-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RiqIbWXftm/C0OFSfhQ/cYqsgVM5yH/9WrmH69Rv+wfXI88BjqoziEduh3Hrm9wz nycrExGK9DDwJhyfGyy9wA== 0001037603-98-000004.txt : 19980210 0001037603-98-000004.hdr.sgml : 19980210 ACCESSION NUMBER: 0001037603-98-000004 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980209 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWCOURT CREDIT GROUP INC CENTRAL INDEX KEY: 0001037603 STANDARD INDUSTRIAL CLASSIFICATION: LOAN BROKERS [6163] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: SEC FILE NUMBER: 001-14604 FILM NUMBER: 98524647 BUSINESS ADDRESS: STREET 1: STE 3500 BCE PLACE STREET 2: 181 BAY ST P.O.BOX 827 CITY: TORONTO ONTARIO STATE: A6 BUSINESS PHONE: 4165942400 MAIL ADDRESS: STREET 1: 181 BAY STREET SUITE 3500 STREET 2: PO BOX 827 CITY: TORONTO ONTARIO 6-K 1 ANNUAL REPORT FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of a Foreign Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month(s) of: December 1997 NEWCOURT CREDIT GROUP INC. BCE Place, 181 Bay Street Suite 3500, P.O. Box 827 Toronto, Ontario Canada, M5J 2T3 [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.] Form 20-F / / Form 40-F /X/ [Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.] Yes / / No /X/ [If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b)] 82- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 6, 1998 NEWCOURT CREDIT GROUP INC. By: John P. Stevenson Corporate Secretary CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. For the years ended December 31, 1997 and December 31, 1996 AUDITORS' REPORT To the Shareholders of Newcourt Credit Group Inc. We have audited the consolidated balance sheets of Newcourt Credit Group Inc. as at December 31, 1997 and 1996 and the consolidated statements of income and retained earnings and cash flows for the years then ended. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1997 and 1996 and the results of its operations and the changes in its financial position for the years then ended in accordance with accounting principles generally accepted in Canada. Toronto, Canada Ernst & Young February 4, 1998 Chartered Accountants Newcourt Credit Group Inc. CONSOLIDATED BALANCE SHEETS [in thousands of Canadian dollars]
As at December 31 1997 1996 $ $ ASSETS Cash and short term investments 7,413 51,184 Cash held in escrow [note 21] 1,771,000 Investment in finance assets [note 3] 2,461,401 1,072,277 Assets held for securitization and syndication [note 4] 1,091,398 774,000 Investment in affiliated companies [note 5] 173,918 162,308 Accounts receivable, prepaids and other 181,736 58,469 Fixed assets [note 6] 87,396 40,859 Goodwill at cost, net of accumulated amortization of $11,961; 1996 - $2,861 [note 7] 408,754 54,279 Total Assets 6,183,016 2,213,376 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 303,968 93,338 Debt [note 9] 2,789,816 1,592,026 Future income tax liability [Note 12] 27,739 12,078 Total Liabilities 3,121,523 1,697,442 Shareholders' Equity Share capital [note 10] 2,935,402 415,160 Retained earnings 126,091 100,774 Total Shareholders' Equity 3,061,493 515,934 Total Liabilities and Shareholders' Equity 6,183,016 2,213,376 See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS [in thousands of Canadian dollars, except for per share amounts]
Years ended December 31 1997 1996 $ $ Fee and affiliate income Securitization and syndication fees [note 4] 188,837 87,506 Net income from affiliated companies [notes 5 & 9] 9,552 8,549 Management and other fees 35,697 23,148 234,086 119,203 Net finance income [note 9] 84,349 52,386 Total asset finance income 318,435 171,589 Selling, general and other operating expenses 178,934 101,738 Depreciation and amortization 20,427 5,701 Operating income before restructuring charges and taxes 119,074 64,150 Restructuring charges [note 8] 103,000 - Operating income before income taxes 16,074 64,150 Provision for (recovery of) income taxes [note 12] (20,347) 13,469 Net income for the year 36,421 50,681 Retained earnings, beginning of year 100,774 56,942 Dividends paid on common and special shares (10,004) (6,685) Options purchased [note 11] (1,100) (164) Retained earnings, end of year 126,091 100,774 Earnings per common share [note 8]: Basic $0.52 $0.96 Fully diluted $0.52 $0.96 See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS [in thousands of Canadian dollars]
Years ended December 31 1997 1996 $ $ OPERATING ACTIVITIES Net income for the year 36,421 50,681 Add items not requiring an outlay of cash Restructuring charges 74,225 - Deferred income taxes (23,516) 7,798 Depreciation and amortization 20,427 5,701 Net change in non-cash assets and liabilities related to operations (130,332) 26,881 Cash provided by (used in) operating activities (22,775) 91,061 INVESTING ACTIVITIES Finance assets, underwritten and purchased (6,033,608) (4,491,880) Finance assets, securitized and syndicated 4,336,050 2,844,220 Finance assets, repayments and others 1,079,027 796,692 Finance assets and assets held for securitization and syndication (618,531) (850,968) Business acquisitions (621,902) - Investment in affiliated companies 8,821 (99,485) Purchase of fixed assets (35,992) (24,772) Cash used in investing activities (1,267,604) (975,225) FINANCING ACTIVITIES Debt issued, net 785,765 512,834 Issue of common shares, net 453,635 231,604 Deferred tax on share issues 18,312 (4,696) Dividends paid on common and special shares (10,004) (6,685) Options purchased (1,100) (164) Cash provided by financing activities 1,246,608 732,893 Decrease in cash and short term investments during the year (43,771) (151,271) Cash and short term investments, beginning of year 51,184 202,455 Cash and short term investments, end of year 7,413 51,184 See accompanying notes
