-----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, BAQ/TAzU6v6icEPeTsR4lMEXWrPpoOgC2Ugzsc8/jn6SCETUpyVsQw1QjqlI1oXK A1ainV82LcrOGM1yZ9teKA== 0000950117-97-001967.txt : 19971120 0000950117-97-001967.hdr.sgml : 19971120 ACCESSION NUMBER: 0000950117-97-001967 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971119 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971119 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CAPITAL CORP /DE/ CENTRAL INDEX KEY: 0000897708 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 223211453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11237 FILM NUMBER: 97724622 BUSINESS ADDRESS: STREET 1: 44 WHIPPANY ROAD CITY: MORRISTOWN STATE: NJ ZIP: 07962-1983 BUSINESS PHONE: 2013973000 MAIL ADDRESS: STREET 1: 44 WHIPPANY RD CITY: MORRISTOWN STATE: NJ ZIP: 07962-1983 8-K 1 AT&T CAPITAL CORP. 8-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: November 19, 1997 AT&T CAPITAL CORPORATION A Delaware Commission File I.R.S. Employer Corporation No. 1-11237 No. 22-3211453 44 Whippany Road, Morristown, New Jersey 07962-1983 Telephone Number (973) 397-3000 2 Form 8-K November 19, 1997 Item 1. CHANGES IN CONTROL OF THE REGISTRANT Item 5. OTHER EVENTS Newcourt Credit Group Inc. a Canadian corporation ("Newcourt"), and AT&T Capital Corporation ("AT&T Capital" or the "Company") announced on November 17, 1997, that Newcourt, the Company and the stockholders of the Company have entered into a Stock Purchase Agreement (a copy of which is attached hereto as Exhibit A) under which Newcourt will acquire all of the outstanding shares of the Company's common stock, subject to certain conditions. The aggregate purchase price to be paid to the current stockholders of AT&T Capital for the shares will be US$1.03 billion in cash and 17.6 million Newcourt common shares. Such shares may not be transferred for periods ranging from 6 to 18 months following the closing. The closing is expected to occur in approximately 60 to 90 days. The joint press release of Newcourt and the Company is attached hereto as Exhibit 99. The cash portion (US$1.03 billion) of the purchase price to be paid by Newcourt will be raised through the issuance by Newcourt of approximately 35 million Newcourt common shares at approximately US$32.500 (C$46.00) per share to the public in Canada and the United States. The remaining portion of the purchase price will be paid by Newcourt through the issuance of approximately 17.6 million Newcourt common shares directly to certain of the current shareholders of AT&T Capital. Toronto-based Newcourt is one of North America's leading sources of asset-based financing serving the corporate, commercial and institutional markets, with owned and managed loans of more than US$7.13 billion (C$10.0 billion) at September 30, 1997, and an international network of more than 42 offices. Mr. Steven K. Hudson, president and CEO of Newcourt, will continue as president and CEO of the combined companies. Newcourt intends for the Company to operate as a wholly-owned subsidiary of Newcourt which will continue to issue commercial paper and medium and long-term debt in the public markets. The current intent of Newcourt is for the Company and Newcourt on a consolidated basis to securitize approximately 40-45% of their new consolidated volumes and to move to a consolidated debt to tangible equity ratio of approximately 5.5:1, with the result that, following the closing, the securitization and leverage policies of the Company would be adjusted to achieve those targets. Newcourt has also indicated that, following the closing, Newcourt intends to guarantee the Company's outstanding commercial paper and outstanding medium-term and long-term debt securities and, in connection therewith, the Company may also guarantee Newcourt's outstanding indebtedness. Newcourt's aggregate outstanding indebtedness, as of September 30, 1997, was US$1.87 billion (C$2.58 billion). The Company's Trust Originated Preferred Securities of $200 million, that were issued by a subsidiary of AT&T Capital in October, 1996, are not effected by the transaction with Newcourt. In connection with the execution and delivery of the Stock Purchase Agreement, Lucent Technologies, Inc. ("Lucent"), pursuant to the terms of the Operating Agreement between Lucent and the Company, consented to the change of control contemplated by the sale of the outstanding stock of the Company to Newcourt by the current stockholders of the Company. In addition, the Company and Newcourt agreed to negotiate with Lucent to amend the terms of such Operating Agreement and to submit a related proposal to Lucent by December 31, 1997. Such proposal is expected to address certain economic terms, the scope of business covered by the 3 Form 8-K November 19, 1997 agreement, the length of the renewal term and certain other matters, taking into account the terms and tenor of other similar vendor finance program agreements, with any economic benefits to Lucent arising from any such amendment being retroactive to October 1, 1997. Any amendment of the terms of the Operating Agreement could have a material effect on the Company. Newcourt has advised the Company that Newcourt is currently a "foreign private issuer", as defined in Rule 3b-4 under the Securities Exchange Act of 1934 as amended, and a reporting company under such Act. Attached hereto as Exhibit B are (i) Newcourt's Prospectus dated November 17, 1997 filed by Newcourt with the Securities and Exchange Commission (the "Commission"), and (ii) Newcourt's Reports on Form 6-K setting forth its consolidated financial statements as of, and for the respective three, six and nine month periods ended, March 31, 1997, June 30, 1997, and September 30, 1997, heretofore filed by Newcourt with the Commission. Form 8-K November 19, 1997 Item 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits 99. Press Release issued by Newcourt and the Company dated November 17, 1997. A) Stock Purchase Agreement dated as of November 17, 1997, among the Company, Newcourt, Hercules Holdings (Cayman) Limited and other selling stockholders of the Company. B) (1) Newcourt's Prospectus dated November 17, 1997 (2) Newcourt's Reports on Form 6-K setting forth its consolidated financial statements as of, and for the respective three, six and nine month periods ended, March 31, 1997, June 30, 1997, and September 30, 1997. Form 8-K November 19, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T CAPITAL CORPORATION RAMON OLIU, JR. _______________ By: Ramon Oliu, Jr. Senior Vice President and Chief Financial Officer November 19, 1997 Form 8-K November 19, 1997 EXHIBIT INDEX Exhibit 99. Press Release issued by Newcourt and the Company dated November 17, 1997. A) Stock Purchase Agreement dated as of November 17, 1997, among the Company, Newcourt, Hercules Holdings (Cayman) Limited and other selling stockholders of the Company. B) (1) Newcourt's Prospectus dated November 17, 1997 (2) Newcourt's Reports on Form 6-K setting forth its consolidated financial statements as of, and for the respective three, six and nine month periods ended, March 31, 1997, June 30, 1997, and September 30, 1997. STATEMENT OF DIFFERENCES The British pound sterling sign shall be expressed as ..........'L' EX-99 2 PRESS RELEASE Exhibit 99 AT&T Capital Corporation NEWCOURT CREDIT GROUP FORGES GLOBAL ALLIANCE WITH AT&T CAPITAL CREATES ONE OF WORLD'S LARGEST ASSET FINANCE COMPANIES For immediate release: Monday, November 17, 1997 - ------------------------------------------------ Toronto, Ontario and Morristown, New Jersey, November 17, 1997 - Newcourt Credit Group and AT&T Capital Corporation announced today that the two industry leaders have entered into an agreement under which Newcourt will acquire all of the outstanding shares of AT&T Capital. The combined entity will form one of the world's largest asset finance companies with a market capitalization in excess of US$4.5 billion (C$6.3 billion, UK'L'2.7 billion). The combined company will become a global enterprise with tremendous financial strength and marketing capability and will be well positioned to provide innovative customer financing solutions and long term shareholder value. It will employ more than 5,000 staff servicing customers in 24 countries around the world. Newcourt and AT&T Capital had combined 1996 new business volumes of US$9.4 billion (C$13.2 billion, UK'L'5.5 billion) and owned and managed assets of US$17.8 billion (C$25.1, UK'L'10.5) at the end of 1996. The total consideration will be US$1.61 billion (C$2.3 billion, UK'L'950 million), comprised of US$1.06 billion (C$1.49 billion, UK'L'625 million) cash and approximately 17.6 million Newcourt common shares, which constitutes a 13% stake in the combined company. AT&T Capital's shareholders have agreed not to sell the Newcourt common shares acquired as part consideration for periods ranging from 6 to 18 months following closing. The selling shareholders have also agreed that US$28.1 million of the cash consideration will be escrowed in respect of AT&T Capital employee share options and incentive-based compensation. The transaction, which is subject to certain conditions including regulatory approvals, is expected to close at the end of January 1998. "The new company combines the best of Newcourt's entrepreneurial drive with the global reach of AT&T Capital," noted Steven K. Hudson, president and CEO of Newcourt Credit Group. "It also enables us to accelerate the pace at which we are offering international commercial finance services to our major equipment manufacturing partners." "Over the past year, we have made great progress in maintaining and building relations with major international vendor clients and in developing a platform from which to promote our products internationally," said David Banks, chief executive officer at AT&T Capital. "By joining forces, AT&T Capital and Newcourt will set a new standard in delivering value to our customers." New Jersey-based AT&T Capital became a privately held company in October 1996 when it was bought by a leasing consortium including Exhibit 99 AT&T Capital Corporation management and Hercules Holding (Cayman) Ltd., a holding company ultimately financed by investment bank Nomura International plc. "Our objective from the outset has been to support management's efforts to build AT&T Capital into a world-class global competitor," said Guy Hands, Managing Director of Nomura International. "With this transaction, the company will achieve that objective much sooner than we ever anticipated. Nomura International is demonstrating its continuing commitment to the combined company by maintaining an indirect 13% equity interest through Hercules." Two Nomura appointed representatives, including Guy Hands, will serve on the Board of Directors of the combined company. The cash consideration of US$1.06 billion (C$1.49 billion, UK'L'625 million) will be entirely financed with equity by issuing approximately 35 million Newcourt Credit Group common shares at C$46.00 per share to the public in Canada and the United States on a bought deal basis. CIBC Wood Gundy Securities Inc. will lead the syndicate of underwriters for the offering. Hercules Holding (Cayman) is a subsidiary of Hercules Holding U.K., which is a company structured and financed by Nomura International plc. Nomura International plc is the wholly-owned European subsidiary of The Nomura Securities Co. Ltd., one of the world's largest investment banks. Its major activities in Europe include the origination, trading and sales of securities, research, principal finance, securitization and emerging markets corporate finance. AT&T Capital is a global leader in providing equipment leasing, finance and related services to approximately 500,000 commercial customers of all sizes in 23 countries. The company had total owned and managed assets of US$13.6 billion (C$19.2 billion, UK'L' 8.0 billion) at September 30, 1997. Newcourt Credit Group is one of North America's leading sources of asset-based financing serving the corporate, commercial and institutional markets, with owned and managed loans of more than US$7.1 billion (C$10.0 billion, UK'L'4.2 billion) at September 30, 1997 and an international network of 42 offices. This press release is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. A portion of the public offering of common shares referred to above is being made in the United States pursuant to a registration statement filed today. The public offering of common shares to be made in the United States will be made by means of a prospectus that may be obtained from Newcourt Credit Group that will contain detailed information about Newcourt and its management, as well as financial statements. #### EX-99 3 EXHIBIT A EXECUTION COPY ================================================================================ STOCK PURCHASE AGREEMENT among HERCULES HOLDINGS (CAYMAN) LIMITED, AT&T CAPITAL CORPORATION, THE STOCKHOLDERS THEREOF LISTED ON EXHIBIT A HERETO and NEWCOURT CREDIT GROUP INC. for the purchase and sale of the outstanding capital stock of AT&T CAPITAL CORPORATION Dated as of November 17, 1997 ================================================================================ TABLE OF CONTENTS ARTICLE I DEFINITIONS.............................................. 2 ARTICLE II PURCHASE AND DELIVERY OF STOCK............................. 12 2.1 Delivery of Stock..................................................... 12 2.2 Consideration for Stock............................................... 12 2.3 Indemnity Escrow...................................................... 13 ARTICLE III CLOSING DATE............................................. 13 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERS.............................................. 14 4.1 Representations and Warranties of Sellers............................. 14 (a) Organization, Good Standing and Qualification......................................................... 14 (b) Authority............................................................. 14 (c) Non-Contravention..................................................... 14 (d) Consents, etc......................................................... 15 (e) Share Ownership....................................................... 15 (f) Brokers and Finders................................................... 16 (g) Limitation on Liability............................................... 16 (h) Bank Act (Canada)..................................................... 16 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................... 16 5.1 Representations and Warranties of the Company........................................................... 16 (a) Organization, Good Standing and Qualification......................................................... 16 (b) Capital Structure..................................................... 17 (c) Authority............................................................. 18 (d) Governmental Filings; Consents; No Violations............................................................ 18 (e) Company Reports; Financial Statements................................. 20 (f) Absence of Certain Changes............................................ 20 (g) Litigation and Liabilities............................................ 21 (h) Compliance with Laws; Licenses........................................ 23 (i) Receivables........................................................... 24 (j) Material Contracts.................................................... 24 (k) Environmental Matters................................................. 25 (l) Taxes................................................................. 26 (m) Labor Matters......................................................... 27 (n) Intellectual Property................................................. 27 (o) Insurance............................................................. 28 (p) Lucent and Other Agreements........................................... 29 (q) Brokers and Finders................................................... 29 (r) Bank Act (Canada)..................................................... 29 (s) Employee Benefits..................................................... 29
i Page ---- ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................ 32 6.1 Representations and Warranties of Purchaser................................ 32 (a) Organization, Good Standing and Qualification......................................................... 32 (b) Capital Structure..................................................... 33 (c) Authority............................................................. 34 (d) Governmental Filings; Consents; No Violations............................................................ 35 (e) Purchaser Reports; Financial Statements............................... 36 (f) Absence of Certain Changes............................................ 37 (g) Liabilities........................................................... 38 (h) Compliance with Laws; Licenses........................................ 38 (i) Other Agreements...................................................... 39 (j) Brokers and Finders................................................... 40 (k) Available Funds....................................................... 40 (l) Validity of Shares.................................................... 41 (m) Investment Intent..................................................... 41 (n) Bank Act (Canada)..................................................... 41 (o) Limitation on Liability............................................... 41 ARTICLE VII COVENANTS.............................................. 42 7.1 Interim Operations of the Company.......................................... 42 7.2 Interim Operations of Purchaser............................................ 45 7.3 Access; Confidentiality.................................................... 47 7.4 Filings; Other Actions; Notification....................................... 48 7.5 Publicity.................................................................. 50 7.6 Indemnification; Directors' and Officers' Liability Insurance........................................................ 50 7.7 Reasonable Best Efforts and Cooperation.................................... 52 7.8 Further Assurances......................................................... 52 7.9 Expenses................................................................... 52 7.10 Taxes...................................................................... 52 7.11 Reporting Issuer Status and Listing........................................ 53 7.12 Execution of Indemnity Escrow Agreement.................................... 53 ARTICLE VIII CONDITIONS TO THE CLOSING.................................... 53 8.1 Conditions of Obligation of Each Party..................................... 53 (a) No Injunction......................................................... 53 (b) Regulatory Authorizations............................................. 53 8.2 Additional Conditions to the Obligations of Purchaser............................................................... 54 (a) Representations and Warranties........................................ 54 (b) Performance of Covenants.............................................. 54 (c) Certificate........................................................... 54 (d) Legal Opinion......................................................... 54 8.3 Additional Conditions to the Obligations of Seller.................................................................. 54 (a) Representations and Warranties........................................ 55 (b) Performance of Covenants.............................................. 55
- ii - Page ---- (c) Certificate........................................................... 55 (d) Listing............................................................... 55 (e) Human Resources Agreement............................................. 55 (f) Legal Opinion......................................................... 55 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER............................... 55 9.1 Termination................................................................ 55 9.2 Effect of Termination...................................................... 58 ARTICLE X GENERAL PROVISIONS......................................... 58 10.1 Survival and Indemnification.......................................... 58 (a) Survival.............................................................. 58 (b) Indemnification by Sellers............................................ 59 (c) Indemnification by Purchaser.......................................... 61 (d) Limitations on Indemnification........................................ 61 (e) Materiality Qualification............................................. 62 (f) Claims................................................................ 62 (g) Termination of Indemnification........................................ 63 (h) Exclusive Remedy...................................................... 64 (i) Insurance............................................................. 64 (j) Mitigation............................................................ 64 (k) Subrogation........................................................... 64 10.2 Notices................................................................... 65 10.3 Interpretation............................................................ 66 10.4 Amendment and Modification; Waiver........................................ 66 10.5 Entire Agreement.......................................................... 67 10.6 Third Party Beneficiaries................................................. 67 10.7 Assignment; Binding Effect................................................ 67 10.8 Governing Law............................................................. 67 10.9 Counterparts.............................................................. 69 10.10 Severability.............................................................. 69 Exhibit A: Stockholders of the Company Exhibit B: Form of Custody Agreement and Power of Attorney Exhibit C: Transfer Restriction Agreement Exhibit D: Shareholders' Agreement Exhibit E: Investment Agreement Exhibit F: Registration Rights Agreement Exhibit G: Human Resources Agreement Exhibit H: Underwriting Agreement Exhibit I-1: Form of Opinion of Counsel to the Company Exhibit I-2: Form of Opinion of Counsel to Hercules Exhibit I-3 Form of Opinion of Counsel to Nomura International plc Exhibit J: Form of Opinion of Purchaser Exhibit K: AF Claim Procedure Exhibit L: Form of Indemnity Escrow Agreement Exhibit M: Form of Exclusivity Letter Seller Disclosure Schedule Company Disclosure Schedule Purchaser Disclosure Schedule
- iii - STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of November 17, 1997 ("Agreement"), among HERCULES HOLDINGS (CAYMAN) LIMITED, a Cayman Islands company ("Hercules"), AT&T CAPITAL CORPORATION, a Delaware corporation (the "Company"), those stockholders of the Company listed on Exhibit A hereto (the "Selling Stockholders" and, together with Hercules, individually a "Seller" and collectively the "Sellers") and NEWCOURT CREDIT GROUP INC., an Ontario corporation ("Purchaser"). WITNESSETH WHEREAS, each Seller owns that number of shares ("Shares") of the common stock, par value US$.01 per share ("Common Stock"), of the Company set forth opposite the name of such Seller on Exhibit A hereto, which together constitute all of the issued and outstanding shares of Common Stock of the Company (the "Stock"); and WHEREAS, under the Custody Agreement and Power of Attorney (defined herein), Hercules may convey the Shares owned by the Selling Stockholders on their behalf; and WHEREAS, on the terms and subject to the conditions set forth herein, in consideration for a combination of cash and common shares of Purchaser (the "Purchaser Common Shares"), Hercules desires on its behalf and on behalf of the Selling Stockholders to sell and Purchaser desires to purchase the Stock; and WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition to Purchaser's willingness to enter into this Agreement, Hercules, the other Selling Stockholders and Purchaser have entered into a share restriction agreement (the "Transfer Restriction Agreement") and Hercules and certain stockholders of Purchaser have entered into a shareholders' voting agreement (the "Shareholders' Agreement"), and Hercules, Purchaser and certain stockholders of Purchaser have entered into an investment agreement (the "Investment Agreement", and together with the Shareholders' Agreement and the Transfer Restriction Agreement, the "Stockholders' Agreements") each dated as of the date hereof, copies of which are attached hereto as Exhibits C, D and E, respectively; and WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to the Sellers' willingness to enter into this Agreement, Sellers and Purchaser have entered into a registration rights agreement (the "Registration Rights Agreement") dated as of the date hereof, a copy of which is attached as Exhibit F hereto; and 2 WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to the Company's willingness to enter into this Agreement, the Company and Purchaser have entered into a human resources agreement (the "Human Resources Agreement") dated as of the date hereof, a copy of which is attached as Exhibit G hereto; and WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition to the Company's willingness to enter into this Agreement, Purchaser has entered into an underwriting agreement with CIBC Wood Gundy Securities Inc., Goldman Sachs Canada, Merrill Lynch Canada Inc., ScotiaMcLeod Inc., Nesbitt Burns Inc., RBC Dominion Securities Inc., Midland Walwyn Capital Inc. and TD Securities Inc. (the "Underwriters"), a copy of which is attached as Exhibit H hereto (the "Underwriting Agreement") and certain other agreements regarding a public offering of common shares of Purchaser; and NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS The following terms when used in this Agreement shall have the following meanings: "AF Claim Procedure" means the indemnity claim procedure set forth in Exhibit K attached hereto. "AF Representation" is defined in Section 10.1(a)(ii). "Affiliate" of a specified Person means a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Agreement" is defined in the introductory paragraph hereof. "1996 Annual Report" is defined in Section 5.1(g). "Article IV Surviving Representations" is defined in Section 10.1(a). "Auburn Facility" is defined in the AF Claim Procedure. "Audit Date" is defined in Section 5.1(e). 