8 222.2 161.8 65.4 737.2 (125.6) 611.6
Total financing and leasing assets 20,078.0 13,321.0 7,693.7 2,691.9 43,784.6 -- 43,784.6
Total managed assets ............. 26,465.2 18,050.1 7,693.7 2,691.9 54,900.9 -- 54,900.9
Finance income and other revenues derived from United States based
financing and leasing assets were $4,284.8 million, $3,718.7 million, and
$5,215.6 million for the year ended September 30, 2002, the combined nine months
ended September 30, 2001 and the year ending December 31, 2000, respectively.
Finance income and other revenues derived from foreign based financing and
leasing assets were $990.3 million, $829.2 million, and $944.8 million for the
year ended September 30, 2002, the combined nine months ended September 30, 2001
and the year ending December 31, 2000, respectively.
76
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented related financial statements or
other information for these subsidiaries on a stand-alone basis ($ in millions).
CONSOLIDATING BALANCE SHEET
September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
($ in millions)
ASSETS
Net finance receivables .............. $ 864.3 $2,504.8 $ 893.5 $23,418.6 $ -- $27,681.2
Operating lease equipment, net ....... -- 797.2 185.3 5,584.9 -- 6,567.4
Assets held for sale ................. -- 156.7 47.7 815.1 -- 1,019.5
Cash and cash equivalents ............ 1,737.8 225.8 330.3 (19.5) -- 2,274.4
Other assets ......................... 4,855.0 444.4 452.5 4,173.9 (4,757.8) 5,168.0
---------- -------- --------- --------- --------- ---------
Total Assets ....................... $ 7,457.1 $4,128.9 $ 1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ................................. $ 28,409.3 $1,858.0 $ 2,147.6 $ 41.1 $ -- $32,456.0
Credit balances of factoring clients . -- -- -- 2,513.8 -- 2,513.8
Other liabilities .................... (25,710.0) 1,785.1 (1,342.5) 27,992.6 -- 2,725.2
---------- -------- --------- --------- --------- ---------
Total Liabilities .................. 2,699.3 3,643.1 805.1 30,547.5 -- 37,695.0
Preferred securities ................. -- -- -- 257.7 -- 257.7
Equity ............................... 4,757.8 485.8 1,104.2 3,167.8 (4,757.8) 4,757.8
---------- -------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 7,457.1 $4,128.9 $ 1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ========= ========= ========= =========
77
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEET
September 30, 2001
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
($ in millions)
ASSETS
Net finance receivables .............. $ 1,834.6 $3,074.4 $ 1,506.1 $24,971.4 $ -- $31,386.5
Operating lease equipment, net ....... -- 1,203.2 273.4 4,926.2 -- 6,402.8
Assets held for sale ................. -- 32.9 157.5 1,824.5 -- 2,014.9
Cash and cash equivalents ............ 440.0 107.0 4.2 256.8 -- 808.0
Other assets ......................... 5,499.8 291.4 302.8 10,590.7 (5,947.6) 10,737.1
---------- -------- --------- --------- --------- ---------
Total Assets ....................... $ 7,774.4 $4,708.9 $ 2,244.0 $42,569.6 $(5,947.6) $51,349.3
========== ======== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ................................. $ 30,218.0 $2,879.2 $ 1,972.3 $ 628.2 $ -- $35,697.7
Credit balances of factoring clients . -- -- -- 2,392.9 -- 2,392.9
Other liabilities .................... (28,391.2) 1,275.7 (1,656.1) 35,822.7 -- 7,051.1
---------- -------- --------- --------- --------- ---------
Total Liabilities .................. 1,826.8 4,154.9 316.2 38,843.8 -- 45,141.7
Preferred securities ................. -- -- -- 260.0 -- 260.0
Equity ............................... 5,947.6 554.0 1,927.8 3,465.8 (5,947.6) 5,947.6
---------- -------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 7,774.4 $4,708.9 $ 2,244.0 $42,569.6 $(5,947.6) $51,349.3
========== ======== ========= ========= ========= =========
78
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF INCOME
Year Ended September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
($ in millions)
Finance income ............................ $ 200.4 $1,050.1 $233.2 $2,859.1 $ -- $ 4,342.8
Interest expense .......................... (3.7) 401.3 4.8 1,036.9 -- 1,439.3
--------- -------- ------ -------- ------ ---------
Net finance income ........................ 204.1 648.8 228.4 1,822.2 -- 2,903.5
Depreciation on operating lease equipment . -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ -------- ------ ---------
Net finance margin ........................ 204.1 145.8 122.9 1,189.7 -- 1,662.5
Provision for credit losses ............... 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ -------- ------ ---------
Net finance margin, after provision for
credit losses ........................... (104.2) (52.1) 98.0 932.5 -- 874.2
Equity in net income of subsidiaries ...... (77.8) -- -- -- 77.8 --
Other revenue ............................. 20.7 124.0 93.0 694.6 -- 932.3
--------- -------- ------ -------- ------ ---------
Operating margin .......................... (161.3) 71.9 191.0 1,627.1 77.8 1,806.5
Operating expenses ........................ 6,588.0 188.7 65.9 1,278.1 -- 8,120.7
--------- -------- ------ -------- ------ ---------
Income before provision for income taxes .. (6,749.3) (116.8) 125.1 349.0 77.8 (6,314.2)
(Benefit) Provision for income taxes ...... (50.6) (60.0) 54.4 430.2 -- 374.0
Minority interest, after tax .............. -- -- -- (10.5) -- (10.5)
--------- -------- ------ -------- ------ ---------
Net income ................................ $(6,698.7) $ (56.8) $ 70.7 $ (91.7) $ 77.8 $(6,698.7)
========= ======== ====== ======== ====== =========
79
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2001
(combined)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
($ in millions)
Finance income ............................. $226.4 $998.0 $219.1 $2,531.8 $ -- $3,975.3
Interest expense ........................... 178.9 305.4 23.1 1,112.4 -- 1,619.8
------ ------ ------ -------- ------- --------
Net finance income ......................... 47.5 692.6 196.0 1,419.4 -- 2,355.5
Depreciation on operating lease equipment .. -- 460.5 103.4 472.8 -- 1,036.7
------ ------ ------ -------- ------- --------
Net finance margin ......................... 47.5 232.1 92.6 946.6 -- 1,318.8
Provision for credit losses ................ 54.7 88.9 15.1 173.8 -- 332.5
------ ------ ------ -------- ------- --------
Net finance margin after provision
for credit losses ........................ (7.2) 143.2 77.5 772.8 -- 986.3
Equity in net income of subsidiaries ....... 527.8 -- -- -- (527.8) --
Other revenue .............................. (80.6) 67.6 68.1 517.5 -- 572.6
------ ------ ------ -------- ------- --------
Operating margin ........................... 440.0 210.8 145.6 1,290.3 (527.8) 1,558.9
Operating expenses ......................... 216.9 160.0 78.4 589.6 -- 1,044.9
------ ------ ------ -------- ------- --------
Income before provision for income taxes ... 223.1 50.8 67.2 700.7 (527.8) 514.0
Provision for income taxes ................. (40.2) 19.3 25.5 237.6 -- 242.2
Minority interest, after tax ............... -- -- -- (8.5) -- (8.5)
------ ------ ------ -------- ------- --------
Net income ................................. $263.3 $ 31.5 $ 41.7 $ 454.6 $(527.8) $ 263.3
====== ====== ====== ======== ======= ========
80
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
($ in millions)
Cash Flows From Operating Activities:
Net cash flows provided by (used for)
operations .............................. $ 401.0 $ (283.7) $(693.8) $ 1,936.1 $ -- $ 1,359.6
--------- --------- ------- --------- ------- ---------
Cash Flows From Investing Activities:
Net increase in financing and
leasing assets .......................... 662.0 211.9 721.3 779.0 -- 2,374.2
Decrease in intercompany loans
and investments ......................... 865.4 -- -- -- (865.4) --
Other ..................................... -- -- -- (52.5) -- (52.5)
--------- --------- ------- --------- ------- ---------
Net cash flows provided by investing
activities .............................. 1,527.4 211.9 721.3 726.5 (865.4) 2,321.7
--------- --------- ------- --------- ------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in debt .......... (1,808.7) (1,021.2) 175.3 (774.7) -- (3,429.3)
Intercompany financing .................... -- 1,211.8 123.3 (2,200.5) 865.4 --
Capital contributions from Tyco ........... 923.5 -- -- -- -- 923.5
Cash dividends paid ....................... -- -- -- -- -- --
Issuance of common stock .................. 254.6 -- -- -- -- 254.6
--------- --------- ------- --------- ------- ---------
Net cash flows (used for) provided by
financing activities .................... (630.6) 190.6 298.6 (2,975.2) 865.4 (2,251.2)
--------- --------- ------- --------- ------- ---------
Net increase (decrease) in cash
and cash equivalents .................... 1,297.8 118.8 326.1 (312.6) -- 1,430.1
Exchange rate impact on cash . ............ -- -- -- 36.3 -- 36.3
Cash and cash equivalents, beginning
of period ............................... 440.0 107.0 4.2 256.8 -- 808.0
--------- --------- ------- --------- ------- ---------
Cash and cash equivalents, end of
period .................................. $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
========= ========= ======= ========= ======= =========
81
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2001
(combined)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
($ in millions) ---------- ----------- -------- ------------ ------------ -----
Cash Flows From Operating Activities:
Net cash flows (used for) provided by
operations ............................. $ (48.9) $ 275.1 $ 128.4 $ 672.5 $ -- $ 1,027.1
--------- --------- ------- ------- --------- ---------
Cash Flows From Investing Activities:
Net increase (decrease) in financing
and leasing assets ..................... 335.0 440.4 (36.7) 275.5 -- 1,014.2
Decrease in intercompany loans
and investments ........................ (2,228.2) -- -- -- 2,228.2 --
Other .................................... -- -- -- (21.2) -- (21.2)
--------- --------- ------- ------- --------- ---------
Net cash flows (used for) provided
by investing activities ................ (1,893.2) 440.4 (36.7) 254.3 2,228.2 993.0
--------- --------- ------- ------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in debt .......... 586.6 (2,872.5) (247.4) (213.3) -- (2,746.6)
Intercompany financing ................... -- 2,134.7 240.6 (147.1) (2,228.2) --
Capital contributions .................... 675.0 -- -- 70.5 -- 745.5
Cash dividends paid ...................... -- -- -- (52.9) -- (52.9)
Issuance of treasury stock ............... -- -- -- 27.6 -- 27.6
--------- --------- ------- ------- --------- ---------
Net cash flows provided by (used for)
financing activities ................... 1,261.6 (737.8) (6.8) (315.2) (2,228.2) (2,026.4)
--------- --------- ------- ------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ....................... (680.5) (22.3) 84.9 611.6 -- (6.3)
Exchange rate impact on cash ............. -- -- -- 2.2 -- 2.2
Cash and cash equivalents, beginning
of period .............................. 1,120.5 129.3 (80.7) (357.0) -- 812.1
--------- --------- ------- ------- --------- ---------
Cash and cash equivalents, end of
period ................................. $ 440.0 $ 107.0 $ 4.2 $ 256.8 $ -- $ 808.0
========= ========= ======= ======= ========= =========
Note 26 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below. The second
quarter of 2001 includes predecessor operations through June 1, 2001 and
successor operations for June 2 through June 30, 2001 ($ in millions).