1. NATURE OF THE COMPANY'S OPERATIONS The Company is an independent, non-bank financial services enterprise with operations primarily in Canada and the United States and has recently expanded its operations in the United Kingdom and Australia. The Company originates, sells and manages asset-based financing by way of secured loans, leases and conditional sales contracts. Generally, the Company retains an interest in the financings it originates. The loan origination activities focus on the commercial and corporate finance segments of the asset-based lending market. The Company originates loans in the commercial finance market through vendor finance programs. These agreements are established with select equipment manufacturers, dealers and distributors to provide equipment sales and inventory financing. The Company serves the corporate finance market through financing services it delivers via vendors to major corporations, public sector institutions and governments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). Except as indicated in Note 20, these consolidated financial statements conform, in all material respects, with accounting principles generally accepted in the United States ("U.S. GAAP"). The more significant accounting policies are summarized below: Principles of consolidation The consolidated financial statements of the Company include the accounts of all its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. Investment in finance assets Investment in finance assets is comprised of loans, the aggregate of finance lease receivables less unearned income and long term securitization receivable. Earned lease income is recognized on an actuarial basis which produces a constant rate of return on the net investment in the leases. Recognition of interest income is suspended when, in management's view, a loss is likely to occur but in no event later than 90 days after an account has gone into arrears. Deferred costs Direct incremental costs of acquisition of finance assets and of investing in affiliated companies are deferred and amortized over the expected period of future benefit. Costs incurred during the pre-operating period of new business ventures are deferred and amortized over the expected period of future benefit. Allowance for credit losses Losses on finance assets and the carrying value of repossessed assets are determined by discounting at the rate of interest inherent in the original asset the expected future cash flows of the finance assets including realization of collateral values and estimated recoveries under third party guarantees and vendor support agreements. General allowances are established for probable losses on loans whose impairment cannot otherwise be measured. Securitizations of finance assets The Company sells the majority of its asset-based financing originations to securitization vehicles. The securitization transactions are accounted for as sales of finance assets, resulting in the removal of the assets from the Company's consolidated balance sheets and the computation of a gain on sale. Proceeds on sale are computed as the aggregate of the initial cash consideration and the present value of any additional sale proceeds, net of a provision for anticipated credit losses on the securitized assets and the amount of a normal servicing fee. The sale of finance assets is recorded when the significant risks and rewards of ownership are transferred. Income is earned on the long term securitization receivable and is recognized on an accrual basis. The carrying value of this asset is reduced, as required, based upon changes in the Company's share of the estimated credit losses on the securitized assets. The Company continues to manage the securitized assets and recognizes income equal to a normal servicing fee over the term of the securitized assets. Syndications Other finance assets are underwritten and sold to institutional investors for cash. These transactions generate syndication fees for the Company, which generally continues to service these assets on behalf of the investors. Fees received for syndicating finance assets are included in income when the related transaction is substantially complete provided the yield on any portion of the asset retained by the Company is at least equal to the average yield earned by the other participants involved. Fixed assets Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis at rates designed to write off the assets over their estimated useful lives as follows: Building 20 years Furniture and fixtures 10 years Computers and office equipment 5 years Goodwill Goodwill is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over a period not to exceed 20 years. The valuation and amortization of goodwill is evaluated on an on-going-basis and, if considered permanently impaired, is written down. The determination as to whether there has been an impairment in value is made by comparing the carrying value of the goodwill to the projected undiscounted net revenue stream to be generated by the related activity. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated using the temporal method, whereby monetary assets and liabilities are converted into Canadian dollars at exchange rates in effect at the consolidated balance sheet dates. Gains and losses on finance assets and debt are deferred and amortized over the remaining lives of the related items on a straight-line basis. Non-monetary assets and liabilities are translated at historical rates. Revenue and expenses are translated at the exchange rate in effect on the date of the transaction. Certain foreign operations are considered self-sustaining. As a result, the assets and liabilities of these operations are translated into Canadian dollars at rates in effect at the balance sheet date. Revenue and expenses are translated at the average exchange rates prevailing during the year. Unrealized foreign currency translation gains and losses on these self-sustaining operations are recorded in shareholders' equity. Income taxes During 1997, the Canadian Institute of Chartered Accountants approved the adoption of the liability method of accounting for income taxes effective for fiscal years beginning on or after January 1, 2000. Effective January 1, 1996, the Company adopted the provisions of the standard. The adoption of the standard changes the Company's method of accounting for income taxes from the comprehensive tax allocation method to an asset and liability approach. Under the asset and liability method, future tax assets and liabilities are provided for all significant temporary differences between the financial statement and tax bases of assets and liabilities and are adjusted for tax rate changes as they occur. The Company has retroactively adopted this standard and concluded that the adoption of this standard does not have a material impact on the Company's financial position or results of operations in the current or preceding years. Earnings per common share Earnings per common share is computed based on the weighted average number of common shares outstanding during the year. Fully diluted earnings per common share has been computed based on the weighted average number of common