-----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, JLcNOuhrZRuYS6H6omT3hgHq0b5F/h0CcpuiqViS6QFwe0lzKSBjCwEmFOtBKNNj fUT3HwlBRzaQ/6G20l4fYA== 0000891092-99-000555.txt : 19990923 0000891092-99-000555.hdr.sgml : 19990923 ACCESSION NUMBER: 0000891092-99-000555 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990922 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIT GROUP INC CENTRAL INDEX KEY: 0000020388 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 132994534 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-01861 FILM NUMBER: 99715258 BUSINESS ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2125361390 MAIL ADDRESS: STREET 1: 1211 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: CIT GROUP HOLDINGS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CIT FINANCIAL CORP/OLD/ DATE OF NAME CHANGE: 19860512 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 22, 1999 The CIT Group, Inc. (Exact name of registrant as specified in its charter) Delaware 1-1861 13-2994534 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 1211 Avenue of the Americas New York, New York 10036 Registrant's telephone number, including area code (212) 536-1390 _______________________________________________________________ (Former name or former address, if changed since last report) Item 5. Other Events. On August 5, 1999 The CIT Group, Inc. and Subsidiaries ("CIT") announced that it had reached a new agreement with Newcourt Credit Group Inc. ("Newcourt") under which it will acquire Newcourt in an exchange of .70 share of CIT Class A Common stock for each outstanding share of Newcourt common stock ("Newcourt Acquisition"). This agreement amends and restates the original acquisition agreement dated March 7, 1999. In connection with the Newcourt Acquisition, the unaudited consolidated financial statements of Newcourt for the six months ended June 30, 1999, and the audited consolidated financial statements of Newcourt for each of the two year periods ended December 31, 1998 and December 31, 1997, are being included in this Form 8-K as Exhibit 99. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (c) Exhibits Exhibit No. Description - ----------- ----------- 23 Consent of Ernst & Young LLP 99 Unaudited consolidated financial statements of Newcourt Credit Group Inc. for the six months ended June 30, 1999, together with notes thereto. Audited consolidated financial statements of Newcourt Credit Group Inc. for each of the two year periods ended December 31, 1998 and December 31, 1997, together with the notes thereto and the reports of the independent auditors. 1 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 hereunto duly authorized. THE CIT GROUP, INC. -------------------------------- (Registrant) By: /s/ JOSEPH M. LEONE -------------------------------- Joseph M. Leone Executive Vice President and Chief Financial Officer Dated: September 22, 1999 2 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23 Consent of Ernst & Young LLP 99 Unaudited consolidated financial statements of Newcourt Credit Group Inc. for the six months ended June 30, 1999, together with notes thereto. Audited consolidated fiancial statements of Newcourt Credit Group Inc. for each of the two year periods ended December 31, 1998 and December 31, 1997, together with the notes thereto and the reports of the independent auditors. 3 EX-23 2 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS Exhibit 23 Consent of Independent Chartered Accountants We consent to the use of our report dated February 22, 1999 on the consolidated financial statements of Newcourt Credit Group Inc. ("Newcourt") as at December 31, 1998 and 1997 and for the years then ended and of our report dated February 4, 1998 on the consolidated financial statements of Newcourt as at December 31, 1997 and 1996 and for the years then ended ("Reports") in the Current Report of The CIT Group, Inc. ("CIT") on Form 8-K filed on September 22, 1999. We also consent to the incorporation by reference of our Reports in the following registration statements of CIT: Registration # Form -------------- ---- 33-85224 S3 333-07249 S3 333-43323 S3 333-64539 S3 333-64529 S3 333-71361 S3 333-84859 S3 333-50499 S8 333-63497 S8 Toronto, Canada Ernst & Young LLP September 22, 1999 Chartered Accountants EX-99 3 CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99 ------------------------------------------------------------ CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. (Unaudited) For the six months ended June 30, 1999 Newcourt [Graphic Omitted] - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) [in thousands of United States dollars] - --------------------------------------------------------------------------------
June 30, December 31, 1999 1998 $ $ - -------------------------------------------------------------------------------------------------- ASSETS Cash 310,774 998,807 Finance assets held for investment [Notes 3 and 5] 9,418,618 8,611,705 Equipment under operating lease [Notes 4 and 5] 2,161,323 2,173,514 Finance assets held for sale 1,563,935 1,542,769 Investment in affiliated companies 253,425 194,860 Accounts receivable, prepaids and other 378,515 310,948 Property and equipment, net [Note 6] 120,832 93,874 Goodwill [Note 7] 1,252,337 1,280,036 Future income tax asset 171,696 146,444 - -------------------------------------------------------------------------------------------------- Total Assets 15,631,455 15,352,957 ================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 682,361 727,468 Debt [Note 8] 11,846,438 11,607,184 - -------------------------------------------------------------------------------------------------- Total Liabilities 12,528,799 12,334,652 - -------------------------------------------------------------------------------------------------- Shareholders' Equity Share capital [Note 11] 2,791,553 2,792,861 Retained earnings 311,103 225,444 - -------------------------------------------------------------------------------------------------- Total Shareholders' Equity 3,102,656 3,018,305 - -------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity 15,631,455 15,352,957 ==================================================================================================
See accompanying Notes - -------------------------------------------------------------------------------- 1 ================================================================================ Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited) [in thousands of United States dollars, except for per share amounts] ================================================================================
Six Months Ended June 30, June 30, 1999 1998 $ $ - -------------------------------------------------------------------------------------------------- Asset finance income Net finance and rental income 206,928 241,551 Securitization gains 84,236 111,659 Syndication fees 69,932 16,090 Management fees and other income [Notes 9 and 10] 171,818 67,526 - -------------------------------------------------------------------------------------------------- Total asset finance income 532,914 436,826 Salaries and wages 182,202 141,869 Operating and administrative 151,534 136,833 Depreciation and goodwill amortization [Note 7] 36,293 37,752 - -------------------------------------------------------------------------------------------------- Operating income before income taxes 162,885 120,372 Provision for income taxes 65,154 48,116 - -------------------------------------------------------------------------------------------------- Net income for the period 97,731 72,256 Retained earnings, beginning of period 225,444 81,240 Dividends paid on common shares (12,072) (7,194) Other -- (135) - -------------------------------------------------------------------------------------------------- Retained earnings, end of period 311,103 146,167 ================================================================================================== Earnings per common share: Basic $0.66 $0.52 Fully diluted $0.66 $0.52 ==================================================================================================
See accompanying Notes - -------------------------------------------------------------------------------- 2 ================================================================================ Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) [in thousands of United States dollars] ================================================================================
Six Months Ended June 30, June 30, 1999 1998 $ $ - -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period 97,731 72,256 Adjustments for: Gain on sale of business units (34,276) -- Future income taxes (25,329) 38,128 Goodwill amortization, depreciation and other expense 36,293 37,752 - -------------------------------------------------------------------------------------------------- Cash flow from operations 74,419 148,136 Net change in non-cash assets and liabilities (22,165) 60,778 - -------------------------------------------------------------------------------------------------- Cash provided by operating activities 52,254 208,914 - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Finance assets, underwritten and purchased (8,320,764) (5,946,879) Finance assets, sold 4,870,679 3,351,018 Finance assets, repayments and others 2,204,042 1,959,190 - -------------------------------------------------------------------------------------------------- Finance assets and assets held for sale (1,246,043) (636,671) Business dispositions (acquisitions) 339,829 (1,059,892) Investment in affiliated companies (58,999) (43,048) Purchase of property and equipment (41,297) (10,886) - -------------------------------------------------------------------------------------------------- Cash used in investing activities (1,006,510) (1,750,497) - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of debt 27,931,051 30,611,865 Repayment of debt (27,656,225) (30,558,378) Issue of common shares, net 3,469 1,468,794 Future tax on share issue costs -- 21,720 Dividends paid on common shares (12,072) (7,194) - -------------------------------------------------------------------------------------------------- Cash provided by financing activities 266,223 1,536,807 - -------------------------------------------------------------------------------------------------- Decrease in cash during the period (688,033) (4,776) Cash, beginning of period 998,807 4,776 - -------------------------------------------------------------------------------------------------- Cash, end of period 310,774 -- ==================================================================================================
See accompanying Notes - -------------------------------------------------------------------------------- 3 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 1. NATURE OF THE COMPANY'S OPERATIONS Newcourt Credit Group Inc. (the "Company") is an independent, non-bank financial services enterprise with operations primarily in the United States, Canada and Europe. The Company also has supporting operations in Latin America and Asia. The Company originates, invests in and sells asset-based financings including secured loans, leases and conditional sales contracts. For asset-based financings sold to institutional investors the Company generally continues to manage these financings on behalf of the investors for a fee. The Company's origination activities focus on the commercial and corporate finance segments of the asset-based financing market. The Company originates leases and loans in the commercial finance market predominantly through vendor finance programs. These agreements are established with select equipment manufacturers, dealers and distributors to provide equipment sales and inventory financing. The Company also serves the corporate finance market through financing services it delivers 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, consistently applied ("Canadian GAAP"). Effective January 1, 1999, the Company adopted the United States dollar as its reporting currency to reflect the increased significance of the U.S. currency in its operations following the acquisition of AT&T Capital Corporation in 1998. Through a translation of convenience, comparative amounts were restated from Canadian to U.S. dollars using an exchange rate of $0.6443, the rate prevailing at December 31, 1998. 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 material intercompany transactions and balances have been eliminated. The Company accounts for its investment in foreign and domestic affiliates in which it has significant influence using the equity method. 1 - -------------------------------------------------------------------------------- 4 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Finance assets held for investment Net investment in finance assets is comprised of loans, capital lease receivables and retained interest in receivables securitized net of an allowance for credit losses. Income is recognized on finance assets held for investment on an actuarial basis which produces a constant rate of return on the investment in finance assets. Recognition of finance income is generally 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. Accrual is resumed when the receivable becomes contractually current and management believes there is no longer any significant probability of loss. Allowance for credit losses Repossessed assets are specifically reserved for at their estimated net realizable value based on estimated collateral values and recoveries under third party guarantees and vendor support agreements. Management also routinely assesses the portfolio on an item-by-item basis and establishes specific allowances for those accounts considered doubtful. General allowances are established for probable losses on loans which cannot be determined on an item-by-item basis. This provision is established by applying historical loss trends to various segments of the portfolio according to external and internal credit ratings. Securitization gains The Company sells certain of its asset-based finance assets to securitization vehicles. Securitization transactions are accounted for as sales of finance assets. These sales are non-recourse to the Company except to the extent of the Company's retained interest in these securitization vehicles. These transactions result in the removal of the assets from the Company's consolidated balance sheets, the recording of assets received and a gain on sale when the significant risks and rewards of ownership are transferred to the purchaser. The assets received are generally cash and a retained interest in the cash flows of the receivables sold. Such retained interest (or securitization investments) is recorded at estimated fair value and may include cash collateral accounts, excess spread assets, and securities backed by the transferred assets. 