Year Ended September 30, 2002
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net finance margin ........................... $487.5 $ 448.2 $ 356.0 $370.8
Provision for credit losses .................. 112.9 195.0 357.7 122.7
Other revenue ................................ 245.1 232.1 246.1 209.0
Salaries and general operating expenses ...... 238.7 234.2 237.9 235.6
Intercompany interest expense -- TCH ......... 76.3 305.0 281.3 --
Goodwill impairment .......................... -- 4,512.7 1,999.0
Provision for income taxes ................... 118.2 50.4 121.3 84.1
Minority interest in subsidiary trust
holding solely debentures
of the Company, after tax .................. 2.4 2.7 2.7 2.7
Net income (loss) ............................ $184.1 $(4,619.7) $(2,397.8) $134.7
Net income (loss) per diluted share(1) ....... $ 0.87 $ (21.84) $ (11.33) $ 0.64
82
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine Months Ended
September 30, 2001
---------------------------------------------
First Second Third
Quarter Quarter Quarter
------------- ---------- -----------
(predecessor) (combined) (successor)
Net finance margin ........................................... $404.7 $429.4 $484.7
Provision for credit losses .................................. 68.3 166.7 97.5
Other revenue ................................................ 211.6 121.8 239.2
Salaries and general operating expenses ...................... 263.5 267.9 263.1
Goodwill amortization ........................................ 22.5 29.7 45.4
Intercompany interest expense -- TCH ......................... -- 25.0 73.8
Acquisition-related costs .................................... -- 54.0 --
Provision for income taxes ................................... 99.0 30.5 112.7
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ....................... 2.9 2.8 2.8
Net income (loss) ............................................ $160.1 $ (25.4) $128.6
Net income (loss) per diluted share(1) ....................... $ 0.75 $ (0.12) $ 0.61
- --------------------------------------------------------------------------------
(1) Per share calculations assume that current period shares are outstanding
for all periods shown.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Prior to Tyco's acquisition of CIT, the independent auditor for CIT Group
Inc. (fomerly The CIT Group, Inc.) was KPMG LLP. The independent accountants for
Tyco were PricewaterhouseCoopers LLP ("PwC"). On June 1, 2001, in connection
with the acquisition, Tyco and CIT jointly determined that CIT would terminate
its audit engagement with KPMG LLP and enter into an audit engagement with PwC,
in order to facilitate the auditing of Tyco's Consolidated Financial Statements.
CIT's Board of Directors approved the appointment of PwC as the independent
accountants for CIT.
In connection with the audit of the year ended December 31, 2000, and the
subsequent interim period through June 1, 2001, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit report of KPMG LLP on the Consolidated Financial Statements of
CIT Group Inc. and subsidiaries as of and for the year ended December 31, 2000,
did not contain any adverse opinion or disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
83
PART III
Item 10. Directors and Executive Offices of the Registrant.
Directors
The following table sets forth information concerning CIT's six directors,
including information as to each director's age as of December 1, 2002 and
business experience during the past five years. This information was provided to
CIT by the directors. CIT knows of no family relationship among the directors.
Certain directors are also directors or trustees of privately held businesses or
not-for-profit entities that are not referred to below.
Name Age Position
- ---- --- -------------------------------------------------
Albert R. Gamper, Jr. .. 60 Chairman, President & Chief Executive Officer of
CIT
John S. Chen ........... 46 Chairman, President and Chief Executive Officer
of Sybase, Inc.
William A. Farlinger ... 73 Chairman of Ontario Power Generation Inc.
Hon. Thomas H. Kean .... 67 President, Drew University and Former Governor
of New Jersey
Edward J. Kelly, III ... 49 President and Chief Executive Officer, Mercantile
Bankshares Corporation.
Peter J. Tobin ......... 58 Dean, Peter J. Tobin College of Business, St.
John's University
ALBERT R. GAMPER, JR. has served as Chairman, President and Chief
Executive Officer since July 1, 2002, as President and Chief Executive Officer
from June 2001 to June 2002, as Chairman, President and Chief Executive Officer
from January 2000 to May 2001, as President and Chief Executive Officer from
December 1989 to January 2000 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, a prior owner of CIT, where he had been
employed since 1962. Mr. Gamper is a director of Public Service Enterprise Group
Incorporated, Chairman of the Board of Directors of St. Barnabas Corporation and
a member of the Board of Trustees of Rutgers University.
JOHN S. CHEN has served as a Director of CIT since July 1, 2002, and
previously from October 2000 to June 1, 2001. Mr. Chen has served as Chairman,
President and Chief Executive Officer of Sybase, Inc., a software developer,
since August 1997. From 1991 to 1997, Mr. Chen served in a variety of positions
with Siemens Nixdorf and with Pyramid Technology Corporation, which was acquired
by Siemens Nixdorf in 1995, including as Executive Vice President of Pyramid in
1991, as President and Chief Operating Officer and a director of Pyramid in 1993
and as President and Chief Executive Officer of Siemens Nixdorf's Open
Enterprise Computing Division in 1996. Mr. Chen is also a director of Sybase,
Inc.
WILLIAM A. FARLINGER has served as a Director of CIT since July 1, 2002,
and previously from November 1999 to June 1, 2001. Mr. Farlinger has served as
Chairman of Ontario Power Generation Inc. (formerly Ontario Hydro) since
November 1995, including as Chairman, President and Chief Executive Officer from
August 1997 to March 1998. Prior to joining Ontario Hydro, Mr. Farlinger spent
his entire business career with the accounting and management consulting firm of
Ernst & Young, Canada, including serving as Chairman and Chief Executive Officer
from 1987 to 1994. Mr. Farlinger is also a director of Laidlaw Inc.
HON. THOMAS H. KEAN has served as a Director of CIT since July 1, 2002,
and previously from November 1999 to June 1, 2001. Mr. Kean has served as
President of Drew University since February 1990, and is a former Governor of
the State of New Jersey. He is also a director of Amerada Hess Corporation,
ARAMARK Corporation, Fiduciary Trust Co. International, The Pepsi Bottling Group
and UnitedHealth Group Inc. Mr. Kean is also a director of The Robert Wood
Johnson Foundation, a non-profit foundation.
EDWARD J. KELLY, III has served as a Director of CIT since July 1, 2002.
Mr. Kelly has served as President and Chief Executive Officer and a Director of
Mercantile Bankshares Corporation since March 2001. Mr. Kelly served as Managing
Director of J.P. Morgan Chase, and one of its predecessors, J.P. Morgan, from
February 1996
84
to February 2001, as General Counsel and Secretary of J.P. Morgan from November
1994 to January 1996, and is a former partner in the New York law firm of Davis
Polk & Wardwell. Mr. Kelly is also a director of Adams Express Company and
Petroleum & Resources Corporation, both of which are closed-end mutual funds,
and of Constellation Energy Group, CSX Corporation, and Hartford Financial
Services Group.
PETER J. TOBIN has served as a Director of CIT since July 1, 2002, and
previously from May 1984 to June 1, 2001. Additionally, the Board named Mr.
Tobin as lead Director, and in such capacity, he will preside at executive
sessions of the independent directors. Mr. Tobin has been Dean of the Peter J.
Tobin College of Business at St. John's University since August 1998. From March
1996 to December 1997, Mr. Tobin was Chief Financial Officer of The Chase
Manhattan Corporation. From January 1992 to March 1996, Mr. Tobin served as
Chief Financial Officer of Chemical Banking Corporation, a predecessor of The
Chase Manhattan Corporation, and prior to that he served in a number of
executive positions at Manufacturers Hanover Corporation, a predecessor of
Chemical Banking Corporation. He is a director of AXA Financial (formerly The
Equitable Companies Incorporated), Alliance Capital Management, L.P., a
subsidiary of AXA Financial that manages mutual funds, and H.W. Wilson, a
publishing company.
Board Committees
Our board of directors has established an audit committee and a
compensation and governance committee. The audit committee is comprised of three
independent directors and the compensation and governance committee is comprised
of two independent directors. The board of directors may appoint additional
committees at its discretion.
Audit Committee
The audit committee conducts its duties consistent with a written charter,
which includes:
o retain and determine the compensation of the independent public
accountants;
o monitoring the integrity of our financial accounting and reporting
process and systems of internal controls;
o reviewing our corporate compliance policies and monitoring
compliance with our Code of Business Conduct and other compliance
policies, including reviewing any significant case of employee
conflict of interest or misconduct; and
o reporting to our board of directors as appropriate.
PETER J. TOBIN (Chairman), WILLIAM A. FARLINGER and EDWARD J. KELLY, III
serve as members of the audit committee. The charter for our audit committee
complies with SEC and New York Stock Exchange requirements. On November 5, 2002,
the Board of Directors determined that Mr. Tobin meets the standard of
"Financial Expert" as proposed by the SEC.
Compensation and Governance Committee
The compensation and governance committee conducts its duties consistent
with a written charter, which includes:
o considering and approving salaries, bonuses and stock-based
compensation for certain executive officers;
o administering and making awards under the Long-Term Equity
Compensation Plan;
o identifying and recommending qualified candidates to fill CIT board
of directors and committee positions;
o overseeing corporate governance, including reviewing the structure,
duties, membership and functions of the board of directors as
appropriate.
HON. THOMAS H. KEAN (Chairman) and JOHN S. CHEN serve as members of the
compensation and governance committee. The Board anticipates naming an
additional member to the compensation and governance committee when an
additional independent director is appointed to the Board.
85
Compensation and Governance Committee Interlocks and Insider Participation
There are no interlocking relationships between any member of our
compensation and governance committee and any of our executive officers that
would require disclosure under the rules of the SEC.
Executive Officers
The following table sets forth information as of December 1, 2002
regarding our executive officers, other than Mr. Gamper, who is listed above as
director. The executive officers were appointed by and hold office at the
discretion of the board of directors. Certain executive officers are also
directors or trustees of privately held or not-for-profit organizations that are
not referred to below.
Name Age Position
- ---- --- --------------------------------------------------
Thomas L. Abbate ...... 57 Executive Vice President and Chief Risk Officer
John D. Burr .......... 59 Group Chief Executive Officer, Equipment Rental
and Finance
Thomas B. Hallman ..... 49 Group Chief Executive Officer, Specialty Finance
Robert J. Ingato ...... 42 Executive Vice President, General Counsel &
Secretary
Joseph M. Leone ....... 49 Executive Vice President and Chief Financial
Officer
Lawrence A. Marsiello . 52 Group Chief Executive Officer, Commercial Finance
David D. McKerroll .... 43 Group Chief Executive Officer, Structured Finance
Nikita Zdanow ......... 65 Group Chief Executive Officer, Capital Finance
THOMAS L. ABBATE has served as CIT's Executive Vice President and Chief
Risk Officer since July 2000. Previously, Mr. Abbate served as Executive Vice
President of Credit Risk Management of CIT since October 1999 and as Executive
Vice President and Chief Credit Officer of Equipment Financing, a business unit
of CIT, since August 1991. Prior to August 1991, Mr. Abbate held a number of
executive positions with CIT and with Manufacturers Hanover Corporation, where
he had been employed since 1973.
JOHN D. BURR has served as Group Chief Executive Officer of CIT's
Equipment Rental and Finance Group since June 2001. Mr. Burr served as President
of Equipment Financing/North American Construction and Transportation division
since 1999 and Executive Vice President of Equipment Financing since 1983, and
held a number of other management and executive positions at CIT since 1967.
THOMAS B. HALLMAN has served as Group Chief Executive Officer of CIT's
Specialty Finance Group since July 2001. Previously, Mr. Hallman served as Chief
Executive Officer of the Consumer Finance business unit, the home equity unit of
Specialty Finance, since joining CIT in 1995, and held a number of senior
management positions with other financial services firms prior to 1995.