shares outstanding after giving effect to the exercise of all outstanding options to acquire common shares. Derivative financial instruments Derivative financial instruments are used to hedge the Company's exposure to interest and currency risk by creating positions which are opposite to, and offset, on-balance sheet positions which arise from normal operations. The most frequently used derivatives are interest rate and currency swaps, bond forwards and foreign exchange forward contracts. Contract and notional amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet. Off-balance sheet treatment is accorded where an exchange of the underlying asset or liability has not occurred or is not assured, or where notional amounts are used solely to determine cash flows to be exchanged. Swaps and bond forward contracts are accounted for on the accrual basis. Net accrued interest receivable/payable and deferred gains/losses are recorded in other assets or other liabilities, as appropriate. Realized gains/losses on terminated contracts are deferred and amortized over the remaining life of the related position. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. INVESTMENT IN FINANCE ASSETS The investment in finance assets consists of loans, leases and the Company's investment in long term securitization receivable outstanding at December 31, 1997, which are due as follows:
Leases Net Long term investment Minimum Unearned Net securitization in finance Loans payments income investment receivable assets $ $ $ $ $ $ 1998 327,305 379,706 72,865 306,841 155,396 789,542 1999 136,838 342,272 46,522 295,750 83,520 516,108 2000 121,208 242,709 27,717 214,992 47,278 383,478 2001 108,604 137,785 17,611 120,174 20,185 248,963 2002 93,309 76,813 11,184 65,629 11,472 170,410 Thereafter 245,542 88,261 14,121 74,140 33,218 352,900 1,032,806 1,267,546 190,020 1,077,526 351,069 2,461,401
Minimum lease payments include the estimated unguaranteed residual value of leased assets of $57,421 [1996 - $29,920]. At December 31, 1996, the investments in loans, leases and long term securitization receivable were $571,801, $346,521 and $153,955 respectively. Included in investment in finance assets is US$876,583 [December 31, 1996 - US$600,367]. Substantially all of the investment in finance assets bear interest at varying levels of fixed rates of interest. There are no significant concentrations. The loans included in investment in finance assets are collateralized by the related finance assets. An analysis of the Company's allowance for credit losses and investment in finance assets is as follows:
December 31, December 31, 1997 1996 $ $ Investment in finance assets 2,461,401 1,072,277 Allowance for credit losses, beginning of year 16,465 5,089 Provisions for credit losses during the year including acquisitions 31,041 14,496 Write-offs, net of recoveries (8,943) (3,120) Allowance for credit losses, end of year 38,563 16,465 Allowance as a percentage of finance assets 1.6% 1.5% Finance assets in arrears (90 days and over) 13,619 6,353 Arrears as a percentage of finance assets 0.6% 0.6% Average recorded investment in finance assets in arrears during the year 7,207 4,123 Finance assets in repossession, at estimated net realizable value 6,023 7,391
Credit provisions against finance assets acquired during the year amounted to $26,230 [December 31, 1996 - $11,357]. The Company has an additional specific credit loss reserve of $1,596 [December 31, 1996 - $1,928] relating to the Company's long term securitization receivable, representing its interest in the CIP I, II, III, IV, V and VI securitization vehicles. Beyond this specific credit loss reserve further losses may be provided for by a reduction in the yield earned on the long term securitization receivable. 4. SECURITIZATIONS The Company has a securitization program under which fixed rate finance assets originated by the Company are sold to securitization vehicles. As a result of this program, a significant amount of the Company's asset finance income is derived from gains on the sale of securitized finance assets and management fees relating to such assets. The Company continues to be responsible for the administration and collection of the receivables on behalf of the investors. Financing contracts are sold to limited partnerships funded by institutional investors through the issuance of senior and junior asset-backed instruments (92% and 8% respectively). The Company retains a one-third interest in the junior instrument on a pari passu basis with institutional investors. Consideration for the sales consist of an initial cash payment and additional sale proceeds, representing the Company's interest in cash flows of the limited partnership. The sales are non-recourse to the Company, except to the extent of the long term securitization receivable for additional sale proceeds. Floating rate contracts are sold through public multi-seller securitization vehicles for cash consideration and additional sale proceeds. The Company provides the multi-seller with protection from certain risks of ownership by providing an over collateralization reserve which represents the Company's interest in the cash flows of the assets sold. An undivided ownership interest in eligible inventory finance loans and revolving loans is sold on a revolving basis to a multi- seller securitization trust. The Company provides the multi- seller with protection from certain risks of ownership by providing an over collateralization reserve and a cash security subject to a dollar floor. During the year, the Company generated net securitization income of $140,133 [1996 - $51,037] which is included in securitization and syndication fees. Included in investment in finance assets is the long term securitization receivable comprised of (i) $319,224 [December 31, 1996 - $143,971] of additional sales proceeds which represents the Company's interest in the cash flows of the securitization vehicles, (ii) $9,006 [December 31, 1996 - $7,534] of securitization proceeds from the sale of assets to certain securitization vehicles which are to be received over the term of the securitized assets as excess servicing fees which have a first priority on all the cash flows of the vehicles and (iii) $22,839 [December 31, 1996 - $2,450] representing the additional cash security provided to certain multi-seller securitization vehicles. As at December 31, 1997, the Company had commitments or substantially completed com- mitments to fund or support the funding of the following amounts:
$ Commercial Finance 3,606,000 Corporate Finance 675,000 4,281,000
5. INVESTMENT IN AFFILIATED COMPANIES Investment in affiliated companies represents the Company's investment in its foreign affiliates through which the international based operations of the Company are conducted and additional investment in other affiliated companies. 6. FIXED ASSETS
Fixed assets consist of the following: December 31, 1997 December 31, 1996 Accumulated Accumulated Cost depreciation Cost depreciation $ $ $ $ Land and buildings 14,654 3,281 5,590 1,011 Furniture and fixtures 48,658 15,143 19,982 3,767 Computers and office equipment 56,552 17,300 25,041 6,767 Other 4,182 926 1,914 123 124,046 36,650 52,527 11,668 Net book value 87,396 40,859
7. ACQUISITIONS On August 29, 1997, the Company acquired all of the outstanding common shares of Commcorp Financial Services Inc. ("Commcorp") for approximately $366 million of which $89 million was paid in cash, and the remaining $277 million through the issuance of common shares. Commcorp provides asset finance and management services to a broad range of industries. On September 5, 1997, the Company purchased the Business Technology Finance ("BTF") division of Lloyds UDT for approximately $493 million paid in cash for assets acquired less the assumption of certain business liabilities. BTF operates primarily in three markets: information technology, telecommunications, and business equipment. Other acquisitions made by the Company include Lease Finance Group Limited Partnership, Omni Financial Services of America, Inc., ERF and an additional interest in BML Leasing Limited for approximately $40 million in cash consideration. These acquisitions have been accounted for as purchases, and accordingly the consolidated financial statements include the results of operations of the acquired businesses from the dates of acquisition. The net assets acquired are as follows:
Commcorp BTF Others Total $ $ $ $ Net assets acquired at approximate fair values Investment in finance assets 596,891 421,802 69,298 1,087,991 Investment in affiliated companies 18,471 - 1,960 20,431 Accounts receivable, prepaids and other 32,368 9,854 16,618 58,840 Fixed assets 14,143 2,195 4,678 21,016 661,873 433,851 92,554 1,188,278 Accounts payable and accrued liabilities 123,734 30,546 11,160 165,440 Debt 351,120 - 60,905 412,025 Deferred income taxes 68,911 - 1,605 70,516 543,765 30,546 73,670 647,981 Net assets acquired 118,108 403,305 18,884 540,297 Consideration Cash 88,633 493,049 40,220 621,902 Common shares 277,295 - - 277,295 Total consideration 365,928 493,049 40,220 899,197 Goodwill 247,820 89,744 21,336 358,900
Upon completion of these acquisitions, total goodwill amounted to $420,715 [December 31, 1996 - $57,140]. 8. RESTRUCTURING CHARGES During the year, the Company recorded restructuring charges totaling $103,000. These charges are related to costs expected to be incurred in connection with the announced plans to integrate Commcorp and rationalize certain of Newcourt's other businesses in Canada and the United States. The charges comprise amounts for severance and office closings and to write-off certain redundant start-up and systems costs. The Company expects that its integration and rationalization plans will be completed by the end of 1998. The effect on net income after income taxes and earnings per common share of this charge is set out below:
$ Restructuring charges 103,000 Taxes recoverable (46,350) Net restructuring charges 56,650 Earnings per common share: Basic - - Operations $1.33 - - Restructuring charges (0.81) $0.52 Fully diluted $0.52
9. DEBT
Debt consists of the following: December 31, December 31, 1997 1996 $ $ Fixed Rate Debt U.S. senior notes, bearing interest varying from 6.95% to 7.12%, maturing in the years 2000 to 2005 149,011 143,186 U.S. senior notes, bearing interest at 8.26%, maturing in the year 2005 143,280 137,020 Medium term notes, bearing interest rates varying from 4.4% to 9.34% maturing in the years 1998 to 2007 1,118,433 328,050 7.625% debenture, maturing in June, 2001 124,802 124,745 6.45% debenture, maturing in June, 2002 149,782 149,733 Other Commercial paper and other short term borrowings 834,281 594,723 Fixed rate debt, bearing interest varying from 5.2% to 12.89% with the related investment in finance assets pledged as security 270,227 114,569 2,789,816 1,592,026
Interest expense on the debt outstanding during the year was $145,252 [1996 - $104,601], of which $16,363 [1996 - $12,689] has been deducted from net income from affiliated companies and the balance $128,889 [1996 - $91,912] deducted from net finance income. On August 12, 1997, the Company increased its Canadian bank facility to $750 million. On May 14, 1997, the Company renewed and increased its U.S. bank facility to US$600 million. The Canadian bank facility and one-third of the U.S. bank facility is a 364-day committed unsecured revolving credit facility with a syndicate of Canadian, U.S. and international banks. The remaining two-thirds of the U.S. bank facility is a three-year committed unsecured revolving credit facility. These credit facilities are used as interim funding pending syndication, sale, securitization, collection of proceeds of financings assets, or as support for the Company's $750 million Canadian commercial paper program and its US$600 million U.S. commercial paper program. The Canadian and U.S. bank facilities attract interest at bankers' acceptance plus 45 basis points and LIBOR plus 45 basis points, respectively. The amount of unused Canadian and U.S. bank facilities are $750,000 [December 31, 1996 - $450,000] and US$500,000 [December 31, 1996 - US$420,000] respectively. The weighted average interest on commercial paper outstanding at the end of the year is 5.96% [1996 - 5.49%]. Included in debt is US$1,388,211 [December 31, 1996 - US$990,243] of which US$1,323,211 [December 31, 1996 - US$925,243] was used to fund leases and loans which are repayable in U.S. dollars. The remainder was swapped into floating rate Canadian dollar debt. The Company's U.S. senior notes, medium term notes, debentures and bank facilities' agreements contain certain restrictive convenants which include maintaining certain asset and debt to equity ratios, certain levels of forward funding commitments, credit losses and arrears within defined levels and expense and earnings ratios. The Company is in compliance with all restrictive convenants.