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 an arm's length servicing fee. - -------------------------------------------------------------------------------- 5 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Income is earned on the securitization investments on an accrual basis. The carrying value of this asset is reduced, as required, based on changes in the Company's share of the estimated credit losses and the effects of changes in the payment rate on the securitized assets. The Company continues to manage the securitized assets and recognizes income equal to an arm's length servicing fee over the term of the securitized assets. Syndication fees Certain finance assets are underwritten and sold to institutional investors for cash. These transactions generate syndication fees for the Company. The Company generally continues to service these assets on behalf of the investors for a fee. 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 assets retained by the Company is at least equal to the average yield earned by the other participants involved. Equipment under operating lease Equipment under operating lease is generally depreciated over the estimated useful life of the asset. Depreciation is generally calculated on a straight-line basis over the term of the lease to the estimated unguaranteed residual value at the end of the lease term. Rental revenue is recognized on a straight-line basis over the related lease term. Estimated unguaranteed residual values Estimated unguaranteed residual values are established upon acquisition and leasing of the equipment based upon the estimated value of the equipment at the end of the lease term. Values are determined on the basis of studies prepared by the Company, historical experience and industry data. Although it is reasonably possible that a change in the unguaranteed residual values could occur in the near term, the Company actively manages its residual values by communicating with lessees and vendors during the lease term to encourage lessees to extend their leases or upgrade and enhance their leased equipment. Residual values are continually reviewed and monitored by the Company. Declines in residual values for capital leases are recognized as an immediate charge to income. Declines in residual values for operating leases are recognized as adjustments to depreciation expense over the shorter of the useful life of the asset or the remaining term of the lease. Deferred costs Direct incremental costs of acquisition of finance assets and operating leases are deferred and amortized over the shorter of the term of the finance asset or operating lease and the expected period of future benefit. As finance assets are securitized, the unamortized portion of the acquisition costs related to the assets being securitized is expensed. Costs incurred during the pre- - -------------------------------------------------------------------------------- 6 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 operating period of new business ventures are deferred and amortized over the expected period of future benefit. Property and equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis at the following rates: Buildings 20 years Furniture and fixtures 10 years Computers and office equipment 5 years Goodwill Goodwill is recorded at cost less accumulated amortization. The Company's amortization periods for goodwill range from 20 to 35 years. The valuation and amortization of goodwill is evaluated on an ongoing basis and, if considered permanently impaired, goodwill 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 The Company's foreign operations function financially and operationally independent of the parent and therefore are considered, for the purposes of foreign currency translation, to be self-sustaining operations. As a result, the assets and liabilities of the Canadian and non-United States foreign operations are translated into United States dollars at rates in effect at the consolidated balance sheet dates. Revenue and expenses are translated at the average exchange rates prevailing during the period. Unrealized foreign exchange currency translation gains and losses on these self-sustaining operations are included in share capital. Income taxes The Company accounts for income taxes using the liability method of income tax allocation. Earnings per common share Basic 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 dilutive options to acquire common shares and any other dilutive items. - -------------------------------------------------------------------------------- 7 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Derivative financial instruments The Company uses derivative financial instruments in conjunction with its interest rate and currency risk management strategies. Derivative financial instruments are used to hedge exposure to interest rate and foreign exchange rate risk arising during the normal course of business. Contract and notional amounts associated with derivative financial instruments are not recorded as assets or liabilities on the consolidated balance sheets. The most frequently used derivative financial instruments are various types of interest rate swaps and foreign exchange contracts. Currency swaps and bond forwards are also used. Swaps and forward contracts are accounted for on the accrual basis when cash flows of the derivatives are matched to a specific on-balance sheet position. Net accrued interest receivable/payable and deferred losses/gains are recorded in accounts receivable, prepaids and others or accounts payable and accrued liabilities, as appropriate. Realized losses/gains on terminated contracts are deferred and amortized over the remaining life of any applicable corresponding position. Foreign exchange contracts are used to hedge the Company's net investment in certain of its self sustaining operations. Gains and losses on these foreign exchange contracts are credited or charged to the cumulative translation adjustment account. When a derivative financial instrument is no longer designated as a hedge, any gain or loss on the contract is recognized in income immediately. Use of estimates The preparation of consolidated 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant areas in which estimates are used include residual values, income taxes, retained interests in securitized assets and related reserves, allowance for credit losses, valuation of finance assets held for sale, restructuring reserves and contingencies. - -------------------------------------------------------------------------------- 8 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 3. FINANCE ASSETS HELD FOR INVESTMENT
Finance assets held for investment consist of: June 30, December 31, 1999 1998 $ $ - --------------------------------------------------------------------------------------------------- Leases 3,726,937 3,963,620 Estimated unguaranteed residual values 900,278 883,194 Unearned Income (729,022) (954,496) - --------------------------------------------------------------------------------------------------- Net leases 3,898,193 3,892,318 Loans 4,969,008 4,304,369 Allowance for credit losses (199,317) (183,693) Securitization investments 750,734 598,711 - --------------------------------------------------------------------------------------------------- Finance assets held for investment 9,418,618 8,611,705 ===================================================================================================
Substantially all of the finance assets held for investment bear interest at varying levels of fixed rates of interest. The loans included in finance assets held for investment are collateralized.
4. EQUIPMENT UNDER OPERATING LEASE Equipment under operating lease consists of: June 30, December 31, 1999 1998 $ $ - --------------------------------------------------------------------------------------------------- Original equipment cost: Information technology 1,403,670 1,452,677 Telecommunications 646,801 531,572 Transportation 381,605 581,655 Manufacturing 408,855 348,801 Healthcare 40,154 30,450 General equipment and other 436,999 289,596 - --------------------------------------------------------------------------------------------------- 3,318,084 3,234,751 Less: accumulated depreciation (1,214,569) (1,117,993) Rental receivables, net 57,808 56,756 - --------------------------------------------------------------------------------------------------- Equipment under operating lease 2,161,323 2,173,514 ===================================================================================================
- -------------------------------------------------------------------------------- 9 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 5. ALLOWANCE FOR CREDIT LOSSES
An analysis of the Company's allowance for credit losses is as follows: June 30, December 31, 1999 1998 $ $ - -------------------------------------------------------------------------------------------------- Finance assets held for investment and equipment under operating lease 11,579,941 10,785,219 - -------------------------------------------------------------------------------------------------- Allowance for credit losses, beginning of period 183,693 24,846 Provision for credit losses during the period 58,410 96,141 Provision for credit losses from acquisition, net of sales -- 132,022 Write-offs, net of recoveries (42,786) (69,316) - -------------------------------------------------------------------------------------------------- Allowance for credit losses, end of period 199,317 183,693 - -------------------------------------------------------------------------------------------------- Allowance as a percentage of investment assets 1.7% 1.7% - -------------------------------------------------------------------------------------------------- Investment assets in arrears (90 days and over) 172,104 143,620 - -------------------------------------------------------------------------------------------------- Arrears as a percentage of investment assets 1.5% 1.3% - -------------------------------------------------------------------------------------------------- Assets in repossession, at estimated net realizable value 151,415 84,540 ==================================================================================================
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following: June 30, 1999 December 31, 1998 --------------------------- ---------------------------- Accumulated Accumulated Cost depreciation Cost depreciation $ $ $ $ - -------------------------------------------------------------------------------------------------- Land and buildings 39,073 17,640 28,842 16,309 Furniture and fixtures 63,404 28,741 55,070 26,702 Computers and office equipment 116,457 54,766 103,231 53,420 Other 3,901 856 3,910 748 - -------------------------------------------------------------------------------------------------- 222,835 102,003 191,053 97,179 - -------------------------------------------------------------------------------------------------- Net book value 120,832 93,874 ==================================================================================================
- -------------------------------------------------------------------------------- 10 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 7. GOODWILL Goodwill amortization during the period was $23,205 [1998 - $30,324]. 8. DEBT
Debt consists of the following: June 30, December 31, 1999 1998 $ $ - ------------------------------------------------------------------------------------------------- Fixed Rate Debt - --------------- U.S. senior notes, bearing interest at rates varying from 6.84% to 8.26%, maturing in the years 2000 to 2005 1,499,614 503,504 Medium term notes, bearing interest at rates varying from 5.00% to 9.34%, maturing in the years 1999 to 2007 597,034 581,004 U.S. medium term notes, bearing interest at rates varying from 5.61% to 8.25%, maturing in the years 1999 to 2028 6,041,752 6,126,500 7.625% debenture, maturing in June, 2001 84,660 80,446 6.45% debenture, maturing in June, 2002 101,586 96,535 Collateralized borrowings related to securitized assets, 5.50%, maturing in 2003 102,864 122,873 Capital lease obligations, discounted at rates varying from 5.70% to 13.50%, maturing in 2004 221,701 258,602 Other fixed rate debt 381,185 338,321 Floating Rate Debt - ------------------ Floating rate U.S. medium term notes, interest rate ranges from 4.89% to 6.75%, maturing in the years 1999 to 2002 1,040,250 1,350,322 Collateralized borrowings relating to securitized assets, based upon one month LIBOR plus 0.125%, maturing in 2001 48,815 65,674 Floating rate medium term notes, interest periodically reprices based upon CDOR index, maturing in the year 2000 67,790 64,430 Commercial paper and other short-term borrowings 1,659,187 2,018,973 - ------------------------------------------------------------------------------------------------- Total debt 11,846,438 11,607,184 ================================================================================================= Interest expense on the debt outstanding during the period was $407,542 [1998 - $293,026].