ROBERT J. INGATO has served as CIT's Executive Vice President and General
Counsel since June 2001, and additionally as Secretary since August 14, 2002.
Previously, Mr. Ingato served as Executive Vice President and Deputy General
Counsel since November 1999, as Executive Vice President of Newcourt Credit
Group, Inc., which was acquired by CIT, since January 1988, as Executive Vice
President and General Counsel of AT&T Capital Corporation, a predecessor of
Newcourt, since 1996, and in a number of other legal positions with AT&T Capital
since 1988.
JOSEPH M. LEONE has served as CIT's Executive Vice President and Chief
Financial Officer since July 1995. Previously, Mr. Leone served as Executive
Vice President of Sales Financing, a business unit of CIT, from June 1991,
Senior Vice President and Controller since March 1986, and in a number of other
executive positions with Manufacturers Hanover Corporation since May 1983.
LAWRENCE A. MARSIELLO has served as Group Chief Executive Officer of CIT's
Commercial Finance Group since August 1999. Previously, Mr. Marsiello served as
Chief Executive Officer of the Commercial Services business unit, the factoring
unit of Commercial Finance, since August 1990, and in a number of other
executive positions with CIT and Manufacturers Hanover Corporation, where he had
been employed since 1974.
86
DAVID D. MCKERROLL has served as Group Chief Executive Officer of CIT's
Structured Finance Group since November 1999. Previously, Mr. McKerroll served
as President of Newcourt Capital, a division of Newcourt Credit Group Inc., and
was one of the founders of Newcourt Credit Group Inc., which he joined in 1987.
Mr. McKerroll is also a director of Cossette Communication Group Inc.
NIKITA ZDANOW has served as Group Chief Executive Officer of CIT's Capital
Finance Group since 1985, and has served in a number of other executive
positions since joining CIT in 1960.
Director Compensation
Director remuneration consists principally of cash and an award of stock
options.
Non-employee directors of CIT are paid an annual retainer of $50,000. Each
year the non-employee directors may make an election to receive some or all of
this annual cash remuneration in one or more of the following forms:
o Cash
o Stock Options
o Restricted Stock
The number of shares of common stock underlying options a director may
elect to recieve instead of cash remuneration is calculated using the
Black-Scholes option pricing model. The options that directors elect to recieve
in lieu of cash component of their compensation are immediately vested, but not
exercisable until one year following the date of grant. These options will have
a term of ten years. Any amount elected to be received in restricted stock will
be converted to shares of common stock with a market value equal to the closing
price of common stock on the day awarded. The restrictions on the restricted
stock will lapse on the first anniversary of the grant date.
The option component of remuneration provides for annual grants of stock
options having a Black-Scholes value of $35,000 for directors generally, except
that the committee chairman are entitled to grants with a $45,000 valuation. At
the time of appointment to the board of directors, non-employee directors are
each awarded a grant of stock option to acquire 10,000 shares of our common
stock. The option component of director and the options granted at the time of
appointment become vested and exercisable in three equal, annual installments.
These options will have a term of ten years.
Directors who are also our employees do not receive any fees or other
compensation for service on our board of directors or its committees. We will
reimburse directors for reasonable out-of-pocket expenses incurred in attending
board or committee meetings.
Compliance with Section 16(a) of the Securities Exchange Act
Based on CIT's records and other information, CIT believes that its
directors and executive officers complied with the applicable SEC filing
requirements for reporting beneficial ownership of CIT's equity securities for
the fiscal year ended September 30, 2002, except that Mr. Kean inadvertently
failed to report in his Form 4 filed for July 2002 that he purchased 10,000
shares of CIT common stock in CIT's IPO and Mr. Zdanow inadvertently reported in
his Form 4 filed for July 2002 that he purchased 1,200 shares of common stock,
rather than the 1,500 shares actually purchased. Mr. Kean and Mr. Zdanow each
filed amended Form 4s in August 2002.
87
Item 11. Executive Compensation
The table below sets forth the annual compensation, including bonuses and
deferred compensation, of the Named Executive Officers for services rendered in
all capacities to CIT during the fiscal year ended September 30, 2002, the nine
months ended September 30, 2001, and the years ended December 31, 2000 and
December 31, 1999.
SUMMARY COMPENSATION TABLE
(U.S. Dollars)
Annual Compensation Long Term Compensation Awards
-------------------------------- ------------------------------------
Other All
Annual Restricted Securities Other
Name and Principal Compen- Stock Underlying Compen-
Positions Period Salary Bonus(1) sation(2) Awards(3) Options(4) sation(5)
- ------------------ ------ ------ -------- --------- ---------- ---------- ---------
Albert R. Gamper, Jr. Oct 2001-Sept 2002 $900,000 $1,668,832 $15,000 $ 0 1,519,560 $10,000
Chairman, President Jan-Sept 2001 $680,769 $3,120,434 $40,958 $16,949,070 717,360 $ 8,250
and Chief Executive Jan-Dec2000 $878,847 $ 800,000 $98,188 $ 2,946,500 185,805 $41,954
Officer Jan-Dec 1999 $761,534 $1,237,503 $57,577 $ 0 206,450 $36,861
Thomas B. Hallman Oct 2001-Sept 2002 $430,000 $ 356,000 $ 1,209 $ 0 379,890 $ 9,197
Group CEO Jan-Sept 2001 $288,846 $ 605,000 $ 8,475 $ 1,490,275 119,560 $ 8,500
Specialty Finance Jan-Dec2000 $333,076 $ 325,000 $16,692 $ 1,057,500 45,419 $20,123
Jan-Dec1999 $277,115 $ 292,188 $ 9,210 $ 0 61,935 $17,485
Joseph M. Leone Oct 2001-Sept 2002 $405,000 $ 390,500 $ 1,346 $ 0 454,890 $ 9,237
Executive Vice President Jan-Sept 2001 $302,308 $ 580,000 $ 8,886 $ 1,659,596 119,560 $ 8,500
and Chief Financial Jan-Dec2000 $358,088 $ 300,000 $21,168 $ 785,625 37,161 $21,124
Officer Jan-Dec1999 $299,695 $ 433,007 $12,267 $ 0 74,322 $18,388
David D. McKerroll (6) Oct 2001-Sept 2002 $435,928 $ 398,356 $ 916 $ 0 293,681 $ 1,943
Group CEO Jan-Sept 2001 $326,483 $ 295,731 $ 7,136 $ 1,128,978 74,725 $ 2,456
Structured Finance Jan-Dec2000 $395,959 $ 554,343 $ 6,151 $ 1,003,125 41,290 $ 0
Nov-Dec1999 $ 49,458 $1,416,459 $ 0 $ 0 81,341 $ 0
Nikita Zdanow Oct 2001-Sept 2002 $460,204 $ 296,000 $ 1,539 $ 0 379,890 $ 5,799
Group CEO Jan-Sept 2001 $344,615 $ 525,000 $ 8,968 $ 1,896,657 74,725 $ 5,100
Capital Finance Jan-Dec2000 $409,238 $ 400,000 $22,711 $ 1,057,500 47,484 $23,170
Jan-Dec1999 $356,741 $ 425,011 $14,437 $ 0 64,000 $20,670
- --------------------------------------------------------------------------------
(1) Bonus payments made to the Messrs. Gamper, Hallman, Leone, and Zdanow
under CIT's Annual Corporate Bonus plan during the twelve months ended
September 30, 2002 were for performance during the period from October 1,
2001 through June 30, 2002. Based on performance for the period from July
1, 2002 to December 31, 2002, Messrs. Gamper, Hallman, Leone, and Zdanow
may be entitled to an additional bonus, which will be payable in early
2003.
For the period from October 2001 through June 2002, Messrs. Gamper,
Hallman, Leone, and Zdanow received a portion of their corporate bonus as
CIT restricted stock. The amounts shown include the value of the
restricted stock. The number of shares was based on a price of $22.20, the
closing price of CIT common stock on August 13, 2002, the date of the
grant. All shares were issued with a one-year restriction. The number and
value of shares awarded are as follows: Mr. Gamper - 50,675 shares
($1,124,985), Mr. Hallman - 12,162 shares ($269,996), Mr. Leone - 15,765
shares ($349,983), and Mr. Zdanow - 11,261 shares ($249,994). The balance
of the listed bonus amounts relate to cash bonuses paid under a Tyco
quarterly corporate bonus plan, which was discontinued after the CIT IPO.
Of the $1,668,832 in corporate bonus that Mr. Gamper received for the
period from October 2001 through September 2002, $918,832 was awarded for
his performance under the Tyco corporate bonus plan, of which $750,000 was
paid out in two quarterly payments, $375,000 paid in cash and $375,000
paid in CIT restricted stock as mentioned above, and $168,832 was awarded
in unrestricted Tyco shares (3,521 shares at a Tyco share price of
$47.95). The additional $750,000 was awarded by CIT for his performance
from January 1 through June 30, 2002 of which $749,985 was paid in CIT
restricted stock as mentioned above and $15 was paid in cash.
For the nine months ended September 2001, Mr. Gamper received a bonus of
$3,120,434, of which $2,002,040 was paid in cash and $1,118,394 was paid
as a grant of 25,020 Tyco common shares, based on the closing price of
Tyco common stock of $44.70 per share on October 1, 2001, the date of the
grant.
The amounts shown in the Bonus column for 2001 and 2000 (other than for
Mr. Gamper as described above), represent the cash amounts paid under
CIT's Annual Corporate Bonus Plan. The amounts shown in the Bonus column
for 1999 represent the cash amounts paid under CIT's annual bonus plan and
the value of CIT Common Stock or common stock units received in lieu of
cash. Pursuant to the CIT Long-Term Equity Compensation Plan ("ECP"),
Executive Officers could elect to receive between 10% and 50% of their
1999 annual bonus awards in Common Stock or Common Stock Units,
respectively, rather than cash. The cash portion deferred was converted to
shares of Common Stock or Common Stock Units with a market value equal to
125% of the deferred amount. CIT paid dividends on the shares of Common
Stock or Common Stock Units awarded to each Named Executive Officer at the
same rate applicable to all other issued and outstanding shares. The
amounts included in the bonus column for shares issued in 1999 represent
the fair market value on January 26, 2000 (the date of grant) of the
shares of CIT Common Stock awarded, based on the closing price of $19.625
per share of CIT Common Stock. The value of restricted stock taken in lieu
of cash is as follows: Mr. Gamper - $687,503, Mr. Hallman - $85,938, Mr.
Leone - $165,007, and Mr. Zdanow - $125,011.
(footnotes continued on next page)
88
(footnotes continued from previous page)
(2) The payments set forth in each period under Other Annual Compensation
represent the dividends paid on restricted stock held in each of those
years. Such dividends were payable at the same rate applicable to all
other issued and outstanding shares.
(3) Restricted Stock Awards include grants of Performance Accelerated
Restricted Shares (PARS) made in January 2000 under The CIT Group, Inc.
Long-Term Equity Compensation Plan and grants of restricted stock made in
June 2001 under the Tyco International Ltd. 1994 Restricted Stock
Ownership Plan for Key Employees in conjunction with the acquisition of
CIT by Tyco.
The 2001 grants vest 100% at the end of three years for Mr. Gamper and
one-third on each anniversary for the others. In addition, shares may vest
earlier under other conditions as described in the individual Award
Agreements. The Tyco Restricted Shares were converted to CIT Restricted
Shares based on the IPO offering price. Recipients of shares have the
right to vote such shares and receive dividends.