As of December 31, 1997, scheduled repayments are as follows: $ 1998 1,237,082 1999 228,653 2000 258,782 2001 242,616 2002 235,472 Thereafter 587,211 2,789,816
10. SHARE CAPITAL Authorized - The Company's authorized share capital consists of the following: [i] Unlimited Common Shares with voting rights; [ii] Unlimited Special Shares without voting rights convertible into Common Shares on a share-for-share basis; and [iii] Unlimited Class A Preference Shares issuable in series. Outstanding - The following is a summary of the changes in share capital during the year:
Year ended Year ended December 31, December 31, 1997 1996 # $ # $ Subscription Rights [Note 21] Outstanding, beginning of year - - - - Proceeds of rights issue, net 38,500,000 1,758,493 - - Outstanding, end of year 38,500,000 1,758,493 - - Common Shares Outstanding, beginning of year 60,182,688 415,160 22,664,466 188,166 Proceeds of share issue, net 13,910,000 481,030 7,150,000 224,434 Issued on acquisition [note 7] 8,214,843 277,295 - - Stock options exercised 743,172 2,839 3,250 44 Others 20,255 585 74,303 2,430 2:1 share division - - 30,091,344 - Conversion of special shares - - 199,325 86 Outstanding, end of year 83,070,958 1,176,909 60,182,688 415,160 Special Shares Outstanding, beginning of year - - 199,325 86 Conversion to common shares - - (199,325) (86) Outstanding, end of year - - - - Total Share Capital 121,570,958 2,935,402 60,182,688 415,160
Public Offerings On April 22, 1996, the Company completed a public offering of 3,850,000 (7,700,000 post split) Common Shares at $28.50 per share for gross proceeds of $109,725. Expenses of this issue, net of deferred income tax recoveries of $2,292, amounted to $2,802. On September 30, 1996, the Company completed a public offering of 3,300,000 (6,600,000 post split) Common Shares at $36.50 per share for gross proceeds of $120,450. Expenses of this issue, net of deferred income tax recoveries of $2,404, amounted to $2,939. On March 11, 1997, the Company completed a public offering of 2,475,000 (4,950,000 post split) Common Shares at $51.00 per share for gross proceeds of $126,225. Expenses of this issue, net of deferred income tax recoveries of $2,508, amounted to $3,066. On August 29, 1997, the Company completed a public offering of 7,260,000 common shares at $38.50 per share for gross proceeds of $279,510. Expenses of this issue, net of deferred income tax recoveries of $5,571, amounted to $6,809. Treasury Issue On September 24, 1997, the Company completed a private placement of 1,700,000 common shares at $50.10 per share for proceeds of $85,170. Special Shares On July 2, 1996, the remaining 199,325 Special Shares were converted into 199,325 (398,650 post split) Common Shares. Common Shares Effective April 14, 1997, the Company subdivided on a two-for-one basis all of the Company's issued and outstanding Common Shares and all the Company's Common Shares reserved for issuance. 11. EMPLOYEE STOCK OPTION PLAN During the year, the Company's Stock Option Plan as approved by the shareholders at the Annual General Meeting was amended. Under the amended Plan, the Company may issue 9,046,878 common shares to employees and directors of the Company at the discretion of the Board of Directors. The number of shares which may be issued under options to any individual employee or director shall not exceed in the aggregate 5% of the total of the outstanding shares. During the year the Company issued 2,557,298 options. The exercise price of each option equals the closing market price of the Company's shares on the day preceding the grant of the option. If there is no trading on the date preceding the date of grant then a weighted average trading price for the five days prior to the date of grant is used. Upon granting of an option, the Company designates both vesting and expiry dates of the options, of which the maximum term is ten years. The vesting period is determined by the Company upon granting of the options.
As at December 31, 1997, the following common share options were outstanding: Number of Shares Per Share $ Expiry Date Options granted to: Directors 15,600 6.75 February 23, 1998 30,000 7.75 February 23, 1998 28,000 8.75 February 23, 1998 25,000 14.40 February 23, 2001 12,000 24.25 February 6, 2007 20,000 24.25 May 2, 2007 18,000 26.00 May 2, 2007 Employees 119,400 6.75 February 23, 1998 152,500 7.75 February 28, 1998 514,502 12.00 January 29, 2001 355,700 24.25 February 6, 2007 2,054,998 26.00 May 2, 2007 50,000 49.50 August 16, 2004 22,000 49.50 September 16, 2007 23,400 47.20 October 30, 2007 3,441,100
Of the above, stock options on 698,413 common shares are exercisable as at December 31, 1997. The remaining stock options on 2,742,687 common shares are exercisable as follows:
Number of Shares Exercisable Date 186,539 1998 638,125 1999 639,325 2000 639,323 2001 639,375 2002 2,742,687
During 1997, the Company purchased 56,802 [1996 - 11,598] options at their fair market value resulting in a cash distribution of $1,100 [1996 - $164]. 12. INCOME TAXES (a) The Company's provision for income taxes is lower than the statutory rate prevailing in Canada due to lower income tax rates on income earned from operations outside Canada and the dividend deduction available as foreign earnings are repatriated. The following table reconciles tax expense calculated at the statutory rates with the actual income tax expense:
December 31, December 31, 1997 1996 $ $ Income before income taxes 16,074 64,150 Statutory rate of income taxes 45% 45% Income taxes at the statutory rate 7,233 28,868 Effect on income taxes of Deductible dividends (11,705) (12,795) Recognition of losses carried forward - (297) Foreign tax rate differential (18,679) (4,054) Large corporations tax 2,164 1,304 Other 640 443 Provision for (recovery of) income taxes (20,347) 13,469 Allocation of provision Current 3,169 5,671 Future (23,516) 7,798 (20,347) 13,469
(b) The tax effects of temporary differences that give rise to significant portions of the future income tax assets and future income tax liability are presented below:
December 31, December 31, 1997 1996 $ $ Future income tax liability: Differences in tax and accounting basis of finance assets (118,819) (26,941) Securitization related (58,806) (27,856) Other (29,224) (1,684) Gross future income tax liability (206,849) (56,481) Future income tax asset: Net operating loss carryforward 110,172 44,347 Other 68,938 56 Gross future income tax asset 179,110 44,403 Valuation allowance 0 0 Gross future income tax asset net of valuation allowance 179,110 44,403 Total future income tax liability (27,739) (12,078)
The Company has $254,281 of net operating losses available for tax purposes to offset future taxable income arising from the reversal of deferred income tax liabilities. Net operating losses pertaining to the Canadian operations of $189,445 will expire at various dates by the year 2004. Net operating losses pertaining to the U.S. operations of $64,836 will expire at various dates by the year 2012. (c) The income (loss) before income taxes and provision for (recovery of) income taxes are as follows:
1997 1996 $ $ Income (loss) before income taxes Canada (47,023) 24,598 United States 37,057 38,538 International 26,040 1,014 16,074 64,150 Provision for current income taxes Canada 1,338 3,880 United States 758 1,667 International 1,073 124 3,169 5,671 Provision for (recovery of) future income taxes Canada (38,605) (5,458) United States 13,694 13,256 International 1,395 0 (23,516) 7,798 Total provision for (recovery of income taxes) Current 3,169 5,671 Future (23,516) 7,798 (20,347) 13,469 Net income Canada (9,756) 26,176 United States 22,605 23,615 International 23,572 890 36,421 50,681
13. FINANCE ASSETS UNDER MANAGEMENT Included in finance assets under management are finance assets which have been securitized or syndicated by the Company and are not reflected on the consolidated balance sheets. Securitized finance assets are described in Note 4. Syndicated finance assets are assets which have been sold to investors without recourse or credit enhancement.