- -------------------------------------------------------------------------------- 11 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 The Company renegotiated its various bank facilities in April 1998 to support the existing commercial paper programs and for general corporate purposes. The U.S. bank facility was increased to $2.3 billion with $1.535 billion having a term of 364 days and $765 million having a term of five years. In addition, the Canadian bank facility was increased to Cdn. $1.2 billion with a term of 364 days. The amount of unused Canadian and U.S. bank facilities are Cdn. $1.0 billion [1998 - Cdn. $0.3 billion] and $2.3 billion [1998 - $2.3 billion], respectively. In April 1999, the Company renewed its various bank facilities to support the existing commercial paper programs and for general corporate purposes. The terms and conditions remained unchanged with the exception of the Canadian facility, which was renewed at Cdn. $1.0 billion with a term of 364 days. The weighted average interest on commercial paper outstanding as at June 30, 1999 is 4.85% [1998 - 4.91%] for the Canadian commercial paper program, 5.65% [1998 - 6.02%] for the U.S. commercial paper program and 5.03% [1998 - nil] for the Australian program. In connection with the purchase of AT&T Capital, the Company unconditionally guarantees the debt and liquidity facilities of AT&T Capital as to payment of principal and interest, when and as this debt shall become due and payable, whether at maturity or otherwise. Also, AT&T Capital entered into an agreement whereby it guarantees certain indebtedness and liquidity facilities of the Company. 9. OTHER INCOME During the first quarter, the Company recorded a pre-tax gain of $56,582 (after-tax gain of $31,120) resulting from the extinguishment of certain derivative financial instruments. During 1998, the Company had derivative financial instruments in place to hedge the Company's net investment in certain of its foreign self-sustaining operations to Canadian dollars (the "1998 Derivatives"), its reporting currency in 1998. Effective January 1, 1999, the Company adopted the United States dollar as its reporting currency. Accordingly, on that date, the Company determined that all non-U.S. dollar functional self-sustaining operations would be hedged to the U.S. currency and that the 1998 Derivatives would be terminated. The 1998 Derivatives were unwound over several weeks in early 1999 to minimize the Company's liability or maximize its receivables from counterparties without exposing the Company to undue risk. Since the 1998 Derivatives were no longer designated as hedges during 1999, any gains or losses must be immediately recognized in earnings. - -------------------------------------------------------------------------------- 12 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 10. SALE OF AUTOMOTIVE LEASING UNITS During the period, the Company disposed of two automotive leasing units, based in Canada and the United Kingdom. Under the terms of the sales, the total consideration was $339,829 cash. Total assets sold were $337,493 and total liabilities sold were $31,940 resulting in a gain of $34,276 ($15,451 after tax). 11. 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. - -------------------------------------------------------------------------------- 13 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Outstanding - The following is a summary of the changes in share capital during the period:
June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------------------ # $ # $ - ------------------------------------------------------------------------------------------------ Subscription rights Outstanding, beginning of period -- -- 38,500,000 1,132,997 Exchange for common shares -- -- (38,500,000) (1,132,997) - ------------------------------------------------------------------------------------------------ Outstanding, end of period -- -- -- -- - ------------------------------------------------------------------------------------------------ Common shares Outstanding, beginning of period 148,312,634 2,751,233 83,070,958 758,282 Shares issued for subscription rights -- -- 38,500,000 1,111,974 Shares issued for warrants -- -- 8,668,446 368,929 Issued on acquisition -- -- 17,633,857 508,995 Stock options exercised 92,762 904 417,492 2,152 Others 82,933 2,565 21,881 901 - ------------------------------------------------------------------------------------------------ Outstanding, end of period 148,488,329 2,754,702 148,312,634 2,751,233 - ------------------------------------------------------------------------------------------------ Total 148,488,329 2,754,702 148,312,634 2,751,233 Unrealized foreign currency translation adjustment -- 36,851 -- 41,628 - ------------------------------------------------------------------------------------------------ Total share capital 148,488,329 2,791,553 148,312,634 2,792,861 ================================================================================================
- -------------------------------------------------------------------------------- 14 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Public Offerings On January 12, 1998, the subscription rights were exchanged for 38,500,000 common shares at Cdn. $46.00 per share. On June 4, 1998, all of the special warrants outstanding were exercised without additional payment. Treasury Issue On January 12, 1998, the Company completed a private placement of 17,633,857 common shares at $31.19 per share for proceeds of $550,000. On May 20, 1998, the Company completed a private placement of 8,668,446 special warrants at $46.14 per warrant. Each special warrant entitled the holder thereof to acquire one common share of the Company. 12. 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 2. Syndicated finance assets are assets which have been sold to investors without recourse or credit enhancement. Finance assets under management are as follows:
June 30, December 31, 1999 1998 $ $ - ----------------------------------------------------------------------------------------- Securitized finance assets 8,990,845 9,000,658 Syndicated finance assets 1,753,436 1,396,230 Syndicated finance assets of affiliated companies 430,220 416,265 - ----------------------------------------------------------------------------------------- Total 11,174,501 10,813,153 =========================================================================================
- -------------------------------------------------------------------------------- 15 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 13. SUMMARIZED FINANCIAL INFORMATION OF AT&T CAPITAL CORPORATION The table below shows summarized consolidated financial information for AT&T Capital, an indirect wholly-owned subsidiary of the Company. The Company has guaranteed ("Guarantee") on a full and unconditional basis the existing registered debt securities and certain other indebtedness of AT&T Capital. The Company has not disclosed financial statements or other information regarding AT&T Capital on a stand-alone basis since management does not believe that it is material to debt holders due to the Guarantee. The following summarized consolidated financial information for AT&T Capital has been prepared in accordance with accounting principles generally accepted in Canada.
Six months ended June 30, 1999 June 30, 1998 $ $ - ----------------------------------------------------------------------------------------- Total asset finance income 254,066 306,007 Operating expenses 171,602 241,585 - ----------------------------------------------------------------------------------------- Operating income before taxes 82,464 64,422 - ----------------------------------------------------------------------------------------- Net income for the period 50,788 31,235 ========================================================================================= December 31, June 30, 1999 1998 $ $ - ----------------------------------------------------------------------------------------- ASSETS Cash 201,657 1,011,409 Finance assets held for investment 4,308,279 4,759,564 Equipment under operating lease 1,506,339 1,565,379 Finance assets held for sale 116,887 177,049 Receivables from affiliates and other assets 4,307,883 3,276,167 - ----------------------------------------------------------------------------------------- Total Assets 10,441,045 10,789,568 ========================================================================================= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Debt 8,916,534 9,280,639 Accrued liabilities 545,935 582,122 - ----------------------------------------------------------------------------------------- Total Liabilities 9,462,469 9,862,761 Total Shareholder's Equity 978,576 926,807 - ----------------------------------------------------------------------------------------- Total Liabilities and Shareholder's Equity 10,441,045 10,789,568 =========================================================================================
- -------------------------------------------------------------------------------- 16 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 Included in the first six months of 1999 total asset finance income is $78.2 million (1998 - $24.6 million) of interest income related to intercompany receivables due from certain subsidiaries of the Company. Total asset finance income decreased in the first six months of 1999 compared to the same period in 1998 due mainly to the sale of various portions of the international businesses of AT&T Capital to the Company at their approximate book value. The assets relating to these businesses approximated $1,178.4 million. Increased securitization volume in the second half of 1998 also contributed to the decrease in finance revenue. Included in receivables from affiliates and other assets is $3.8 billion as at June 30, 1999 (1998 - $2.9 billion) of intercompany receivables due from certain subsidiaries of the Company. The purchase price the Company paid for AT&T Capital has not been "pushed down" to AT&T Capital's stand-alone financial statements; however, these statements reflect the adoption of the accounting policies and procedures of the Company. 14. MERGER WITH THE CIT GROUP INC. On March 8, 1999, the Company announced that it would be acquired by The CIT Group Inc. ("CIT") through an exchange of common stock. Under the terms of the transaction each outstanding share of the Company's common stock will be exchanged for 0.92 shares of CIT. Under an amended and restated agreement and plan of reorganization dated August 4, 1999, the Company and CIT reached agreement that the Company's common stock would be exchanged for 0.70 shares of CIT as well as the elimination of certain closing conditions. The transaction is expected to close during the fourth quarter of 1999, and is conditional upon regulatory and shareholder approval. CIT is headquartered in Livingston, New Jersey, USA. CIT is a leading diversified finance organization offering secured commercial and consumer financing primarily in the United States. 15. YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in errors when information using Year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000 and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. - -------------------------------------------------------------------------------- 17 ================================================================================ Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) [in thousands of United States dollars unless otherwise indicated] ================================================================================ June 30, 1999 It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 16. FOREIGN EXCHANGE RATES The following Canadian to U.S. dollars exchange rates were used during the period: December 31, 1998 0.6443 June 30, 1999 0.6779 Average for first six months of 1999 0.6701 17. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 1999 consolidated financial statements. - -------------------------------------------------------------------------------- 18 ================================================================================ CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. For the years ended December 31, 1998 and 1997 Newcourt [Graphic Omitted] - -------------------------------------------------------------------------------- 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, 1998 and 1997 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, 1998 and 1997 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in Canada. Toronto, Canada Ernst & Young LLP February 22, 1999 Chartered Accountants - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. CONSOLIDATED BALANCE SHEETS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- As at December 31 1998 1997 $ $ - -------------------------------------------------------------------------------- ASSETS Cash 1,550,221 7,413 Cash held in escrow [Note 11] -- 1,771,000 Finance assets held for investment [Notes 3 and 5] 13,365,986 2,185,568 Equipment under operating lease [Note 4] 3,373,451 275,833 Finance assets held for sale [Note 6] 2,394,488 1,091,398 Investment in affiliated companies 302,437 173,918 Accounts receivable, prepaids and other 482,613 181,736 Property and equipment, net [Note 7] 145,699 87,396 Goodwill [Note 8] 1,896,657 408,754 Future income tax asset [Note 13] 227,292 -- - -------------------------------------------------------------------------------- Total Assets 23,738,844 6,183,016 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 1,039,032 303,968 Debt[Note 10] 18,015,185 2,789,816 Future income tax liability [Note 13] -- 27,739 - -------------------------------------------------------------------------------- Total Liabilities 19,054,217 3,121,523 - -------------------------------------------------------------------------------- Shareholders' Equity Share capital [Note 11] 4,334,723 2,935,402 Retained earnings 349,904 126,091 - -------------------------------------------------------------------------------- Total Shareholders' Equity 4,684,627 3,061,493 - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity 23,738,844 6,183,016 - -------------------------------------------------------------------------------- See accompanying Notes -2- - -------------------------------------------------------------------------------- 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 1998 1997 $ $ - -------------------------------------------------------------------------------- Asset finance income Net finance and rental income 815,787 84,349 Gain on sale of finance assets [Note 6] 452,119 188,837 Management and other fees 230,685 45,249 - -------------------------------------------------------------------------------- Total asset finance income 1,498,591 318,435 Operating and administrative 465,747 84,774 Salaries and wages 443,447 94,160 Goodwill amortization, depreciation and other expense [Note 8] 117,304 20,427 - -------------------------------------------------------------------------------- Operating income before restructuring charges and taxes 472,093 119,074 Restructuring charges [Note 9] -- 103,000 - -------------------------------------------------------------------------------- Operating income before income taxes 472,093 16,074 Provision for (recovery of) income taxes [Note 13] 177,726 (20,347) - -------------------------------------------------------------------------------- Net income for the year 294,367 36,421 Retained earnings, beginning of year 126,091 100,774 Dividends paid on common shares (26,001) (10,004) Premium on redemption of preferred securities and other (44,553) (1,100) - -------------------------------------------------------------------------------- Retained earnings, end of year 349,904 126,091 - -------------------------------------------------------------------------------- Earnings per common share: Basic $2.06 $0.52 Fully diluted $2.06 $0.52 See accompanying Notes -3- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- Years ended December 31 1998 1997 $ $ - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the year 294,367 36,421 Add (deduct) items not requiring an outlay (inflow) of cash: Future income taxes 101,551 (23,516) Goodwill amortization, depreciation and other expense 117,304 20,427 Restructuring charges -- 74,225 - -------------------------------------------------------------------------------- Cash flow from operations 513,222 107,557 Net change in non-cash assets and liabilities [Note 20] (171,643) (130,332) - -------------------------------------------------------------------------------- Cash provided by (used in) operating activities 341,579 (22,775) - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Finance assets, underwritten and purchased (19,888,800) (6,033,608) Finance assets, sold 11,605,676 4,336,050 Finance assets, repayments and others 4,835,614 1,079,027 - -------------------------------------------------------------------------------- Finance assets and assets held for sale (3,447,510) (618,531) Business acquisitions (1,645,029) (621,902) Investment in affiliated companies (128,519) 8,821 Purchase of property and equipment (46,633) (35,992) - -------------------------------------------------------------------------------- Cash used in investing activities (5,267,691) (1,267,604) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of debt 120,440,387 5,673,486 Repayment of debt (115,920,409) (4,887,721) Redemption of preferred securities (330,903) -- Issue of common shares, net 2,272,134 452,535 Future tax on share issue costs 33,712 18,312 Dividends paid on common shares (26,001) (10,004) - -------------------------------------------------------------------------------- Cash provided by financing activities 6,468,920 1,246,608 - -------------------------------------------------------------------------------- Increase (decrease) in cash during the year 1,542,808 (43,771) Cash, beginning of year 7,413 51,184 - -------------------------------------------------------------------------------- Cash, end of year 1,550,221 7,413 - -------------------------------------------------------------------------------- See accompanying Notes -4- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 1. NATURE OF THE COMPANY'S OPERATIONS Newcourt Credit Group Inc. (the "Company") is an independent, non-bank financial services enterprise with operations primarily in the United States, Canada and Europe. The Company also has supporting operations in Latin America and Asia. The Company originates, invests in and sells asset-based financings including secured loans, leases and conditional sales contracts. For asset-based financings sold to institutional investors the Company generally continues to manage these financings on behalf of the investors for a fee. The Company's origination activities focus on the commercial and corporate finance segments of the asset-based financing market. The Company originates leases and loans in the commercial finance market predominantly through vendor finance programs. These agreements are established with select equipment manufacturers, dealers and distributors to provide equipment sales and inventory financing. The Company also serves the corporate finance market through financing services it delivers 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, consistently applied ("Canadian GAAP"). Except as indicated in Note 21, 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 material intercompany transactions and balances have been eliminated. The Company accounts for its investment in foreign and domestic affiliates in which it has significant influence using the equity method. Finance assets held for investment Net investment in finance assets is comprised of loans, capital lease receivables, retained interest in receivables securitized net of an allowance for credit losses. Income is recognized on finance assets held -5- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 for investment on an actuarial basis which produces a constant rate of return on the investment in finance assets. Recognition of finance income is generally 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. Accrual is resumed when the receivable becomes contractually current and management believes there is no longer any significant probability of loss. Allowance for credit losses Repossessed assets are specifically reserved for at their estimated net realizable value based on estimated collateral values and recoveries under third party guarantees and vendor support agreements. Management also routinely assesses the portfolio on an item-by-item basis and establishes specific allowances for those accounts considered doubtful. General allowances are established for probable losses on loans which cannot be determined on an item-by-item basis. This provision is established by applying historical loss trends to various segments of the portfolio according to external and internal credit ratings. Gain on sale of finance assets The Company sells certain of its asset-based finance assets to securitization vehicles. Securitization transactions are accounted for as sales of finance assets. These sales are non-recourse to the Company except to the extent of the Company's retained interest in these securitization vehicles. These transactions result in the removal of the assets from the Company's consolidated balance sheets, the recording of assets received and a gain on sale when the significant risks and rewards of ownership are transferred to the purchaser. The assets received are generally cash and a retained interest in the cash flows of the receivables sold. Such retained interest (or securitization investments) is recorded at estimated fair value and may include cash collateral accounts, excess spread assets, and securities backed by the transferred assets. 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 an arm's length servicing fee. Income is earned on the securitization investments on an accrual basis. The carrying value of this asset is reduced, as required, based on changes in the Company's share of the estimated credit losses and the effects of changes in the payment rate on the securitized assets. The Company continues to manage the securitized assets and recognizes income equal to an arm's length servicing fee over the term of the securitized assets. -6- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Certain finance assets are underwritten and sold to institutional investors for cash. These transactions generate syndication fees for the Company. The Company generally continues to service these assets on behalf of the investors for a fee. 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 assets retained by the Company is at least equal to the average yield earned by the other participants involved. Equipment under operating lease Equipment under operating lease is generally depreciated over the estimated useful life of the asset. Depreciation is generally calculated on a straight-line basis over the term of the lease to the estimated unguaranteed residual value at the end of the lease term. Rental revenue is recognized on a straight-line basis over the related lease term. Estimated unguaranteed residual values Estimated unguaranteed residual values are established upon acquisition and leasing of the equipment based upon the estimated value of the equipment at the end of the lease term. Values are determined on the basis of studies prepared by the Company, historical experience and industry data. Although it is reasonably possible that a change in the unguaranteed residual values could occur in the near term, the Company actively manages its residual values by communicating with lessees and vendors during the lease term to encourage lessees to extend their leases or upgrade and enhance their leased equipment. Residual values are continually reviewed and monitored by the Company. Declines in residual values for capital leases are recognized as an immediate charge to income. Declines in residual values for operating leases are recognized as adjustments to depreciation expense over the shorter of the useful life of the asset or the remaining term of the lease. Deferred costs Direct incremental costs of acquisition of finance assets and operating leases are deferred and amortized over the shorter of the term of the finance asset or operating lease and the expected period of future benefit. As finance assets are securitized, the unamortized portion of the acquisition costs related to the assets being securitized is expensed. Costs incurred during the pre-operating period of new business ventures are deferred and amortized over the expected period of future benefit. -7- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Property and equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis at the following rates: Buildings 20 years Furniture and fixtures 10 years Computers and office equipment 5 years Goodwill Goodwill is recorded at cost less accumulated amortization. The Company's amortization periods for goodwill range from 20 to 35 years. The valuation and amortization of goodwill is evaluated on an ongoing basis and, if considered permanently impaired, goodwill 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 Prior to 1998, assets and liabilities denominated in foreign currencies of certain foreign operations were translated using the temporal method, whereby monetary assets and liabilities were converted into Canadian dollars at exchange rates in effect at the consolidated balance sheet dates. Gains and losses on finance assets and debt were deferred and amortized over the remaining lives of the related items on a straight-line basis. Non-monetary assets and liabilities were translated at historical rates. Revenue and expenses were translated at the exchange rate in effect on the date of the transaction. As a consequence of the acquisition of AT&T Capital Corporation ("AT&T Capital"), the Company's foreign operations function financially and operationally independent of the parent and therefore are considered, for the purposes of foreign currency translation, to be self-sustaining operations. As a result, the assets and liabilities of these operations are translated into Canadian dollars at rates in effect at the consolidated balance sheet dates. Revenue and expenses are translated at the average exchange rates prevailing during the year. Unrealized foreign exchange currency translation gains and losses on these self-sustaining operations are included in share capital. Income taxes The Company accounts for income taxes using the liability method of income tax allocation. -8- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Earnings per common share Basic 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 dilutive options to acquire common shares and any other dilutive items. Derivative financial instruments The Company uses derivative financial instruments in conjunction with its interest rate and currency risk management strategies. Derivative financial instruments are used to hedge exposure to interest rate and foreign exchange rate risk arising during the normal course of business. Contract and notional amounts associated with derivative financial instruments are not recorded as assets or liabilities on the consolidated balance sheets. The most frequently used derivative financial instruments are various types of interest rate swaps and foreign exchange contracts. Currency swaps and bond forwards are also used. Swaps and forward contracts are accounted for on the accrual basis when cash flows of the derivatives are matched to a specific on balance sheet position. Net accrued interest receivable/payable and deferred losses/gains are recorded in accounts receivable, prepaids and others or accounts payable and accrued liabilities, as appropriate. Realized losses/gains on terminated contracts are deferred and amortized over the remaining life of any applicable corresponding position. Foreign exchange contracts are used to hedge the Company's net investment in certain of its self sustaining operations. Gains and losses on these foreign exchange contracts are credited or charged to the cumulative translation adjustment account. Use of estimates The preparation of consolidated 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant areas in which estimates are used include residual values, income taxes, retained interests in securitized assets and related reserves, allowance for credit losses, valuation of finance assets held for sale, restructuring reserves and contingencies. -9- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 3. FINANCE ASSETS HELD FOR INVESTMENT Finance assets held for investment consist of: 1998 1997 $ $ - -------------------------------------------------------------------------------- Leases 6,207,826 1,116,967 Estimated unguaranteed residual values 946,958 57,421 Unearned income (2,094,662) (190,020) - -------------------------------------------------------------------------------- Net leases 5,060,122 984,368 Loans 7,661,725 888,694 Allowance for credit losses (285,104) (38,563) Securitization investments [Note 6] 929,243 351,069 - -------------------------------------------------------------------------------- Finance assets held for investment 13,365,986 2,185,568 - -------------------------------------------------------------------------------- As at December 31, 1998, the minimum annual payments are as follows: Leases Loans $ $ - -------------------------------------------------------------------------------- 1999 2,756,957 1,645,407 2000 1,498,115 1,206,589 2001 971,360 869,506 2002 536,220 779,485 2003 346,190 678,701 Thereafter 98,984 2,482,037 - -------------------------------------------------------------------------------- Total 6,207,826 7,661,725 - -------------------------------------------------------------------------------- Included in finance assets held for investment is US$6,394,845 [1997 - US$693,758]. Substantially all of the finance assets held for investment bear interest at varying levels of fixed rates of interest. The loans included in finance assets held for investment are collateralized. -10- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 4. EQUIPMENT UNDER OPERATING LEASE Equipment under operating lease consists of: 1998 1997 $ $ Original equipment cost: Information technology 2,254,660 364,608 Telecommunications 825,038 -- Transportation 902,771 -- Manufacturing 541,365 -- Healthcare 47,260 -- General equipment and other 449,474 -- - -------------------------------------------------------------------------------- 5,020,568 364,608 Less: accumulated depreciation (1,735,206) (88,775) Rental receivables, net 88,089 -- - -------------------------------------------------------------------------------- Equipment under operating lease 3,373,451 275,833 - -------------------------------------------------------------------------------- Minimum annual future rentals to be received on non-cancelable operating leases as at December 31, 1998, are as follows: $ - -------------------------------------------------------------------------------- 1999 967,088 2000 693,188 2001 344,681 2002 129,523 2003 55,350 Thereafter 3,140 - -------------------------------------------------------------------------------- Included in equipment under operating lease is US$1,765,768 [1997 - US$182,824]. -11- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 5. ALLOWANCE FOR CREDIT LOSSES An analysis of the Company's allowance for credit losses is as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Finance assets held for investment and equipment under operating lease 16,739,437 2,461,401 - -------------------------------------------------------------------------------- Allowance for credit losses, beginning of year 38,563 16,465 Provision for credit losses during the year 149,217 2,598 Provision for credit losses from acquisition, net of sales 204,907 28,443 Write-offs, net of recoveries (107,583) (8,943) - -------------------------------------------------------------------------------- Allowance for credit losses, end of year 285,104 38,563 - -------------------------------------------------------------------------------- Allowance as a percentage of investment assets 1.7% 1.6% - -------------------------------------------------------------------------------- Investment assets in arrears (90 days and over) 222,908 13,619 - -------------------------------------------------------------------------------- Arrears as a percentage of investment assets 1.3% 0.6% - -------------------------------------------------------------------------------- Assets in repossession, at estimated net realizable value 131,212 6,023 - -------------------------------------------------------------------------------- -12- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 6. SECURITIZATIONS The Company has securitization programs under which finance assets originated by the Company are sold to securitization vehicles. These sales are non-recourse to the Company except to the extent of the Company's retained interest in such securitization vehicles. The Company's responsibility is limited to that of servicer which includes the administration and collection of the receivables on behalf of the investors. Under these programs, the Company has securitized finance assets during the year as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- North American term vehicles 6,302,829 2,174,038 North American conduits 3,965,089 1,838,268 Foreign conduits 389,388 -- - -------------------------------------------------------------------------------- Total 10,657,306 4,012,306 - -------------------------------------------------------------------------------- The Company's term securitizations have senior-subordinate structures which are financed by the issuance of credit tranched securities. These securities have ratings ranging from triple A to single B and are sold to third party institutional investors. The Company's conduit securitizations are also senior-subordinate structures and are financed by the issuance of commercial paper. Securitization investments represent the Company's retained interest in the cash flows of the finance assets sold. Such retained interest includes cash collateral accounts, excess spread assets, securities backed by the transferred assets and servicing fees. -13- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Net securitization income which is generally received in cash and the Company's investment in securitization investments are as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Net securitization income (included in gain on sale of finance assets) 383,758 140,133 - -------------------------------------------------------------------------------- Securitization investments: Cash collateral accounts 387,431 22,839 Excess spread assets and securities backed by the transferred assets 541,812 328,230 - -------------------------------------------------------------------------------- Total 929,243 351,069 - -------------------------------------------------------------------------------- -14- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 7. PROPERTY AND EQUIPMENT Property and equipment consist of the following: 1998 1997 ---------------------- --------------------- Accumulated Accumulated Cost depreciation Cost depreciation $ $ $ $ Land and buildings 44,765 25,313 14,654 3,281 Furniture and fixtures 85,472 41,443 48,658 15,143 Computers and office equipment 160,222 82,911 56,552 17,300 Other 6,068 1,161 4,182 926 - -------------------------------------------------------------------------------- 296,527 150,828 124,046 36,650 - -------------------------------------------------------------------------------- Net book value 145,699 87,396 ================================================================================ -15- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 8. GOODWILL AND ACQUISITIONS On January 12, 1998, the Company purchased all of the outstanding common shares of AT&T Capital for approximately US$1.7 billion (Cdn $2.4 billion), of which approximately US$1.15 billion (Cdn $1.6 billion) was paid in cash and the remaining US$550 million (Cdn $790 million) was satisfied through the issuance of approximately 17.6 million common shares of the Company. AT&T Capital is a full-service, diversified equipment leasing and finance company that operates predominantly in the United States. This acquisition has been accounted for as a purchase and accordingly the Company's consolidated financial statements 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: Cash 12,346 Finance assets held for investment 9,370,344 Equipment under operating lease 2,287,583 Accounts receivable, prepaids and other 498,933 Future income tax receivable 319,252 - -------------------------------------------------------------------------------- 12,488,458 - -------------------------------------------------------------------------------- Accounts payable and accrued liabilities 876,647 Debt 10,213,136 Preferred securities 286,560 Restructuring accrual 200,176 - -------------------------------------------------------------------------------- 11,576,519 - -------------------------------------------------------------------------------- Net assets acquired 911,939 - -------------------------------------------------------------------------------- Consideration: Cash 1,645,029 Common shares 789,997 - -------------------------------------------------------------------------------- Total consideration 2,435,026 - -------------------------------------------------------------------------------- Goodwill 1,523,087 ================================================================================ The Company's amortization period with respect to the acquisition of AT&T Capital is 35 years. The goodwill amortization period was determined by the Company based upon AT&T Capital's superior market presence, relationships with leading manufacturers and the long-term expected future cash flows to be provided by its ongoing operations. -16- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 During 1997, the Company purchased Commcorp Financial Services Inc., the Business Technology Finance division of Lloyds UDT and other finance operations in the United States. Each of these acquisitions has been accounted for as a purchase and the net assets acquired and the resulting goodwill is as follows: Commcorp BTF Others Total 1997 Acquisitions $ $ $ $ - -------------------------------------------------------------------------------- Net assets acquired at approximate fair values: Finance assets held for investment 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 Property and equipment 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 Future income tax liability 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 ================================================================================ The Company's amortization period with respect to all acquisitions prior to the AT&T Capital acquisition is 20 years. Goodwill amortization 1998 $ - -------------------------------------------------------------------------------- AT&T Capital acquisition 41,795 1997 acquisitions 19,585 Pre-1997 acquisitions 4,640 - -------------------------------------------------------------------------------- Total 66,020 ================================================================================ -17- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 9. RESTRUCTURING CHARGES In 1997, the Company recorded restructuring charges totaling $103,000, resulting in an after tax charge of $56,650. These charges were related to costs incurred to integrate Commcorp Financial Services Inc. and to rationalize certain of the Company'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. In connection with the acquisition of AT&T Capital, the Company has accrued the estimated costs of integrating the operations of AT&T Capital in order to reduce future costs. Integration costs include amounts for severances, head office closures and relocation, as well as the write-off of redundant application systems. A breakdown of the restructuring accrual and the amounts utilized are as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Balance, beginning of year 77,262 -- Restructuring charges -- 103,000 Acquired restructuring provision 53,750 -- Restructuring charges accrued on acquisition 146,426 -- Amounts utilized (214,745) (25,738) - -------------------------------------------------------------------------------- Balance, end of year 62,693 77,262 ================================================================================ -18- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 10. DEBT Debt consists of the following:
1998 1997 $ $ - --------------------------------------------------------------------------------------------------------- Fixed Rate Debt U.S. senior notes, bearing interest at rates varying from 6.84% to 781,474 292,291 8.26%, maturing in the years 2000 to 2005 Medium term notes, bearing interest at rates varying from 4.40% to 901,760 1,118,433 9.34%, maturing in the years 1999 to 2007 U.S. medium term notes, bearing interest at rates varying from 5.53% to 9,508,769 -- 8.25%, maturing in the years 1999 to 2028 7.625% debenture, maturing in June, 2001 124,858 124,802 6.45% debenture, maturing in June, 2002 149,830 149,782 Collateralized borrowings related to securitized assets, 5.50%, 190,707 -- maturing in 2003 Capital lease obligations, discounted at rates varying from 5.70% to 401,369 -- 13.50%, maturing in 2004 Other fixed rate debt 525,099 270,227 Floating Rate Debt Floating rate U.S. medium term notes, interest rate ranges from 5.52% 2,095,797 -- to 6.29%, maturing in the years 1999 to 2000 Collateralized borrowings relating to securitized assets, based upon 101,931 -- one month LIBOR plus 0.125%, maturing in 2001 Floating rate medium term notes, interest periodically reprices based 100,000 -- upon CDOR index, maturing in the year 2000 Commercial paper and other short-term borrowings 3,133,591 834,281 - --------------------------------------------------------------------------------------------------------- Total debt 18,015,185 2,789,816 =========================================================================================================