The PARS awarded under CIT's prior plan vested on June 1, 2001 due to the
change of control associated with CIT's acquisition by Tyco International.
The shares were issued at a fair market value of $20.75. Awards were as
follows: Mr. Gamper - 142,000 shares; Mr. Hallman - 30,000 shares; Mr.
Leone - 30,000 shares; Mr. McKerroll - 30,000 shares; and Mr. Zdanow -
30,000 shares.
For the year 2000, Restricted Stock Awards also included grants made under
a Special Stock Award Program to Mr. Hallman, Mr. Leone, Mr. McKerroll and
Mr. Zdanow. Payments under this plan were based on the achievement of 2000
company performance measures. Awards were in the form of restricted stock
grants recommended and approved on January 24, 2001. 50% of the award
vested on this date and the remaining 50% was subject to restriction until
January 24, 2002, except that these shares vested on June 1, 2001 in
conjunction with the acquisition of CIT by Tyco. The values of these
grants are included in the Restricted Stock Awards column based on the
share price on the grant date of January 24, 2001 of $21.75 per share of
CIT common stock. Awards were as follows: Mr. Hallman - 20,000 shares; Mr.
Leone - 7,500 shares; Mr. McKerroll - 17,500 shares; and Mr. Zdanow -
20,000 shares.
The number and value at September 30, 2002 of restricted stock holdings
based upon the closing market price of $17.98 per share for CIT common
shares was as follows: Mr. Gamper - 230,023 shares ($4,135,814), Mr.
Hallman - 22,675 shares ($407,697), Mr. Leone - 27,473 shares ($493,965),
Mr. McKerroll 7,964 shares ($143,193), and Mr. Zdanow - 24,641 shares
($443,045). A portion of this stock was granted as part of their corporate
bonus for the period from October 2001 through June 2002. For more details
see footnote (1).
(4) Two new option awards were granted during the twelve months ended
September 30, 2002. The first grant was awarded on February 5, 2002 under
the Tyco International Ltd. Long Term Incentive Plan and the Tyco
International Ltd. Long Term Incentive Plan II. These options were
converted to options to purchase shares of CIT at the time of the CIT IPO
from Tyco based on a conversion rate of .5978. The second grant was
awarded under the CIT Group Inc. Long Term Equity Compensation Plan on
July 2, 2002 to coincide with the CIT IPO from Tyco. For more details see
the table below "Option Grants In Last Fiscal Year".
All options issued either in Tyco options or in CIT options prior to the
Tyco acquisition are reported in the table as current CIT options based on
a conversion rate of .5978 from Tyco options to CIT Options. Options
granted between January and September 2001 were awarded under the Tyco
International Ltd. Long Term Incentive Plan and the Tyco International
Ltd. Long Term Incentive Plan II. The 2001 grants vested one-third on each
anniversary date for Mr. Gamper and 100% at the end of three years for the
others. At the time of the CIT IPO from Tyco, all unvested options granted
between January and September 2001 were cancelled.
For Mr. Gamper, 800,000 unvested Tyco options were cancelled and 8,994
vested options were forfeited. Additionally, Mr. Gamper, retained 400,000
vested Tyco options that were awarded on June 1, 2001 and vested on June
1, 2002. These options did not convert to options to purchase shares of
CIT and remained as options to purchase shares of Tyco. For Mr. Hallman,
200,000 unvested Tyco options were cancelled. For Mr. Leone, 200,000
unvested Tyco options were cancelled. For Mr. McKerroll, 125,000 unvested
Tyco options were cancelled. For Mr. Zdanow, 125,000 unvested Tyco options
were cancelled. The numbers shown in the table have been converted to CIT
shares at a rate of .5978. Options for 2000 and 1999 were awarded under
The CIT Group Inc. Long Term Equity Compensation Plan and represent CIT
options that were converted to options to purchase shares of Tyco at the
time of the acquisition of CIT by Tyco based on an exchange rate of .6907
and then converted to options to purchase new shares of CIT at the time of
the CIT IPO from Tyco based on an exchange rate of .5978.
(5) For the twelve months ended September 30, 2002, nine months ended
September 30, 2001, and the years ended December 31, 2000 and 1999 the
payments set forth under "All Other Compensation" for Messrs. Gamper,
Hallman, Leone, and Zdanow include the matching employer contribution to
each participant's account and the employer flexible retirement account
contribution to each participant's flexible retirement account under the
CIT Group Inc. Savings Incentive Plan (the "CIT Savings Plan"). The
matching employer contribution was made pursuant to a compensation
deferral feature of the CIT Savings Plan under Section 401(k) of the
Internal Revenue Code of 1986. For the period ending September 2002, they
were as follows: Mr. Gamper - $10,000, Mr. Hallman - $9,197, Mr. Leone -
$9,237, and Mr. Zdanow - $5,799. For January through September 2001, they
were as follows: Mr. Gamper - $8,250, Mr. Hallman - $8,500, Mr. Leone -
$8,500, and Mr. Zdanow - $5,100. In 2000 Messrs. Gamper, Hallman, Leone,
and Zdanow received a contribution of $6,800 under the employer match and
a contribution of $6,800 under the employer flexible retirement account.
In 1999 Messrs. Gamper, Hallman, Leone, and Zdanow received a contribution
of $6,400 under the employer match and a contribution of $6,400 under the
employer flexible retirement account. The payments set forth under "All
Other Compensation" also included contributions to the accounts of Messrs.
Gamper, Hallman, Leone, and Zdanow under The CIT Group Inc. Supplemental
Savings Plan (the "CIT Supplemental Savings Plan"), which is an unfunded
non-qualified plan. For 2000, they were as follows: Mr. Gamper - $28,354,
Mr. Hallman - $6,523, Mr. Leone - $7,524, and Mr. Zdanow - $9,570. For
1999, they were as follows: Mr. Gamper - $24,061, Mr. Hallman - $4,685,
Mr. Leone - $5,588, and Mr. Zdanow - $7,870.
For the twelve months ended September 30, 2001 and the nine months ended
September 30, 2001, "All Other Compensation" reported for Mr. McKerroll
includes the matching employer contribution under the Registered
Retirement Savings Plan (RRSP), a Canadian-based, government program. The
Contribution was paid out in Canadian dollars and has been converted to US
dollars using a .6462 conversion rate.
(6) For the twelve months ended September 30, 2002, nine months ended
September 30, 2001, and the years ended December 31, 2000 and 1999, Mr.
McKerroll's employment contract states his base salary and bonus guarantee
in US dollars. Mr. McKerroll is a resident of Canada and is paid in the
local currency (Canadian dollars). Therefore, minor variations in his
compensation may occur due to currency fluctuations. Mr. McKerroll's
payments in Canadian dollars, for the period ending September 30, 2002
were C$687,367 in base salary and C$628,123 in bonus and C$505,235 in base
salary and C$457,646 in bonus for the period ending September 30, 2001.
Mr. McKerroll's payout in Canadian dollars, for the period ending December
31, 2000 was C$588,000 in base salary and C$823,200 in bonus. The balances
were converted to U.S. Dollars using an average annual conversion rate of
.6342 for 2002, .6462 for 2001 and .6734 for 2000.
Mr. McKerroll received a pro-rated portion of compensation for the period
from November 15, 1999 to December 31, 1999. Mr. McKerroll became a CIT
employee on November 15, 1999 as part of CIT's acquisition of Newcourt
Credit Group, Inc. Compensation received by Mr. McKerroll for the period
prior to the acquisition date was not included in these numbers. His
compensation in Canadian dollars for this pay period was C$73,500 in base
salary and C$2,105,007 in bonus. Mr. McKerroll's 1999 bonus compensation
includes C$1,944,222, ($1,308,275), which reflects a portion of the bonus
paid to him for the period prior to November 15, 1999. All 1999
compensation for Mr. McKerroll was converted to U.S. dollars using the
average annual rate of .6729.
89
Stock Option Awards During Fiscal 2002
The following table sets out awards of stock options to Named Executive
Officers in fiscal 2002. All stock options awarded during fiscal 2002 were
awarded under the CIT Group Inc. Long Term Equity Compensation Plan, the Tyco
International Ltd. Long Term Incentive Plan, or the Tyco International Ltd. Long
Term Incentive Plan II and represent options to acquire CIT common shares.
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base Grant Date
Date of Options/SARs Employees in Price Expiration Present
Name Grant(1) Granted(2) Fiscal Year(3) ($/Sh)(4) Date Value(5)
---- ---------- ------------ -------------- --------- ---------- ----------
Albert R. Gamper Jr. 07/02/2002 1,400,000 8.93% $23.00 07/02/2012 $8,694,000
President and 02/05/2002 119,560 0.76% $39.87 02/04/2012 $ 316,436
Chief Executive Officer 03/05/1999 82,580 0.53% $74.47 03/05/2009 $ 104,464
11/13/1997 255,668 1.63% $65.39 11/13/2007 $ 329,300
Thomas B. Hallman 07/02/2002 350,000 2.23% $23.00 07/02/2012 $2,173,500
Group CEO 02/05/2002 29,890 0.19% $39.87 02/05/2012 $ 79,109
Specialty Finance
Joseph M. Leone 07/02/2002 425,000 2.71% $23.00 07/02/2012 $2,639,250
Executive Vice President 02/05/2002 29,890 0.19% $39.87 02/04/2012 $ 79,109
and Chief Financial 03/05/1999 41,290 0.26% $74.47 03/05/2009 $ 52,232
Officer 11/13/1997 47,318 0.30% $65.39 11/13/2007 $ 60,946
David D. McKerroll 07/02/2002 275,000 1.75% $23.00 07/02/2012 $1,707,750
Group CEO 02/05/2002 18,681 0.12% $39.87 02/04/2012 $ 49,442
Structured Finance 10/26/2000 41,290 0.26% $34.06 10/26/2010 $ 225,072
11/18/1999 20,645 0.13% $51.92 11/18/2009 $ 59,354
07/28/1999 24,568 0.16% $51.05 07/28/2009 $ 68,938
03/07/1999 36,129 0.23% $89.33 03/07/2009 $ 22,436
05/02/1997 82,579 0.53% $62.43 02/06/2007 $ 89,268
Nikita Zdanow 07/02/2002 350,000 2.23% $23.00 07/02/2012 $2,173,500
Group CEO 02/05/2002 29,890 0.19% $39.87 02/04/2012 $ 79,109
Capital Finance 10/26/2000 23,572 0.15% $34.06 10/26/2010 $ 54,216
11/18/1999 33,032 0.21% $51.92 11/18/2009 $ 22,792
03/05/1999 30,968 0.20% $74.47 03/05/2009 $ 4,986
11/13/1997 53,099 0.34% $65.39 11/13/2007 $ 15,877
- --------------------------------------------------------------------------------
(1) All options listed represent options to purchase CIT common stock.
However, except for options originally granted in July 2002, all options
listed were converted to CIT options from Tyco option and, in some cases,
from earlier CIT options which Tyco converted to Tyco options. Each Date
of Grant represents the date of original grant of a current CIT option or
a converted Tyco option or earlier CIT option. The vesting schedule and
expiration date for each option is based upon the original Date of Grant.
(2) Options granted in July 2002 were granted under the CIT Group Inc.