Finance assets under management are as follows: December 31, December 31, 1997 1996 $ $ Securitized finance assets 5,626,856 2,731,341 Syndicated finance assets 1,386,706 1,230,221 Syndicated finance assets of affiliated companies 616,052 655,843 7,629,614 4,617,405
14. SEGMENTED INFORMATION The Company is in the business of underwriting and then securitizing or syndicating asset-based financings in Canada, the United States and internationally. Income is generated from these sources as securitization and syndication fees, income from affiliated companies, management fees and net finance income. The Company's investment in finance assets at December 31 is as follows:
1997 1996 $ $ Canada 992,404 372,785 United States 848,686 612,215 International 620,311 87,277 Total 2,461,401 1,072,277 Asset finance income for the year ended December 31 is as follows: 1997 1996 $ $ Securitization and syndication fees Canada 86,326 36,970 United States 87,302 43,837 International 15,209 6,699 Total 188,837 87,506
1997 1996 $ $ Income from affiliated companies International 9,552 8,549 Management and other fees Canada 14,771 9,237 United States 20,926 13,911 Total 35,697 23,148 Net finance income Canada 43,794 23,671 United States 27,468 26,769 International 13,087 1,946 Total 84,349 52,386 Total asset finance income Canada 144,891 69,878 United States 135,697 84,517 International 37,847 17,194 Total 318,435 171,589
15. LEASE COMMITMENTS Future minimum annual payments on a cash basis under leases for premises over the next 5 years and thereafter are as follows:
$ 1998 9,770 1999 10,425 2000 10,977 2001 11,216 2002 10,924 Thereafter 58,551 111,863
Rent expense amounted to $9,632 in 1997 [1996 - $5,568]. 16. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into derivative contracts and other hedging transactions to manage asset/liability exposures, specifically exposures to market interest rate and foreign currency risk. Market risk represents the potential for changes in the value of assets and liabilities due to fluctuations in interest and foreign exchange rates. The notional principal amounts of the Company's derivatives and the current credit exposure are as follows:
Current credit Notional principal amounts maturing exposure Total Total Under 1 to 5 Over Dec. 31 Dec. 31 Dec. 31 1 year years 5 years 1997 1996 1997 $ $ $ $ $ $ Interest rate contracts Bond forwards Interest rate swaps 986,062 0 0 986,062 808,925 0 235,717 762,284 247,574 1,245,575 403,669 11,327 1,221,779 762,284 247,574 2,231,637 1,212,594 11,327 Foreign exchange contracts Spot and forward contracts 1,811,703 0 0 1,811,703 16,243 0 Cross currency swaps 637,469 620,897 76,970 1,335,336 619,119 3,458 2,449,172 620,897 76,970 3,147,039 635,362 3,458 Total derivatives 3,670,951 1,383,181 324,544 5,378,676 1,847,956 14,785 Notional principal amounts are the contract amounts used in determining payments. Credit risk exposure is the replacement cost of all contracts without taking into account any netting arrangements. All counterparties are investment grade financial institutions. The fair market value of derivative contracts hedging on balance sheet financial instruments is approximately $56 million.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of assets and liabilities at December 31 is as follows:
1997 $ Estimated Carrying Value Fair Value Assets Investment in finance assets 2,461,401 2,464,976 Assets held for securitization and syndication 1,091,398 1,091,398 Investment in affiliated companies 173,918 174,918 Liabilities Debt 2,789,816 2,799,179
The aggregate of the estimated fair value amounts presented does not represent management's estimate of the underlying value of the Company. Moreover, fair values disclosed represent estimates of value made at a specific point in time and may not be reflective of future fair values. In the case of items which are short term in nature or contain variable rate features, fair value is considered to be equal to carrying value. These items are not listed above. Details of the estimated fair value of derivative financial instruments are provided in Note 16. The estimated fair value of investment in finance assets is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of the debt reflects changes in general interest rates which have occurred since the debt was originated and changes in the creditworthiness of the individual borrowers. For fixed rate debt estimated fair value is determined by discounting the expected future cash flows related to this debt at market interest rates for debt with similar credit risks. 18. INTEREST RATE SENSITIVITY The table below summarizes the Company's exposure to interest rate movements by setting out the maturity or repricing date of interest rate sensitive assets and liabilities.