Interest expense on the debt outstanding during the year was $977,186 [1997 - $145,252], of which $30,975 [1997 - $16,363] has been deducted from management and other fees and the balance of $946,211 [1997 - $128,889] deducted from net finance and rental income. The Company renegotiated its various bank facilities in April 1998 to support the existing commercial paper programs and for general corporate purposes. The U.S. bank facility was increased to US$2.3 billion with US$1.535 billion having a term of 364 days and US$765 million having a term of five years. In addition, the Canadian bank facility was increased to $1.2 billion -19- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 with a term of 364 days. The amount of unused Canadian and U.S. bank facilities are $0.3 billion [1997 - $750 million] and US$2.3 billion [1997 - US$500 million], respectively. The Company is required to maintain interest coverage, debt, negative pledge and minimum consolidated tangible net worth covenants in connection with these bank facilities. The Company is in compliance with these and all other covenants as at December 31, 1998. The weighted average interest on commercial paper outstanding at the end of the year is 6.11% for the Canadian commercial paper program [1997 - 5.96%], 6.39% for the U.S. commercial paper program and 5.05% [1997 - nil] for the Australian program. Included in debt is US$9,794,691 [1997 - US$1,388,211] repayable in U.S. dollars, of which US$8,671,451 [1997 - US$1,323,211] was used to fund leases and loans which are repayable in U.S. dollars. The remainder of this debt was used to fund non U.S. dollar denominated assets, with derivative financial instruments used to match fund these assets. During May 1998, the Securities and Exchange Commission declared effective an AT&T Capital debt statement of US$5 billion. As at December 31, 1998, US$1.2 billion was still outstanding. In connection with the purchase of AT&T Capital, the Company unconditionally guarantees the debt and liquidity facilities of AT&T Capital as to payment of principal and interest, when and as this debt shall become due and payable, whether at maturity or otherwise. Also, AT&T Capital entered into an agreement whereby it guarantees certain indebtedness and liquidity facilities of the Company. As at December 31, 1998, scheduled repayments of principal are as follows: Short-term Term Borrowings(1) Borrowings(2) Total $ $ $ - -------------------------------------------------------------------------------- 1999 3,840,503 4,895,381 8,735,884 2000 -- 3,328,257 3,328,257 2001 -- 1,889,784 1,889,784 2002 -- 485,496 485,496 2003 -- 775,859 775,859 Thereafter -- 2,799,905 2,799,905 - -------------------------------------------------------------------------------- Total 3,840,503 14,174,682 18,015,185 ================================================================================ (1) Includes commercial paper, bank facilities and other short-term borrowings. (2) Includes senior notes, medium term notes and all debentures which were originally issued for a term of one year or greater. -20- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 11. 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:
1998 1997 - ------------------------------------------------------------------------- ----------------------- # $ # $ - ------------------------------------------------------------------------------------------------- Subscription rights Outstanding, beginning of year 38,500,000 1,758,493 -- -- Exchange for common shares (38,500,000) (1,758,493) -- -- 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 83,070,958 1,176,909 60,182,688 415,160 Proceeds of share issue, net -- -- 13,910,000 481,030 Shares issued for subscription rights 38,500,000 1,725,864 -- -- Shares issued for warrants 8,668,446 572,605 -- -- Issued on acquisition [Note 8] 17,633,857 789,997 8,214,843 277,295 Stock options exercised 417,492 3,340 743,172 2,839 Others 21,881 1,396 20,255 585 - ------------------------------------------------------------------------------------------------- Outstanding, end of year 148,312,634 4,270,111 83,070,958 1,176,909 - ------------------------------------------------------------------------------------------------- Total 148,312,634 4,270,111 121,570,958 2,935,402 Unrealized foreign currency translation -- 64,612 -- -- adjustment - ------------------------------------------------------------------------------------------------- Total share capital 148,312,634 4,334,723 121,570,958 2,935,402 =================================================================================================
-21- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Subdivision of 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 of the Company's common shares reserved for issuance. Public Offerings 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. On December 3, 1997, the Company completed a public offering of 38,500,000 subscription rights at $46.00 per right for gross proceeds of $1.77 billion. The proceeds were held in escrow pending the acquisition of AT&T Capital. Expenses of this issue, net of deferred income tax recoveries of $36,929, amounted to $45,136. On January 12, 1998, the subscription rights were exchanged for 38,500,000 common shares at $46.00 per share. On June 4, 1998, all of the special warrants outstanding were exercised without additional payment. 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. On January 12, 1998, the Company completed a private placement of 17,633,857 common shares at US$31.19 per share for proceeds of US$550,000. On May 20, 1998, the Company completed a private placement of 8,668,446 special warrants at US$46.14 per warrant. Each special warrant entitled the holder thereof to acquire one common share of the Company. -22- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 12. EMPLOYEE STOCK OPTION PLAN During the year, amendments to the Company's Stock Option Plan were approved by the shareholders at the Annual General Meeting. 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 2,860,100 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, 1998, the following common share options were outstanding: Number Per Share of Shares $ Expiry Date - -------------------------------------------------------------------------------- Options granted to: Directors 30,000 7.25 February 23, 2001 22,000 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 415,510 12.00 January 29, 2001 328,875 24.25 February 6, 2007 2,054,998 26.00 May 2, 2007 50,000 49.50 August 16, 2004 16,000 49.50 September 16, 2007 21,350 47.20 October 30, 2007 640,400 49.05 January 8, 2008 863,050 56.80 February 4, 2008 18,000 68.50 April 29, 2008 1,300,000 31.75 October 6, 2008 - -------------------------------------------------------------------------------- Total 5,810,183 ================================================================================ -23- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Of the above, stock options for 467,510 common shares are exercisable as at December 31, 1998. The remaining stock options for 5,342,673 common shares are exercisable as follows: Exercisable Date Number of Shares - -------------------------------------------------------------------------------- 1999 634,807 2000 1,335,670 2001 1,335,670 2002 1,335,665 2003 700,861 - -------------------------------------------------------------------------------- Total 5,342,673 ================================================================================ -24- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 13. 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 rate with the actual income tax expense: 1998 1997 $ $ - -------------------------------------------------------------------------------- Income before income taxes 472,093 16,074 - -------------------------------------------------------------------------------- Statutory rate of income taxes 45% 45% - -------------------------------------------------------------------------------- Income taxes at the statutory rate 212,442 7,233 Effect on income taxes of: Deductible dividends (4,264) (11,705) Foreign losses, no tax benefit booked 3,538 -- Foreign tax rate differential (63,782) (18,679) Goodwill amortization 25,767 2,614 Large corporations tax 4,568 2,164 Other (543) (1,974) - -------------------------------------------------------------------------------- Provision for (recovery of) income taxes 177,726 (20,347) - -------------------------------------------------------------------------------- Allocation of provision (recovery): Current 76,175 3,169 Future 101,551 (23,516) - -------------------------------------------------------------------------------- Provision for (recovery of) income taxes 177,726 (20,347) - -------------------------------------------------------------------------------- -25- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 (b) The tax effect of temporary differences that give rise to significant portions of the future income tax asset and liability are presented below: 1998 1997 $ $ - -------------------------------------------------------------------------------- Future income tax asset: Net operating loss carryforward 201,779 110,172 Goodwill 218,290 -- Alternative minimum tax 20,147 -- Other 14,548 68,938 - -------------------------------------------------------------------------------- Gross future income tax asset 454,764 179,110 Less: Valuation allowance (5,807) -- - -------------------------------------------------------------------------------- Gross future income tax asset net of valuation allowance 448,957 179,110 - -------------------------------------------------------------------------------- Future income tax liability: Differences in tax and accounting basis of finance assets (76,853) (118,819) Securitization related (122,925) (58,806) Other (21,887) (29,224) - -------------------------------------------------------------------------------- Gross future income tax liability (221,665) (206,849) - -------------------------------------------------------------------------------- Total future income tax asset (liability) 227,292 (27,739) - -------------------------------------------------------------------------------- By region: Canada (12,309) 3,981 United States 242,195 (31,720) Other foreign countries (2,594) -- - -------------------------------------------------------------------------------- Total future income tax asset (liability) 227,292 (27,739) ================================================================================ The Company has $459,080 of non-capital losses available for tax purposes to offset future taxable income arising from the reversal of deferred income tax liabilities. These non-capital tax losses arise principally from timing differences relating to depreciation and restructuring charges as well as certain other permanent differences. Non-capital losses pertaining to the Canadian operations of $360,975 will expire at various dates by the year 2005. Net operating losses pertaining to the U.S. operations of $98,105 will expire at various dates by the year 2013. -26- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 (c) The income (loss) before income taxes and provision for (recovery of) income taxes are as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Income (loss) before income taxes: Canada 121,026 (47,023) United States 266,269 37,057 Other foreign countries 84,798 26,040 - -------------------------------------------------------------------------------- 472,093 16,074 ================================================================================ Provision for current income taxes: Canada 4,774 1,338 United States 60,830 758 Other foreign countries 10,571 1,073 - -------------------------------------------------------------------------------- 76,175 3,169 ================================================================================ Provision for (recovery of) future income taxes: Canada 45,367 (38,605) United States 51,468 13,694 Other foreign countries 4,716 1,395 - -------------------------------------------------------------------------------- 101,551 (23,516) ================================================================================ Total provision for (recovery of) income taxes: Current 76,175 3,169 Future 101,551 (23,516) - -------------------------------------------------------------------------------- 177,726 (20,347) ================================================================================ Net income (loss): Canada 70,885 (9,756) United States 153,971 22,605 Other foreign countries 69,511 23,572 - -------------------------------------------------------------------------------- 294,367 36,421 ================================================================================ -27- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 14. 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 Notes 2 and 6. Syndicated finance assets are assets which have been sold to investors without recourse or credit enhancement. Finance assets under management are as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Securitized finance assets 13,969,670 5,626,856 Syndicated finance assets 2,167,050 1,386,706 Syndicated finance assets of affiliated companies 646,073 616,052 - -------------------------------------------------------------------------------- Total 16,782,793 7,629,614 ================================================================================ -28- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 15. SEGMENT REPORTING The Company operates in the following two segments of the finance market: commercial finance (Newcourt Financial) and corporate finance (Newcourt Capital). Newcourt Financial provides asset-based sales and inventory financing in the commercial finance market. Newcourt Capital provides structured financing on capital assets and related advisory services to corporate and institutional borrowers. The Company does not allocate to the segments operating and administrative costs associated with managing the capital structure and loan origination activities of the Newcourt Financial and Newcourt Capital segments. Newcourt Newcourt Financial Capital Total $ $ $ - -------------------------------------------------------------------------------- 1998 Net finance and rental income 724,941 90,846 815,787 Gain on sale of finance assets 383,758 68,361 452,119 Management and other fees 208,621 22,064 230,685 - -------------------------------------------------------------------------------- Total asset finance income 1,317,320 181,271 1,498,591 - -------------------------------------------------------------------------------- Goodwill amortization and depreciation expense 8,281 1,888 10,169 - -------------------------------------------------------------------------------- Segment income 716,288 147,646 863,934 - -------------------------------------------------------------------------------- Finance assets held for investment 12,163,172 1,202,814 13,365,986 Equipment under operating lease 3,373,451 -- 3,373,451 ================================================================================ 1997 Net finance and rental income 70,193 14,156 84,349 Gain on sale of finance assets 140,133 48,704 188,837 Management and other fees 36,252 8,997 45,249 - -------------------------------------------------------------------------------- Total asset finance income 246,578 71,857 318,435 - -------------------------------------------------------------------------------- Goodwill amortization and depreciation expense 9,587 226 9,813 - -------------------------------------------------------------------------------- Segment