3 "Bankruptcy and Equity Exception" means that enforceability may be affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, and by general equitable principles. "Bought-Deal Financing" is defined in Section 6.1(k). "Business Day" means any day which is not a Saturday, Sunday or a day on which banks in New York City, Toronto or London are authorized or obligated by law or executive order to be closed. "CAL Claim" is defined in the CAL Claim Indemnification Agreement. "CAL Claim Indemnification Agreement" means the CAL Claim Indemnification Agreement dated as of November 17, 1997 between Hercules and Purchaser. "Canadian GAAP" means the accounting principles recommended in Canada, from time to time, in the Handbook of the Canadian Institute of Chartered Accountants. "Cash Consideration" means an amount of cash equal to the sum of (a) US$1,031,951,747, (b) the product of (i) the per share amount of any dividend declared on Purchaser Common Shares from and after the date of this Agreement through the Closing and (ii) the number of Purchaser Common Shares constituting the Common Share Consideration, and (c) the product of (i) US$1,031,951,747 plus the amount calculated under clause (b) hereof, (ii) the Equity Escrow Rate and (iii) a fraction the numerator of which is the number of days that have elapsed during the period from January 1, 1998 through the Closing Date and the denominator of which is 365; provided that the amount in clause (c) shall not accrue, and shall therefore not be added as part of the Cash Consideration, during any period of delay of the Closing beyond January 1, 1998 that results from a wilful breach of any covenant or agreement hereunder by Hercules. "Closing" is defined in Article III. "Closing Date" is defined in Article III. "Code" means the Internal Revenue Code of 1986, as amended. "Common Share Consideration" means 17,633,857 Purchaser Common Shares. 4 "Common Stock" is defined in the recitals to this Agreement. "Company" is defined in the introductory paragraph hereof. "Company Disclosure Schedule" means the disclosure schedule delivered by the Company to Purchaser at the time of execution hereof. "Company IP Rights" is defined in Section 5.1(n). "Company License and Computer Rights" is defined in Section 5.1(n). "Company Material Adverse Effect" means a material adverse effect on the financial condition or results of operations of the Company and its Subsidiaries taken as a whole; provided, however, that any such effect resulting from any change after the date hereof and prior to the Closing (i) in any law, rule or regulation or generally accepted accounting principles or interpretations thereof that applies generally to companies operating in the same industries as the Company or (ii) in general economic or business conditions in the industries in which the Company operates, shall not be considered when determining if a Company Material Adverse Effect has occurred. "Company Material Breaches" is defined in Section 5.1(d)(ii). "Company Material Subsidiary" means AT&T Commercial Finance Corporation, AT&T Capital Leasing Services, Inc., AT&T Credit Corporation, AT&T Systems Leasing Corporation, AT&T Capital Canada, Inc., NCR Credit Corp., AT&T Capital Limited and The Capita Corporation Hong Kong Limited. "Company Options" means any options or rights to acquire Shares. "Company Plans" is defined in Section 5.1(s)(i). "Company Properties" is defined in Section 5.1(k). "Company Reports" is defined in Section 5.1(e). "Company Subsidiary" means each Subsidiary of the Company as of the date of this Agreement. 5 "Confidentiality Agreement" means the Confidentiality Agreement, dated August 29, 1997, as amended to the date hereof, among Hercules, the Company and Purchaser relating to the confidentiality of certain information provided to Purchaser with respect to the Company. "Contract" means any written agreement, lease, contract, note, mortgage, indenture, arrangement or other obligation not otherwise terminable on 90 days' or less notice. "Costs" is defined in Section 7.6(a). "CSR" is defined in Section 6.1(e) "Current Premium" is defined in Section 7.6(b). "Custody Agreement and Power of Attorney" means each of the agreements dated as of November 12, 1997 between Hercules and each of the Selling Stockholders, substantially in the form attached hereto as Exhibit B. "D&O Insurance" is defined in Section 7.6(b). "Deductible" is defined in Section 10.1(d). "Dell Agreements" is defined in Section 6.1(i). "Derivatives" is defined in Section 5.1(g)(iii). "Disclosure Schedules" means the collective reference to the Company Disclosure Schedule, the Seller Disclosure Schedule and the Purchaser Disclosure Schedule. "Dollars", "US$" and "$" means the lawful currency of the United States of America. "Environmental Law" means (i) any federal, state, provincial, foreign or local law, statute, ordinance, rule, regulation, code, license, permit, order, judgment, decree, injunction or agreement with any Governmental Entity (A) relating to the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or (B) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as now in effect and (ii) the federal Comprehensive Environmental Response Compensation and 6 Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the federal Water Pollution Control Act of 1972, the federal Clean Air Act, the federal Clean Water Act, the federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste Disposal and the federal Toxic Substances Control Act and the federal Insecticide, Fungicide and Rodenticide Act, each as amended and as now in effect. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" is defined in Section 5.1(s)(iv). "Escrow Arrangement" is defined in Section 6.1(k). "Equity Escrow Rate" means the annualized rate of return (expressed as a percentage) earned on the proceeds from the Bought-Deal Financing that are placed in escrow pending the Closing during the period from January 1, 1998 through the second Business Day immediately preceding the Closing Date, as reported to the Purchaser and Hercules in writing by the escrow agent thereunder. "Escrow Shares" is defined in Section 2.3. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended. "Exchange Offer" means any offer to certain of the Selling Stockholders by Purchaser to exchange their Shares for a number of Purchaser Common Shares. "Exclusivity Letter" is defined in Section 9.1(d). "Financing Documents" is defined in Section 6.1(k). "Government Antitrust Entity" is defined in Section 7.4(b). "Governmental Entity" means any United States or foreign governmental or regulatory authority, court, agency, ministry, commission, crown corporation, body or other governmental entity. "Hazardous Substance" means any substance presently listed, defined, designated, judicially interpreted or classified as hazardous, toxic, radioactive or dangerous, under any Environmental Law, including any toxic waste, 7 hazardous substance, toxic substance, hazardous waste, petroleum radioactive material, friable asbestos and polychlorinated biphenyls. "Hercules" is defined in the introductory paragraph hereof. "Hercules Information" is defined in Section 6.1(o). "Hercules Surviving Representations" is defined in Section 10.1(a). "Holder" is defined in Section 10.1(b). "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Human Resources Agreement" is defined in the recitals to this Agreement. "Indemnified Parties" is defined in Section 7.6(a). "Indemnified Person" is defined in Section 10.1(c). "Indemnity Escrow Agent" means such Indemnity Escrow Agent as the Purchaser and Hercules shall reasonably agree upon prior to Closing, appointed pursuant to the Indemnity Escrow Agreement. "Indemnity Escrow Agreement" is defined in Section 2.3. "Indemnity Escrow" is defined in Section 2.3. "Installment Receipt and Pledge Agreement" means the installment receipt and pledge agreement among Purchaser, CIBC Wood Gundy Inc. and Canadian Imperial Bank of Commerce to be entered into in connection with the Bought-Deal Financing. "Instalment Receivables Loan Agreement" is defined in the Underwriting Agreement. "Investment Agreement" is defined in the recitals to this Agreement. "Knowledge", when used in this Agreement with respect to either the Company or Purchaser, shall mean the actual knowledge of one or more of the duly elected or appointed executive officers of the Company or Purchaser, 8 respectively, and does not include information of which they may be deemed to have constructive knowledge only. "Law" means any law, by-law, ordinance, protocol, code, guideline, policy, direction, regulation, judgment, order, writ, decree, arbitration award, license or permit of any Governmental Entity. "Leadership Forum" means the list of employees of the Company set forth in Section 5.1(f)(iii) of the Company Disclosure Schedule. "License" means any governmental or non-governmental permit, franchise, concession or license. "Lien" means any lien, pledge, security interest, claim or other encumbrance. "Losses and Expenses" is defined in Section 10.1(b). "Lucent Agreements" is defined in Section 5.1(p). "ME" means the Montreal Exchange. "NYSE" means the New York Stock Exchange. "Other Agreements" is defined in Section 5.1(p). "Pension Plan" is defined in Section 5.1(s)(iii). "Person" means an individual, sole proprietorship, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Entity or other entity of whatever nature and any person in such person's capacity as trustee, executor, administrator or other legal representative. "Plan of Merger" is defined in Section 5.1(l). "Pledge Agreement" means any of the Pledge Agreements entered into between the Selling Stockholders and the Company. "Preference Shares" is defined in Section 6.1(b). "Preferred Shares" is defined in Section 5.1(b). "Purchase Price" means the Cash Consideration plus the Common Share Consideration. 9 "Purchaser" is defined in the introductory paragraph hereof. "Purchaser Common Share Agreements" is defined in Section 6.1(i). "Purchaser Common Shares" is defined in the recitals to this Agreement. "Purchaser Confidentiality Agreement" means the Confidentiality Agreement, dated October 21, 1997, between Purchaser and each of Hercules and the Company relating to the confidentiality of certain information provided to Hercules or the Company with respect to Purchaser. "Purchaser Disclosure Schedule" means the disclosure schedule delivered by Purchaser to Sellers at the time of execution hereof. "Purchaser Indemnified Person" is defined in Section 10.1(b). "Purchaser Material Adverse Effect" means a material adverse effect on the financial condition or results of operations of Purchaser and its Subsidiaries taken as a whole; provided, however, that any such effect resulting from any change after the date hereof and prior to the Closing (i) in any law, rule or regulation or generally accepted accounting principles or interpretations thereof that applies generally to companies operating in the same industries as Purchaser or (ii) in general economic or business conditions in the industries in which Purchaser operates, shall not be considered when determining if a Purchaser Material Adverse Effect has occurred. "Purchaser Material Breaches" is defined in Section 6.1(d)(ii). "Purchaser Material Subsidiary" means those entities described as such in Section 6.1(a)(ii) of the Purchaser Disclosure Schedule. "Purchaser Options" means any options or rights to acquire Purchaser Common Shares. "Purchaser Reports" is defined in Section 6.1(e). "Purchaser Surviving Representations" is defined in Section 10.1(a). 10 "Receivables" of a Person means all loans, equipment leases, sale contracts, credit or financing agreements or arrangements, portfolio servicing agreements, account receivable invoices and other obligations or rights to payments owned by such Person or any of its Subsidiaries. "Registration Rights Agreement" is defined in the recitals to this Agreement. "SEC" means the Securities and Exchange Commission. "Securities Act" means the United States Securities Act of 1933, as amended. "Seller" and "Sellers" are defined in the introductory paragraph hereof. "Seller Disclosure Schedule" means the disclosure schedule delivered by Sellers to Purchaser at the time of execution hereof. "Seller Indemnified Person" is defined in Section 10.1(c). "Selling Stockholders" is defined in the introductory paragraph hereof. "Sellers' Surviving Representations" is defined in Section 10.1(a). "Shareholders' Agreement" is defined in the recitals to this Agreement. "Shares" is defined in the recitals to this Agreement. "Special Shares" means Purchaser's non-voting special shares, which are convertible into Purchaser Common Shares on a share-for-share basis. "Stock" is defined in the recitals to this Agreement. "Stockholders' Agreements" is defined in the recitals to this Agreement. "Subsidiary" means, with respect to a party, any entity, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned 11 or controlled by such party or by one or more of its respective Subsidiaries or by such party and any one or more of its respective Subsidiaries. "Tax" (including, with correlative meaning, the terms "Taxes", "Taxable" and "Taxing") includes all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severances, stamp, payroll, sales, employment, unemployment, disability, use, property, withholding, excise, production, value added, occupancy and other taxes, duties or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect to such amounts and any interest in respect of such penalties and additions. "Tax Return" includes all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. "TOPrS" means the 9.06% Trust Originated Preferred Securities publicly issued in October 1996 by Capita Preferred Trust. "Transfer Restriction Agreement" is defined in the recitals to this Agreement. "TSE" means The Toronto Stock Exchange. "Underwriters" is defined in the recitals to this Agreement. "Underwriting Agreement" is defined in the recitals to this Agreement. "U.S. GAAP" means generally accepted accounting principles in the United States. "Voting Debt" of any Person means any bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of such Person on any matter. "Voting Trust Agreement" means the Voting Trust Agreement dated as of October 1, 1996 among the Sellers and Thomas Wajnert, as trustee thereunder, as amended. 12 ARTICLE II PURCHASE AND DELIVERY OF STOCK 2.1 Delivery of Stock. (a) On the terms and subject to the conditions of this Agreement, Hercules shall, on behalf of itself and the other Sellers, at the Closing on the Closing Date, transfer, assign and deliver to Purchaser or its designee certificates evidencing the Stock. Such certificates evidencing the Stock shall be in form suitable for transfer and (i) duly endorsed in blank or (ii) be accompanied by stock transfer powers duly executed in blank, in either case with all necessary stock transfer tax stamps affixed and cancelled. (b) In the event that, subsequent to the date hereof and prior to Closing, Hercules or any of its Affiliates acquires Shares of any Selling Stockholder pursuant to the terms of the stock purchase agreement to which such Selling Stockholder is a party, then such Selling Stockholder shall be relieved of its obligations hereunder with respect to such Shares and Hercules shall have the right and shall be obligated to deliver such Shares to Purchaser on the terms and subject to the conditions hereof. No such transaction shall affect Purchaser's right to acquire all of the Stock or the Sellers' right to obtain the aggregate Cash Consideration and Common Share Consideration in respect thereof, subject in each case to the terms and conditions of this Agreement. In such event, Exhibit A hereto will be appropriately adjusted to reflect the transfer of Shares from such Selling Stockholder to Hercules. 2.2 Consideration for Stock. On the terms and subject to the conditions of this Agreement, Purchaser shall, at the Closing on the Closing Date, and against delivery of certificates evidencing the Stock and any related stock transfer forms as provided in Section 2.1: (a) deliver to Hercules, for the account of itself and the other Sellers, the Cash Consideration, by wire transfers of funds immediately available in New York City or London to such account or accounts as Hercules shall designate in writing to Purchaser not less than one Business Day prior to the Closing Date; and (b) deliver to Hercules or its designee, for the account of itself and the other Sellers, certificates in such number as Hercules shall designate in writing to the Purchaser not less than one Business Day prior to the Closing Date (duly endorsed in blank, or accompanied by stock transfer powers duly executed in blank, with all 13 necessary stock transfer tax stamps affixed and cancelled) evidencing the Common Share Consideration. 2.3 Indemnity Escrow. Immediately after the Closing, Hercules shall deposit or cause to be deposited with the Indemnity Escrow Agent the Common Share Consideration (the "Escrow Shares") to be used, to the extent necessary, to fund indemnity payments for which Holders may become liable under Section 10.1(b) (the "Indemnity Escrow"). All matters relating to the Indemnity Escrow, to the extent not referred to in this Agreement, shall be governed by the agreement among the Indemnity Escrow Agent, Purchaser and Hercules to be executed prior to Closing substantially in the form attached as Exhibit L hereto, with such changes as the Indemnity Escrow Agent may reasonably request (the "Indemnity Escrow Agreement"); provided that in the event of any conflict between the terms of this Agreement and the Indemnity Escrow Agreement, the terms of this Agreement shall be controlling. The Indemnity Escrow Agent shall hold and transfer the Escrow Shares in accordance with the Indemnity Escrow Agreement and the provisions of Section 10.1(b) hereof. The Indemnity Escrow shall not be used for any other purpose. ARTICLE III CLOSING DATE Unless this Agreement shall have been terminated and the transactions herein abandoned pursuant to Section 9.1, subject to the provisions of Article VIII, the closing (the "Closing") of the purchase and sale of the Stock provided for in Article II shall take place at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York at 10:00 a.m., New York City time, on the later of (i) the second Business Day following the satisfaction or waiver of the conditions set forth in Section 8.1(b) and (ii) January 30, 1998, or at such other place and time or on such other date as the parties may agree. The date on which the Closing occurs is herein called the "Closing Date". 14 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERS 4.1 Representations and Warranties of Sellers. Each Seller severally represents and warrants to Purchaser that, except as set forth on the specific section of the Seller Disclosure Schedule referenced to in any particular representation and warranty referenced below: (a) Organization, Good Standing and Qualification. In the case of Hercules only, Hercules is a corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands and Hercules has delivered to Purchaser complete and correct copies of its Memorandum and Articles of Association or other comparable documents. (b) Authority. Such Seller has all requisite power and authority and has taken all actions necessary in order to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. Each of this Agreement and any Custody Agreement and Power of Attorney, the Transfer Restriction Agreement and, in the case of Hercules only, the Indemnity Escrow Agreement to which such Seller is a party constitutes a valid and legally binding agreement of such Seller enforceable against such Seller in accordance with its terms, except as affected by the Bankruptcy and Equity Exception. (c) Non-Contravention. The execution and delivery of this Agreement by such Seller does not, and the consummation of the transactions contemplated hereby and the performance by such Seller of the obligations which such Seller is obligated to perform hereunder will not: (a) in the case of Hercules only, violate any provision of any organizational documents of such Seller; or (b) assuming that all consents, authorizations, orders or approvals of, filings or registrations with, and notices to, each Governmental Entity listed in Section 4.1(d)(i) of the Seller Disclosure Schedule and all consents listed in Section 4.1(d)(ii) of the Seller Disclosure Schedule have been obtained or made, (i) violate any Law, order, judgment or decree to which such Seller or its Shares are subject, or (ii) violate, result in the termination or the acceleration of, or conflict with or constitute a default under, any Contract to which such Seller is a party or by which any of its property is bound, except, in the case of clauses (i) and (ii), for such violations, terminations, accelerations, conflicts or defaults as would not prevent, materially delay or 15 materially impair such Seller's ability to consummate the transactions contemplated by this Agreement. (d) Consents, etc. (i) Except as described in Section 4.1(d)(i) of the Seller Disclosure Schedule, no consent, authorization, order or approval of, filing or registration with, or notice to, any Governmental Entity and (ii) except as described in Section 4.1(d)(ii) of the Seller Disclosure Schedule, no consent, authorization, approval, waiver, order, license, certificate or permit or act of or from, or notice to, any party to any Contract to which such Seller is a party or by which any of its property is bound is required for the execution and delivery of this Agreement by such Seller and the consummation by such Seller of the transactions contemplated hereby, except in each case for any such consent, authorization, approval, waiver, order, license, certificate or permit or act of or from, filing or registration with, or notice to, any Person the failure of which to be obtained or made would not prevent, materially delay or materially impair such Seller's ability to consummate the transactions contemplated by this Agreement. (e) Share Ownership. (i) Such Seller is the owner of, beneficially and of record, all right, title and interest in and to the number of Shares set forth opposite such Seller's name in Exhibit A hereto. As of the Closing, such Seller will have good and marketable title to all such Shares and the absolute right to sell, assign and transfer the same to Purchaser, free and clear of any Lien (other than, in the case of any Selling Stockholder, Liens, which shall not survive the Closing, imposed by the Custody Agreement and Power of Attorney, the Pledge Agreement and the Voting Trust Agreement to which such Selling Stockholder is a party, and Liens created or incurred by Purchaser or any of its Affiliates). Such Seller is not a party to any option, warrant, right, contract, call, put or other agreement providing for the disposition or acquisition of any of the capital stock of the Company, including such Shares (other than each subscription agreement, stock purchase agreement and sale participation agreement to which such Seller is a party (each of which will terminate and have no further force and effect as of the Closing), this Agreement and, in the case of any Selling Stockholder, the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party). (ii) In the case of each Selling Stockholder, Hercules has the power and authority under the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party to convey the Shares owned by such 16 Selling Stockholder to Purchaser without further consent by such Selling Stockholder. Under the terms of the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party, such Selling Stockholder has delivered to and deposited in custody with Hercules (acting as custodian and attorney-in-fact) certificates representing the Shares owned by such Selling Stockholder (duly endorsed in blank by the registered owner or owners thereof) and has irrevocably appointed said custodian and attorney-in-fact as such Selling Stockholder's agent and attorney-in-fact with full power and authority to act under such Custody Agreement and Power of Attorney on such Selling Stockholder's behalf with respect to the conveyance of such Shares. (f) Brokers and Finders. Such Seller has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated by this Agreement, except that Hercules has employed Morgan Stanley & Co. and Nomura International plc to act as Sellers' financial advisors. (g) Limitation on Liability. Each Seller understands and agrees that neither Purchaser nor any of its respective Affiliates are making any representation and warranty whatsoever, express or implied, other than those representations and warranties of Purchaser expressly set forth in Article VI. Each Seller understands and agrees that, following the Closing, it shall not be entitled to indemnification from Purchaser with respect to any claims arising out of any breach by Purchaser of this Agreement, including any breach of a representation and warranty, except as expressly provided in Section 10.1. (h) Bank Act (Canada). In the case of Hercules only, Hercules is not a "financial institution" as such term is defined in the Bank Act (Canada). ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY 5.1 Representations and Warranties of the Company. The Company hereby represents and warrants to Purchaser that, except as set forth on the specific section of the Company Disclosure Schedule referenced to in any particular representation and warranty referenced below: (a) Organization, Good Standing and Qualification. Each of the Company and the Company Material Subsidiaries is 17 a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its properties and assets and to carry on its business as presently conducted and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, when taken together with all other such failures, would not reasonably be expected to have a Company Material Adverse Effect. The Company has made available to Purchaser a complete and correct copy of the Company's and its Subsidiaries' certificates of incorporation and by-laws (or comparable documents), each as amended to date. The Company's and its Subsidiaries' certificates of incorporation, by-laws and other comparable documents so delivered are in full force and effect, and neither the Company nor any of its Subsidiaries is in default or violation of any provisions thereof except for such defaults or violations which, when taken together with all other such defaults or violations, would not reasonably be expected to have a Company Material Adverse Effect. Section 5.1(a) of the Company Disclosure Schedule contains a correct and complete list of each jurisdiction where the Company and each of its Subsidiaries is organized and qualified to do business. The only Subsidiaries of the Company are those set forth in the Company Disclosure Schedule. Except as set forth in Section 5.1(a) of the Company Disclosure Schedule, and except for securities acquired in the ordinary course of business, including in connection with the realization on collateral positions and the acquisition of securities as part of any financing transaction, neither the Company nor any of its Subsidiaries owns less than 100% of the outstanding voting securities or other equity interests of any corporation, joint venture or other entity (other than investments in marketable securities of any Person, none of which exceed 5% of the outstanding capital stock or other equity interests of such Person). (b) Capital Structure. The authorized capital stock of the Company consists of 150,000,000 Shares, of which 90,337,379 Shares were outstanding on November 17, 1997, and 10,000,000 shares of preferred stock, par value US$.01 per share (the "Preferred Shares"), of which none are currently outstanding. All of the outstanding Shares have been duly authorized and are validly issued, fully paid and nonassessable. The Company has no Shares or Preferred Shares reserved for issuance. As of November 17, 1997, 18 there were 4,333,055 Shares subject to outstanding Company Options. No Shares have been issued and no Company Options have been authorized, issued or granted on November 17, 1997. Section 5.1(b) of the Company Disclosure Schedule contains a correct and complete list of each outstanding Company Option, including the holder, date of grant, exercise price and number of Shares subject thereto. Each of the outstanding shares of capital stock or other equity securities of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable and, except for directors' qualifying shares, owned by the Company or a direct or indirect wholly owned subsidiary of the Company, free and clear of any Lien. Except as set forth above and in Section 5.1(b) of the Company Disclosure Schedule, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments to issue or sell any shares of capital stock or other equity securities of the Company or any of its Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity securities of the Company or any of its Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding. The Company does not have outstanding Voting Debt. (c) Authority. The Company has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. This Agreement constitutes a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, except as affected by the Bankruptcy and Equity Exception. (d) Governmental Filings; Consents; No Violations. (i) Other than the filings and/or notices (A) pursuant to Section 7.4, (B) under the HSR Act, the Competition Act (Canada), the Exon-Florio provisions of the United States Defense Production Act and the Exchange Act and (C) set forth in Section 5.1(d)(i) of the Company Disclosure Schedule, no notices, reports or other filings are required to be made by the Company or any of its Subsidiaries with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by the Company or any of its Subsidiaries from, any Governmental Entity, in connection with the execution and delivery of this Agreement by the Company and the consummation by the Company of the 19 transactions contemplated hereby, except those as to which the failure to make or obtain are not, individually or in the aggregate, reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of the Sellers to consummate the transactions contemplated by this Agreement. (ii) The execution, delivery and performance of this Agreement by the Company do not, and the consummation by the Company of the transactions contemplated hereby will not, constitute or result in (A) a breach or violation of, or a default under, the certificate of incorporation or by-laws of the Company or the comparable governing instruments of any of its Subsidiaries, (B) a breach or violation of, or a default under, the acceleration of any material obligations or the creation of a Lien on any material assets of the Company or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, or (except as set forth in Section 5.1(d)(ii) of the Company Disclosure Schedule) give rise to any right of termination under, any provision of any Contracts of the Company or any of its Subsidiaries or any Law or License to which the Company or any of its Subsidiaries is subject or (C) any change in the rights or obligations of any party under any of the Contracts, except, in the case of clause (B) or (C) above, for any breach, violation, default, acceleration, creation or change that, individually or in the aggregate, is not reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of Sellers to consummate the transactions contemplated by this Agreement (collectively, "Company Material Breaches"). Section 5.1(d)(ii) of the Company Disclosure Schedule sets forth a correct and complete list of each Contract and License of the Company and its Subsidiaries pursuant to which a consent or waiver is required prior to consummation of the transactions contemplated by this Agreement in order to avoid the occurrence of a Company Material Breach under such Contract or License. (iii) Neither the Company nor any of its Subsidiaries is in breach or default under any Contract other than such breaches or defaults that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. No event has occurred (except for the execution of this Agreement) which either entitles, or would upon notice or with the lapse of time or both, entitle the holder of any indebtedness of the Company or any of its Subsidiaries to accelerate, or which does accelerate, the maturity of any indebtedness which is 20 material to the Company and its Subsidiaries taken as a whole. (e) Company Reports; Financial Statements. The Company has delivered to Purchaser each registration statement, Exchange Act report, proxy statement or information statement prepared by the Company since December 31, 1996 (the "Audit Date"), including (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and (ii) the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 1997, June 30, 1997 and September 30, 1997, each in the form (including exhibits, annexes and any amendments thereto) filed with the SEC (collectively, including any such reports filed subsequent to the date hereof, the "Company Reports"). As of their respective dates, the Company Reports did not, and any Company Reports filed with the SEC subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. As of their respective dates, the Company Reports complied, and any Company Reports filed with the SEC subsequent to the date hereof will comply, as to form, in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be. Each of the consolidated balance sheets included in or incorporated by reference into the Company Reports (including the related notes and schedules) fairly presents the consolidated financial position of the Company and its Subsidiaries as of its date and each of the consolidated statements of income and of changes in financial position included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings and changes in financial position, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments that are not expected to be material in amount or effect), in each case in accordance with U.S. GAAP consistently applied during the periods involved (except as may be noted therein and except for the permitted omission of certain footnote disclosures in the unaudited financial statements). (f) Absence of Certain Changes. (i) Except as disclosed in the Company Reports or in Section 5.1(f)(i) of the Company Disclosure Schedule prior to the date hereof, from the Audit Date to the date hereof, the Company and its Subsidiaries have conducted their respective businesses only 21 in, and have not engaged in any transaction other than according to, the ordinary and usual course of such businesses and there is not and has not been (A) any change in the financial condition, properties, business or results of operations of the Company and its Subsidiaries; or (B) any damage, destruction or other casualty loss with respect to any material asset or property owned, leased or otherwise used by the Company or any of the Company Material Subsidiaries, whether or not covered by insurance, with such exceptions to this Section 5.1(f)(i) that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (ii) Except as disclosed in the Company Reports filed prior to the date hereof or in Section 5.1(f)(ii) of the Company Disclosure Schedule, since the Audit Date to the date hereof, there is not and has not been (A) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company (which for the avoidance of doubt shall not include any payments made to holders of the TOPrS); or (B) any change by the Company in accounting principles, practices or methods, except as required by Law or U.S. GAAP; or (C) any event or action which, if it had taken place or been taken following the execution of this Agreement would not have been permitted by Section 7.1(a) without the prior written consent of Purchaser. (iii) From the Audit Date to the date hereof, except as provided for herein or as disclosed in the Company Reports prior to the date hereof or as set forth in Section 5.1(f)(iii) of the Company Disclosure Schedule, there has not been any material increase in the compensation payable or that could become payable by the Company and its Subsidiaries to their executive officers or members of the Leadership Forum or any amendment of any Company Plan other than increases or amendments in the ordinary course and compensation arrangements for newly-hired executives. (g) Litigation and Liabilities. (i) Except as set forth in Section 5.1(g)(i) of the Company Disclosure Schedule or the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Annual Report"), there are no civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries or any other facts or circumstances which to the Knowledge of the Company are reasonably likely to result in any such suits, claims, hearings, investigations or proceedings other 22 than such suits, claims, hearings, investigations or proceedings that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. There are no judgments, decrees, injunctions, rules or orders of any Governmental Entity outstanding against the Company or any of its Subsidiaries other than such judgments, decrees, injunctions, rules or orders that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. (ii) There are no liabilities or obligations, whether accrued, absolute, fixed, contingent or otherwise, of the Company and its Subsidiaries as of the date hereof that would be required to be reflected on a balance sheet prepared in accordance with U.S. GAAP that are not so reflected on the consolidated balance sheet of the Company and its consolidated Subsidiaries as of September 30, 1997, except such liabilities or obligations that are described in Section 5.1(g)(ii) of the Company Disclosure Schedule or such liabilities or obligations which (when considered net of any associated financial benefit or asset of the Company or such Subsidiary created or arising in connection therewith) would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. For the avoidance of doubt, the representation and warranty in this Section 5.1(g)(ii) shall not be deemed to include any representation or warranty as to the amount or quality of any assets of the Company or any of its Subsidiaries (including any receivables or residuals) or the lack of any impairment thereof. (iii) Except as set forth in Section 5.1(g)(iii) of the Company Disclosure Schedule or in the 1996 Annual Report, neither the Company nor any of its Subsidiaries has any indebtedness, obligation or liability of any kind relating to forward commodity contracts, commodity futures and options, currency futures and options, stock index futures and options, or interest rate swaps, options, caps, collars or floors, or any hybrids of the foregoing derivative products (collectively "Derivatives"), in each case which is material to the Company and its Subsidiaries taken as a whole. Section 5.1(g)(iii) of the Company Disclosure Schedule sets forth as to each Derivative (A) the applicable notional amount, (B) the aggregate credit exposure of the Company or its Subsidiary, as the case may be, (C) the existence of any netting arrangements and (D) the counterparties. 23 (h) Compliance with Laws; Licenses. (i) Except as set forth in the Company Reports prior to the date hereof, the businesses of each of the Company and its Subsidiaries have not been, and are not being, conducted in violation of any applicable Laws, except for possible violations that are not, individually or in the aggregate, reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of Sellers to consummate the transactions contemplated by this Agreement. Except as set forth in the Company Reports prior to the date hereof or in Section 5.1(h) of the Company Disclosure Schedule, no investigation or review by any Governmental Entity with respect to the Company or any of its Subsidiaries is pending or, to the Knowledge of the Company, threatened, nor has any Governmental Entity indicated to the Company an intention to conduct the same, except for those the outcome of which are not, individually or in the aggregate, reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of Sellers to consummate the transactions contemplated by this Agreement. To the Knowledge of the Company, no material change is required in the Company's or any of the Company Material Subsidiaries' processes, properties or procedures in connection with any such Laws, and neither the Company nor any of the Company Material Subsidiaries has received any notice or communication of any material noncompliance with any such Laws that has not been cured in all material respects. (ii) The Company and its Subsidiaries hold all Licenses from, and have made all filings, applications and registrations with, each Governmental Entity and other Persons necessary for the operation of their respective businesses as presently conducted, except in each case for such Licenses, filings, applications and registrations, the failure of which to hold or make, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect; all such Licenses are in full force and effect, except for such Licenses, the failure of which to be in full force and effect, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect and no proceedings are pending or, to the Knowledge of the Company, threatened by any Governmental Entity or other Person for the suspension, revocation or termination of any such License, except for such suspensions, revocations or terminations that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in default in any respect under any such License, except for such defaults 24 that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect, and, except for statutory or regulatory restrictions of general application and except as set forth in Section 5.1(h)(ii) of the Company Disclosure Schedule, no Governmental Entity has placed any restriction on the business or properties of the Company or any of its Subsidiaries, except for such restrictions that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. (i) Receivables. All of the Receivables of the Company, together with any instruments securing the same, (i) were made for valuable consideration, (ii) to the Knowledge of the Company, constitute valid obligations in all respects of the Persons shown as indebted thereon by the records of the Company or its Subsidiaries and (iii) to the Knowledge of the Company are legally enforceable in all respects according to their terms (subject to the Bankruptcy and Equity Exception), except in the case of clauses (i), (ii) and (iii) for such Receivables, the failure of which to satisfy the requirements of such clauses, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. All of the Receivables, together with any instruments securing same, (A) set forth on Section 5.1(i) of the Company Disclosure Schedule are freely assignable by the Company or its Subsidiaries (as the case may be) and (B) other than those Receivables otherwise designated on Section 5.1(i) of the Company Disclosure Schedule, are not subject to any valid right of set-off or similar claim, except in the case of Receivables the failure of which to be freely assignable or not subject to any valid right of set-off or similar claim, individually or in the aggregate, could not reasonably be expected to have a Company Material Adverse Effect. The amounts shown on the records of the Company and its Subsidiaries to be owing and unpaid on the respective Receivables reflect, in all respects material to the Company, the true and correct outstanding balances owing and unpaid thereon as of the respective dates indicated therein. (j) Material Contracts. Except as set forth in the Company Reports prior to the date hereof or as disclosed in Section 5.1(j) of the Company Disclosure Schedule, none of the Company or its Subsidiaries has entered into or is otherwise bound by (i) any contract which contains restrictions with respect to payment of dividends or any other distributions in respect of its capital stock (except for those contracts which restrict the payment of dividends upon the occurrence of an event of default), (ii) any 25 material guarantee or other contingent liability in respect of any indebtedness or obligation of any Person (other than (A) the endorsement of negotiable instruments for collection in the ordinary course of business, (B) guarantees of letter of credit reimbursement obligations, purchase orders and similar obligations issued for the benefit of customers in the ordinary course of business and (C) guarantees of indebtedness of or performance by any wholly owned Subsidiary of the Company), (iii) any management service or consulting contract not terminable on less than 90 days' notice which is reasonably expected to involve the payment by the Company in any year of an amount in excess of US$500,000, (iv) any Contract which would limit or restrict in any manner the right or ability of the Company or any Subsidiary after the Closing Date to engage in any line of business, or to compete with any Persons, or (v) any Contract not entered into in the ordinary course of business which is reasonably expected to involve the payment by the Company of US$2,500,000 or more in any year and is not cancellable without penalty within 90 days. Each Contract set forth in the Company Disclosure Schedule in reference to this Section 5.1(j) is in full force and effect and there exist no defaults or events of default or event, occurrence, condition or act on the part of the Company or, to the Company's Knowledge, any other party to such Contracts (including the consummation of the transactions contemplated hereby) which, with the giving of notice or the lapse of time, would reasonably be expected to result in a Company Material Adverse Effect. (k) Environmental Matters. Except as disclosed in the Company Reports prior to the date hereof and except for such matters that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect, (i) to the Company's Knowledge, the Company and its Subsidiaries are in compliance with all applicable Environmental Laws; (ii) to the Company's Knowledge, all properties owned or operated by the Company or its Subsidiaries (the "Company Properties") are not contaminated with any Hazardous Substance in violation of any applicable Environmental Law and have not been operated as a sanitary landfill or hazardous waste disposal site; (iii) neither the Company nor any of its Subsidiaries has received any notices, demand letters or requests for information from any Governmental Entity or any third party indicating that the Company may be in violation of any Environmental Law and none of the Company, its Subsidiaries or any of the Company Properties are subject to any court order, administrative order or decree arising under any Environmental Law; and (iv) to the Company's Knowledge, no Hazardous Substance has 26 been disposed of, transferred, released or transported from any of the Company Properties during the time such Company Property was owned or operated by the Company or one of its Subsidiaries other than as permitted under applicable Environmental Law. (l) Taxes. Except to the extent that any breach, failure or inaccuracy, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect: (i) all Tax Returns that are required to be filed by or with respect to the Company and each of its Subsidiaries have been duly filed and all such Tax Returns are complete and accurate. (ii) all Taxes shown to be due on the material Tax Returns referred to in clause (i) have been paid in full; (iii) those Tax Returns referred to in clause (i) Section 5.1(l)(i) that are currently under examination by the Internal Revenue Service or the appropriate state, local or foreign Taxing authority are set forth in Section 5.1(l) of the Company Disclosure Schedule; (iv) all assessments made as a result of the examinations referred to in Section 5.1(l)(iii) have been paid in full; and (v) no waivers of statutes of limitation have been given by or requested with respect to any Tax Returns of the Company or any of its Subsidiaries other than those set forth in Section 5.1(l) of the Company Disclosure Schedule. Except as set forth in Section 5.1(l) of the Company Disclosure Schedule, all amounts payable by the Company or any of its Subsidiaries pursuant to Section 6.13(b) or 6.13(e) of the Agreement and Plan of Merger among AT&T Capital Corporation, AT&T Corp., Hercules and Antigua Acquisition Corporation, dated as of June 5, 1996, as amended to date (the "Plan of Merger"), have been paid, and neither the Company nor any of its Subsidiaries has any continuing liability with respect to any tax sharing agreements referred to in Section 6.13(e) of the Plan of Merger or otherwise. In addition, neither the Company nor any of its Subsidiaries has indemnified or otherwise become obligated to any Person with respect to any income tax liability. 27 (m) Labor Matters. Neither the Company nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization relating to employees of the Company, nor is the Company or any of its Subsidiaries the subject of any proceeding asserting that the Company or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization nor is there, nor has there been for the past five years, any labor strike, dispute, walkout, work stoppage, slow-down or lockout involving the Company or any of its Subsidiaries pending or, to the Knowledge of the Company, threatened, except in each case for those exceptions that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. There have been no material work stoppages or other such controversies during the past five years from the date hereof. The Company and its Subsidiaries are in compliance in all respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice, except in each case with those exceptions that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (n) Intellectual Property. (i) Section 5.1(n)(i) of the Company Disclosure Schedule lists, as of the date of this Agreement: (A) all material foreign and domestic patents and patent applications which are owned by the Company and its Subsidiaries; and (B) all material foreign and domestic copyright registrations, trademark registrations, trademark registration applications, service mark registrations, service mark registration applications and trade names which are owned by the Company and its Subsidiaries (collectively the "Company IP Rights"). Section 5.1(n)(i) of the Company Disclosure Schedule also lists: (1) all material license agreements of foreign or domestic patent, trademark or service mark rights entered into by or primarily for use by the Company and its Subsidiaries; and (2) all material computer programs, databases and other computer software utilized by the databases and other computer software used by the Company and its Subsidiaries as of the Closing Date (collectively the "Company License and Computer Rights"). (ii) Except as disclosed in the Company Reports filed with the SEC prior to the date hereof, the Company owns, or is licensed to use, all of the Company IP Rights 28 and the Company License and Computer Rights, with such exceptions and would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (iii) Unless otherwise indicated in Section 5.1(n)(iii) of the Company Disclosure Schedule: (A) there are no existing or, to the Knowledge of the Company, threatened claims by any third party based on the use by, or challenging the ownership of, the Company IP Rights or the Company License and Computer Rights; (B) to the Knowledge of the Company, (1) none of the products, apparatus, methods or services which the Company or any of its Subsidiaries makes, offers, sells or provides infringes upon the intellectual property of others and (2) none of the intellectual property of the Company or its Subsidiaries is being infringed by others; (C) each item of Company IP Rights and Company License and Computer Rights has been duly registered with, filed in or issued by the appropriate domestic or foreign governmental agency, to the extent required to protect such property, and each such registration, filing and issuance remains in full force and effect; (D) none of the Company or its Subsidiaries has received any oral or written claim or demand from any person pertaining to or challenging the right of the Company or its Subsidiaries to use any Company IP Rights or Company License and Computer Rights, and no proceedings have been instituted, are pending or, to the Knowledge of the Company, threatened which challenge such rights; and (E) no litigation or claim is pending or, to the Knowledge of the Company, threatened wherein the Company or any of its Subsidiaries is accused of infringing or otherwise violating the intellectual property right of another, or of breaching a contract conveying rights regarding intellectual property, except in the case of each of clauses (A), (B), (C), (D) and (E) for such exceptions that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Within the six-year period immediately prior to the date of this Agreement, to the Knowledge of the Company, neither the Company nor its Subsidiaries made use of any intellectual property material to the operation of their respective businesses at the Closing Date other than rights under the Company IP Rights and the Company License and Computer Rights, except as set forth in Section 5.1(n)(iii) of the Company Disclosure Schedule and except such uses as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. (o) Insurance. True and complete copies of all material insurance policies maintained by the Company and 29 its Subsidiaries (or, to the extent not yet finalized and available, the commitments with respect thereto), together with written descriptions of all formal self-insurance policies and programs maintained for the benefit of the Company or any of its Subsidiaries by the Company or any of its Affiliates, have been made available to Purchaser. Such material policies provide coverage for the operations of the Company and its Subsidiaries in amounts and covering such risks as the Company believes is necessary to conduct its business. Neither the Company nor any of its Subsidiaries has received formal notice that any such policy is invalid or unenforceable. (p) Lucent and Other Agreements. Section 5.1(p) of the Company Disclosure Schedule sets forth a list of each operating agreement, license agreement, intercompany agreement and other agreement which involves annual payments in excess of $1,000,000 between the Company, on the one hand, and each of Lucent Technologies Inc., AT&T Corp. or NCR Corporation, on the other hand (all such agreements with Lucent Technologies Inc. being referred to herein as the "Lucent Agreements" and all such agreements with either AT&T Corp. or NCR Corporation being referred to herein as the "Other Agreements"). Each Lucent Agreement is in full force and effect and is a valid and binding agreement of the parties thereto enforceable against each such party in accordance with its terms, except as affected by the Bankruptcy and Equity Exception. The Company has not received any notice that it is in default under any of the Other Agreements. (q) Brokers and Finders. Neither the Company nor any of its Subsidiaries nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated by this Agreement, subject, however, to the understanding set forth in Section 7.9 hereof. (r) Bank Act (Canada). The Company is in compliance in all material respects with the Bank Act (Canada). (s) Employee Benefits. Except to the extent that any breach, failure or