Long-Term Equity Compensation Plan. For this grant, the stock options
fully vest on the fourth anniversary of the date of the grant. In
addition, these options may vest earlier under other conditions as
described in the individual award agreements. Options granted in February
2002 were granted as options to purchase shares of Tyco Common Stock under
the Tyco International Ltd. Long Term Incentive Plan and the Tyco
International Ltd. Long Term Incentive Plan II. At the time of the CIT
IPO, these options were converted to options to purchase shares of CIT
based on a conversion rate of .5978. For this grant, the stock options
vest fully on the third anniversary of the date of the grant. In addition,
these options may vest earlier under other conditions as described in the
individual award agreements. Options granted prior to February 2002 were
originally granted as options to purchase shares of CIT Common Stock under
the CIT Long-Term Equity Compensation Plan (prior to CIT's acquisition by
Tyco). These options were converted to options to purchase shares of Tyco
at the time of the acquisition of CIT by Tyco based on an exchange rate of
.6907 and then converted to options to purchase new shares of CIT at the
time of the CIT IPO from Tyco based on an exchange rate of .5978. For
Messrs. Gamper, Leone and Zdanow, the options granted on November 13, 1997
in the exhibit include three separate grants Gamper (109,584; 54,792 and
91,292), Leone (23,370; 12,263 and 11,685) and Zdanow (15,690; 24,939 and
12,470).
(3) Represents the percentage of all options granted in fiscal 2002 under the
CIT Group Inc. Long-Term Equity Compensation Plan.
(4) The July 2002 options were issued as part of a firm-wide IPO grant at an
exercise price equal to the initial offering price of CIT on the date of
grant. The February 2002 options were originally granted by Tyco at an
exercise price equal to the closing price of Tyco's common stock on the
date of grant. The remaining options were originally granted by CIT prior
to its acquisition by Tyco at an exercise price equal to the closing price
of CIT's common stock on the date of grant. The exercise price of the
earlier CIT options were adjusted at the time of CIT's acquisition by Tyco
based on a conversion rate of .6907, and the exercise price of all Tyco
options, including those converted from earlier CIT options, were adjusted
based on a conversion rate of .5978. The exercise price for each converted
option represents the current values after applying all applicable
conversion formulas.
(footnotes continued on next page)
90
(footnotes continued from previous page)
(5) The ultimate value of the options will depend on the future market price
of CIT's common shares, which cannot be forecast with reasonable accuracy.
The actual value, if any, an optionee will realize upon exercise of an
option will depend on the excess of the market value of CIT's common
shares over the exercise price on the date the option is exercised. The
values shown are based on the Black-Scholes option-pricing model, which is
a method of calculating a theoretical value of the options based upon a
mathematical formula using certain assumptions. For the calculation, the
following assumptions were used: an assumed life of three to eight years;
interest rate of 3.2% to 4.9%, which represents the risk free rate with a
maturity date similar to the assumed exercise period; assumed annual
volatility of underlying shares of 27.8% to 33.2%, calculated based on a
historical share price movement analysis of peer organizations over
periods generally commensurate with the expected life of the option;
quarterly dividend payment of $0.12 per share; and the vesting schedule
indicated for the grant.
The following table gives additional information on options exercised in
fiscal 2002 by the Named Executive Officers and on the number and value of
options held by Named Executive Officers on September 30, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
(U.S. Dollars)
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Options at 09/30/2002(1) 09/30/2002
Shares ------------------------ ------------------------
Acquired on Value Exercisable / Exercisable /
Name Exercise Realized Unexercisable Unexercisable
- --------------------------- ----------- -------- ------------------- -------------
Albert R. Gamper, Jr. 0 $0 338,248 / 1,519,560 $0 / $0
President and
Chief Executive Officer
Thomas B. Hallman 0 $0 0 / 379,890 $0 / $0
Group CEO
Consumer Finance
Joseph M. Leone 0 $0 88,608 / 454,890 $0 / $0
Executive Vice President
and Chief Financial Officer
David McKerroll 0 $0 205,211 / 293,681 $0 / $0
Group CEO
Structured Finance
Nikita Zdanow 0 $0 140,671 / 379,890 $0 / $0
Group CEO
Capital Finance
- --------------------------------------------------------------------------------
(1) Does not include 400,000 exercisable options to purchase shares of Tyco
granted to Al Gamper on June 1, 2001. These options remained as options to
purchase shares of Tyco and were not substituted with options to purchase
shares of CIT. The options reported are non-qualified stock options to
purchase CIT common shares awarded under the CIT Group Inc. Long-Term
Equity Compensation Plan including all options converted from Tyco options
or prior CIT options. The exercise price of the options ranges from $23.00
to $89.33 per share and the closing trading price on the New York Stock
Exchange of Common Stock at September 30, 2002 was $17.98.
RETENTION AGREEMENTS
General
Mr. Gamper has a retention agreement that extends until June 1, 2004. Mr.
Gamper's agreement provides that he will serve as the Chief Executive Officer of
CIT. The agreement provides for the payment of an annual base salary of not less
than $1,000,000 (which Mr. Gamper voluntarily reduced to $900,000 from the
inception of his contract through the current date) and an annual cash bonus
based on performance targets. Pursuant to his employment agreement, his base
salary shall be reviewed at the time all executive officers of CIT are reviewed.
Provided CIT achieves at least fifteen percent growth in its net income from the
prior annual period, Mr. Gamper is entitled to a Special Cash Bonus of
$3,000,000 for the fiscal year ending September 30, 2002.
The agreement also provided for grants of restricted stock and stock
options, which are detailed in the Summary Compensation Table. The retention
agreement provides for participation in all employee pension, welfare,
perquisites, fringe benefit and other benefit plans generally applicable to the
most senior executives of CIT and continued participation in CIT's Executive
Retirement Program and all other supplemental and excess retirement plans during
the retention agreement on terms no less favorable than provided immediately
prior to the effective date of the agreement. Mr. Gamper is eligible to receive
benefits under the CIT retiree medical and life insurance plan for the remainder
of his life and the life of his spouse. In addition, Mr. Gamper is entitled to
receive
91
expense reimbursement and certain additional benefits provided to him pursuant
to a prior employment agreement between Mr. Gamper and CIT dated as of November
1, 1999, which shall be provided on the same basis as such benefits were
provided to Mr. Gamper prior to the effective date of the agreement.
In addition, Messrs. Hallman, Leone, McKerroll and Zdanow also have
retention agreements that extend until June 1, 2004. Their agreements provide
for the payment of an annual base salary of not less than the amount received
prior to the acquisition by Tyco, to be reviewed at the time all executive
officers of CIT are reviewed. Further, with the exception of Mr. McKerroll, they
are entitled to an annual bonus opportunity, as determined by the Chief
Executive Officer of CIT. Mr. McKerroll has a guaranteed minimum bonus of
$400,000 per year through December 31, 2002, after which he will be subject to
the same bonus provision as the other executive officers. The retention
agreements for Messrs. Hallman, Leone, McKerroll and Zdanow provide for
participation in all employee pension, welfare, perquisites, fringe benefit and
other benefit plans generally available to senior executives. In addition, the
agreements for Messrs. Hallman, Leone, and Zdanow provide for continued
participation in CIT's Executive Retirement Program and all other supplemental
and excess retirement plans on terms no less favorable than provided immediately
prior to the effective date of the agreement. Messrs. Hallman, Leone, and Zdanow
are also eligible to receive benefits under the CIT retiree medical and life
insurance plan.
Messrs. Hallman, Leone, McKerroll and Zdanow's agreements also provide for
grants of restricted stock and stock options, details of which are provided in
the Summary Compensation Table.
Termination and Change-In-Control Arrangements
If Mr. Gamper's employment is terminated by him for "good reason" or by
CIT without "cause" (in each case, as these terms are defined in the retention
agreement), then he is entitled to a cash payment equal to (i) the sum of his
unpaid base salary through the date of termination and $1,000,000 pro rated for
the portion of the year he completed in the year of his termination, (ii) three
times the sum of Mr. Gamper's annual base salary plus $1,000,000, paid in
accordance with normal payroll periods in equal installments over a period of
three years, provided that Mr. Gamper continues to comply with the
confidentiality and non-compete provisions of the retention agreement and, (iii)
if not already paid, the special cash bonus (without regard to CIT's financial
performance). Also in such event, the restricted stock and options described
above, as well as any other stock incentives then held by Mr. Gamper, will vest
immediately. In addition, Mr. Gamper will be paid or provided with any amounts
or benefits he is eligible to receive under any benefit plan of CIT, including
the retiree medical benefits described above, and to the extent permitted under
law he will be credited with age and service credit under the relevant
retirement plans through June 1, 2004.
Mr. Gamper's retention agreement provides that he will not, during the
retention period and for two years after the date of termination (three years in
the case of termination by CIT without "cause" or by Mr. Gamper for "good
reason" (in each case, as these terms are defined in the retention agreement)),
without the written consent of the board of directors of CIT (A) engage or be
interested in any business in the U.S. which is in competition with any lines of
business actively being conducted by CIT on the date of termination; (B) hire
any person who was employed by CIT or its affiliates within the six-month period
preceding the date of such hiring or solicit, entice, persuade or induce any
person or entity doing business with CIT or its affiliates to terminate such
relationship or to refrain from extending or renewing the same, or (C) disparage
or publicly criticize Tyco or CIT or any of their affiliates.
The retention agreements of Messrs. Hallman, Leone, and Zdanow provide
that, under certain circumstances, upon a termination of employment each will be
entitled to receive: (i) the sum of (1) his annual base salary through the
termination date and (2) a pro-rated average annual bonus (as defined in the
agreement) based on the number of days in the fiscal year until termination; and
(ii) the sum of (1) the greater of (x) the annual base salary payable for the
remainder of the retention agreement, or (y) two times the annual base salary,
and (2) two times the average annual bonus. The retention agreement of Mr.
McKerroll provides that, under certain circumstances, upon a termination of
employment he will be entitled to receive the sum of his annual base salary
through the termination date and $3,000,000. Further, the options and restricted
stock granted in consideration of the retention agreement shall vest at the
earlier of the vesting dates specified in the award agreements, or subject to
compliance with the Confidentiality and Competitive Activity Section of the
retention agreement, the second anniversary of the termination. Each of them
will also receive life insurance and medical, dental and disability benefits for
up to two years after termination, any other amounts or benefits required to be
paid or provided (to the extent not paid) and outplacement services. Messrs.
Hallman, Leone, and Zdanow will also receive two additional years of age and
service credit under all relevant company retirement plans.
92
With respect to Messrs. Hallman, Leone, McKerroll and Zdanow, the
retention agreements provide that each of them will not, while employed by CIT
under the retention agreement and for one year after termination (two years in
the case of termination by CIT without "cause" or by the executive for "good
reason" (in each case, as these terms are defined in the retention agreements)),
without the written consent of the board of directors of CIT (A) engage or be
interested in any business in the world which is in competition with any lines
of business actively being conducted by CIT on the date of termination; (B) hire
any person who was employed by CIT 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 to terminate such relationship or to refrain
from extending or renewing the same, or (C) disparage or publicly criticize CIT
or any of their affiliates.
In the event Mr. Gamper or the other Named Executive Officers become
subject to excise taxes under Section 4999 of the Internal Revenue Code, each
retention agreement provides a gross up payment equal to the amount of such
excise taxes.