income 121,588 61,999 183,587 - -------------------------------------------------------------------------------- Finance assets held for investment 1,784,337 401,231 2,185,568 Equipment under operating lease 275,833 -- 275,833 ================================================================================ -29- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows: 1998 1997 $ $ - -------------------------------------------------------------------------------- Total segment income 863,934 183,587 Less unallocated amounts: Corporate and administrative expenses 391,841 167,513 - -------------------------------------------------------------------------------- Operating income before taxes 472,093 16,074 ================================================================================ The following provides additional information of the Company's operations by geographic region. United Other States Canada Countries Total $ $ $ $ - -------------------------------------------------------------------------------- 1998 Net finance and rental income 606,607 53,484 155,696 815,787 Gain on sale of finance assets 319,805 128,300 4,014 452,119 Management and other fees 160,798 37,590 32,297 230,685 - -------------------------------------------------------------------------------- Total asset finance income 1,087,210 219,374 192,007 1,498,591 - -------------------------------------------------------------------------------- Finance assets held for investment 9,227,220 1,569,936 2,568,830 13,365,986 Equipment under operating lease 2,733,763 208,443 431,245 3,373,451 ================================================================================ 1997 Net finance and rental income 27,468 43,794 13,087 84,349 Gain on sale of finance assets 87,302 86,326 15,209 188,837 Management and other fees 20,926 14,771 9,552 45,249 - -------------------------------------------------------------------------------- Total asset finance income 135,696 144,891 37,848 318,435 - -------------------------------------------------------------------------------- Finance assets held for investment 586,502 978,755 620,311 2,185,568 Equipment under operating lease 262,184 13,649 -- 275,833 ================================================================================ -30- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 16. LEASE COMMITMENTS Future minimum annual payments on a cash basis under leases for premises over the next five years and thereafter are as follows: $ - -------------------------------------------------------------------------------- 1999 44,859 2000 34,074 2001 23,395 2002 19,131 2003 8,061 Thereafter 51,534 - -------------------------------------------------------------------------------- Total 181,054 ================================================================================ Rent expense amounted to $54,564 in 1998 [1997 - $9,632]. -31- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 17. 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(1) exposure(2) ---------------------------------------------- ----------- Total Under 1 to 5 Over Dec. 31, Dec. 31 1 year years 5 years 1998 1998 As at December 31, 1998 $ $ $ $ $ - -------------------------------------------------------------------------------------------------- Interest rate contracts: Forwards 426,541 -- -- 426,541 603 Swaps 3,013,225 2,893,659 1,180,198 7,087,082 39,257 - --------------------------------------------------------------------------------------------------- 3,439,766 2,893,659 1,180,198 7,513,623 39,860 - --------------------------------------------------------------------------------------------------- Foreign exchange contracts: Forwards 747,316 702,249 2,810 1,452,375 83,964 Swaps 948,218 1,844 185,018 1,135,080 24,244 - --------------------------------------------------------------------------------------------------- 1,695,534 704,093 187,828 2,587,455 108,208 - --------------------------------------------------------------------------------------------------- Total derivatives 5,135,300 3,597,752 1,368,026 10,101,078 148,068 ===================================================================================================
-32- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998
Current credit Notional principal amounts maturing(1) exposure(2) -------------------------------------------------- ----------- Total Under 1 to 5 Over Dec. 31, Dec. 31 1 year years 5 years 1998 1998 As at December 31, 1997 $ $ $ $ $ - ------------------------------------------------------------------------------------------------------- Interest rate contracts: Forwards 986,062 -- -- 986,062 -- Swaps 235,717 762,284 247,574 1,245,575 11,327 - ------------------------------------------------------------------------------------------------------- 1,221,779 762,284 247,574 2,231,637 11,327 - ------------------------------------------------------------------------------------------------------- Foreign exchange contracts: Forwards 1,811,703 -- -- 1,811,703 -- Swaps 637,469 620,897 76,970 1,335,336 3,458 - ------------------------------------------------------------------------------------------------------- 2,449,172 620,897 76,970 3,147,039 3,458 - ------------------------------------------------------------------------------------------------------- Total derivatives 3,670,951 1,383,181 324,544 5,378,676 14,785 =======================================================================================================
(1) Notional principal amounts are the contract amounts used in determining payments. (2) Credit risk exposure represents the amount owed to the Company under such contracts. All counterparties are investment grade financial institutions. In addition, the fair market value of derivative financial instruments is a net payable of approximately $234 million [1997 - $56 million]. -33- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of assets and liabilities at December 31 is as follows:
1998 1997 $ $ - ----------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value - ----------------------------------------------------------------------------------------- Assets: Finance assets held for investment 13,365,986 13,626,101 2,185,568 2,189,143 Finance assets held for sale 2,394,488 2,394,488 1,091,398 1,091,398 Investment in affiliated companies 302,437 299,716 173,918 174,918 Liabilities: Debt 18,015,185 18,199,342 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. 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. 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. -34- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 19. SENSITIVITY TO INTEREST AND CURRENCY EXCHANGE RATES The Company monitors its asset/liability position using techniques including market value, sensitivity analysis and a value at risk model. Value at risk measures the effect of interest rate movements upon the market value of equity. The value at risk tests discussed below for exposure to interest rate and currency rate exposures are based on a variance/co-variance model using a three-month horizon and a 95% confidence level. The model assumes that financial returns are normally distributed. The value at risk model takes into account correlations and diversification across market factors, including currencies and interest rates. Estimates of volatility and correlations of market factors are drawn from the RiskMetrics dataset as of December 31, 1998. RiskMetrics is a leading portfolio modeling system for evaluating risk. RiskMetrics uses market risk estimation methodology that was developed with market risk experience, accompanied by volatility and correlation datasets covering the major financial markets. Based on the Company's overall interest rate exposure at December 31, 1998, including derivatives and other interest rate sensitive instruments, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements, would not materially affect on a fair values basis, the consolidated financial position, results of operations or cash flows of the Company. Based on the Company's overall currency rate exposure at December 31, 1998, including derivatives and other foreign currency sensitive instruments, a near-term change in currency rates, within a 95% confidence level based on historical currency rate movements, would not materially affect on a fair value basis the consolidated financial position, results of operations or cash flows of the Company. There were no past due amounts or reserves for credit losses at December 31, 1998, related to derivative transactions. -35- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 20. CONSOLIDATED STATEMENTS OF CASH FLOWS AND OTHER REPORTING DETAILS 1998 1997 $ $ - -------------------------------------------------------------------------------- Decrease (increase) in accounts receivable, prepaids and other 195,346 (101,297) decrease in accounts payable and accrued liabilities (366,989) (29,035) - -------------------------------------------------------------------------------- Total (171,643) (130,332) ================================================================================ Cash interest paid 845,629 147,038 - -------------------------------------------------------------------------------- Cash taxes paid 58,967 6,671 ================================================================================ -36- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 21. 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] Under Canadian GAAP, the Company records its retained interest in its securitization transactions at fair value at the time of sale. Under U.S. GAAP, retained interests are recorded initially at the Company's carrying value. Certain of the Company's retained interests are considered available for sale securities and accordingly are marked to market with the change in market value being recorded as a component of comprehensive income. In addition, certain securitization transactions are recorded as gains under U.S. GAAP when the assets are legally isolated, whereas under Canadian GAAP such gains are recorded upon the transfer of risks and rewards of ownership, and substantial completion of the transaction. [ii] For Canadian GAAP purposes, certain costs relating to the restructuring of AT&T Capital's operations are netted against the restructuring accrual. For U.S. GAAP purposes, such amounts are expensed in income immediately. During 1997, the restructuring charge was reduced for costs that would have been accrued as an adjustment to the liabilities assumed through the purchase of Commcorp Financial Services Inc. and the rationalization of certain of the Company's businesses in Canada and the United States under U.S. GAAP, rather than expensed as permitted by Canadian GAAP. Certain of these expenses were recorded for U.S. GAAP purposes as incurred in 1998. [iii] 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. [iv] Prior to 1998, the Company used the temporal method in translating assets and liabilities denominated in foreign currencies whereby unrealized translation gains and losses on long-term monetary items were deferred and amortized. For U.S. GAAP purposes, deferred unrealized translation gains and losses were recorded in income. As a consequence of the AT&T Capital acquisition in 1998, the Company's foreign operations are now considered self-sustaining and the current rate translation method is used whereby unrealized translation gains and losses are included in shareholders' equity in accordance with Canadian and U.S. GAAP. -37- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 The following table presents the amounts that would have been reported for U.S. GAAP purposes in 1998 and 1997:
1998 1997 $ $ - ------------------------------------------------------------------------------------- Net income for the year - Canadian GAAP 294,367 36,421 Adjustments: Securitization transactions (net of income taxes of $10,462 (14,623) 5,486 [1997 - $4,364]) Restructuring charge (net of income taxes of $28,890 [1997 - (38,017) 19,067 15,600]) Options retired -- (1,100) Foreign exchange losses (net of income taxes of nil [1997 - -- (7,553) $6,180]) Other (net of income taxes of $2,413 [1997 - nil]) (7,378) -- - ------------------------------------------------------------ ------------------------ Net income for the year - U.S. GAAP 234,349 52,321 Other comprehensive income: Unrealized gain on available for sale securities (net of income taxes of $7,660 [1997- nil] ) 11,455 -- Unrealized foreign currency translation adjustment (net of income taxes of $29,075 [1997 - nil] ) 35,537 -- - ------------------------------------------------------------------------------------- Comprehensive income - U.S. GAAP 281,341 52,321 Retained earnings, beginning of year 128,283 85,966 Dividends paid on common shares (26,001) (10,004) Premium on redemption of preferred securities (44,343) -- - ------------------------------------------------------------------------------------- Retained earnings, end of year 339,280 128,283 Share capital 4,334,723 2,935,402 - ------------------------------------------------------------------------------------- Shareholders' equity 4,674,003 3,063,685 =====================================================================================
-38- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 The following sets forth the computation of basic and diluted earnings per share: 1998 1997 $ $ - -------------------------------------------------------------------------------- Numerator Net income for the year - U.S. GAAP 234,349 52,321 Less: Premium on redemption of preferred securities (44,343) -- - -------------------------------------------------------------------------------- Income available for the common shareholders - U.S. GAAP 190,006 52,321 ================================================================================ Denominator Denominator for basic earnings per common share: Weighted average number of shares 142,741,776 70,219,175 Effect of dilutive securities: Employee stock options 2,117,291 1,171,555 - -------------------------------------------------------------------------------- Denominator for diluted earnings per common share: Adjusted weighted average number of common shares 144,859,067 71,390,730 and assumed conversions ================================================================================ Basic earnings per common share $1.33 $0.75 Diluted earnings per common share $1.31 $0.73 ================================================================================ -39- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 (b) 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 under Canadian GAAP. Under Canadian GAAP, amounts paid to employees to retire issued stock options without issuing common shares are recorded as capital transactions. Under APB No. 25, such amounts paid are recorded as compensation expense. 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: 1998 1997 $ $ - -------------------------------------------------------------------------------- Pro-forma net income available to common shareholders per U.S. GAAP 189,541 51,917 Pro-forma earnings per common share: - Basic earnings per common share $1.33 $0.74 - Fully diluted earnings per common share $1.30 $0.74 ================================================================================ 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 1998: dividend yield of 0.35% [1997 - 0.58%], expected volatility of 40% [1997 - 30%], risk free interest rate of 5.0%, [1997 - - 6.3%] and expected lives of eight years [1997 - eight years].