inaccuracy, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect: (i) Section 5.1(s) of the Company Disclosure Schedule contains a true and complete list of each "employee benefit plan" (within the meaning of 30 section 3(3) of ERISA, including, without limitation, multiemployer plans (within the meaning of ERISA section 3(37)), stock purchase, stock option, severance, employment, change-in- control, fringe benefit, collective bargaining, bonus, incentive, deferred compensation and all other written employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA (including any funding mechanism therefor now in effect or required in the future as a result of the transactions contemplated by this Agreement or otherwise), under which the Company or any of its Subsidiaries has any present or future liability other than solely as a result of its status as an ERISA Affiliate of a plan sponsor or any contributing employer (provided, that, with respect to plans, agreements, programs, policies and arrangements maintained outside the United States, Section 5.1(s) of the Company Disclosure Schedule contains a true and complete list of each written plan, agreement, program, policy and arrangement). All such plans, agreements, programs, policies and arrangements are collectively referred to herein as "Company Plans". (ii) To the extent requested by Purchaser, with respect to each Company Plan for U.S. based employees, the Company has delivered or made available to Purchaser a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable: (A) any related trust agreement or other funding instrument; (B) the most recent determination letter, if applicable; (C) any summary plan description; and (D) for the three most recent years (I) the Form 5500 and attached schedules and (II) audited financial statements. (iii) All Company Plans are in substantial compliance with all applicable laws, including the Code and ERISA. The Company has received a favorable determination letter from the Internal Revenue Service with respect to the qualified status of each Company Plan that is an "employee pension benefit plan" within the meaning of section 3(2) of ERISA (a "Pension Plan") and that is intended to be qualified under section 401(a) of the Code and the plan is so qualified and, 31 nothing has occurred, whether by action or failure to act, that would be reasonably expected to cause the loss of such qualification. Except as disclosed in Section 5.1(g)(i) of the Company Disclosure Schedule, there is no pending or threatened action, suit or claim relating to the Company Plans and, to the knowledge of the Company, no facts exist which could give rise to any such action, suit or claim. Neither the Company nor any Subsidiary has engaged in any transactions with respect to any Company Plan that could reasonably be expected to subject the Company or any of its Subsidiaries to a tax or penalty imposed by section 4975 of the Code. (iv) As of the date hereof, no liability under Title IV of ERISA has been or is expected to be incurred by the Company or any Subsidiary with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single- employer plan of any entity which is considered one employer with the Company under section 4001 of ERISA or section 414 of the Code (an "ERISA Affiliate") other than the payment of premiums of the Pension Benefit Guaranty Corporation. None of the Company, its Subsidiaries or any ERISA Affiliate have contributed, or been obligated to contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA at any time during the six-year period prior to the date hereof. (v) (A) No event has occurred and no condition exists that would be reasonably likely to subject the Company or its Subsidiaries to any tax, fine, lien or penalty imposed by ERISA, the Code or other applicable laws, rules and regulations with respect to a Company Plan; and (B) for each Company Plan with resect to which a Form 5500 has been field, no material change has occurred with respect to the matters covered by the most recent Form 5500 since the date thereof. (vi) All contributions required to be made by the Company or any of its Subsidiaries under the terms of any Company Plan have been timely made or have been reflected on the most recent consolidated balance sheet filed or incorporated by reference in the Company Reports prior to the 32 date hereof. Neither any Company Plan nor any single-employer plan of an ERISA Affiliate has had an "accumulated funding deficiency" (whether or not waived) within the meaning of section 412 of the Code or section 302 of ERISA. Neither the Company nor its Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to section 401(a)(29) of the Code. (vii) With respect to each single-employer plan of an ERISA Affiliate, as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities" within the meaning of section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in such actuarial valuation) did not exceed the then current value of the assets of any such single- employer plan. Neither the Company nor its Subsidiaries maintain or contribute to a Company Plan subject to Title IV of ERISA. Notwithstanding anything in this Agreement to the contrary, the Company shall be deemed to have made no representation or warranty whatsoever and the Sellers shall be deemed to have granted no indemnity with respect to any matter arising from, relating to or otherwise in respect of, the levels of compensation (including bonuses and or severance arrangements) or the numbers or ownership of outstanding stock options or phantom equity interests or stock appreciation rights owned by employees of the Company or its Subsidiaries. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER 6.1 Representations and Warranties of Purchaser. Purchaser represents and warrants to Sellers that, except as set forth on the specific section of the Purchaser Disclosure Schedule referenced to in any particular representation and warranty referenced below: (a) Organization, Good Standing and Qualification. (i) Each of Purchaser and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its properties and assets and to carry on 33 its business as presently conducted and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, when taken together with all other such failures, would not reasonably be expected to have a Purchaser Material Adverse Effect. (ii) Section 6.1(a)(ii) of the Purchaser Disclosure Schedule contains a complete list of each Subsidiary of Purchaser and each Purchaser Material Subsidiary. Purchaser has made available to Hercules a complete and correct copy of the certificates of incorporation and by-laws (or comparable documents), each as amended to date, of the Purchaser and each of the Purchaser Material Subsidiaries (other than those of Newcourt DFS Inc.). Purchaser's and the Purchaser Material Subsidiaries' certificates of incorporation and by-laws (or comparable documents) so made available are in full force and effect, and neither Purchaser nor any of its Subsidiaries is in default or violation of any provisions of its respective certificate of incorporation or by-laws except for such defaults or violations which, when taken together with all other such defaults or violations, would not reasonably be expected to have a Purchaser Material Adverse Effect. Section 6.1(a)(ii) of the Purchaser Disclosure Schedule contains a correct and complete list of each jurisdiction where Purchaser and each of the Purchaser Material Subsidiaries is organized and qualified to do business. Except as set forth in Section 6.1(a)(ii) of the Purchaser Disclosure Schedule, and except for securities acquired in the ordinary course of business, including in connection with the realization on collateral positions and the acquisition of securities as part of any financing transaction, neither Purchaser nor any of its Subsidiaries owns less than 100% of the outstanding voting securities or other equity interests of any corporation, joint venture or other entity that would qualify as a Purchaser Material Subsidiary (other than investments in marketable securities of any Person, none of which exceed 5% of the outstanding capital stock or other equity interests of such Person). (b) Capital Structure. The authorized capital stock of Purchaser consists of an unlimited number of Purchaser Common Shares, of which 82,675,910 shares were outstanding on November 17, 1997; an unlimited number of Special Shares, of which no shares were outstanding on November 17, 1997; and an unlimited number of Class A preference shares issuable in series ("Preference Shares"), of which no shares 34 were outstanding on November 17, 1997. All of the outstanding shares of capital stock have been duly authorized and are validly issued, fully paid and nonassessable. As of the date hereof, there are 4,228,490 outstanding Purchaser Options. On the date of this Agreement, no Purchaser Common Shares, Special Shares or Preference Shares have been issued except Purchaser Common Shares issued upon the exercise of Purchaser Options. As of the date hereof, there are 3,845,010 Purchaser Options that are "in-the-money" (by an aggregate amount of Canadian $112.6 million), assuming that Purchaser Common Shares have a market value of Canadian $50 per share. Each of the outstanding shares of capital stock or other equity securities of each Purchaser Material Subsidiary is duly authorized, validly issued, fully paid and nonassessable and, except for directors' qualifying shares, owned by Purchaser or a direct or indirect wholly owned Subsidiary of Purchaser, free and clear of any Lien. Except as set forth in Section 6.1(b) of the Purchaser's Disclosure Schedule, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments to issue or sell any shares of capital stock or other equity securities of Purchaser or any Purchaser Material Subsidiary or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any equity securities of Purchaser or any Purchaser Material Subsidiary, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Purchaser does not have outstanding Voting Debt. (c) Authority. No vote, or other approval or consent or other evidence of approval of holders of capital stock of Purchaser is necessary (as a matter of law, as required by the TSE, ME or NYSE or otherwise) to approve this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement, the Financing Documents or any of the transactions contemplated hereby and thereby (including the Bought-Deal Financing). Purchaser has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents and to consummate the transactions contemplated hereby and thereby. Each of this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the 35 Financing Documents constitutes a valid and legally binding agreement of Purchaser enforceable against Purchaser in accordance with its terms, except as affected by the Bankruptcy and Equity Exception. (d) Governmental Filings; Consents; No Violations. (i) Other than the filings and/or notices (A) pursuant to Section 7.4, (B) under the HSR Act, the Exon-Florio provisions of the United States Defense Production Act, the Competition Act (Canada), the Exchange Act and the applicable rules of the NYSE, TSE and ME and (C) set forth in Section 6.1(d)(i) of the Purchaser Disclosure Schedule, no notices, reports or other filings are required to be made by Purchaser or any of its Subsidiaries with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Purchaser or any of its Subsidiaries from, any Governmental Entity, in connection with the execution and delivery of this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and thereby, except those as to which the failure to make or obtain are not, individually or in the aggregate, reasonably likely to have a Purchaser Material Adverse Effect or prevent, materially delay or materially impair the ability of Purchaser to consummate the transactions contemplated by this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents. (ii) The execution, delivery and performance of this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents by Purchaser do not, and the consummation by Purchaser of the transactions contemplated hereby and thereby will not, constitute or result in (A) a breach or violation of, or a default under, the certificate of incorporation or by-laws of Purchaser or the comparable governing instruments of any of its Subsidiaries, (B) a breach or violation of, or a default under, the acceleration of any material obligations or the creation of a Lien on any material assets of Purchaser or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, any provision of any Contracts of Purchaser or any of its Subsidiaries or any Law or License to which Purchaser or any of its Subsidiaries is subject or (C) any change in the rights or obligations of any party under any of the Contracts (including, without limitation, the Dell Agreements), except, in the case of clause (B) or (C) above, 36 for any breach, violation, default, acceleration, creation or change that, individually or in the aggregate, is not reasonably likely to have a Purchaser Material Adverse Effect or prevent, materially delay or materially impair the ability of Purchaser to consummate the transactions contemplated by this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents (collectively, "Purchaser Material Breaches"). Section 6.1(d)(ii) of the Purchaser Disclosure Schedule sets forth a correct and complete list of each Contract and License of Purchaser and its Subsidiaries pursuant to which a consent or waiver is required prior to consummation of the transactions contemplated by this Agreement, the Investment Agreement, the Transfer Restriction Agreement, the Registration Rights Agreement and the Financing Documents in order to avoid the occurrence of a Purchaser Material Breach under such Contract or License. (iii) Neither Purchaser nor any of its Subsidiaries is in breach or default under any Contract other than such breaches or defaults that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect. No event has occurred (except for the execution of this Agreement) which either entitles, or would upon notice or with the lapse of time or both, entitle the holder of any indebtedness of Purchaser or any of its Subsidiaries to accelerate, or which does accelerate, the maturity of any indebtedness which is material to Purchaser and its Subsidiaries taken as a whole. (e) Purchaser Reports; Financial Statements. Purchaser has made available to Hercules each registration statement, prospectus, report, proxy statement, information circular or material change report prepared by Purchaser since the Audit Date, including (i) Purchaser's Annual Report for the year ended December 31, 1996, (ii) Purchaser's Annual Information Form for the year ended December 31, 1996, (iii) any offering memorandum, prospectus, registration statement, proxy statement, information circular or material change report prepared by Purchaser or its representatives since the Audit Date, including any prepared in connection with the financing of the transaction contemplated by this Agreement and (iii) Purchaser's quarterly reports for the periods ended March 31, 1997 and June 30, 1997, each in the form (including exhibits, annexes and any amendments thereto) filed with the securities regulatory authorities in each of the Provinces of Canada ("CSR"), SEC, NYSE, ME and/or TSE (collectively, including any such reports filed subsequent to the date 37 hereof, the "Purchaser Reports"). As of their respective dates, the Purchaser Reports did not, and any Purchaser Reports filed with the CSR, SEC, NYSE, ME and/or TSE subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. As of their respective dates, the Purchaser Reports complied, and any Purchaser Reports filed with the CSR, SEC, NYSE, ME and/or TSE subsequent to the date hereof will comply, as to form, in all material respects with the requirements of all rules and regulations of any Governmental Entity applicable thereto, as well as those of the NYSE, ME and TSE. Each of the consolidated balance sheets included in or incorporated by reference into the Purchaser Reports (including the related notes and schedules) fairly presents the consolidated financial position of Purchaser and its Subsidiaries as of its date and each of the consolidated statements of income and retained earnings and consolidated statements of cash flows included in or incorporated by reference into the Purchaser Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings and cash flows, as the case may be, of Purchaser and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments that are not expected to be material in amount or effect), in each case in accordance with Canadian GAAP consistently applied during the periods involved. (f) Absence of Certain Changes. (i) Except as disclosed in the Purchaser Reports prior to the date hereof or in Section 6.1(f) of the Purchaser Disclosure Schedule, from the Audit Date to the date hereof, Purchaser and its Subsidiaries have conducted their respective businesses only in, and have not engaged in any transaction other than according to, the ordinary and usual course of such businesses and there is not and has not been (A) any change in the financial condition, properties, business or results of operations of Purchaser and its Subsidiaries; or (B) any damage, destruction or other casualty loss with respect to any material asset or property owned, leased or otherwise used by Purchaser or any of the Purchaser Material Subsidiaries, whether or not covered by insurance, with such exceptions to this Section 6.1(f)(i) that would not, individually or in the aggregate, reasonably be expected to have a Purchaser Material Adverse Effect. 38 (ii) Except as disclosed in the Purchaser Reports prior to the date hereof or in Section 6.1(f) of the Purchaser Disclosure Schedule, since the Audit Date to the date hereof, there is not and has not been (A) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of Purchaser; or (B) any change by Purchaser in accounting principles, practices or methods, except as required by Law or Canadian GAAP; or (C) any event or action which, if it had taken place or been taken following the execution of this Agreement would not have been permitted by Section 7.2 without the prior written consent of Hercules. (g) Liabilities. There are no liabilities or obligations, whether accrued, absolute, fixed, contingent or otherwise, of Purchaser and its Subsidiaries as of the date hereof that would be required to be reflected on a balance sheet prepared in accordance with Canadian GAAP that are not so reflected on the consolidated balance sheet of Purchaser and its consolidated Subsidiaries as of September 30, 1997, except such liabilities or obligations that are described in Section 6.1(g) of the Purchaser Disclosure Schedule or such liabilities or obligations which (when considered net of any associated financial benefit or asset of Purchaser or such Subsidiary created or arising in connection therewith) would not, individually or in the aggregate, reasonably be expected to have a Purchaser Material Adverse Effect. For the avoidance of doubt, the representation and warranty in this Section 6.1(g) shall not be deemed to include any representation or warranty as to the amount or quality of any assets of Purchaser or any of its Subsidiaries (including any receivables or residuals) or the lack of any impairment thereof. (h) Compliance with Laws; Licenses. (i) Except as set forth in the Purchaser Reports prior to the date hereof, the businesses of each of Purchaser and its Subsidiaries have not been, and are not being, conducted in violation of any applicable Laws, except for possible violations that are not, individually or in the aggregate, reasonably likely to have a Purchaser Material Adverse Effect or prevent, materially delay or materially impair the ability of Purchaser to consummate the transactions contemplated by this Agreement, the Stockholders' Agreements or the Registration Rights Agreement. Except as set forth in the Purchaser Reports prior to the date hereof, no investigation or review (other than reviews taking place in the ordinary course of business) by any Governmental Entity with respect to Purchaser or any of its Subsidiaries is pending or, to the Knowledge of Purchaser, threatened, nor has any 39 Governmental Entity indicated to Purchaser an intention to conduct the same, except for those the outcome of which are not, individually or in the aggregate, reasonably likely to have a Purchaser Material Adverse Effect or prevent, materially delay or materially impair the ability of Purchaser to consummate the transactions contemplated by this Agreement, the Stockholders' Agreements or the Registration Rights Agreement. To the Knowledge of Purchaser, no material change is required in Purchaser's or any of its Subsidiaries' processes, properties or procedures in connection with any such Laws, and neither Purchaser nor any of its Subsidiaries has received any notice or communication of any material noncompliance with any such Laws that has not been cured in all material respects. (ii) Purchaser and its Subsidiaries hold all Licenses from, and have made all filings, applications and registrations with, each Governmental Entity and other Persons necessary for the operation of their respective businesses as presently conducted, except in each case for such Licenses, filings, applications and registrations, the failure of which to hold or make, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect; all such Licenses are in full force and effect, except for such Licenses, the failure of which to be in full force and effect, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect and no proceedings are pending or, to the Knowledge of Purchaser, threatened by any Governmental Entity or other Person for the suspension, revocation or termination of any such License, except for such suspensions, revocations or terminations that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect. Except as set forth in Section 6.1(h)(ii) of the Purchaser Disclosure Schedule, neither Purchaser nor any of its Subsidiaries is in default in any respect under any such License, except for such defaults that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect, and, except for statutory or regulatory restrictions of general application, no Governmental Entity has placed any restriction on the business or properties of Purchaser or any of its Subsidiaries, except for such restrictions that, individually or in the aggregate, would not reasonably be expected to have a Purchaser Material Adverse Effect. (i) Other Agreements. (i) Section 6.1(i)(i) of the Purchaser Disclosure Schedule sets forth a list of each material contract between Purchaser or any of its 40 Subsidiaries, on the one hand, and Dell Computer Corporation or any of its respective Subsidiaries, on the other hand (the "Dell Agreements"). Each Dell Agreement is in full force and effect and is a valid and binding agreement of the parties thereto enforceable against each such party in accordance with its terms, except as affected by the Bankruptcy and Equity Exception. Purchaser has not received any notice that it is in default under any of the Dell Agreements. Purchaser represents and warrants that neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall cause a termination of any of the Dell Agreements. (ii) Purchaser has provided Hercules with copies of each shareholders' agreement, transfer restriction agreement, registration rights agreement, voting agreement or other similar agreement concerning the Purchaser Common Shares to which Purchaser is a party or of which Purchaser has Knowledge (together with the Stockholders' Agreements, the "Purchaser Common Share Agreements"), each as in effect on the date hereof. All such agreements are set forth in Section 6.1(i)(ii) of the Purchaser Disclosure Schedule. (j) Brokers and Finders. Purchaser has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated by this Agreement, the Stockholders Agreement or the Registration Rights Agreement, except that Purchaser has employed CIBC Wood Gundy Securities Inc., Goldman, Sachs & Co. and Merrill Lynch to act as its financial advisors, the arrangements with which have been disclosed to Sellers prior to the date hereof and the fees of which will be borne entirely by Purchaser. (k) Available Funds. Attached hereto as Exhibit H is a fully executed copy of the Underwriting Agreement and commitment letter for a "bought deal" regarding a public offering of Purchaser Common Shares and the commitment letter to enter into the Installment Receipt and Pledge Agreement (which together with the other documents entered into or to be entered into in connection with the Bought-Deal Financing are referred to as the "Financing Documents") which, if completed in accordance with its terms, will yield net proceeds of not less than US$1,100,000,000 (the "Bought-Deal Financing") available, subject to escrow arrangements with respect to the public offering of subscription receipts for Purchaser Common Shares in the Installment Receipt and Pledge Agreement (the "Escrow Arrangement"), within three weeks following the date hereof. After due inquiry, Purchaser has no reason to believe that any of the 41 conditions that it is required to satisfy under the Underwriting Agreement or any other Financing Document will not be satisfied on a timely basis. (l) Validity of Shares. The issuance of the Purchaser Common Shares comprising part of the Purchase Price has been duly authorized by all necessary corporate action on the part of Purchaser and, when such Purchaser Common Shares are issued and delivered in accordance with the terms of this Agreement, such Purchaser Common Shares will be validly issued, fully paid and nonassessable and shall be free and clear of any Liens (other than pursuant to the Transfer Restriction Agreement and the Indemnity Escrow Agreement or to the extent created by any Holder). The Purchaser is a reporting issuer under the Securities Act (Ontario) and the Securities Act (Quebec) and is not in default in any material respect of any requirement of either such Act or the regulations thereunder; the Purchaser Common Shares are registered under the Exchange Act, and the Purchaser has made all filings and reports required by the Exchange Act, the Securities Act and the rules and regulations of the SEC thereunder; and the Purchaser is in compliance in all material respects with all of the rules and regulations of the NYSE. All of the issued and outstanding Purchaser Common Shares are, and the Purchaser Common Shares to be issued under Section 2.2(b) will at the time of such issuance be, listed and posted for trading on each of the NYSE, TSE and ME. There is no undertaking required or other condition imposed by any of the NYSE, TSE or ME in connection with the transactions contemplated herein which would have the effect of restricting the transferability of the Purchaser Common Shares. (m) Investment Intent. Purchaser is acquiring the Stock for its own account, for investment and not with a view to, or for resale in connection with, the distribution thereof. (n) Bank Act (Canada). Purchaser is not a "financial institution" as such term is defined in the Bank Act (Canada). (o) Limitation on Liability. Purchaser understands and agrees that none of the Sellers, the Company nor any of their respective Affiliates are making any