At its meeting on November 5, 2002, the compensation and governance
committee of the board of directors approved certain changes to the retention
agreements of Messrs. Gamper, Hallman, Leone and Zdanow. These changes will go
into effect upon the execution of amendment agreements by such executives. The
board of directors ratified the amendments to Mr. Gamper's agreement. These
changes include: (1) extending the term of the agreements from June 1, 2004 to
December 31, 2004; and (2) establishing a minimum annual bonus for purposes of
calculating severance benefits. In addition, the following changes were approved
with respect to the retention agreements for Messrs. Hallman, Leone and Zdanow:
(A) a reduction in the officer's post-termination non-compete agreements to one
year from the date of termination for any reason; (B) providing for the payment
of an enhanced severance payment in a lump sum if the executive officer is
terminated without "cause" or resigns his employment for "good reason" during
the two-year extension period, and (C) providing that the term of the agreements
would extend for a two year period after a "change in control" (as defined in
the agreements). The enhanced severance payment applies a multiplier of 2.5 to
the officer's base and bonus compensation, as opposed to the 2.0 multiplier
described in the formula summarized above. Mr. Gamper's retention agreement
provides that he is entitled to his regular contractual severance payment if he
is terminated without "cause" or he resigns for "good reason" during the 90-day
period following a "Change in Control".
Retirement Plan and Supplemental Retirement Plan
The CIT Group Inc. Retirement Plan (the "Retirement Plan") covers officers
and salaried employees who have one year of service and have attained age 21. We
also maintain a Supplemental Retirement Plan for employees whose benefit in the
Retirement Plan is subject to the Internal Revenue Code limitations. Mr.
McKerroll is not a participant in either the Retirement Plan or the Supplemental
Retirement Plan.
The Retirement Plan was revised in 2000 with a new "cash balance" formula,
which became effective January 1, 2001. Under this new formula, each member's
accrued benefits as of December 31, 2000 was converted to a lump sum amount and
each year thereafter the balance is to be credited with a percentage of the
member's "Benefits Pay" (comprised of base salary, plus certain annual bonuses,
sales incentives and commissions) depending on years of service as follows:
Years of Service % Of "Benefits Pay"
-------------- ------------------
1 - 9 5
10 - 19 6
20 - 29 7
30 or more 8
These balances are also to receive annual interest credits, subject to
certain government limits. For 2001, the interest credit was 7.00% and for 2002
it will be 5.76%. Upon termination after 5 years of employment or retirement,
the amount credited to a member is to be paid in a lump sum or converted into an
annuity. Certain eligible members had the option of remaining under the Plan
formula as in effect prior to January 1, 2001.
Messrs. Gamper, Hallman, Leone, and Zdanow are earning benefits under the
"cash balance" formula effective January 1, 2001. The following table shows the
estimated annual retirement benefits (including the benefit under the
Supplemental Retirement Plan) which would be payable to each individual if he
retired at normal retirement age (age 65) at his normalized 2002 "benefits pay."
The projected amounts include annual interest credits at 5.76%.
93
Year of Estimated
Name Normal Retirement Annual Benefit
------ ----------------- --------------
Albert R. Gamper, Jr ..... 2007 $575,400
Thomas B. Hallman ........ 2017 $151,200
Joseph M. Leone .......... 2018 $214,900
Nikita Zdanow ............ 2002 $169,700
Executive Retirement Plan
The Named Executive Officers, excluding Mr. McKerroll, are participants
under the Executive Retirement Plan. The benefit provided is life insurance
equal to approximately three times base salary during such participant's
employment, with a life annuity option payable monthly by us upon retirement.
The participant pays a portion of the annual premium, which is calculated based
on the provided life insurance benefit. We are entitled to recoup our payments
from the proceeds of the policy in excess of the death benefit. Upon the
participant's retirement, a life annuity will be payable out of our current
income and we anticipate recovering the cost of the life annuity out of the
proceeds of the insurance policy payable to CIT upon the death of the
participant.
In addition to the table of pension benefits shown above, we are
conditionally obligated to make annual payments under the Executive Retirement
Plan in the amounts indicated to the Named Executive Officers at retirement: Mr.
Gamper, $463,100; Mr. Hallman, $155,500; Mr. Leone, $222,600; and Mr. Zdanow,
$225,300.
Other Employee Benefits
We maintain a defined contribution plan with a 401(k) feature. In
addition, we maintain a supplemental unfunded defined contribution plan for
employees in a grandfathered defined benefit plan. Retiree medical and dental
coverage is offered on a contributory basis to certain eligible employees who
meet the age and service requirements.
Long-Term Equity Compensation Plan
We adopted the CIT Group Inc. Long-Term Equity Compensation Plan (the
"ECP"), covering directors and employees of the Company and its subsidiaries.
The ECP is administered by the board of directors and/or the compensation and
governance committee of 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 are set forth in award
agreements (Award Agreements"). The Administrator of the ECP has the discretion
to select the participants to whom Awards will be granted and 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 at all times. All awards under the ECP will be intended to
constitute deductible "qualified performance-based compensation" within the
meaning of Section 162(m), provided, however, that in the event the
Administrator determines that such compliance is not desired with respect to an
Award of Restricted Stock (as defined below), compliance with Code Section
162(m) will not be required.
The total number of shares of common stock that may be subject to Awards
under the ECP is 26,000,000 shares. Any shares of common stock under Awards that
terminate or lapse will again be available under the ECP, and any shares that
are transferred or relinquished to the Company in satisfaction of the exercise
price or any withholding obligation with respect to an Award will be deemed to
be available for Awards under the ECP. In addition, if any Awards granted under
another equity compensation plan are converted into Awards granted under the ECP
in connection with a merger or other business transaction approved by the
Company's stockholders, the number of shares of common stock that may be subject
to Awards under the ECP will be increased by the number of shares covered by the
converted Awards. 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 shall not exceed 3% of the consolidated
pre-tax earnings of the Company. The maximum aggregate number of shares of
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 shares available under the
ECP.
94
With respect to any Awards based in whole or in part on performance
objectives, prior to the end of the performance period during which performance
will be measured (the "Performance Period"), the Administrator of the ECP, in
its discretion, may adjust the performance objectives to reflect an event that
may materially affect CIT's performance including, but not limited to, market
conditions, changes in accounting policies or practices, an acquisition or
disposition of assets or other property by CIT, or other unusual or unplanned
events.
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 cash
or in shares of equivalent value, or in a combination thereof.
Stock Options. Options (each an "Option") to purchase shares of 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. The Option Price generally may not
be less than the fair market value of the common stock on the date of grant of
an Option; however, an Option granted in connection with a corporate transaction
may have an Option Price equal to the value attributed to the common stock in
such transaction, and an Option granted to substitute for another Option
(including a Tyco option) may have an Option Price equal to the economic
equivalent of the exercise price of the replaced Option. Each Option represents
the right to purchase one share of 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 CIT shares of 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.
No incentive stock option granted to a 10% stockholder of CIT shall be
exercisable later than the fifth anniversary of the date of the grant.
Stock Appreciation Rights. An Award of a stock appreciation right ("SAR")
may be granted under the ECP with respect to shares of common stock. Generally,
one SAR is granted with respect to one share of 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 common stock. The appreciation is equal
to the difference between (i) the "base value" of the SAR (which is determined
with reference to the fair market value of the common stock on the date the SAR
is granted) and (ii) fair market value of the common stock 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 common
stock as so determined, payable at the discretion of the participant in cash,
shares of common stock, or some combination thereof, subject to availability of
shares of common stock to CIT.
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 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 CIT, 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.
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Performance Shares and Performance Units. A performance share Award
("Performance Shares") 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 fair market value of
one share of common stock 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. 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 common stock, or some combination
thereof, subject to availability of shares of common stock of CIT, 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 specified pre-established
performance measure. The number of performance-based Awards granted under the
ECP in any fiscal year is determined by the Administrator. The Administrator
will adopt in writing each year, within 90 days of the beginning of such year,
the applicable performance goals that must be achieved in order to receive
annual performance-based Awards and, if applicable, shares of Restricted Stock,
Performance Units and Performance Shares. At the time that performance goals are
established by the Administrator for a year, the Administrator will establish an
individual performance-based Award opportunity for such year for each
participant or group of participants. A participant's individual annual
performance-based Award opportunity is based on the participant's achievement of
his or her performance goals during such year and may be expressed in dollars,
as a percentage of base salary, or by formula. A participant's actual
performance-based Award may be paid in cash, shares of common stock or a
combination thereof.
The value of performance-based Awards may be based on absolute measures or
on a comparison of CIT'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 and, where applicable, may be measured before or
after interest, depreciation, amortization, service fees, extraordinary items
and/or special items: pre-tax earnings, operating earnings, after-tax earnings,
return on investment, revenues or income, net income, absolute and/or relative
return on equity, capital invested or assets, earnings per share, cash flow or
cash flow on investments, profits, earnings growth, share price, total
shareholder return, economic value added, expense reduction, customer
satisfaction, or any combination of the foregoing measures as the Administrator
deems appropriate.
Change of Control. Upon a Change of Control of CIT (as defined for
purposes of the ECP): (i) all outstanding Options and SARs shall become
immediately exercisable and will remain exercisable until the earlier of the
expiration of their initial term or the second anniversary of the grantee's
termination of employment with CIT; (ii) all restrictions on outstanding shares
of Restricted Stock shall lapse; (iii) the performance goals with respect to all
outstanding awards of Restricted Stock, Performance Shares and Performance Units
will be deemed to have been fully attained for the Performance Period; and (iv)
the vesting of all Awards denominated in shares of common stock will be
accelerated.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The table below shows, as of the most recent practicable date, the name
and address of each person known to CIT that beneficially owns in excess of 5%
of any class of voting stock. Information in this table is as of September 30,
2002.
Percentage
of
Title of Class Name and Address of Amount and Nature of Common
of Stock Beneficial Owner Beneficial Ownership Stock
- -------------- ------------------- -------------------- ----------
Common Stock ... Dodge & Cox (1) 20,803,700 10.4
One Sansome Street, 35th Floor
San Francisco, CA 94104
- --------------------------------------------------------------------------------
(1) Dodge & Cox has sole voting power for 19,217,000 shares, shared voting
power for 453,800 shares, and sole dispositive power for all of the
shares.
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Security Ownership of Directors and Executive Officers
The table below shows, as of November 15, 2002, the number of shares of
CIT Common Stock owned by each director, by Messrs. Gamper, Hallman, Leone,
McKerroll, and Zdanow (the "Named Executive Officers"), and by the directors and
executive officers as a group.
Amount and Nature
of Beneficial Ownership
(CIT Common Stock and Percentage
Name of Individual Exchangeable Shares)(1)(2)(3) of Class
------------------ ----------------------------- ----------
Albert R. Gamper, Jr. ............... 608,371 *
John S. Chen ........................ 10,249 *
William A. Farlinger ................ 1,156 *
Thomas H. Kean ...................... 21,416 *
Edward J. Kelly, III ................ 4,064 *
Peter J. Tobin ...................... 7,891 *
Thomas B. Hallman ................... 32,675 *
Joseph M. Leone ..................... 126,081 *
David D. McKerroll .................. 248,175 *
Nikita Zdanow ....................... 166,812 *
All Directors and Executive
Officers as a group (14 persons) .... 1,532,497 *
- --------------------------------------------------------------------------------
* Represents less than 1% of the total outstanding Common Stock.
(1) Includes shares of Restricted Stock issued under the Long-Term Equity
Compensation Plan, for which the holders have voting rights, but for which
ownership has not vested, in the following amounts: Mr. Gamper - 230,023
shares, Mr. Chen - 2,064 shares, Mr. Kelly - 2,064 shares, Mr. Hallman -
22,675 shares, Mr. Leone - 27,473 shares, Mr. McKerroll - 7,964 shares,
and Mr. Zdanow - 24,641 shares.