Expiration As at December 31, 1997 Under 1 to 5 Over 1 year years 5 years Total $ $ $ $ Investment in finance assets 789,542 1,318,959 352,900 2,461,401 Assets held for securitization 1,091,398 0 0 1,091,398 Investment in affiliated companies 43,830 25,285 104,803 173,918 1,924,770 1,344,244 457,703 3,726,717 Interest rate contracts 986,532 (696,193) (290,339) 0 Rate exposure on assets 2,911,302 648,051 167,364 3,726,717 Debt 1,237,082 965,523 587,211 2,789,816 Interest rate swaps 1,405,118 (1,139,956)(265,162) 0 Rate exposure on debt 2,642,200 (174,433) 322,049 2,789,816 Net asset position 269,102 822,484 (154,685) 936,901
Expiration As at December 31, 1996 Under 1 to 5 Over Total 1 year years 5 years $ $ $ $ Investment in finance assets 538,833 356,119 177,325 1,072,277 Assets held for securitization 774,000 0 0 774,000 Investment in affiliated companies 49,679 23,349 89,280 162,308 1,362,512 379,468 266,605 2,008,585 Interest rate contracts 155,000 (35,000) (120,000) 0 Rate exposure on assets 1,517,512 344,468 146,605 2,008,585 Debt 691,322 465,875 434,829 1,592,026 Interest rate swaps 605,025 (377,487) (227,538) 0 Rate exposure on debt 1,296,347 88,388 207,291 1,592,026 Net asset position 221,165 256,080 (60,686) 416,559
19. CONSOLIDATED STATEMENT OF CASH FLOWS AND OTHER REPORTING DETAILS
December 31, December 31, 1997 1996 $ $ Decrease in accounts receivable, prepaids and other (101,297) (36,304) Increase (decrease) in accounts payable and accrued liabilities (29,035) 63,185 Total (130,332) 26,881 Cash interest paid 147,038 94,794 Cash taxes paid 6,671 12,477
20. RECONCILIATION TO UNITED STATES ACCOUNTING PRINCIPLES a) These consolidated financial statements have been prepared in accordance with Canadian GAAP which conform in all material respects with U.S. GAAP, except as noted below: [i] For Canadian GAAP purposes, unrealized translation gains and losses on long term monetary items are deferred and amortized over the remaining terms of those items. For U.S. GAAP purposes, such gains and losses are recorded in income immediately. [ii] For Canadian GAAP purposes, amounts paid to employees to retire issued stock options without issuing common stock are recorded as capital transactions. For U.S. GAAP purposes, such amounts paid are recorded as compensation expense. [iii] For Canadian GAAP purposes, finance assets sold to securitization vehicles are not consolidated. Under U.S. GAAP, the Company is required to consolidate certain of these securitization vehicles. In addition, U.S. GAAP requires the Company to equity account for its interest in certain other securitization vehicles. Accordingly, for U.S. GAAP purposes, the Company has deferred gains recorded on the asset sales to these vehicles, and, in the case of consolidated vehicles, has recorded their assets and liabilities on its consolidated balance sheets. The Company will recognize the deferred gains in income as the related finance assets are collected. [iv] The restructuring charge was reduced for costs that would have been accrued as an adjustment to the liabilities assumed through the purchase of Commcorp and the rationalization of certain Newcourt businesses in Canada and the United States under U.S. GAAP, rather than expensed as permitted by Canadian GAAP. The following tables present the amounts that would have been reported for U.S. GAAP purposes in 1997 and 1996:
1997 1996 $ $ Net income for the year - Canadian GAAP 36,421 50,681 Difference in accounting for foreign exchange gains (losses) (net of income tax recovery of $6,180 [1996 - $555]) (7,553) 684 Difference in accounting for options retired (1,100) (164) Difference in accounting for securitization transactions (net of income taxes of $4,364 [1996 - $268]) 5,486 (395) Difference in accounting for restructuring charge (net of income taxes of $15,600 [1996 - nil]) 19,067 0 Net income for the year - U.S. GAAP 52,321 50,806 Earnings per common share: Basic - - Operations $1.28 $0.96 - - Restructuring charges (0.53) 0 $0.75 $0.96 Fully diluted $0.73 $0.95
The following sets forth the computation of basic and diluted earnings per share for income from continuing operations before restructuring charges:
1997 1996 $ $ Numerator Income 89,904 50,806 Denominator Denominator for basic earnings per common share - - weighted average shares 70,219,175 52,799,810 Effect of dilutive securities: Employee stock options 1,171,555 785,836 Denominator for diluted earnings per common share - adjusted weighted - average common shares and assumed conversions 71,390,730 53,585,646 Basic earnings per common share $1.28 $0.96 Diluted earnings per common share $1.26 $0.95
Changes in consolidated balance sheet items, as computed under U.S. GAAP:
December 31, December 31, 1997 1996 $ $ Increase in investment in finance assets 136,646 213,564 Increase (decrease) in accrued liabilities (14,137) 3,939 Increase in debt 135,457 206,498 Increase in subordinated debt 31,422 26,271 Increase (decrease) in other assets 76,127 (3,496) Increase in goodwill 19,667 0 Increase in future income tax liability 13,784 11,832 Changes in shareholders' equity, as computed under U.S. GAAP: December 31, December 31, 1997 1996 $ $ Retained earnings, beginning of year 85,966 41,845 Net income for the year 52,321 50,806 Dividends paid on common and special shares (10,004) (6,685) Retained earnings, end of year 128,283 85,966 Share capital [note 10] 2,935,402 415,160 Total Shareholders' Equity 3,063,685 501,126
(b)U.S. GAAP requires the following disclosures in respect of income taxes. The following disclosures are based on amounts determined in accordance with U.S. GAAP. The tax effects of temporary differences that give rise to significant portions of the future income tax asset and future income tax liability are presented below:
December 31, December 31, 1997 1996 $ $ Future income tax liability: Differences in tax and accounting basis of finance assets (118,819) (26,941) Securitization related (63,173) (16,024) Other (23,342) (1,684) Gross future income tax liability (205,334) (44,649) Future income tax asset: Net operating loss carryforward 110,172 44,347 Other 53,641 56 Gross future income tax asset 163,813 44,403 Valuation allowance 0 0 Gross future income tax asset net of valuation allowance 163,813 44,403 Total future income tax liability (41,521) (246)
The Company has $254,281 of net operating losses available for tax purposes to offset future taxable income arising from the reversal of deferred income tax liabilities. Net operating losses pertaining to the Canadian operations of $189,445 will expire at various dates by the year 2004. Net operating losses pertaining to the U.S. operations of $64,836 will expire at various dates by the year 2012. The disclosure below is based on amounts determined under U.S. GAAP:
1997 1996 $ $ Income (loss) before income taxes Canada (19,901) 26,019 United States 39,645 37,533 International 26,014 1,010 45,758 64,562 Provision for current income taxes Canada 1,338 4,006 United States 758 1,541 International 1,073 124 3,169 5,671 Provision for (recovery of) deferred income taxes Canada (25,905) (1,720) United States 14,778 9,805 International 1,395 0 (9,732) 8,085 Total provision for (recovery of) income taxes Current 3,169 5,671 Future (9,732) 8,085 (6,563) 13,756 Net income Canada 4,666 23,733 United States 24,109 26,187 International 23,546 886 52,321 50,806
(c) The Company accounts for its Stock Option Plan in accordance with Canadian GAAP on a basis consistent with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Accordingly, no compensation expense has been recognized for its stock option plan for either Canadian or U.S. GAAP purposes. FASB Statement No. 123 provides for an alternative method of accounting for the plan for U.S. GAAP purposes. Had compensation cost for the Company's plan been determined based on the fair value at the grant dates consistent with the method of FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 $ $ Net income per U.S. GAAP 51,917 50,305 Earnings per share: - - Basic and fully diluted earnings per share $0.74 $0.95
The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1997 respectively: dividend yield of 0.75 and 0.58 per cent, expected volatility of 27 and 30 per cent, risk free interest rates of 6.2 and 6.3 per cent and expected lives of 5 and 8 years.
1997 1996 Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price # $ # $ Outstanding, beginning of year 1,687,726 8.63 1,119,424 6.76 Granted 2,557,298 26.00 593,500 12.14 Exercised (802,640) 6.83 (23,196) 7.88 Forfeited (1,284) 23.02 (2,002) 12.00 Outstanding, end of year 3,441,100 21.96 1,687,726 8.63 Options exercisable at year end 698,413 1,315,207 Weighted average fair value of options granted during the year $12.02 $4.05
21. SUBSEQUENT EVENTS On November 17, 1997, the Company agreed subject to the satisfaction of certain closing conditions to acquire all of the issued and outstanding common shares of AT&T Capital Corporation, one of the world's largest diversified equipment leasing and commercial finance companies. On December 3, 1997, the Company completed its offering of 38.5 million subscription rights resulting in gross proceeds to the Company of $1.77 billion. The cash received upon the issuance of subscription rights has been put into escrow pending the acquisition of AT&T Capital Corporation and in return, invested in treasury bills and bankers' acceptances. Each subscription right entitles the holder to acquire one common share of the Company upon the completion of the Company's acquisition of AT&T Capital Corporation. The subscription rights consist of approximately 26 million fully paid subscription rights issued at $46 per right and approximately 12.5 million installment receipt subscription rights issued at $47.10 per right. On January 12, 1998, the Company satisfied the closing conditions specified in the stock purchase agreement and acquired all of the issued and outstanding shares of AT&T Capital Corporation. The purchase price paid on the acquisition closing is approximately U.S. $1.61 billion (Cdn $2.3 billion), of which approximately U.S. $1.06 billion (Cdn $1.47 billion) was paid in cash and the remaining U.S. $550 million (Cdn $811 million) was satisfied through the issuance of approximately 17.6 million common shares of the Company. The acquisition will be accounted for as a purchase in the first quarter of 1998 and accordingly the consolidated financial statements will include the results of operations of the acquired business from the date of acquisition. The net assets acquired are as follows:
$ Net assets acquired at approximate fair values Investment in finance assets 3,964,922 Investment in capital leases 4,711,276 Investment in operating leases 2,283,298 Assets held for securitization and syndication 685,188 Accounts receivable, prepaids and other 917,576 12,562,260 Accounts payable and accrued liabilities 1,011,283 Debt 10,198,722 Minority interest in preferred shares 286,562 11,496,567 Net assets acquired 1,065,693 Consideration Cash 1,471,341 Common shares 811,157 Total consideration 2,282,498 Goodwill 1,216,805
The financial statement figures of AT&T Capital Corporation as at December 31, 1997 are in accordance with accounting principles generally accepted in the United States, translated into Canadian dollars at US$ = $1.4328 Canadian. The goodwill amount is subject to adjustment upon final determination of the fair value of assets and liabilities acquired. 22. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] December 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----