representation and warranty whatsoever, express or implied, other than those representations and warranties of Sellers and the Company expressly set forth in Articles IV and V, respectively. Purchaser understands and agrees that, following the Closing, it shall not be entitled to 42 indemnification from Sellers with respect to any claims arising out of any breach by Sellers or the Company of this Agreement, including any breach of a representation and warranty, except as expressly provided in Section 10.1. Purchaser acknowledges that neither Hercules nor the Company nor any of their respective Affiliates, directors, officers, employees, counsel, accountants or other representatives shall have any liability to Purchaser or any of the underwriters in the Bought-Deal Financing whatsoever in connection with any offering memorandum, prospectus, registration statement or proxy statement prepared by Purchaser or its representatives in connection with the Purchaser's financing of the transactions contemplated by this Agreement, except with respect to the written information about Hercules furnished by Hercules specifically for inclusion in such documents which is set forth in Section 6.1(o) of the Seller Disclosure Schedule (the "Hercules Information"). ARTICLE VII COVENANTS 7.1 Interim Operations of the Company. (a) Hercules and the Company agree that, after the date hereof and prior to the Closing (unless Purchaser shall otherwise approve in writing, which approval shall not be unreasonably withheld or delayed, and except as otherwise expressly contemplated by this Agreement or Section 7.1(a) of the Company Disclosure Schedule and Section 7.1(a) of the Seller Disclosure Schedule): (i) the business of the Company and its Subsidiaries shall, subject to the further provisions of this Section 7.1(a), be conducted in the ordinary and usual course and, to the extent consistent therewith, the Company and its Subsidiaries shall use reasonable efforts to preserve its business organization intact and maintain its existing relations and goodwill with customers, suppliers, distributors, creditors, lessors and business associates; (ii) the Company shall not (A) sell or pledge any capital stock owned by it in any of its Subsidiaries (other than pursuant to a merger of two or more wholly owned Subsidiaries); (B) amend its or its Subsidiaries' charter or by-laws (or comparable documents); (C) split, combine or reclassify, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for, its outstanding shares of 43 capital stock; (D) declare, set aside or pay any dividend or other distribution payable in cash, stock or property in respect of any capital stock; or (E) repurchase, redeem or otherwise acquire, or permit any of its Subsidiaries to purchase, redeem or otherwise acquire, any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock; (iii) neither the Company nor any of its Subsidiaries shall: (A) issue, sell, pledge, dispose of or encumber, or authorize or propose the issuance, sale, pledge, disposition or encumbrance of, any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class (other than Shares issuable pursuant to Company Options outstanding on the date hereof); or (B) other than (1) pursuant to a merger of two or more wholly owned Subsidiaries, (2) in connection with securitization transactions undertaken in the ordinary and usual course of business, (3) in the ordinary and usual course of business and in an amount not in excess of US$20,000,000 in any transaction or series of new related transactions or (4) in connection with lease renewals or sales of leased property to the lessee thereof, transfer, lease, license, guarantee, sell, mortgage, pledge or dispose of any other property or assets (including capital stock of any of its Subsidiaries) or encumber any property or assets (including capital stock of any of its Subsidiaries); or (C) other than in the ordinary and usual course of business, incur or modify any material indebtedness or other liability; or (D) purchase or acquire assets or other property (other than for the purpose of financing the purchase or lease thereof by a third party) (x) which purchase or acquisition is not in the ordinary and usual course of business or (y) which assets or other property has a fair market value in excess of US$10,000,000 in any transaction or series of related transactions; or (E) expend funds in excess of US$50,000 in the aggregate for environmental remedial actions at the Auburn Facility; (iv) neither the Company nor any of its Subsidiaries shall terminate, establish, adopt, enter into, make any new grants or awards under, amend or otherwise modify, any Company Plans or employment agreements or increase the salary, wage, bonus or other 44 compensation of any employees (other than payments required or permitted under the Company's retirement plans, severance plans and annual incentive plans) except (A) grants, awards and increases that are contemplated by existing board resolutions or this Agreement as set forth in Section 7.1(a)(iv) of the Company Disclosure Schedule or (B) increases occurring in the ordinary and usual course of business (which shall include normal periodic performance reviews and related compensation and benefit increases) or (C) otherwise required by applicable law or the terms of such plans; (v) neither the Company nor any of its Subsidiaries shall settle or compromise any claim or litigation for an amount in excess of US$5,000,000 or, except in the ordinary and usual course of business modify, amend or terminate any of its material Contracts or waive, release or assign any material rights or claims; (vi) neither the Company nor any of its Subsidiaries shall make any Tax election or permit any insurance policy naming it as a beneficiary or loss- payable payee to be cancelled or terminated except in the ordinary and usual course of business; (vii) the Company and its Subsidiaries shall promptly notify the Purchaser of receipt of any notice from any significant customer of the Company or any of its Subsidiaries of such customer's intention to terminate any material Contract with the Company or any of its Subsidiaries; (viii) neither the Company nor any of its Subsidiaries shall change any accounting principle used by the Company or any of its Subsidiaries other than as required by U.S. GAAP or applicable law (in which case the Company will give Purchaser notice of such change); (ix) neither the Company nor any of its Subsidiaries shall (A) pay any dividend or other distribution to Hercules or any of its Affiliates in cash, stock or property (other than, for the avoidance of doubt, the $750,000 management fee payable to Hercules or its Affiliates by the Company on or prior to December 31, 1997, but in no event for any period or portion thereof thereafter), (B) issue any capital stock, options, warrants or similar instruments, or (C) transfer any property or assets to, or make other 45 financial accommodations to, Hercules or any of its Affiliates (other than the $750,000 management fee payable to Hercules or its Affiliates by the Company on or prior to December 31, 1997, but in no event for any period or portion thereof thereafter); (x) the Company will not make and Hercules will not cause the Company to make any amendments or modifications to its credit manual; and (xi) neither the Company nor any of its Subsidiaries will authorize or enter into any binding, non-cancellable agreement to do any of the foregoing that may not be terminated without penalty immediately after the Closing. (b) Sellers agree that, after the date hereof and prior to the Closing (unless Purchaser shall otherwise approve in writing) none of them shall sell, assign, pledge, dispose of or encumber any Shares owned by them or any of their Affiliates, except as contemplated by Section 2.1(b). 7.2 Interim Operations of Purchaser. Purchaser agrees that, after the date hereof and prior to the Closing (unless Hercules shall otherwise approve in writing, which approval shall not be unreasonably withheld or delayed, and except as otherwise expressly contemplated by this Agreement or Section 7.2 of the Purchaser Disclosure Schedule): (i) the business of Purchaser and its Subsidiaries shall be conducted in the ordinary and usual course (except to the extent such conduct would not otherwise adversely affect the value of the Purchaser and its Subsidiaries, taken as a whole, or impair or delay the Purchaser's ability to consummate the transactions contemplated by this Agreement, including the Bought-Deal Financing, in each case, in any material respect) and, to the extent consistent therewith, Purchaser and its Subsidiaries shall use all reasonable efforts to preserve its business organization intact and maintain its existing relations and goodwill with material customers, material suppliers, material distributors, material creditors, material lessors and material business associates, provided that to the extent that any of the foregoing (other than financing or credit transactions entered into by the Purchaser) would require Purchaser to obtain prior consent under the Investment Agreement, Purchaser shall obtain the prior consent of Hercules, 46 which consent right it shall exercise reasonably, in good faith and in the best interests of the Purchaser; (ii) Purchaser shall not (A) amend its charter or by-laws (or comparable documents); (B) split, combine or reclassify, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for, its outstanding shares of capital stock; (C) declare, set aside or pay any dividend payable in cash, stock or property in respect of any capital stock, except for cash dividends declared and paid with board approval in the ordinary course of business; or (D) repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock; (iii) neither Purchaser nor any of the Purchaser Material Subsidiaries shall issue, sell, pledge, dispose of or encumber, or authorize or propose the issuance, sale, pledge, disposition or encumbrance of, any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of, its capital stock of any class, other than (A) Purchaser Common Shares issuable pursuant to Purchaser Options outstanding on the date hereof, (B) in respect of the Bought-Deal Financing, (C) issuances of shares or grants of options for the purpose of compensating employees, officers and directors consistent with past business practice, provided that in no event shall the aggregate number of shares so issued and options so granted represent greater than 5% of the total number of shares outstanding as of the date of this Agreement, (D) issuances of shares for the purpose of effecting acquisitions of businesses, properties or assets having a purchase price not in excess of US$20,000,000 or (E) transactions solely between Purchaser and one or more of its wholly-owned Subsidiaries or transactions solely between or among wholly-owned Subsidiaries; (iv) Purchaser shall not amend or authorize an amendment to, waive or authorize any waiver of rights under, or terminate any of the Financing Documents or any of the Purchaser Common Share Agreements (other than the Shareholders' Agreement) to which it is a party or any other agreement relating to the transactions contemplated by this Agreement without the 47 prior written approval of Hercules, which approval will not be unreasonably withheld or delayed; and (v) neither Purchaser nor any of its Subsidiaries will authorize or enter into any binding, non-cancellable agreement to do any of the foregoing that may not be terminated without penalty immediately after the Closing. 7.3 Access; Confidentiality. (a) Upon reasonable notice, and except as may otherwise be required by applicable law, Hercules shall (and shall cause the Company and its Subsidiaries to) afford Purchaser's directors, officers, employees, counsel, accountants and other authorized representatives access, during normal business hours throughout the period prior to the Closing, to the properties, books, Contracts and records of the Company and, during such period, shall (and shall cause the Company and its Subsidiaries to) furnish promptly to Purchaser all information concerning the business, properties and personnel of the Company as may reasonably be requested, provided that no investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty made by Sellers, and provided, further, that the foregoing shall not require Hercules or the Company to permit any inspection, or to disclose any information, that in the reasonable judgment of Hercules would result in the disclosure of any trade secrets of third parties or violate any of its or the Company's obligations with respect to confidentiality. All requests for information made pursuant to this Section shall be directed to an executive officer of Hercules or such Person as may be designated by its executive officers, as the case may be. Any information regarding the Company heretofore or hereafter obtained by Purchaser or its representatives from either Hercules or the Company shall be subject to the terms of the Confidentiality Agreement, and such information shall be held by Purchaser and its representatives in accordance with the terms of the Confidentiality Agreement. Purchaser agrees to comply, and to ensure that its representatives comply, with all reasonable restrictions imposed upon Purchaser by Hercules or the Company in connection with the access provided pursuant hereto and, in the event this Agreement is terminated, will indemnify and hold harmless the Sellers for Losses and Expenses arising as a direct result of any act or omission by Hercules, the Company or any of the Company's Subsidiaries taken or not taken, as the case may be, at the direction of Purchaser or its representatives. 48 (b) Upon reasonable notice, and except as may otherwise be required by applicable law, Purchaser shall (and shall cause its Subsidiaries to) afford Hercules's directors, officers, employees, counsel, accountants and other authorized representatives access, during normal business hours throughout the period prior to the Closing, to the properties, books, Contracts and records of Purchaser and, during such period, shall (and shall cause its Subsidiaries to) furnish promptly to Hercules all information concerning the business, properties and personnel of Purchaser as may reasonably be requested, provided that no investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty made by Purchaser, and provided, further, that the foregoing shall not require Purchaser to permit any inspection, or to disclose any information, that in the reasonable judgment of Purchaser would result in the disclosure of any trade secrets of third parties or violate any of its obligations with respect to confidentiality. All requests for information made pursuant to this Section shall be directed to an executive officer of Purchaser or such Person as may be designated by its executive officers, as the case may be. Any information regarding Purchaser heretofore or hereafter obtained by Hercules or its representatives from Purchaser shall be subject to the terms of the Purchaser Confidentiality Agreement, and such information shall be held by Hercules and the Company and their representatives in accordance with the terms of the Purchaser Confidentiality Agreement. Hercules agrees to comply, and to ensure that its representatives comply, with all reasonable restrictions imposed upon Hercules by Purchaser in connection with the access provided pursuant hereto and, in the event this Agreement is terminated, will indemnify and hold harmless the Purchaser for Losses and Expenses arising as a direct result of any act or omission by Purchaser or any of the Purchaser's Subsidiaries taken or not taken, as the case may be, at the direction of Hercules or its representatives. 7.4 Filings; Other Actions; Notification. (a) Sellers and Purchaser shall cooperate with each other and use (and cause their respective Subsidiaries to use) their respective reasonable best efforts to prepare and file as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings and other documents, including notification and report under the HSR Act, the Exon-Florio provisions of the United States Defense Production Act and the Competition Act (Canada) and to obtain as promptly as practicable all permits, consents, approvals and authorizations necessary or advisable to be 49 obtained from any Governmental Entity in connection with the transactions contemplated by this Agreement; provided that Sellers shall not be required to prepare and file any such documentation or to obtain any such permits, consents, approvals and authorizations in connection with the Purchaser's financing of its purchase of Stock under this Agreement, all of which shall be the sole responsibility of Purchaser. Subject to applicable laws relating to the exchange of information, Hercules and Purchaser shall have the right to review in advance, and to the extent practicable each will consult the other on, all the information relating to the Company, Sellers or Purchaser, as the case may be, and any of their respective Subsidiaries, that appear in any filing made with, or written materials submitted to, any Governmental Entity in connection with the transactions (including Purchaser's financing of its purchase of Stock hereunder) contemplated by this Agreement. In exercising the foregoing right, each of Hercules and Purchaser shall act reasonably and as promptly as practicable. (b) Without limiting the generality of the undertakings pursuant to this Section, Hercules and Purchaser each agree to take or cause to be taken the following actions: (i) provide promptly to any and all federal, state, local or foreign court or Government Entity with jurisdiction over enforcement of any applicable antitrust laws ("Government Antitrust Entity") information and documents requested by any Government Antitrust Entity or necessary, proper or advisable to permit consummation of the transactions contemplated by this Agreement; and (ii) take promptly, in the event that any permanent or preliminary injunction or other order is entered or becomes reasonably foreseeable to be entered in any proceeding that would make consummation of such transactions in accordance with the terms of this Agreement unlawful or that would prevent or delay consummation of the transactions contemplated by this Agreement, any and all commercially reasonable steps (including the appeal thereof or the posting of a bond, but not including undertaking the sale or other disposition of, or the holding separate of, any assets, categories of assets or businesses of Hercules, the Company or Purchaser or the respective Subsidiaries of any of them having an aggregate value in excess of 10% of the pro forma combined assets of the Company and the Purchaser following the Closing) necessary to vacate, modify or suspend such injunction or order so as to permit such consummation on a schedule as close as possible to that contemplated by this Agreement; provided that Sellers shall not be required to take any action contemplated by clauses 50 (i) and (ii) above with respect to or in connection with the Purchaser's financing of its purchase of Stock under this Agreement, it being understood that the taking of all such actions shall be the sole responsibility of Purchaser. (c) Hercules and Purchaser each shall, upon request by the other, furnish the other with all information concerning themselves, their Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice or application made by or on behalf of Sellers, the Company, Purchaser or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. (d) Hercules and Purchaser each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Hercules or Purchaser, as the case may be, or any of their respective Subsidiaries, from any Governmental Entity with respect to the transactions contemplated by this Agreement. Hercules and Purchaser each shall give prompt notice to the other of any change that is reasonably likely to prevent, materially delay or materially impair the ability of Hercules or Purchaser to consummate the transactions contemplated by this Agreement. (e) Sellers, the Company and Purchaser shall use reasonable efforts to obtain each consent or approval of each other Person whose consent or approval is required in order to permit the maintenance by the Company or Purchaser, as applicable, following the Closing of any obligation, right or interest of the Company or Purchaser, as applicable, under any Contract or any non-governmental permit, franchise, concession or license to which the Company, Purchaser or any of their respective Subsidiaries is a party or is subject. 7.5 Publicity. Unless otherwise required by law or in order to continue doing business in the ordinary course, prior to the earlier of (x) the Closing Date and (y) the second anniversary of the date of termination of this Agreement, no news release or other public announcement pertaining to the transactions contemplated by this Agreement shall be made by or on behalf of either party hereto without the prior approval of the other party. 7.6 Indemnification; Directors' and Officers' Liability Insurance. (a) On and after the Closing Date, 51 until October 1, 2002, Purchaser shall, or shall cause the Company to, indemnify and hold harmless, to the fullest extent permitted under applicable law (and Purchaser shall, or shall cause the Company to, advance expenses as incurred to the fullest extent permitted under applicable law provided the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification), each present and former director, officer and employee of the Company and its Subsidiaries (including any predecessor companies) (collectively, the "Indemnified Parties") against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Closing, including the transactions contemplated by this Agreement. (b) Purchaser shall ensure that the Company shall from and after the Closing Date until October 1, 2002, have in place officers' and directors' liability insurance providing insurance protection to the Company's and its Subsidiaries' officers and directors substantially similar (including as to scope, deductible and maximum liability) as the insurance maintained by or for the Company as of June 5, 1996 ("D&O Insurance"), so long as the annual premium therefor is not in excess of $750,000 (the "Current Premium"); provided, however, if a future annual premium exceeds the Current Premium, Purchaser shall cause the Company to use its best efforts to obtain as much D&O Insurance as can be obtained for the remainder of such period for a premium not in excess of the Current Premium. (c) If the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its Properties and assets to any individual, corporation or other entity, then and in each such case, proper provisions shall be made so that the successors and assigns of the Company shall assume all of the obligations set forth in this Section. (d) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each of the Indemnified Parties, their heirs and their representatives. 52 7.7 Reasonable Best Efforts and Cooperation. Sellers, the Company and Purchaser each shall use (and shall cause their Subsidiaries to use) its reasonable best efforts to cause the conditions set forth in Article VIII hereof to be satisfied and to consummate the transactions contemplated by this Agreement (provided that, for the avoidance of doubt, it is understood and agreed that neither Sellers nor the Company shall be required to exercise reasonable best efforts with respect to the Bought-Deal Financing and shall have no obligation to furnish any information (other than the Hercules Information) to any Person for purposes of, or otherwise in connection with, the Bought-Deal Financing). Without limiting the foregoing, Purchaser shall use its reasonable best efforts to cause the Bought-Deal Financing to be consummated on a timely basis. 7.8 Further Assurances. Each party shall cooperate with the other, and execute and deliver, or use its best efforts to cause to be executed and delivered, all such other instruments, including instruments of conveyance, assignment and transfer, and to make all filings with and to obtain all consents, approvals or authorizations of any Governmental Entity or any other Person under any permit, license, agreement, indenture or other instruments, and take all such other actions as such party may reasonably be requested to take by the other party hereto from time to time, consistent with the terms of this Agreement, in order to effectuate the provisions and purposes of this Agreement and the transactions contemplated hereby. 7.9 Expenses. Whether or not the transactions contemplated hereby are consummated, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby (other than those third-party fees and expenses incurred by or on behalf of Hercules, the Company or any of their respective Affiliates in connection with the Bought-Deal Financing, which shall be payable, in any case, by Purchaser, but including, without limitation, broker's and finder's fees and attorneys' fees and expenses) shall be paid by the party incurring such expenses, provided, however, that, notwithstanding the foregoing, it is understood and agreed that the Company will bear US$3 million (less the amount of reasonable fees paid by the Company to its public relations firm and to Sidley & Austin in connection with the transactions contemplated hereby) of third party fees and expenses which may be allocated to it by Hercules or certain of its Affiliates (on behalf of the Sellers) and that Sellers will bear any and all such third party fees and expenses incurred by the Sellers and allocated to the Company in excess of such amount. 7.10 Taxes. Purchaser shall be liable for and shall pay all applicable sales, transfer, recording, deed, stamp and 53 other similar taxes resulting from the consummation of the transactions contemplated hereby. 7.11 Reporting Issuer Status and Listing. Purchaser undertakes to remain a reporting issuer under the Securities Act (Ontario) and the Securities Act (Quebec) not in default of any requirement of either such Act or the regulations thereunder, and to maintain its status as a reporting company under the Exchange Act and to maintain the listing of the Purchaser Common Shares (including those to be issued pursuant hereto) on each of the NYSE and the TSE for a period of no less than twenty four months immediately following the Closing Date; provided, however, that no breach of this covenant shall be deemed to have occurred unless (and then only to the extent that) any Holder shall, as a result of Purchaser's non-compliance herewith, not be able or be materially impaired in its ability to sell the Purchaser Common Shares conveyed to it hereunder. 