(2) Includes shares of stock issuable pursuant to stock options awarded under
the Long-Term Equity Compensation Plan that have vested or will vest
within 60 days after November 15, 2002 in the following amounts: Mr.
Gamper - 338,248 shares, Mr. Chen - 8,185 shares, Mr. Farlinger - 1,156
shares, Mr. Kean - 11,416 shares, Mr. Tobin - 7,891 shares, Mr. Leone -
88,608 shares, Mr. McKerroll- 205,211 shares, Mr. Zdanow - 140,671shares.
(3) Includes 390,817 shares of Restricted Stock issued under the Long-Term
Equity Compensation Plan, for which all executive officers and directors
as a group have voting rights, but for which ownership has not vested, and
1,015,580 shares of stock issuable pursuant to stock options awarded under
the Long-Term Equity Compensation Plan to all executive officers and
directors as a group that have vested or will vest within 60 days after
November 15, 2002, including Restricted Stock issued and stock options
awarded to the spouse of one executive officer, who is also an employee of
CIT.
Item 13. Certain Relationships and Related Transactions.
We have in the past and may in the future enter into certain transactions
with affiliates. Such transactions have been, and it is anticipated that such
transactions will continue to be, entered into as a fair market value for the
transaction.
General
Tyco acquired us in June 2001 and we became an indirect, wholly owned
subsidiary. On July 2, 2002, Tyco sold 100% of our issued and outstanding common
stock in an initial public offering. Prior to the offering date, some of our
directors and executive officers were also directors, officers and employees of
Tyco and/or its other subsidiaries.
In the ordinary course of business, we entered into a number of agreements
with Tyco and its subsidiaries relating to our historical business and our prior
relationship with the Tyco group of companies, the material terms of which are
described below. In addition, in connection with our IPO, we entered into
agreements with Tyco relating to our separation from Tyco and the ongoing
relationship of the two companies after the offering date, as described below.
Agreements Relating to the Offering
Separation Agreement
We entered into a separation agreement to address claims that may arise
with respect to our respective businesses. The separation agreement provides for
cross-indemnification and mutual releases designed principally to place
financial responsibility for possible third-party claims relating to our
business with us and financial responsibility for possible third-party claims
relating to Tyco's businesses with Tyco. The cross-indemnification
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includes liabilities for misstatements relating to the registration of our
common stock in the IPO. In addition, Tyco has indemnified us against
liabilities for misstatements in filings and press releases made to comply with
the securities laws, unless the misstatements are solely attributable to us. The
separation agreement also provides for the parties' access to information,
insurance, cooperation in the event of litigation and avoidance of conduct or
statements that would be injurious to one another.
Tax Agreement
We entered into an agreement pursuant to which Tyco has indemnified us for
any income-based tax liabilities, determined on a non-consolidated basis,
imposed on any of our predecessors for periods or partial periods ending on or
prior to the date such predecessors merged into us. Tyco also indemnified us for
any liability of ours or of our predecessors for any income-based taxes imposed
as a result of the merger of our predecessors with us. We are also indemnified
for any penalties imposed on us resulting from the late filing of federal income
tax returns that were prepared by or under the direction for Tyco on our behalf
and from late payments related to those returns. Tyco has also indemnified us
for any liability for U.S. federal income taxes and income taxes of New York,
New Jersey and any other state for which a unitary return was filed resulting
from a tax position reflected on any applicable income tax return prepared by or
under the direction of Tyco on our behalf which was taken by Tyco in a manner
inconsistent with our past practices. Tyco did not indemnify us, however, for
any tax liability resulting from a claim for refund filed by or on behalf of our
predecessor on May 30, 2002. The agreement further provides that we will pay
Tyco for the use of any tax attributes of Tyco Capital Holding Inc., one of our
predecessors, existing as of the date of the merger with us. We believe that as
of the date of the merger, the tax attributes of Tyco Capital Holding Inc.
consisted of net operating losses. The payments to Tyco will be based on the
actual tax benefits that we realize from the Tyco Capital Holding Inc. tax
attributes.
Financial Services Cooperation Agreement
We entered into an agreement with Tyco pursuant to which we may have the
opportunity to provide financing for Tyco customers after this offering.
Pursuant to this agreement, Tyco may offer us the opportunity in appropriate
circumstances to develop financing programs under which we could offer Tyco
customers financing, leasing, rental and related financial services and
products. We may also have the opportunity to provide other financial services
in connection with the acquisition of products and services from third party
suppliers. This agreement will remain in effect until terminated by either party
on 90 days' notice.
Operating Agreement
When Tyco acquired us, CIT and Tyco entered into an Operating Agreement,
dated as of June 1, 2001, that provided that (i) CIT and Tyco would not engage
in transactions, including finance, underwriting and asset management and
servicing transactions, unless the transactions were at arm's-length and for
fair value, (ii) CIT would have sole discretion and decision-making authority
for underwriting, managing and servicing assets in transactions originated
through Tyco, (iii) dividends and distributions from CIT to Tyco were limited to
(x) fifteen percent (15%) of our cumulative net income, plus (y) the net capital
contributions by Tyco to CIT, and (iv) CIT would at all times maintain our
books, records and assets separately from Tyco. The Operating Agreement
terminated upon completion of our IPO.
Other Transactions
On September 30, 2001, we sold at net book value certain international
subsidiaries to a non-U.S. subsidiary of Tyco. As a result of this sale, we had
receivables from affiliates totaling $1,440.9 million, representing our debt
investment in these subsidiaries. CIT charged arm's length, market-based
interest rates on these receivables, and recorded $19.0 million of interest
income, as an offset to interest expense, related to those notes for the quarter
ended December 31, 2001. A note receivable issued at the time of this
transaction of approximately $295 million was collected.
Following Tyco's announcement on January 22, 2002 that it planned to
separate into four independent, publicly traded companies, we repurchased at net
book value the international subsidiaries on February 11, 2002. In conjunction
with this repurchase, the receivables from affiliates of $1,588.1 million on the
Consolidated Balance Sheet at December 31, 2001 was satisfied.
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We have entered into a number of equipment loans and leases with
affiliates of Tyco. Lease terms generally range from 3 to 12 years. Tyco has
guaranteed payment and performance obligations under each loan and lease
agreement. At September 30, 2002, the aggregate amount outstanding under these
equipment loans and leases was approximately $29.3 million.
While CIT was an indirect subsidiary of Tyco, certain of CIT's expenses,
such as third party consulting and legal fees, were paid by Tyco and billed to
CIT. The payables were subsequently satisfied.
On May 1, 2002, we assumed a third-party corporate aircraft lease
obligation from Tyco. The assumed lease obligation is approximately $16.0
million and extends for 134 months beginning on May 1, 2002. Prior to Tyco's
acquisition of us, we had an agreement to purchase this aircraft directly from
the previous owner.
On September 30, 2002, certain subsidiaries of Tyco sold receivables
totaling $350.0 million to CIT in a factoring transaction. At various times
during the year ended September 30, 2002 CIT and Tyco engaged in similar
factoring transactions, the highest amount of which was $384.4 million.
Item 14. Controls and Procedures.
Within 90 days before filing this report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
ensure that the information that the Company must disclose in its reports filed
under the Securities Exchange Act is communicated and processed in a timely
manner. Albert R. Gamper Jr. Chairman, President and Chief Executive Officer,
and Joseph M. Leone, Executive Vice President and Chief Financial Officer,
participated in this evaluation.
Based on this evaluation, Messrs. Gamper and Leone concluded that, as of
the date of their evaluation, the Company's disclosure controls and procedures
were effective, except as noted in the next paragraph. Since the date of the
evaluation described above, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls.
During our fiscal 2002 financial reporting process, management, in
consultation with the Company's independent accountants, identified a deficiency
in our tax financial reporting process relating to the calculation of deferred
tax assets and liabilities which constitutes a "Reportable Condition" under
standards established by the American Institute of Certified Public Accountants.
Management believes that this matter has not had any material impact on our
financial statements. Management has initiated the design, development and
implementation of processes and controls to address this deficiency, the
completion of which will extend into 2003.
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PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report (see Item 8):
1. The following financial statements of CIT and Subsidiaries:
Reports of Independent Accountants
Consolidated Balance Sheets-September 30, 2002 and September 30,
2001
Consolidated Statements of Income for the fiscal year ended
September 30, 2002, for the period from June 2 through September 30,
2001, for the period January 1 through June 1, 2001, and for the
fiscal year ended December 31, 2000
Consolidated Statements of Stockholders' Equity for the fiscal year
ended September 30, 2002, for the period from June 2 through
September 30, 2001, for the period January 1 through June 1, 2001,
and for the fiscal year ended December 31, 2001
Consolidated Statements of Cash Flows for the fiscal year ended
September 30, 2002, for the period from June 2 through September 30,
2001, for the period January 1 through June 1, 2001, and for the
fiscal year ended December 31, 2001
Notes to Consolidated Financial Statements
2. All schedules are omitted because they are not applicable or because
the required information appears in the Consolidated Financial
Statements or the notes thereto.
(b) Current Report on Form 8-K, filed on July 1, 2002, reporting the
pricing of its initial public offering and the assumption by CIT of all debt
obligations of its predecessor, and filing certain exhibits.
Current Report on Form 8-K, filed on July 12, 2002, reporting CIT's
announcement of the underwriters exercise of the overallotment
option with respect to CIT's initial public offering.
Current Report on Form 8-K, dated July 23, 2002, reporting CIT's
announcement of financial results for the quarter ended June 30,
2002.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 2, 2002, by and
between Tyco Capital Holding, Inc., a Nevada corporation, and
CIT Group Inc., a Nevada corporation (incorporated by
reference to Exhibit 2.1 to Form 8-K filed by CIT on July 10,
2002).
2.2 Agreement and Plan of Merger, dated as of July 2, 2002, by and
between CIT Group Inc. (Del), a Delaware corporation, and Tyco
Capital Holding, Inc., a Nevada corporation (incorporated by
reference to Exhibit 2.2 to Form 8-K filed by CIT on July 10,
2002).
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Form 8-K filed by
CIT on July 10, 2002).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.2 to Form 8-K filed by CIT on July 10, 2002).
3.3 Certificate of Ownership and Merger merging Tyco Capital
Holding, Inc. and CIT Group Inc. (Del) (incorporated by
reference to Exhibit 3.3 to Form 8-K filed by CIT on July 10,
2002).
100
3.4 By-laws of the Company (incorporated by reference to Exhibit
3.4 to Form 8-K filed by CIT on July 10, 2002).
4.1 Form of Certificate of Common Stock of CIT (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the
Registration Statement on Form S-1 filed June 26, 2002). 4.2
Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and The Bank of New York, as trustee, for the issuance
of unsecured and unsubordinated debt securities (Incorporated
by reference to an Exhibit to Form S-3 filed by CIT on
September 24, 1998).
4.3 First Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and The Bank of New York, as
trustee, for the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to Exhibit 4.2g to
Amendment No. 1 to Form S-3 filed by CIT on August 8, 2001).
4.4 Second Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of June 1, 2001,
by and between CIT Group Inc. (formerly know as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and successor
to The CIT Group, Inc.) and The Bank of New York, as trustee,
for the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to Exhibit 4.1 to Form
8-K filed by CIT on February 22, 2002).