1998 1997 - --------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price # $ # $ - ----------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 3,441,100 21.96 1,687,726 8.63 Granted 2,860,100 43.74 2,557,298 26.00 Exercised (417,492) 8.55 (802,640) 6.83 Forfeited (73,525) 43.74 (1,284) 23.02 - --------------------------------------------------------------------------------------------------------- Outstanding, end of year 5,810,183 33.63 3,441,100 21.96 - --------------------------------------------------------------------------------------------------------- Options exercisable at year end 467,510 698,413 - --------------------------------------------------------------------------------------------------------- Weighted average fair value of options $22.10 $12.02 granted during the year =========================================================================================================
-40- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 (c) Impending Accounting Changes: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities". This Statement of Position is required to be adopted in years beginning after December 15, 1998. The Company expects to adopt the new Statement effective January 1, 1999. This new Statement of Position requires costs of start-up activities to be expensed as incurred. Upon adoption, the Company is expected to record a pre-tax charge of approximately $23 million to income as a cumulative effect related to this change in accounting principle. -41- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 22. SUMMARIZED FINANCIAL INFORMATION OF AT&T CAPITAL CORPORATION The table below shows summarized consolidated financial information for AT&T Capital, an indirect wholly-owned subsidiary of the Company. The Company has guaranteed ("Guarantee") on a full and unconditional basis the existing registered debt securities and certain other indebtedness of AT&T Capital. The Company has not disclosed financial statements or other information regarding AT&T Capital on a stand-alone basis since management does not believe that it is material to debt holders due to the Guarantee. The following summarized consolidated financial information for AT&T Capital has been prepared in accordance with accounting principles generally accepted in Canada. Year ended December 31, 1998 $ - -------------------------------------------------------------------------------- Total asset finance income 862,722 Operating expenses 611,714 - -------------------------------------------------------------------------------- Operating income before taxes 251,008 Net income for the period 144,802 ================================================================================ December 31, 1998$ - -------------------------------------------------------------------------------- ASSETS Cash 1,569,780 Finance assets held for investment 7,387,186 Equipment under operating lease 2,429,581 Finance assets held for sale 274,793 Receivables from affiliates and other assets 5,084,846 - -------------------------------------------------------------------------------- Total Assets 16,746,186 ================================================================================ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Debt 14,404,220 Accrued liabilities 903,495 - -------------------------------------------------------------------------------- Total Liabilities 15,307,715 Total Shareholder's Equity 1,438,471 - -------------------------------------------------------------------------------- Total Liabilities and Shareholder's Equity 16,746,186 ================================================================================ -42- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] - -------------------------------------------------------------------------------- December 31, 1998 Included in total asset finance income is $99.7 million of interest income related to intercompany receivables due from certain subsidiaries of the Company. Included in receivables from affiliates and other assets is $4.4 billion of intercompany receivables due from certain subsidiaries of the Company. The purchase price the Company paid for AT&T Capital has not been "pushed down" to AT&T Capital's stand-alone financial statements. 23. YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in errors when information using Year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000 and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 24. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 1998 consolidated financial statements. -43- - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. For the years ended December 31, 1997 and December 31, 1996 Newcourt [GRAPHIC OMITTED] -44- - -------------------------------------------------------------------------------- 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. /s/ Ernst & Young Toronto, Canada Ernst & Young February 4, 1998 Chartered Accountants -45- - -------------------------------------------------------------------------------- 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 408,754 54,279 $11,961; 1996 - $2,861 [note 7] - -------------------------------------------------------------------------------- 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 -46- - -------------------------------------------------------------------------------- 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 -47- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- Cash flow from operations 107,557 64,180 Net change in non-cash assets and liabilities (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 -48- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -49- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -50- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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: Buildings 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. -51- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -52- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -53- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -54- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -55- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -56- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 As at December 31, 1997, the Company had commitments or substantially completed commitments 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 =====================================================================================================================
-57- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -58- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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]. -59- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ================================================================================ -60- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ===============================================================================================
-61- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -62- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -63- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ======================================================================================================================
-64- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -65- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 Per Share Shares $ 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 ============= -66- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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]. -67- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ================================================================================ -68- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 (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 -- -- - -------------------------------------------------------------------------------- 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. -69- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 (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 -- - -------------------------------------------------------------------------------- (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 ================================================================================ -70- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 - -------------------------------------------------------------------------------- -71- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ================================================================================ -72- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ================================================================================ -73- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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]. -74- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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(1) exposure(2) - -------------------------------------------------------------------------------------------------------------------- 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 986,062 -- -- 986,062 808,925 -- Interest rate swaps 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 -- -- 1,811,703 16,243 -- 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 ================================================================================================================
(1) Notional principal amounts are the contract amounts used in determining payments. (2) Credit Credit risk exposure is the replacement cost of all contracts withour 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. -75- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -76- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 ----------------------------------------------- Under 1 to 5 Over As at December 31, 1997 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 -- -- 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) -- - --------------------------------------------------------------------------------------------------- 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) -- - --------------------------------------------------------------------------------------------------- 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 ===================================================================================================
-77- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997
Expiration -------------------------------------------- Under 1 to 5 Over As at December 31, 1996 1 year years 5 years Total $ $ $ $ - --------------------------------------------------------------------------------------------------- Investment in finance assets 583,833 356,119 177,325 1,072,277 Assets held for securitization 774,000 -- -- 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) -- - --------------------------------------------------------------------------------------------------- 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) -- - --------------------------------------------------------------------------------------------------- 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 ================================================================================ -78- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -79- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 has 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 -- - -------------------------------------------------------------------------------- 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) -- - -------------------------------------------------------------------------------- $ 0.75 $ 0.96 ================================================================================ Fully diluted $ 0.73 $ 0.95 ================================================================================ -80- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 - -------------------------------------------------------------------------------- -81- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 -- 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 ================================================================================ -82- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 (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 -- -- - -------------------------------------------------------------------------------- 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. -83- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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 -- - -------------------------------------------------------------------------------- (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 ================================================================================ -84- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 (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 Price Exercise Shares 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 ===================================================================================================================
-85- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -86- - -------------------------------------------------------------------------------- Newcourt Credit Group Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars] - -------------------------------------------------------------------------------- December 31, 1997 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. -87- -----END PRIVACY-ENHANCED MESSAGE-----