7.12 Execution of Indemnity Escrow Agreement. Hercules and Purchaser agree to enter into the Indemnity Escrow Agreement prior to the Closing with the Indemnity Escrow Agent. ARTICLE VIII CONDITIONS TO THE CLOSING 8.1 Conditions of Obligation of Each Party. The respective obligations of Purchaser and Sellers hereunder are subject to the satisfaction or waiver, at or prior to the Closing Date, of the following conditions: (a) No Injunction. At the Closing Date, there shall be no (i) injunction, restraining order or decree of any nature of any court or Governmental Entity of competent jurisdiction in effect that restrains or prohibits the purchase of the Stock hereunder or (ii) pending action, suit or proceeding brought by any Governmental Entity which seeks to restrain or prohibit the purchase of the Stock hereunder. (b) Regulatory Authorizations. All consents, authorizations, orders or approvals of each Governmental Entity listed in Part I of Section 4.1(d)(i) of the Seller Disclosure Schedule, Part I of Section 5.1(d)(i) of the Company Disclosure Schedule and Part I of Section 6.1(d)(i) of the Purchaser Disclosure Schedule and the filings required or permitted under the HSR Act, the Exon-Florio provisions of the United States Defense Production Act and the Competition Act (Canada) shall have been obtained and any applicable waiting periods in respect thereof (including all applicable waiting periods specified under the HSR Act 54 and other applicable anti-trust laws) shall have expired or been terminated. 8.2 Additional Conditions to the Obligations of Purchaser. The obligation of Purchaser to consummate the transactions contemplated by this Agreement is subject to the satisfaction at or prior to the Closing Date of each of the following additional conditions (any of which may be waived in writing by Purchaser): (a) Representations and Warranties. The representations and warranties of Sellers and the Company contained in Articles IV and V of this Agreement, respectively, shall be true and correct in all material respects as of the Closing Date as though made at and as of the Closing Date, except to the extent that any representation and warranty is made as of a specified date other than the Closing Date, in which case such representation and warranty shall be true and correct in all material respects as of such date. (b) Performance of Covenants. Sellers shall have performed in all material respects all obligations and agreements, and complied in all material respects with all covenants and conditions, contained in this Agreement to be performed or complied with by them prior to or at the Closing Date. (c) Certificate. Purchaser shall have received a certificate of Hercules, executed by a director of Hercules and dated the Closing Date, on behalf of the Sellers, to the effect that the conditions specified in paragraphs (a) and (b) above have been fulfilled (provided that statements therein with respect to any Selling Stockholder may be based solely on representations made by such Selling Stockholder in the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party). (d) Legal Opinion. Purchaser shall have received opinions of Robert J. Ingato, general counsel of the Company, Maples and Calder, general counsel to Hercules, and the legal department of Nomura International plc, each dated the Closing Date and addressed to Purchaser, in the forms set forth in Exhibits I-1, I-2 and I-3, respectively. 8.3 Additional Conditions to the Obligations of Sellers. The obligation of Sellers to consummate the transactions contemplated by this Agreement is subject to the satisfaction at or prior to the Closing Date of each of the 55 following additional conditions (any of which may be waived in writing by Hercules on behalf of the Sellers): (a) Representations and Warranties. The representations and warranties of Purchaser contained in Article VI of this Agreement shall be true and correct in all material respects as of the Closing Date as though made at and as of the Closing Date, except to the extent that any representation and warranty is made as of a specified date other than the Closing Date, in which case such representation and warranty shall be true and correct in all material respects as of such date. (b) Performance of Covenants. Purchaser shall have performed in all material respects all obligations and agreements, and complied in all material respects with all covenants and conditions, contained in this Agreement to be performed or complied with by it prior to or at the Closing Date. (c) Certificate. Hercules shall have received a certificate of Purchaser, executed by an executive officer of Purchaser and dated the Closing Date, to the effect that the conditions specified in paragraphs (a) and (b) above have been fulfilled. (d) Listing. The Purchaser Common Shares to be issued by Purchaser as consideration pursuant to Section 2.2 hereof shall have been listed and posted for trading on each of the NYSE, TSE and ME. (e) Human Resources Agreement. The payment in respect of vested options of the Company contemplated by the Human Resources Agreement shall have occurred simultaneously with the Closing. (f) Legal Opinion. Hercules shall have received an opinion of Jamie Johnson, counsel to Purchaser, dated the Closing Date and addressed to the Sellers, in the form set forth in Exhibit J. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER 9.1 Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date: 56 (a) By mutual written consent of Hercules and Purchaser; or (b) By either Hercules or Purchaser upon written notice to the other party in the event that any Governmental Entity (including any court of competent jurisdiction), the consent of which is necessary for the consummation of the transactions contemplated hereby pursuant to Section 8.1(b), shall have issued an order, decree or ruling or taken any other official action enjoining or otherwise prohibiting the transactions contemplated by this Agreement or denying approval of any application or notice for approval to consummate such transactions, and such order, decree, ruling or other action shall have become final and non-appealable; provided that the right to terminate this Agreement pursuant to this clause (b) shall not be available to any party that has breached in any material respect its obligations under this Agreement in any manner that has proximately contributed to the occurrence of such injunction, prohibition or demand; or (c) By either Hercules or the Purchaser upon written notice given to the other party in the event that the Closing shall not have taken place on or before February 27, 1998, provided that the failure of the Closing to occur on or before such date is not the result of a wilful breach of any covenant or agreement hereunder by the party seeking such termination; or (d) By Hercules upon written notice given to Purchaser at any time later than December 8, 1997 and prior to Hercules having received written notice from the Montreal Trust Company of Canada (in its capacity as custodian under the Installment Receipt Agreement and as depository under the Installment Receivable Loan Agreement, each as defined in the Underwriting Agreement) that funds raised pursuant to the Bought-Deal Financing have been deposited under the Escrow Arrangement; provided that Hercules' right to terminate this Agreement pursuant to this clause (d) shall terminate on (i) December 22, 1997 unless Hercules shall have executed a letter substantially in the form attached hereto as Exhibit M (the "Exclusivity Letter") with a term determined by Hercules not to exceed eight weeks, or (ii) the date of termination of the Exclusivity Letter after giving effect to any written extensions thereof which have been mutually agreed by Hercules and Purchaser; or (e) By Hercules or Purchaser upon written notice given to the other party at any time in the event that: 57 (x) Underwriters underwriting more than 8% of the securities being offered in the Bought-Deal Financing have given notice of termination of their obligations under the Underwriting Agreement pursuant to Section 12(1)(b) of the Underwriting Agreement; and (y) there shall have occurred (i) any change (actual, anticipated, contemplated or threatened, financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of Purchaser or any of its Subsidiaries or the Company or any of its Subsidiaries, that would be material to Purchaser, its Subsidiaries, the Company and its Subsidiaries, considered as a whole, or (ii) any change in any material fact in the Preliminary Prospectuses, Prospectuses, Registration Statement or Supplementary Material (each as defined in the Underwriting Agreement), or the existence of any new material fact, which change or new material fact has had or would reasonably be expected to have a significant adverse effect on the market price or value of the Purchaser Common Shares; provided that Purchaser may not exercise the right of termination under this Section 9.1(e) if the basis for such termination is (1) any breach or default by Purchaser of any of its representations, warranties or agreements under any of this Agreement or any of the Financing Documents or (2) the failure of the financial institutions to enter into the Instalment Receivables Loan Agreement and to advance funds as contemplated by the commitment letter; or (f) By Hercules or Purchaser upon written notice given to the other party in the event that: (x) Underwriters underwriting more than 8% of the securities being offered in the Bought-Deal Financing have given notice of termination of their obligations under the Underwriting Agreement pursuant to Section 12(2) of the Underwriting Agreement; and (y) there shall occur or come into effect any occurrence or any catastrophe of national or international consequence or any action, governmental law or regulation, inquiry or other occurrence of any nature whatsoever which 58 seriously adversely affects or will seriously adversely affect the Canadian or United States financial markets or the business of the Purchaser, its Subsidiaries and the Company and its Subsidiaries, considered as a whole. 9.2 Effect of Termination. In the event of the termination of this Agreement as provided above, this Agreement (other than this Section) shall become void and of no further force and effect and there shall be no duties, liabilities or obligations of any kind or nature whatsoever on the part of either party hereto to the other party based either upon this Agreement or the transactions contemplated hereby; provided, however, that (i) nothing in this Section 9.2 shall relieve any party from liability in respect of any wilful breach of this Agreement by it or wilful failure by it to perform its obligations hereunder, and (ii) the obligations of the parties referred to in the last sentences of Section 7.3(a) and 7.3(b) and in Sections 7.5 and 7.9 shall continue to apply following any such termination of this Agreement. No termination of this Agreement shall affect the rights and obligations of the parties under the Confidentiality Agreement and the Purchaser Confidentiality Agreement. ARTICLE X GENERAL PROVISIONS 10.1 Survival and Indemnification. (a) Survival. The following representations and warranties shall survive the Closing for the periods specified: (i) the representations and warranties of Sellers contained in Article IV and the AF Representation (the "Article IV Surviving Representations") shall survive until the first anniversary of the date of this Agreement; provided, however, that, the representation and warranty contained in the first two sentences of Section 4.1(e)(i) shall survive indefinitely; (ii) the representations and warranties of the Company (subject to the last paragraph of Article 5) contained in Sections 5.1(g)(ii), 5.1(i), 5.1(k) and 5.1(p) (the "Hercules Surviving Representations" and together with the Article IV Surviving Representations the "Sellers' Surviving Representations") shall survive until the first anniversary of the date of this Agreement; provided, however, that, the representations 59 and warranties of the Company contained in Section 5.1(k) solely insofar as they relate to the Auburn Facility (the "AF Representation") shall survive only until the six-month anniversary of the date of this Agreement; and (iii) the representations and warranties of Purchaser contained in Sections 6.1(a)(i), 6.1(c), 6.1(d)(i), 6.1(d)(ii), 6.1(g), 6.1(i), 6.1(j), 6.1(l), 6.1(m) and 6.1(o) (together the "Purchaser Surviving Representations") shall survive until the first anniversary of the date of this Agreement; provided, however, that, the representation and warranty contained in the first sentence of Section 6.1(l) shall survive indefinitely. The agreements of the parties contained in Sections 7.6, 7.9, 7.10 and 7.11 and this Article X shall survive the Closing until the expiration of the term of the undertaking set forth in such covenant, if any, and otherwise until the first anniversary of the date of this Agreement. The indemnification obligations in respect of the agreement of Hercules and the Company contained in Section 7.1(a)(ix) (the "Hercules Surviving Covenant") shall survive until the first anniversary of the date of this Agreement. All other representations, warranties, covenants and agreements of the parties hereunder (including those representations and warranties contained in the certificates provided under Sections 8.2(c) and 8.3(c)), shall terminate and be of no further force or effect immediately after the Closing. No party shall have any liability or obligation of any nature with respect to any representation, warranty, covenant or agreement (including those representations and warranties contained in the certificates provided under Sections 8.2(c) and 8.3(c)) after the termination thereof. (b) Indemnification by Sellers. (i) Subject to the other provisions of this Section 10.1, from and after the Closing Date: (A) Hercules and each of the Selling Stockholders listed on Exhibit A to the Indemnity Escrow Agreement (together with Hercules, individually a "Holder" and collectively the "Holders") shall jointly and severally indemnify and hold harmless Purchaser, Purchaser's Affiliates, each of their respective directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (each a "Purchaser Indemnified Person" and 60 collectively the "Purchaser Indemnified Persons") from and against any and all damages, claims, losses, expenses, costs, obligations and liabilities, including, without limiting the generality of the foregoing, liabilities for all reasonable attorneys' fees and expenses (collectively, "Losses and Expenses") suffered or incurred by any such Purchaser Indemnified Persons arising from, relating to or otherwise in respect of, any breach of any representation or warranty of the Company contained in the Hercules Surviving Representations; provided that, for purposes of the AF Representation, the representations and warranties (or any disclosures noted with respect thereto in the Company Reports) shall be deemed to be read without any "Knowledge" qualification contained therein; and provided, further, that the procedures for making claims under this Section 10.1(b)(i)(A) in respect of any breach of the AF Representation shall be governed by the AF Claim Procedure; and (B) each Seller (including, for the avoidance of doubt, Hercules) shall severally indemnify and hold harmless the Purchaser Indemnified Persons from and against any and all Losses and Expenses suffered or incurred by any such Purchaser Indemnified Persons arising from, relating to or otherwise in respect of, any breach of any representation and warranty given by such Seller contained in the Article IV Surviving Representations. provided that the obligations of the Holders under clauses (A) and (B) above and sub-paragraph (ii) below shall be satisfied solely out of and to the extent of the Indemnity Escrow and in accordance with the procedures contained in the Indemnity Escrow Agreement. (ii) Notwithstanding the limitations of Section 10.1(d), from and after the Closing Date, the Holders shall indemnify and hold harmless the Purchaser Indemnified Persons from and against any and all Losses and Expenses suffered or incurred by any such Purchaser Indemnified Persons arising from, relating to or otherwise in respect of, any breach of the agreements contained in the Hercules Surviving Covenant or in Section 7.9. 61 (iii) Notwithstanding anything to the contrary contained herein, no Holder shall have any liability under this Agreement with respect to the CAL Claim. (c) Indemnification by Purchaser. Subject to the other provisions of this Section 10.1, from and after the Closing Date: (i) Purchaser shall indemnify and hold harmless Sellers, their respective Affiliates, and each of their respective directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (each a "Seller Indemnified Person" and collectively the "Seller Indemnified Persons" and, together with the Purchaser Indemnified Persons, collectively the "Indemnified Persons" and individually an "Indemnified Person") from and against any and all Losses and Expenses suffered or incurred by any such Seller Indemnified Persons arising from, relating to or otherwise in respect of, any breach of any representation and warranty of Purchaser contained in the Purchaser Surviving Representations; and (ii) Purchaser shall indemnify and hold harmless the Seller Indemnified Persons from and against any and all Losses and Expenses suffered or incurred by any such Seller Indemnified Persons arising from, relating to or otherwise in respect of claims arising out of (x) the Bought-Deal Financing or the Exchange Offer other than Losses and Expenses arising out of (A) claims from third parties (other than Purchaser or any of its Affiliates) which are based solely on material misstatements in any SEC filing made by the Company prior to the date of this Agreement or (B) with respect to the Hercules Information or (y) any breach of the agreements contained in Sections 7.6, 7.9, 7.10 and 7.11. (d) Limitations on Indemnification. Neither Sellers nor Purchaser shall have any obligation to indemnify any Purchaser Indemnified Person pursuant to Section 10.1(b)(i) or any Seller Indemnified Person pursuant to Section 10.1(c)(i), respectively, unless and until the aggregate amount of Losses and Expenses (net of insurance proceeds recoverable by such Indemnified Person) incurred by Purchaser Indemnified Persons or Seller Indemnified Persons, respectively, exceeds US$50,000,000 (the "Deductible"), in which case Sellers or Purchaser, as applicable, shall, subject to the two immediately succeeding sentences, be liable only for Losses and Expenses in excess of such Deductible. Subject to the last sentence of this Section 10.1(d), the maximum aggregate liability of Sellers on the one hand and Purchaser on the other hand under Sections 10.1(b)(i) and 10.1(c)(i), as applicable, is US$500,000,000, and neither Sellers nor Purchaser shall have any obligation or liability pursuant to such clauses in excess of such 62 amount). Only those Losses and Expenses indemnifiable under Sections 10.1(b)(i) or 10.1(c)(i) that are equal to or in excess of US$500,000 (net of relevant insurance proceeds recoverable by such Indemnified Person) per claim (notwithstanding that multiple claims may arise from a breach of a single representation, warranty or covenant) shall be indemnifiable under this Section 10.1 or otherwise count towards satisfaction of the Deductible. Any Losses and Expenses for which any Holder is obligated to indemnify any Purchaser Indemnified Person shall be satisfied solely out of and to the extent of the Indemnity Escrow and in accordance with the procedures contained in the Indemnity Escrow Agreement. (e) Materiality Qualification. For purposes of this Section 10.1, Losses and Expenses arising out of, or resulting from, breaches of (i) any Hercules Surviving Representations or (ii) the Purchaser Surviving Representations set forth in Sections 6.1(g) and 6.1(i) shall, in each case, be determined as if references in the relevant representation or warranty to a "Company Material Adverse Effect" or a "Purchaser Material Adverse Effect", as the case may be, were to an adverse effect representing an amount in excess of US$500,000, and as if references in the relevant representation or warranty to the word "material" were to an amount in excess of US$500,000; provided that, for the avoidance of doubt, all such representations and warranties shall continue to be qualified by reference to any items (other than materiality) included in any corresponding section of the relevant Disclosure Schedule. (f) Claims. (i) All indemnification claims under this Agreement by Purchaser Indemnified Persons against the Holders shall be governed by the terms and procedures contained in Article III of the Indemnity Escrow Agreement. (ii) If a claim by a third party is made against an Indemnified Person hereunder, and if such Indemnified Person intends to seek indemnity with respect thereto under this Section 10.1, such Indemnified Person shall promptly notify the indemnifying Person in writing of such claims setting forth such claims in reasonable detail; provided that failure of such Indemnified Person to give prompt notice as provided herein shall not relieve the indemnifying Person of any of its obligations hereunder, except to the extent that the indemnifying Person is materially prejudiced by such failure. The indemnifying Person shall have 30 days after receipt of such notice to assume and undertake, through counsel of its own choosing, the settlement or defense thereof, and the Indemnified Person shall cooperate 63 with it in connection therewith; provided, however, that the Indemnified Person may participate in such settlement or defense through counsel chosen by such Indemnified Person; provided that the fees and expenses of such separate counsel shall be borne by such Indemnified Person unless there exists a conflict between the Indemnified Person and indemnifying Person as to their respective legal defenses (other than one that is of a monetary nature), in which case the Indemnified Person shall be entitled to retain separate counsel, the reasonable fees and expenses of which shall be reimbursed by the indemnifying Person. If the indemnifying Person shall assume the defense of a claim, it shall not settle or compromise such claim without the prior written consent of the Indemnified Person (which consent shall not be unreasonably withheld) unless (A) the indemnifying Person agrees in writing that the Indemnified Person is entitled to indemnification in respect of such claim pursuant to this Section 10.1, (B) such settlement or compromise includes as an unconditional term thereof the giving by the claimant of a release of the Indemnified Person from all liability with respect to such claim, (C) such settlement or compromise does not admit criminal liability or culpability or impugn the reputation of the Indemnified Person in any respect and (D) such settlement or compromise does not involve the imposition of equitable remedies or the imposition of any obligations on such Indemnified Person other than financial obligations for which such Indemnified Person will be indemnified hereunder. If the indemnifying Person does not notify the Indemnified Person within 30 days after the receipt of the Indemnified Person's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Person shall have the right to defend the claim at the cost and expense of the indemnifying Person, but shall not settle or compromise the claim without the consent of the indemnifying Person (which consent will not be unreasonably withheld) unless the Indemnified Person agrees in writing that it is not entitled to any indemnities pursuant to this Section 10.1. (g) Termination of Indemnification. The obligations to indemnify and hold harmless an Indemnified Person pursuant to Section 10.1(b) or 10.1(c), as the case may be, shall terminate when the applicable representation, warranty or covenant terminates pursuant to Section 10.1(a); provided, however, that such obligation to indemnify and hold harmless shall not terminate with respect to any item as to which the Indemnified Person shall have, after the Closing Date but before the expiration of the applicable survival period, previously made a claim by delivering a written notice (stating in reasonable detail the basis of 64 such claim, the representation, warranty or covenant alleged to have been breached and the relevant facts and circumstances surrounding such claim) to the indemnifying Person. (h) Exclusive Remedy. After the Closing Date, the indemnification provided pursuant to this Section 10.1, if any, shall be the sole and exclusive remedy of any party hereto for any Losses and Expenses arising out of or relating to any breach of any representation, warranty or covenant contained in this Agreement; provided, however, that the limitations of this Section 10.1(h) shall not apply to any claim based upon actual fraud or wilful misconduct. In addition, for the avoidance of doubt, Losses and Expenses with respect to the CAL Claim shall not be so limited, and shall be governed by the CAL Claim Indemnification Agreement (including the limitations set forth therein). (i) Insurance. Each Indemnified Person shall be obligated in connection with any claim for indemnification under this Section 10.1 to use all commercially reasonable efforts to obtain any insurance proceeds available to such Indemnified Person with regard to the applicable claims. The amount which the indemnifying Person is or may be required to pay to any Indemnified Person pursuant to this Section 10.1 shall be reduced (retroactively, if necessary) by any insurance proceeds or other amounts actually recovered by or on behalf of such Indemnified Person in reduction of the related Losses and Expenses. If an Indemnified Person shall have received any payment pursuant to this Section 10.1 from an indemnifying Person in respect of Losses and Expenses of such Indemnified Person and shall subsequently receive insurance proceeds or other amounts in respect of such Losses and Expenses, then such Indemnified Person shall promptly repay to the indemnifying Person a sum equal to the amount of such insurance proceeds or other amounts actually received by or on behalf of such Indemnified Person. (j) Mitigation. In addition to the requirements of Section 10.1(i), each Indemnified Person shall be obligated in connection with any claim for indemnification under this Section 10.1 to use all commercially reasonable efforts to mitigate Losses and Expenses upon and after becoming aware of any event which could reasonably be expected to give rise to such Losses and Expenses. (k) Subrogation. An indemnifying Person shall be subrogated to any right of action which the Indemnified 65 Person may have against any other Person with respect to any matter giving rise to a claim for indemnification hereunder. 10.2 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed given if delivered Personally, transmitted by facsimile (and telephonically confirmed), mailed by registered or certified mail with postage prepaid and return receipt requested, or sent by commercial overnight courier, courier fees prepaid (if available; otherwise, by the next best class of service available), to the parties at the following addresses: (a) if to Purchaser, to it at: BCE Place, 181 Bay Street Suite 3500, P.O. Box 827 Toronto, Ontario Canada M5J 2TS Attn: President Telecopy: (416) 777-6206 Confirmation: (416) 777-6100 with a copy to: BCE Place, 181 Bay Street Suite 3500, P.O. Box 827 Toronto, Ontario Canada M5J 2TS Attn: General Counsel Telecopy: (416) 594-2525 Confirmation: (416) 777-6158 (b) if to Sellers, to Hercules at: c/o Maples and Calder Ugland House, PO Box 309, George Town Grand Cayman, Cayman Islands, BW1 Attn: Rebecca Steller Telecopy: (345) 949-8088 Confirmation: (345) 949-8066 with a copy to: Dorsey & Whitney 250 Park Avenue New York, New York 10010-1709 Attn: Owen Marx Telecopy: (212) 953-7201 Confirmation: (212) 415-9310 66 and with a copy to: Nomura International plc Principal Finance Nomura House, 1 St. Martins-le-Grand London EC1A 4NP Attn: Guy Hands Telecopy: (171) 521-3565 Confirmation: (171) 521-2224 (c) if to the Company, to it at: 44 Whippany Road Morristown, NJ 07962-1983 Attn: Robert J. Ingato, General Counsel Telecopy: (201) 397-3220 Confirmation: (201) 397-3191 or to such other Person or address as either party shall specify by notice in writing to the other party in accordance with this Section 10.2. All such notices or other communications shall be deemed to have been received on the date of the Personal delivery or on the third Business Day after the mailing or dispatch thereof; provided that notice of change of address shall be effective only upon receipt. 