4.5 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and Bank One Trust Company, N.A., as trustee, for the
issuance of unsecured and unsubordinated debt securities
(Incorporated by reference to an Exhibit to Form S-3 filed by
CIT on September 24, 1998).
4.6 First Supplemental Indenture dated as of May 9, 2001 among CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), Bank One Trust Company, N.A., as trustee, and Bank One
NA, London Branch, as London Paying Agent and London
Calculation Agent (Incorporated by reference to Exhibit 4.2d
to Post-Effective Amendment No. 1 to Form S-3 filed by CIT on
May 11, 2001).
4.7 Second Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and Bank One Trust Company,
N.A., as trustee (Incorporated by reference to Exhibit 4.2e to
Form S-3 filed by CIT on June 7, 2001).
4.8 Third Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of May 9, 2001
and the Second Supplemental Indenture dated as of June 1,
2001, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and Bank One Trust Company,
N.A., as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.2 to Form 8-K filed by CIT on February 22, 2002).
4.9 Fourth Supplemental Indenture dated as of July 2, 2002 to an
Indenture dated as of September 24, 1998, as supplemented by
the First Supplemental Indenture dated as of May 9, 2001 and
the Second Supplemental Indenture dated as of June 1, 2001 and
the Third Supplemental Indenture dated as of February 14,
2002, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and Bank One Trust Company,
N.A., as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.1 to Form 8-K filed by CIT on July 10, 2002).
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4.9 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and The Bank of New York, as trustee, for the issuance
of unsecured and senior subordinated debt securities
(Incorporated by reference to an Exhibit to Form S-3 filed by
CIT September 24, 1998).
4.10 First Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and The Bank of New York, as
trustee, for the issuance of unsecured and senior subordinated
debt securities (Incorporated by reference to Exhibit 4.2f to
Form S-3 filed by CIT on June 7, 2001).
4.11 Second Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of June 1, 2001,
by and between CIT Group Inc. (formerly known as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and successor
to The CIT Group, Inc.) and The Bank of New York, as trustee,
for the issuance of unsecured senior subordinated debt
securities (Incorporated by reference to Exhibit 4.3 to Form
8-K filed by CIT on February 22, 2002).
4.12 Third Supplemental Indenture dated as of July 2, 2002 to an
Indenture dated as of September 24, 1998, as supplemented by
the First Supplemental Indenture dated as of June 1, 2001 and
the Second Supplemental Indenture dated as of February 14,
2002, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and The Bank of New York, as
trustee, for the issuance of unsecured senior subordinated
debt securities (Incorporated by reference to Exhibit 4.2 to
Form 8-K filed by CIT on July 10, 2002).
4.13 Certain instruments defining the rights of holders of CIT's
long-term debt, none of which authorize a total amount of
indebtedness in excess of 10% of the total amounts outstanding
of CIT and its subsidiaries on a consolidated basis have not
been filed as exhibits. CIT agrees to furnish a copy of these
agreements to the Commission upon request.
10.1 Agreement dated as of June 1, 2001 between CIT Holdings (NV)
Inc., a wholly-owned subsidiary of Tyco International Ltd.,
and CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), a Nevada corporation, regarding transactions between
CIT Holdings and CIT (incorporated by reference to Exhibit
10.13 to Form 8-K filed by CIT on June 7, 2001).
10.2 Form of Separation Agreement by and between Tyco International
Ltd. and CIT (incorporated by reference to Exhibit 10.2 to
Amendment No. 3 to the Registration Statement on Form S-1
filed June 26, 2002).
10.3 Form of Financial Services Cooperation Agreement by and
between Tyco International Ltd. and CIT (incorporated by
reference to Exhibit 10.3 to Amendment No. 2 to the
Registration Statement on Form S-1 filed June 12, 2002).
10.4 5-Year Credit Agreement, dated as of March 28, 2000, among CIT
Group Inc. (formerly known as Tyco Capital Corporation and The
CIT Group, Inc.), the banks party thereto, J.P. Morgan
Securities Inc. (formerly known as Chase Securities Inc.), as
Arranger, Barclays Bank PLC, Bank of America, N.A., Citibank,
N.A. and The Dai-Ichi Kangyo Bank, Limited, as Syndication
Agents, and JP Morgan Chase Bank (formerly known as The Chase
Manhattan Bank), as Administrative Agent (`'5 Year Credit
Agreement ") (Incorporated by reference to Exhibit 10.6 to
Form 10-Q filed by CIT on February 14, 2002).
10.5 Assumption Agreement, dated as of June 1, 2001, to 5 Year
Credit Agreement (Incorporated by reference to Exhibit 10.7 to
Form 10-Q filed by CIT on February 14, 2002).
102
10.6 Additional Bank Agreement, dated as of August 1, 2000, to 5
Year Credit Agreement (Incorporated by reference to Exhibit
10.8 to Form 10-Q filed by CIT on February 14, 2002).
10.7 $765,000,000 Credit Agreement, dated as of April 13, 1998,
among Capita Corporation (formerly known as AT&T Capital
Corporation), as Borrower, CIT Group Inc. (formerly known as
Tyco Capital Corporation and The CIT Group, Inc.), as
Guarantor, the banks party thereto (the `'Banks"), JP Morgan
Chase Bank (formerly known as Morgan Guaranty Trust Company of
New York), as Administrative Agent, Canadian Imperial Bank of
Commerce, as Syndication Agent, JP Morgan Chase Bank (formerly
known as The Chase Manhattan Bank) and Deutsche Bank AG, New
York Branch, as Co-Documentation Agents, and J.P. Morgan
Securities Inc. and CIBC Oppenheimer Corp., as Arrangers
("Capita Corporation Credit Agreement") (incorporated by
reference to Exhibit 10.9 to Form 10-Q filed by CIT on
February 14, 2002).
10.8 Amendment No. 1 to Capita Corporation Credit Agreement, dated
as of April 9, 1999 (Incorporated by reference to Exhibit
10.10 to Form 10-Q filed by CIT on February 14, 2002).
10.9 Amendment No. 2 to Capita Corporation Credit Agreement, dated
as of November 15, 1999 (Incorporated by reference to Exhibit
10.11 to Form 10-Q filed by CIT on February 14, 2002).
10.10 Amendment No. 3 to Capita Corporation Credit Agreement, dated
as of May 30, 2001 (Incorporated by reference to Exhibit 10.12
to Form 10-Q filed by CIT on February 14, 2002).
10.11 Assumption Agreement, dated as of June 1, 2001, to Capita
Corporation Credit Agreement (Incorporated by reference to
Exhibit 10.13 to Form 10-Q filed by CIT on February 14, 2002).
10.12 Guaranty by CIT Group Inc., dated as of November 15, 1999, of
Capita Corporation Credit Agreement (Incorporated by reference
to Exhibit 10.14 to Form 10-Q filed by CIT on February 14,
2002).
10.13 364-Day Credit Agreement, dated as of March 27, 2001, among
CIT Financial Ltd., the banks party thereto, as lenders, Royal
Bank of Canada, as Administrative Agent, and Canadian Imperial
Bank of Commerce and The Chase Manhattan Bank of Canada, as
Syndication Agents ("Canadian 364-Day Credit Agreement")
(Incorporated by reference to Exhibit 10.15 to Form 10-Q filed
by CIT on February 14, 2002).
10.14 Guaranty of CIT Group Inc., dated as of July 2, 2002, of
Canadian 364-Day Credit Agreement (Incorporated by reference
to Exhibit 10.15 to Form 10-Q filed by CIT on August 14,
2002).
10.15 364-Day Credit Agreement, dated as of October 15, 2002, among
CIT Group Inc., the banks party thereto, J.P. Morgan
Securities Inc., as Sole Lead Arranger and Bookrunner,
JPMorgan Chase Bank, as Administrative Agent, Barclays Bank
PLC, as Syndication Agent, Bank of America, N.A., as
Syndication Agent, and Citibank, N.A., as Syndication Agent
(incorporated by reference to Form 8-K filed October 24,
2002).
10.19 Retention Agreement for Albert R. Gamper, Jr., as proposed to
be amended (incorporated by reference to Exhibit 10.19 to
Amendment No. 3 to the Registration Statement on Form S-1
filed June 26, 2002).
10.20 Retention Agreement for Joseph M. Leone (incorporated by
reference to Exhibit 10.20 to Amendment No. 3 to the
Registration Statement on Form S-1 filed June 26, 2002).
10.21 Retention Agreement for Thomas B. Hallman (incorporated by
reference to Exhibit 10.21 to Amendment No. 3 to the
Registration Statement on Form S-1 filed June 26, 2002).
10.22 Retention Agreement for David D. McKerroll.
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10.23 Retention Agreement for Nikita Zdanow (incorporated by
reference to Exhibit 10.23 to Amendment No. 3 to the
Registration Statement on Form S-1 filed June 26, 2002).
10.24 Executive Severance Plan (incorporated by reference to Exhibit
10.24 to Amendment No. 3 to the Registration Statement on Form
S-1 filed June 26, 2002).
10.25 Long-Term Equity Compensation Plan (incorporated by reference
to Exhibit 10.25 to Amendment No. 3 to the Registration
Statement on Form S-1 filed June 26, 2002).
10.26 Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.26 to Amendment No. 3 to the Registration
Statement on Form S-1 filed June 26, 2002).
10.27 Form of Tax Agreement by and between Tyco International Ltd.
and CIT (incorporated by reference to Exhibit 10.27 to
Amendment No. 2 to the Registration Statement on Form S-1
filed June 12, 2002).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
21.1 Subsidiaries of CIT.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of KPMG LLP.
24.1 Powers of Attorney.
99.1 Certification of Albert R. Gamper, Jr. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Joseph M. Leone pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ Robert J. Ingato
--------------------------------------------
Robert J. Ingato
Executive Vice President and General Counsel
December 23, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on December --, 2002 in
the capacities indicated below.
Name Date
---- ----
/s/ Albert R. Gamper, Jr. December 23, 2002
- ---------------------------------------------------------
Albert R. Gamper, Jr.
Chairman, President, Chief Executive Officer and Director
(principal executive officer)
John S. Chen*
- ---------------------------------------------------------
John S. Chen
Director
William A. Farlinger*
- ---------------------------------------------------------
William A. Farlinger
Director
Thomas H. Kean*
- ---------------------------------------------------------
Thomas H. Kean
Director
Edward J. Kelly, III*
- ---------------------------------------------------------
Edward J. Kelly, III
Director
Peter J. Tobin*
- ---------------------------------------------------------
Peter J. Tobin
Director
/s/ Joseph M. Leone December 23, 2002
- ---------------------------------------------------------
Joseph M. Leone
Executive Vice President and
Chief Financial Officer
(principal accounting officer)
By: /s/ Robert J. Ingato December 23, 2002
------------------------------------------------------
Robert J. Ingato
Executive Vice President and General Counsel
Original powers of attorney authorizing Albert R. Gamper, Jr., Robert J.
Ingato, and James P. Shanahan and each of them to sign on behalf of the
above-mentioned directors are held by the Corporation and available for
examination by the Securities and Exchange Commission pursuant to Item 302(b) of
Regulation S-T.
105
CERTIFICATIONS
I, Albert R. Gamper, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of CIT Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ Albert R. Gamper, Jr.
--------------------------------------------
Albert R. Gamper, Jr.
Chairman, President, Chief Executive Officer
and Director
106
I, Joseph M. Leone, certify that:
1. I have reviewed this annual report on Form 10-K of CIT Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ Joseph M. Leone
----------------------------------------------------
Joseph M. Leone
Executive Vice President and Chief Financial Officer
107