10.3 Interpretation. The table of contents and headings herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Where a reference in this Agreement is made to a Section or Exhibit, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." Purchaser acknowledges and agrees that this Agreement has been extensively negotiated at arm's length between sophisticated parties and there shall be no presumption that any ambiguity or inconsistency contained in this Agreement will be interpreted against the party principally responsible for the drafting of such provision. 10.4 Amendment and Modification; Waiver. (a) This Agreement and the exhibits and Disclosure Schedules hereto may not be amended except by an instrument or instruments in writing signed and delivered on behalf of each of the parties hereto. (b) At any time prior to the Closing Date, any party hereto which is entitled to the benefits hereof may (a) extend the time for the performance of any of the obligations or other 67 acts of the other party, (b) waive any inaccuracy in the representations and warranties of the other party contained herein or in any schedule hereto or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements of the other party or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed and delivered on behalf of such party. 10.5 Entire Agreement. This Agreement (including the Disclosure Schedules and the documents included as exhibits hereto), the Confidentiality Agreement, the Purchaser Confidentiality Agreement and the CAL Claim Indemnification Agreement constitute the entire agreement and supersede all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. EACH PARTY HERETO AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER SELLERS NOR PURCHASER MAKE ANY OTHER REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR ANY OF ITS AFFILIATES OR ANY OF THEIR RESPECTIVE REPRESENTATIVES WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FOREGOING. 10.6 Third Party Beneficiaries. Except as expressly provided in Sections 7.6(d), nothing in this Agreement, express or implied, is intended to confer upon any Person other than the parties hereto (including each of the Selling Stockholders) and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 10.7 Assignment; Binding Effect. This Agreement shall not be assigned by either party hereto without the prior written consent of the other party. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.8 Governing Law and Venue; Waiver of Jury Trial. (A) THIS AGREEMENT, OTHER THAN ANY MATTERS RELATING TO SECTION 10.1 HEREOF, SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties hereby irrevocably submit to the jurisdiction of the courts of the State of New York and the Federal courts of the United States of America located in the State of New York solely in respect of the 68 interpretation and enforcement of the provisions of this Agreement (other than any matters relating to Section 10.1 hereof) and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement (other than any matters relating to Section 10.1 hereof) or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a New York State or Federal court. The parties hereby consent to and grant any such court jurisdiction over the Person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.2 or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. (B) MATTERS RELATING TO SECTION 10.1 OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF ENGLAND. The parties hereby irrevocably submit to the jurisdiction of the courts of England solely in respect of any matters relating to the provisions of Section 10.1, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that Section 10.1 may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such an English court. The parties hereby consent to and grant any such court jurisdiction over the Person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.2 or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. (c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN 69 RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.8. 10.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 10.10 Severability. Subject to the proviso to the immediately succeeding sentence, the provisions of this Agreement shall be deemed several and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction; provided, however, that the invalidity or unenforceability of such provision, in the reasonable determination of Hercules or Purchaser, does not materially impair the rights of Sellers or Purchaser, respectively, under this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their respective officers hereunto duly authorized all as of the date first written above. HERCULES HOLDINGS (CAYMAN) LIMITED By:_________________________________ Name: Title: THE SELLING STOCKHOLDERS LISTED ON EXHIBIT A By: HERCULES HOLDINGS (CAYMAN) LIMITED (as Custodian and Attorney- In-Fact for the Selling Stockholders) By:____________________________ Name: Title: AT&T CAPITAL CORPORATION By:_________________________________ Name: Title: NEWCOURT CREDIT GROUP INC. By:_________________________________ Name: Title: EX-99 4 EXHIBIT (B)(1) Information contained herein is subject to completion or amendment. A registration statement relating to the securities has been filed with the Securities and Exchange Commission. The securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Preliminary Prospectus SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1997 November , 1997 [LOGO] CDN.$161,000,000 UP TO 3,500,000 FULLY PAID SUBSCRIPTION RIGHTS, EACH REPRESENTING THE RIGHT TO RECEIVE ONE COMMON SHARE OF NEWCOURT CREDIT GROUP INC. Up to 3,500,000 fully paid Canadian dollar subscription rights (the "Fully Paid Subscription Rights") offered hereby will be sold by Newcourt Credit Group Inc. ("Newcourt" or the "Corporation") at a price of Cdn.$46 per Fully Paid Subscription Right. The proceeds of the sale of Fully Paid Subscription Rights will be held by Montreal Trust Company of Canada, as depository, and invested in short-term obligations of or guaranteed by the Government of Canada (and other approved investments) pending the acquisition by Newcourt of all of the issued and outstanding shares of AT&T Capital Corporation (the "Acquisition"). See "Acquisition of AT&T Capital Corporation". Each Fully Paid Subscription Right entitles the holder thereof to acquire, upon closing of the Acquisition (the "Acquisition Closing"), and without payment of additional consideration, one Common Share (a "Common Share") of the Corporation. Immediately following the Acquisition Closing, Common Shares will be issued to holders of record of the Fully Paid Subscription Rights as at the Acquisition Closing, and certificates representing such Common Shares will be delivered to such holders as soon as practicable following the Acquisition Closing. In the event the Acquisition Closing does not occur on or before February 27, 1998 (the "Termination Date"), holders of the Fully Paid Subscription Rights will receive the subscription price therefor plus interest equal to the pro rata share of interest actually earned on such amount between the closing of this offering ("Closing") and the Termination Date, net of applicable withholding taxes. See "Details of the Offering". Concurrently with the offering of the Fully Paid Subscription Rights in the United States, the Corporation is offering subscription rights evidenced by instalment receipt certificates in Canada (the "Instalment Receipt Subscription Rights and, together with the Fully Paid Subscription Rights, the "Subscription Rights"). The aggregate number of Subscription Rights to be offered in Canada and the United States will be 35,000,000. THE INSTALMENT RECEIPT SUBSCRIPTION RIGHTS WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES. The offering price for the Fully Paid Subscription Rights offered hereby has been determined by negotiation between the Corporation and the Underwriters. See "Details of Offering". The outstanding Common Shares of the Corporation are listed on The Toronto Stock Exchange, the Montreal Exchange and the New York Stock Exchange under the symbol "NCT". On November 14, 1997, the closing sale price of the Common Shares on The Toronto Stock Exchange and on the New York Stock Exchange was $51.30 and U.S.$36.31, respectively. See "Price Range and Trading Volume For Common Shares". THIS OFFERING IS MADE BY A CANADIAN ISSUER THAT IS PERMITTED, UNDER A MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE UNITED STATES, TO PREPARE THIS PROSPECTUS IN ACCORDANCE WITH THE DISCLOSURE REQUIREMENTS OF CANADA. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SUCH REQUIREMENTS ARE DIFFERENT FROM THOSE OF THE UNITED STATES. THE FINANCIAL STATEMENTS OF THE CORPORATION INCLUDED OR INCORPORATED HEREIN HAVE BEEN PREPARED IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AND ARE SUBJECT TO CANADIAN AUDITING AND AUDITOR INDEPENDENCE STANDARDS, AND THUS MAY NOT BE COMPARABLE TO FINANCIAL STATEMENTS OF UNITED STATES COMPANIES. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THE ACQUISITION OF THE SECURITIES DESCRIBED HEREIN MAY HAVE TAX CONSEQUENCES BOTH IN THE UNITED STATES AND IN CANADA. SUCH CONSEQUENCES FOR INVESTORS WHO ARE RESIDENT IN, OR CITIZENS OF, THE UNITED STATES MAY NOT BE DESCRIBED FULLY HEREIN. SEE "U.S. FEDERAL INCOME TAX CONSEQUENCES" AND "CANADIAN FEDERAL INCOME TAX CONSIDERATIONS" FOR A GENERAL DISCUSSION OF CERTAIN UNITED STATES AND CANADIAN TAX CONSEQUENCES, RESPECTIVELY. THE ENFORCEMENT BY INVESTORS OF CIVIL LIABILITIES UNDER THE FEDERAL SECURITIES LAWS MAY BE AFFECTED ADVERSELY BY THE FACT THAT THE CORPORATION IS INCORPORATED OR ORGANIZED UNDER THE LAWS OF CANADA, THAT SOME OR ALL OF ITS OFFICERS AND DIRECTORS MAY BE RESIDENTS OF CANADA, THAT SOME OR ALL OF THE UNDERWRITERS OR EXPERTS NAMED IN THE REGISTRATION STATEMENT MAY BE RESIDENTS OF CANADA AND THAT ALL OR A SUBSTANTIAL PORTION OF THE ASSETS OF THE CORPORATION MAY BE LOCATED OUTSIDE OF THE UNITED STATES. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------
Net Proceeds Price to Public Underwriters' Fee (1) to the Corporation --------------- --------------------- ------------------ Per Fully Paid Subscription Right................ Cdn.$46 Cdn.$1.84 Cdn.$44.16 Per Instalment Receipt Subscription Right ....... Cdn.$47.10 Cdn.$1.88 Cdn.$44.12 Total Offering (3)(4)............................ Cdn.$ Cdn.$ Cdn.$
- ---------- (1) Before deducting expenses of the offering, estimated at Cdn.$10 million, which together with the Underwriters' fee, are payable by the Corporation. No fee will be paid by the Corporation to the Underwriters in respect of approximately 2.1 million Subscription Rights purchased by certain members of management of the Corporation and AT&T Capital. See "Plan of Distribution". (2) The Instalment Receipt Subscription Rights will not be offered or sold in the United States. (3) The Corporation has also granted to the Underwriters an option to acquire up to an aggregate of 3,500,000 additional Subscription Rights at the issue price per Fully Paid Subscription right or Instalment Receipt Subscription Right, as applicable, to cover over-allotments, if any, and for market stabilization purposes (the "Over-Allotment Option"). Such option expires on Closing. See "Plan of Distribution". (4) As the Underwriter may sell Subscription Rights to the public in the form of either Fully Paid Subscription Rights or Instalment Receipt Subscription Rights, the total price to the public, the total Underwriters' fee and the total net proceeds to the Corporation will not be determinable until immediately prior to the filing of the final prospectus. See "Plan of Distribution." The Fully Paid Subscription Rights offered hereby are offered by the Underwriters as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The right is reserved to close the subscription books at any time without notice. It is expected that Closing will take place on or about December 3, 1997, or such later date as the Corporation and the Underwriters may agree, but in any event not later than January 3, 1998. Certificates representing Fully Paid Subscription Rights will be available for delivery at the Closing. CIBC WOOD GUNDY SECURITIES INC. GOLDMAN SACHS CANADA MERRILL LYNCH CANADA INC. SCOTIAMCLEOD INC. MIDLAND WALWYN CAPITAL INC. NESBITT BURNS INC. RBC DOMINION SECURITIES INC. TD SECURITIES INC. - 2 - TABLE OF CONTENTS DOCUMENTS INCORPORATED BY REFERENCE ....................................... 4 EXCHANGE RATE DATA ........................................................ 5 PROSPECTUS SUMMARY ........................................................ 6 THE OFFERING .............................................................. 6 NEWCOURT CREDIT GROUP INC ................................................. 7 AT&T CAPITAL CORPORATION .................................................. 8 ACQUISITION OF AT&T CAPITAL CORPORATION ................................... 8 SELECTED SUMMARY FINANCIAL INFORMATION .................................... 9 NEWCOURT CREDIT GROUP INC ................................................. 10 SUMMARY DESCRIPTION OF THE BUSINESS OF NEWCOURT ........................... 10 ACQUISITION OF AT&T CAPITAL CORPORATION ................................... 11 AT&T CAPITAL CORPORATION .................................................. 12 RECENT DEVELOPMENTS ....................................................... 19 DETAILS OF THE OFFERING ................................................... 19 U.S. FEDERAL INCOME TAX CONSEQUENCES ...................................... 23 CANADIAN FEDERAL INCOME TAX CONSIDERATIONS ................................ 25 DIVIDENDS ................................................................. 25 DESCRIPTION OF SHARE CAPITAL .............................................. 25 USE OF PROCEEDS ........................................................... 26 PLAN OF DISTRIBUTION ...................................................... 26 PRICE RANGE AND TRADING VOLUME FOR COMMON SHARES .......................... 27 ELIGIBILITY FOR INVESTMENT ................................................ 27 LEGAL MATTERS ............................................................. 28 AUDITORS, TRANSFER AGENT AND REGISTRAR .................................... 28 PURCHASERS' STATUTORY RIGHTS .............................................. 28 NEWCOURT CREDIT GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS .................. F-1 COMPILATION REPORT ....................................................... F-2 COMMENTS FOR UNITED STATES READERS ON CANADA AND UNITED STATES REPORTING DIFFERENCES ................................ F-2 NEWCOURT CREDIT GROUP INC ................................................ F-9 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS ................... F-12 AT&T CAPITAL CORPORATION AUDITED CONSOLIDATED FINANCIAL STATEMENTS ............................. F-21
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SUBSCRIPTION RIGHTS OR THE COMMON SHARES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into and form an integral part of this prospectus: (a) the Renewal Annual Information Form of the Corporation dated May 2, 1997; - 3 - (b) the audited comparative consolidated financial statements of the Corporation and the auditors' report contained in the Corporation's Annual Report to shareholders thereon for the fiscal year ended December 31, 1996; (c) the unaudited comparative interim consolidated financial statements of the Corporation for the three months ended March 31, 1997, the six months ended June 30, 1997 and the nine months ended September 30, 1997; (d) the Management Information Circular of the Corporation dated February 6, 1997, except the sections entitled "Compensation Committee", "Report on Executive Compensation", "Corporate Governance" and "Share Performance Graph"; and (e) the material change report of the Corporation dated August 7, 1997 describing the proposed acquisition by the Corporation of all of the issued and outstanding shares of Commcorp Financial Services Inc. In addition to the foregoing, the pro forma consolidated financial statements of the Corporation contained in the Corporation's prospectus dated August 15, 1997 and comprising the unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated statements of income and retained earnings as at and for the year ended December 31, 1996, and the related notes and assumptions thereto, are deemed incorporated herein by reference. See "Pro Forma Consolidated Financial Statements". Any documents of the type referred to above and any material change reports (excluding confidential reports) filed by the Corporation pursuant to the requirements of applicable securities legislation after the date of this prospectus and prior to the termination of this distribution shall be deemed to be incorporated by reference into this prospectus. ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE INCORPORATED BY REFERENCE HEREIN OR CONTAINED HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED, FOR PURPOSES OF THIS PROSPECTUS, TO THE EXTENT THAT A STATEMENT CONTAINED HEREIN OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR SUPERSEDES SUCH PRIOR STATEMENT. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT CONSTITUTE A PART OF THIS PROSPECTUS, EXCEPT AS SO MODIFIED OR SUPERSEDED. - 4 - Information set forth herein with respect to AT&T Capital Corporation and its subsidiaries has been derived from publicly available information, including the audited consolidated financial statements and unaudited interim consolidated financial statements of AT&T Capital Corporation filed by AT&T Capital Corporation with the United States Securities and Exchange Commission in accordance with applicable U.S. law and from documents provided by, and discussions with, management of AT&T Capital Corporation. The Stock Purchase Agreement (as hereinafter defined) provides that the Vendors (as hereinafter defined) shall have no liability to the Corporation for the information regarding AT&T Capital Corporation contained in this prospectus and the Vendors are indemnified by the Corporation for any damage or loss arising in connection with any third party claims against the Vendors under this prospectus. Newcourt has no reason, based on its initial investigations and its review of other available information, to question the material accuracy of this description or to believe that there are material omissions therefrom. However, the Corporation is not at this time in a position to undertake any further assurances or assume any further responsibility with respect to the description of AT&T Capital Corporation in this prospectus. In addition, although the Underwriters, as a result of their investigation, have no knowledge that would indicate that the description of AT&T Capital Corporation in this prospectus is untrue or incomplete in any material respect, the Underwriters are not in a position to assume any further responsibility with respect to the description. EXCHANGE RATE DATA All dollar amounts set forth in this prospectus, including the offering price of the Subscription Rights, are stated in Canadian dollars, except where otherwise indicated. The following table sets forth for each period indicated the period-end exchange rates, the average exchange rates and the high and low exchange rates for U.S. dollars. These rates are the noon-buying rates in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. On November 14, 1997, the noon buying rate was U.S.$1.00 = Cdn.$1.4082.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 ----------------- --------------- 1997 1996 1996 1995 ---- ---- ---- ---- Period-end......................... 1.3868 1.3622 1.3706 1.3640 Average............................ 1.3763 1.3678 1.3636 1.3726 High................................ 1.3873 1.3745 1.3865 1.4267 Low................................. 1.3663 1.3607 1.3287 1.3275
- 5 - PROSPECTUS SUMMARY This summary is qualified by, and should be read in conjunction with, the detailed information appearing elsewhere in this short form prospectus. THE OFFERING OFFERING: 35,000,000 Subscription Rights consisting of Fully Paid Subscription Rights in the United States and Canada and Instalment Receipt Subscription Rights in Canada, each Subscription Right representing the right to acquire one Common Share of the Corporation. AMOUNT OF OFFERING: $1,000,610,000 PRICE: $47.10 per Instalment Receipt Subscription Right, of which $29.00 is payable on Closing and $18.10 is payable on or before December 3, 1998. $46 per Fully Paid Subscription Right USE OF PROCEEDS: The net proceeds of the offering, after deducting fees payable to the Underwriters and the estimated expenses of the offering, will be approximately $_________ . The net proceeds of the offering will be used to finance the cash portion of the purchase price for all of the issued and outstanding shares of AT&T Capital Corporation, with the remainder to be used for working capital and general corporate purposes. See "Acquisition of AT&T Capital Corporation" and "Use of Proceeds". The proceeds from the sale of the Subscription Rights will be delivered to Montreal Trust Company of Canada as depository for the Corporation and held by it pending the Acquisition Closing, which is expected to occur on or after January 30, 1998. See "Details of the Offering". SUBSCRIPTION RIGHTS: Each Subscription Right entitles the holder thereof to acquire, upon the Acquisition Closing, one Common Share without further action on the part of the holder. Beneficial ownership of the Instalment Receipt Subscription Rights (and, prior to the payment of the final instalments, the Common Shares to be acquired pursuant to such Instalment Receipt Subscription Rights) will be represented by Instalment Receipts. On the Acquisition Closing: (i) in the case of Fully Paid Subscription Rights, Common Shares will be issued to holders of record as at the Acquisition Closing, and certificates representing such Common Shares will be delivered to such holders as soon as practicable thereafter; and (ii) in the case of Instalment Receipt Subscription Rights, Common Shares will be acquired by holders of Instalment Receipt Subscription Rights pursuant to such Instalment Receipt Subscription Rights, the final instalment of the purchase price of such shares will become payable by such holders on December 3, 1998 and the Instalment Receipts will thereafter represent beneficial ownership of such Common Shares. In the event the Acquisition Closing does not occur on or before the Termination Date, holders of Subscription Rights will receive (i) in the case of Fully Paid Subscription Rights, an amount equal to the subscription price therefor, and (ii) in the case of Instalment Receipt Subscription Rights, an amount equal to the first instalment thereon, plus, in either case, interest equal to the interest actually earned on the investment of such amount between Closing and the Termination Date, net of any applicable withholding taxes. HOLDERS OF SUBSCRIPTION RIGHTS ARE NOT SHAREHOLDERS OF THE CORPORATION. See "Details of the Offering". INSTALMENT PAYMENT The Subscription Rights offered hereunder will be ARRANGEMENTS: issued and sold by the Corporation to the Underwriters. The Common Shares to be acquired pursuant to the Instalment Receipt Subscription Rights on the Acquisition Closing are being sold by the Underwriters on an instalment basis. Beneficial ownership of the Instalment Receipt Subscription Rights (and, prior to payment of the final
6 instalment, the Common Shares to be acquired pursuant to such Instalment Receipt Subscription Rights) will be represented by Instalment Receipts. The Financial Institutions have agreed to provide non-recourse financing to the Underwriters to fund a portion of the Underwriters' cost of the Instalment Receipt Subscription Rights, such financing to be secured by way of cash collateral pending the Acquisition Closing, a pledge of the Instalment Receipt Subscription Rights and the underlying Common Shares when issued on the Acquisition Closing and an assignment by way of security of the final instalments payable by holders of Instalment Receipts. The first instalment of $29.00 per Instalment Receipt Subscription Right is payable on the Closing and, if the Acquisition Closing occurs on or before the Termination Date, the final instalment of $18.10 per Common Share is payable on or before December 3, 1998 (not later than 4:00 p.m. local time at the place of payment) by the registered holder of the Instalment Receipts. As soon as practicable after payment in full of the final instalment, the registered holder of an Instalment Receipt will receive a certificate representing the underlying Common Shares, which Common Shares will no longer be subject to the pledge in favour of the Financial Institutions. IF A REGISTERED HOLDER OF AN INSTALMENT RECEIPT DOES NOT PAY THE FINAL INSTALMENT IN FULL ON OR BEFORE THE DUE DATE, THE COMMON SHARES REPRESENTED BY SUCH INSTALMENT RECEIPT MAY, AT THE FINANCIAL INSTITUTIONS' OPTION, UPON COMPLIANCE WITH APPLICABLE LAW, BE ACQUIRED BY THE FINANCIAL INSTITUTIONS IN FULL SATISFACTION OF THE REGISTERED HOLDER'S OBLIGATIONS TO PAY THE FINAL INSTALMENT SECURED BY THE PLEDGE. THE INSTALMENT RECEIPT AGREEMENT WILL PROVIDE THAT, UNLESS THE FINANCIAL INSTITUTIONS SHALL HAVE ACQUIRED THE COMMON SHARES IN FULL SATISFACTION OF THE OBLIGATIONS OF A REGISTERED HOLDER, THE FOREGOING SHALL NOT LIMIT ANY OTHER REMEDIES AVAILABLE TO THE FINANCIAL INSTITUTIONS AGAINST THE REGISTERED HOLDER OF AN INSTALMENT RECEIPT IN THE EVENT THE PROCEEDS OF ANY SALE OF COMMON SHARES ARE INSUFFICIENT TO COVER THE AMOUNT OF THE FINAL INSTALMENT AND THE COSTS OF SALE AND, ACCORDINGLY, THE REGISTERED HOLDER SHALL IN SUCH CIRCUMSTANCES REMAIN LIABLE TO THE FINANCIAL INSTITUTIONS FOR ANY SUCH DEFICIENCY. See "Details of the Offering - Instalment Receipts". RIGHTS OF INSTALMENT Following the Acquisition Closing and the acquisition RECEIPT HOLDERS: of the Common Shares pursuant to the Instalment Receipt Subscription Rights, registered holders of Instalment Receipts will be entitled, in the manner set forth in the Instalment Receipt Agreement described herein, unless they have defaulted on their obligations under the Instalment Receipt Agreement, to fully participate in all normal course dividends and other distributions paid on the Common Shares, to exercise the votes attached to the Common Shares represented by such Instalment Receipts and to receive periodic reports and other materials as if they were registered holders of the Common Shares. See "Details of the Offering - Instalment Receipts - Rights and Privileges".
NEWCOURT CREDIT GROUP INC. Newcourt is an independent non-bank financial services company which originates, sells and manages asset-based financings. The Corporation originates the financing of a broad range of equipment and capital assets by way of secured loans, conditional sales contracts and financial leases. The Corporation's loan origination activities focus on the commercial finance and corporate finance segments of the asset based lending market. On August 29, 1997 Newcourt acquired all of the issued and outstanding common shares of Commcorp Financial Services Inc. ("Commcorp"), a Canadian asset-finance and associated management service company, for approximately $366 million. On September 5, 1997, Newcourt acquired the Business Technology Finance division of Lloyds Bowmaker Limited (a United Kingdom- based asset finance company) for $493 million. In October 1997, Newcourt acquired the micro-balance origination and processing business of Lease Finance Group of Chicago, Illinois. - 7 - For the year ended December 31, 1996, Newcourt generated total asset finance income of $171.6 million resulting in net income of $50.7 million. For the nine months ended September 30, 1997 Newcourt reported total asset finance income of $192.2 million and net income of $33.1 million (reflecting the one time pre-tax restructuring charge of $48 million related to the acquisition of Commcorp). As at September 30, 1997, Newcourt had over $9.9 billion in owned and managed finance assets. AT&T CAPITAL CORPORATION AT&T Capital is one of the world's leading commercial finance companies with a diversified portfolio of approximately U.S.$13 billion as at December 31, 1996 in owned and managed assets covering a broad spectrum of equipment. Through its international network of 23 countries, AT&T Capital offers its customers a large variety of financing products and services including operating leases, finance leases and loan products. AT&T Capital provides its financial products and services to its worldwide customers through three principal marketing channels: vendor finance, direct customer finance and international. For the year ended December 31, 1996, AT&T Capital's revenues totalled more than U.S.$1.9 billion resulting in net income for the year of approximately U.S.$168.5 million. For the nine months ended September 30, 1997, AT&T Capital's total revenues were U.S.$1.3 billion resulting in net income for the nine months ended September 30, 1997 of U.S.$35.8 million. Net income for the nine months ended September 30, 1997 was U.S.$35.8 million, a decrease of U.S.$79.5 million from the comparable period in 1996. Net income was lower due to the decreased level of capital lease revenue as a result of the completion in 1996 of a U.S.$3.1 billion securitization, higher relative interest expense associated with increased leverage relating to the additional debt incurred to finance the 1996 acquisition of AT&T Capital by Hercules Holdings (Cayman) Limited and distribution on certain preferred securities. See "AT&T Capital Corporation - AT&T Capital's Recent Financial Performance". ACQUISITION OF AT&T CAPITAL CORPORATION On November 17, 1997, Newcourt entered into a stock purchase agreement pursuant to which it agreed, subject to the satisfaction of certain closing conditions, to acquire all of the issued and outstanding Common Shares of AT&T Capital. The aggregate purchase price to be paid by Newcourt is approximately U.S.$1.61 billion (Cdn.$2.3 billion), of which U.S.$1.06 billion (Cdn.$1.5 billion) will be paid in cash (financed by the proceeds of this offering) and the remaining $U.S.550 million (Cdn.$776 million) will be satisfied by the issuance of approximately 17.6 million Common Shares of Newcourt to the shareholders of AT&T Capital. Hercules Holdings (Cayman) Limited (a subsidiary of Hercules Holding U.K. Limited, which is a company structured and financed by Nomura International plc) owns 97.4% of the outstanding shares of AT&T Capital, with the remainder of the shares owned by members of management of AT&T Capital. Newcourt expects that the Acquisition will close on or after January 30, 1998. The completion of the Acquisition and the resulting combination of Newcourt and AT&T Capital will create one of the largest providers of vendor finance in the world, and one of the world's largest non-bank commercial asset finance companies with owned and managed finance assets aggregating more than $25.0 billion. While the combined business entity offers the potential for significant revenue growth and substantial cost savings, the Acquisition also creates significant challenges and risks to Newcourt, including the management of the integration of two businesses, the continued dependence on external sources of funding (and the related sensitivity to credit ratings) and the dependence of AT&T Capital on its former affiliates for a substantial portion of its business volume. - 8 - SELECTED SUMMARY FINANCIAL INFORMATION The following selected financial information has been derived from the consolidated financial statements of the Corporation for the five years ended December 31, 1996 prepared in accordance with Canadian generally accepted accounting principles and the interim consolidated statements for the nine months ended September 30, 1997. The information below should be read in conjunction with the consolidated financial statements and accompanying notes of the Corporation and unaudited interim consolidated financial statements of the Corporation for the nine months ended September 30, 1997, incorporated herein by reference. SELECTED SUMMARY FINANCIAL INFORMATION (in thousands of Canadian dollars, except per share amounts)
NINE MONTHS ENDED SEPT. 30 YEAR ENDED DECEMBER 31, -------------- ----------------------------------------- 1997(6) 1996 1995 1994 1993(3) 1992 ----------- ----------------------------------------- (UNAUDITED) $ $ $ $ $ $ INCOME STATEMENT DATA Securitization and syndication fees 109,206 106,514 52,110 34,338 24,135 7,775 Income from affiliated companies and management fees 27,859 12,689 10,364 8,690 7,411 5,853 Net finance income 55,156 52,386 29,686 15,930 12,619 13,039 --------- -------- ------ ------ ------ ------ Total asset finance income 192,221 171,589 92,160 58,958 44,165 26,667 Operating income 27,317(7) 64,150 36,438 24,610 21,940 12,087 Net income 33,135 50,681 29,405 18,737 14,268 9,654 Earnings per Common and Special Share(1)(4)(5) $0.50 0.96 0.76 0.60 0.67 0.49 Fully diluted earnings per Common and Special Share(2)(5) $0.50 0.96 0.76 0.60 0.67 0.49
AS AT SEPT. 30 AS AT DECEMBER 31, -------------- ------------------------------------------------ 1997 1996 1995 1994 1993(3) 1992 -------- ------------------------------------------------ (UNAUDITED) $ $ $ $ $ $ BALANCE SHEET DATA Total assets 4,151,125 2,164,494 1,158,215 733,970 547,423 729,220 Debt 2,575,436 1,543,144 879,039 540,381 440,809 609,129 Shareholders' equity(4)(5) 1,300,520 515,934 245,194 160,964 28,011 46,818
- ---------- Notes: (1) Based on the weighted average number of Common Shares and Special Shares outstanding during the period. (2) Based on the weighted average number of Common Shares and Special Shares outstanding during the period after giving effect to the exercise of outstanding stock options. (3) The 1993 figures include a $3.4 million gain ($1.9 million after provision for income taxes or $0.18 per share), attributable to the securitization of pre- 1993 commercial finance assets. (4) On November 30, 1995, 1,611,000 Special Shares were converted into 1,611,000 Common Shares. On December 27, 1995, 1,411,675 Special Shares were converted into 1,411,675 Common shares. On July 2, 1996, the remaining 199,325 Special Shares were converted into 199,325 Common Shares. On December 11, 1995, the Corporation redeemed and cancelled all issued and outstanding Preference Shares. (5) Effective April 14, 1997, the Corporation subdivided on a two-for-one basis all of its issued and outstanding Common Shares and all of its Common Shares reserved for issuance. The Selected Summary Financial Information set out in the above table has been adjusted to reflect the stock split. (6) These unaudited interim statements reflect the acquisition on August 29, 1997 of all of the issued and outstanding common shares of Commcorp and the acquisition on September 5, 1997 of the business technology finance division of Lloyds Bowmaker Limited. See "Recent Developments". (7) Operating income before restructuring charge and taxes was $75.3 million for the nine months ended September 30, 1997, Newcourt incurred a one time pre-tax restructuring charge of $48.0 million in respect of severances, office relocations and system conversions relating to the integration of Commcorp's operations with Newcourt's existing businesses. See "Recent Developments". - 9 - NEWCOURT CREDIT GROUP INC. Newcourt Credit Group Inc./Groupe-Credit Newcourt Inc. ("Newcourt" or the "Corporation") was incorporated in 1984 under the laws of Ontario. The Corporation's head office and principal place of business is located at Suite 3500, BCE Place, 181 Bay Street, P.O. Box 827, Toronto, Ontario, M5J 2T3. SUMMARY DESCRIPTION OF THE BUSINESS OF NEWCOURT Newcourt is an independent, non-bank financial services company which originates, sells and manages asset-based financings. The Corporation originates the financing of a broad range of equipment and capital assets by way of secured loans, conditional sales contracts and financial leases. Newcourt distinguishes itself from traditional lenders such as banks, trust and finance companies in that it: sells and manages, rather than owns, the majority of the finance assets which it originates, thereby reducing the Corporation's capital requirements and credit exposure; produces the majority of its income through gains from, and fees related to, the sale of loans, thereby reducing the Corporation's dependence on net finance income; funds its activities through commitments from institutional investors rather than by accepting deposits from the public; and offers select, asset-based financing services rather than providing full-service lending. The Corporation has organized its business activities and operations around three core functions: (i) loan origination; (ii) loan funding; and (iii) loan management. The Corporation's loan origination activities focus on the commercial finance and corporate finance segments of the asset-based lending market. In the commercial finance market, Newcourt offers its lending services through select strategic relationships with equipment manufacturers, dealers and distributors ("vendors") and certain professional bodies and associations. The Corporation has more than 235 vendor finance programs with selected equipment manufacturers which are the primary source of the Corporation's loan origination business in the commercial finance market. In the commercial finance market, Newcourt provides its lending services through six distinct business units: HEALTH CARE (FORMERLY HEALTHGROUP FINANCIAL) - provides both direct and vendor financing in Canada and the United States for health care equipment used by medical and dental practitioners, clinics and hospitals; INFORMATION TECHNOLOGY - provides vendor financing in Canada, the United States and Europe for information technology and communication equipment users; TRANSPORTATION AND CONSTRUCTION - provides vendor and inventory financing in Canada and the United States for transportation and construction equipment users; INVENTORY FINANCE - provides inventory or "floorplan" financing for equipment manufacturers, dealers and distributors in Canada, the United States and Australia; CONSUMER AND PREMIUM FINANCE - provides point-of-sale term financing to owner-operated enterprises and consumers in Canada and the United States and financing of commercial property/casualty and workers' compensation insurance premiums throughout the United States; and ASSET MANAGEMENT - provides fair market value leases in Canada and the United States in the high technology industry. In the corporate finance market, the Corporation's specialized investment banking unit provides advisory and funding services to major Canadian, U.S. and international corporations, public sector institutions and governments. Newcourt's principal structured finance activities in the corporate finance market include providing corporate and government structured debt financing, providing financial services to the regional airline industry, arranging cross-border lease financing, acquiring and managing asset-based finance portfolios and financing international equipment acquisitions. To finance its originated loans, Newcourt arranges interim funding from a number of public and private sources, including bank lines, commercial paper and medium term note programs and other short term debt financing instruments. Term funding is arranged for the Corporation's originated commercial finance assets through securitization vehicles while corporate finance transactions are generally syndicated to institutional investors. Newcourt's Portfolio Services Unit, which operates out of two main service centres in Toronto and Indianapolis, provides the administrative staff and systems needed to service and support the Corporation's portfolio of over $9.9 billion in owned and managed finance assets. - 10 - Newcourt has 42 worldwide offices, including 17 Canadian offices, 21 offices in the United States, 2 offices in the United Kingdom, an office in Australia and a foreign affiliate office in Barbados. NEWCOURT'S RECENT FINANCIAL PERFORMANCE Newcourt reported operating income (before the restructuring charge of $48 million relating to the acquisition of Commcorp) of $75.3 million for the nine months ended September 30, 1997 representing an 80% increase over the $41.9 million in operating income reported for the same period in 1996. During the third quarter, Newcourt completed three acquisitions which strengthened its presence in the commercial vendor finance market and increased owned and managed assets by more than $2.5 billion. The acquisition of Commcorp Financial Services Inc. increased Newcourt's origination capability in the Canadian small-balance market. The acquisition of the Business Technology Finance division of UK-based Lloyds Bowmaker Limited also increased Newcourt's small-balance origination strength and established a European-based loan management platform for the Corporation. In October, 1997, Newcourt acquired the micro-balance origination and processing business of Lease Finance Group of Chicago, Illinois. Newcourt originated new asset-based financings of $6.01 billion during the first nine months of 1997, compared with $4.43 billion for the same period the previous year. Approximately 58% of this amount ($3.51 billion) was generated from the Corporation's activities in the commercial finance market, while the remaining 42% ($2.50 billion) was sourced in the corporate finance market. The U.S. and Canadian markets each accounted for 48% of the total origination volume with the remaining 4% attributed to various international markets. Total asset finance income for the nine months ended September 30, 1997 rose 67% to $192.2 million from $115.1 million during the same period last year. Fee-based income accounted for $137.1 million (71%) of total asset finance income of the Corporation for the period as compared with $79.5 million (69%) for the same period in 1996. ACQUISITION OF AT&T CAPITAL CORPORATION On November 17, 1997, the Corporation agreed, subject to the satisfaction of certain closing conditions, to acquire all of the issued and outstanding common shares of AT&T Capital Corporation ("AT&T Capital"). AT&T Capital, a company incorporated under the laws of Delaware, is one of the world's largest diversified equipment leasing and commercial finance companies. Hercules Holdings (Cayman) Limited ("Hercules") (a subsidiary of Hercules Holdings U.K. Limited, which is a company structured and financed by Nomura International plc), owns 97.4% of the outstanding shares of AT&T Capital, with the remainder of the shares owned by members of management of AT&T Capital. Pursuant to the stock purchase agreement entered into by Newcourt, AT&T Capital and Hercules and certain members of management of AT&T Capital (collectively, the "Vendors") dated November 17, 1997 (the "Stock Purchase Agreement"), the aggregate purchase price to be paid by Newcourt on the Acquisition Closing is approximately U.S.$1.61 billion (Cdn.$2.2 billion), of which approximately U.S.$1.06 billion (Cdn.$1.5 billion) will be paid in cash and the remaining U.S.$550 million (Cdn.$776 million) will be satisfied by the issuance of approximately 17.6 million Common Shares of Newcourt. The Vendors have agreed, subject to certain exceptions, that such Newcourt Common Shares shall not be sold, transferred or otherwise disposed of by the Vendors for a period of six months following the Acquisition Closing, and thereafter may be sold, transferred or disposed of, as to one-third of such shares, six months after the Acquisition Closing, as to a further one-third of such shares twelve months after the Acquisition Closing and the remaining one-third of such shares eighteen months after the Acquisition Closing. The cash portion of the purchase price will be derived from the proceeds of this offering. See "Use of Proceeds". CLOSING The Acquisition Closing is subject to the satisfaction of certain closing conditions specified in the Stock Purchase Agreement, including receipt of material regulatory approvals. The Stock Purchase Agreement is also subject to termination (and the Acquisition will not be completed) if the Underwriters terminate their obligations under the Underwriting Agreement in the event of (i) a material adverse change in the business, affairs, operations, assets, liabilities or capital of Newcourt or (ii) any occurrence or any catastrophe of national or international consequence which seriously adversely affects or will seriously adversely affect the Canadian or United States financial markets or the business of the Corporation and its subsidiaries considered as a whole. Although the Corporation expects to complete the Acquisition on these terms, there can be no assurance that it will do so, or that the Acquisition Closing will occur on or after January 30, 1998, as currently contemplated by the Stock Purchase Agreement. If the Acquisition does not close by the Termination Date, the Subscription Rights will be automatically cancelled and purchasers of Subscription Rights will receive an amount equal to their initial investment in the Subscription Rights, plus interest, pursuant to the Subscription Rights Agreement. See "Details of the Offering". Upon completion of the Acquisition of AT&T Capital, Newcourt anticipates certain restructuring costs will be incurred. See the notes to the "Unaudited Pro Forma Consolidated Financial Statements" of Newcourt included in this prospectus. - 11 - AT&T CAPITAL CORPORATION OVERVIEW AT&T Capital is one of the world's leading commercial finance companies. AT&T Capital has a diversified portfolio of approximately U.S.$13 billion as at December 31, 1996 in owned and managed assets representing over 500,000 customers and covering a broad spectrum of equipment. Through its international network, AT&T Capital offers its customers a large variety of financing products and services including operating leases, finance leases and loan products. AT&T Capital provides its financing services in 23 countries and, in addition to its offices in the United States, has principal offices in Brussels, Frankfurt, London, Mexico City, Milan, Paris, Sydney, Hong Kong and Toronto. As at December 31, 1996, AT&T Capital had more than 3,000 employees. AT&T Capital was founded in 1985 as a captive finance subsidiary of AT&T Corp. ("AT&T") to facilitate the sale of products to customers of AT&T business units engaged in the manufacturing and sale of telecommunications, computer and related equipment. AT&T Capital built its business around an operational infrastructure that benefited from AT&T's controls and management disciplines and combined it with the expertise of senior management recruited from within the equipment leasing industry. As AT&T Capital's business capacity grew, it expanded beyond financing AT&T equipment and entered related financial services markets. On October 1, 1996, in connection with a restructuring of AT&T's operations, the Vendors acquired ownership of AT&T Capital (the "Merger"). BUSINESS OF AT&T CAPITAL AT&T Capital provides its financial products and services to its worldwide customers and clients through three principal marketing channels: Vendor Finance, Direct Customer Finance and International Finance. The table below shows approximate financing volumes and assets as a percent of AT&T Capital's total financing volumes and owned assets, attributable to each of its origination channels for the year ended December 31, 1996.
FINANCING VOLUME TOTAL ASSETS ---------------- ------------ (in $U.S. millions) $ % $ % - - - - Vendor Finance...................... 2,412 46 2,590 32 Direct Customer Finance............. 1,584 24 3,560 44 International Finance............... 1,249 30 1,942 24 ----- -- ----- -- $5,245 100 $8,092 100 ====== === ====== ===
VENDOR FINANCE AT&T Capital has established vendor finance programs with producers of telecommunications, information technology and industrial equipment. In addition, the Vendor Finance unit also offers inventory financing for equipment distributors and dealers and private label financing programs for vendors. AT&T, Lucent Technologies Inc. ("Lucent") and NCR Corporation ("NCR") (AT&T, Lucent and NCR are collectively referred to as the "Former Affiliates") have collectively been the largest vendor clients of AT&T Capital. Historically, AT&T Capital has financed (for the customers of the Former Affiliates) a large volume of the Former Affiliates' telecommunications and information technology sales. During the fiscal year ended December 31, 1996, AT&T Capital generated U.S.$1.1 billion of financing volume from Lucent and NCR related vendor finance activities. Of this financing volume, 76% was related to Lucent and 24% was related to NCR. In serving other vendor clients, AT&T Capital strategically focuses on the telecommunications, information technology, medical, manufacturing, materials handling, image processing and office equipment sectors. AT&T Capital's vendor finance products include a variety of customized financing products, sales aid services (including the training of vendor personnel and point-of-sale support), private label programs (in which AT&T Capital provides financing to the vendor's customers under the vendor's name), customer operations support and interfaces, alternate channel programs (distribution channels not involving the vendor's direct sales force), and support for value-added retailers or distributors (retailers or distributors that modify products and re-sell them). - 12 - DIRECT CUSTOMER FINANCE AT&T Capital directly markets financial products and services to specific market segments, including small business, structured and technology equipment finance, short-term instrument and data equipment rentals and consumer automobile leasing. Direct Customer Finance activities consist of Technology Finance and Services, Specialized Commercial Finance and Capital Markets. Technology Finance and Services. AT&T Capital's equipment management services have included procurement, integration, deployment, tracking and remarketing of equipment. Technology assets are the fastest growing segment of the capital equipment arena. Having identified this opportunity early on, AT&T Capital is now one of the largest providers of financing and specialized asset management services to corporate users of information technology assets. AT&T Capital develops innovative financing solutions for acquiring, operating and disposing of high technology assets and capital equipment. It specializes in structuring flexible solutions for complex transactions to support customers in multi-vendor environments. To serve the short-term needs of sophisticated computer users who operate in periods of peak demand, AT&T Capital also offers rentals of a full range of high performance computers and test equipment. AT&T Capital serviced such high profile events as the 1996 Republican and Democratic national conventions and the 1996 Olympic Games in Atlanta. These services are flexible and responsive with turnaround time measured in hours to anywhere in the United States, and AT&T Capital has recently expanded its service area with offices in Canada and Mexico. Specialized Commercial Finance. AT&T Capital has leveraged its large customer base, sophisticated transaction structuring skills, and high volume transaction processing capabilities to provide specialized financial services directly to target segments in the commercial finance market. AT&T Capital targets small and medium-size companies in the United States with products including small business administration ("SBA") loans, asset-based loans, franchise financing, and other financing products (such as pre-approved credit lines). AT&T Capital is the second largest lender in the United States government's SBA program - a U.S.$7.8 billion government guaranteed loan program. The SBA program was established to provide financing to small businesses for equipment, land and buildings and inventory. AT&T Capital's SBA licensed subsidiary, AT&T Capital Small Business Lending Corporation, has been designated as a preferred lender by the SBA administration in 60 of the SBA's 68 districts. For the year ended December 31, 1996, AT&T Capital provided more than U.S.$250 million of SBA-guaranteed loans. Early in 1997, AT&T Capital announced a 50/50 joint venture with American Express to offer equipment financing opportunities to small businesses, beginning with American Express' 1.6 million small business customers. The joint venture was created, in part, to facilitate access to credit for small businesses. Through a new company, American Express CapitaFinance L.L.C., small businesses are able to arrange prompt financing for a wide assortment of equipment with financing periods generally ranging from one to five years. Following the purchase of equipment, small businesses simply call a toll-free telephone number to easily arrange financing. The program combines technology and marketing in an innovative approach bringing speed and convenience to small businesses for smaller finance transactions. The new venture combines the financing expertise and credit skills of AT&T Capital with the marketing experience of American Express. Capital Markets - Through its capital markets business, AT&T Capital serves the structured financing requirements of large companies worldwide. This form of financing makes maximum use of AT&T Capital's structuring and risk management skills and allows it to customize transactions to meet customer needs. AT&T Capital's experience in technology and financial service markets brings it many opportunities to enter into business relationships with large, growth-oriented companies that require big-ticket project and equipment finance. On these corporate and structured finance transactions, AT&T Capital will generally provide a total financing solution to the client, which results in AT&T Capital agreeing to finance a significant portion of the investment and syndicate the balance to a third party. AT&T Capital has focused its capital markets initiatives in select sectors, including transportation, manufacturing, industrial, telecommunications, media and real estate. To deal effectively with the complexity of many capital markets projects, AT&T Capital assembles teams that include specialists in financial structuring, pricing, credit analysis, asset management and engineering. During 1996, AT&T Capital financed telecommunications networks in Indonesia, Canada and the United States, as well as numerous radio properties, several industrial facilities and select transportation equipment. A new office opened in Hong Kong is intended to provide a base for developing project finance ventures in the Asia/Pacific region. INTERNATIONAL FINANCE Although AT&T Capital operates principally in the United States, it has expanded globally in order to respond to the needs of its vendor clients. AT&T Capital's international business is managed through four geographic regions: Canada, Europe, Asia Pacific and Latin America. International expansion has resulted from a combination of acquisitions, start up operations and joint ventures. While AT&T Capital's start up operations and joint ventures were primarily focused on supporting global vendor relationships (directly through vendor channels and indirectly through local distributors), some of its acquisitions have included specialized commercial and consumer finance origination capabilities. These acquisitions provided AT&T Capital with an international infrastructure and growth opportunities. AT&T Capital began operations in the United Kingdom in 1991, in Canada in 1992, acquired a business in Hong Kong in 1994 and opened offices in Mexico and Australia in 1994. - 13 - Canada - AT&T Capital Canada is one of the largest general equipment lessors in Canada, providing financing of telecommunications, computing, office and industrial equipment and consumer automobile leasing throughout Canada. In the third quarter of 1996, AT&T Capital acquired the operating assets and lease portfolio of Municipal Leasing Corporation, a Canadian operation which had approximately U.S.$160 million in assets at the time of the acquisition. Municipal leasing serves the office equipment and automotive leasing needs of 26,000 customers in Ontario. AT&T Capital Canada provides ongoing financing support for Lucent as well as other Canadian equipment vendors and distributors, including Danka Canada, Sony of Canada Broadcast and Professional Group and Xerox Canada for non Xerox equipment financing. Europe - In January 1995, AT&T Capital established a European network for its financial services through the acquisition of the vendor leasing and finance companies of Banco Central Hispano and certain of its affiliates located in the United Kingdom, Germany, France, Italy, Belgium, and The Netherlands. AT&T Capital's expansion to Europe has coincided with the entry into such markets by AT&T Capitals manufacturer and distributor vendor clients. As a result, AT&T Capital is able to support a number of vendor clients requiring cross border financing needs, including such vendors as ATL (ultrasound equipment), Coherent (laser medical technology), and Perkin-Elmer (analytical instruments). AT&T's Capital European operations support more than 15 multinational vendors in 13 countries and provide a platform for Lucent small ticket equipment financing needs, residual based operating lease and rental programs. Asia Pacific - AT&T Capital's Asia Pacific operations are focused on vendor programs and other specialty asset finance business. In June 1995, AT&T Capital acquired an Australian equipment finance company with approximately U.S.$40 million in assets. Latin America - Global manufacturers like Lucent and NCR have targeted the growth opportunities in Latin America, which resulted in AT&T Capital establishing a strong presence in the region. In 1995, AT&T Capital entered into a joint venture with Banco Frances, a leading Argentine commercial bank to operate an equipment leasing operation in Argentina. In Mexico, AT&T Capital has established vendor relationships with such technology companies as Sun Microsystems and Sony Professional Products. RELATIONSHIP WITH THE FORMER AFFILIATES A significant portion of AT&T Capital's total assets and revenues and a substantial majority of its net income are attributable to financing provided by AT&T Capital to customers of the Former Affiliates with respect to Former Affiliates' products and, to a lesser extent, transactions with the Former Affiliates as end-users, primarily with respect to the lease of information technology and other equipment to them as end-users and the administration and management of certain leased assets on behalf of AT&T. In 1993, AT&T Capital entered into a series of agreements with AT&T to formalize the relationship between the two companies, including the following three significant agreements, each dated as of June 25, 1993: (i) the AT&T Operating Agreement, (ii) the Intercompany Agreement, and (iii) the License Agreement. AT&T Capital has executed agreements comparable to the AT&T Operating Agreement with each of Lucent and NCR. In addition, AT&T Capital has entered into supplementary agreements with Lucent and NCR pursuant to which Lucent and NCR have agreed that various provisions of the Intercompany Agreement and the License Agreement shall apply to them. The Operating Agreements provide, among other things, that (i) AT&T Capital serves as the "preferred provider" of financing services and has certain related and other rights and privileges in connection with the financing of AT&T, Lucent and NCR equipment to customers and distributors of the Former Affiliates and (ii) subject to limited exceptions, the Former Affiliates shall not compete or maintain an ownership interest in any business that competes with AT&T Capital and its subsidiaries. In connection with its financing business for Lucent, AT&T Capital provides an additional incentive, in the form of a sales assistance fee, for Lucent to assist AT&T Capital in the financing of products manufactured or marketed by Lucent. The sales assistance fee is based on designated percentages of the aggregate sales prices and other charges ("volumes") of Lucent products financed by AT&T Capital. In January 1997, AT&T Capital and Lucent agreed to a modified formula for calculating the sales assistance fee (as well as extension of the transactions that qualify for a sales assistance fee to those originated in indirect marketing channels and international transactions) for the remaining years of the term of Lucent's Operating Agreement (retroactive to 1996). The revised formula doubles the aggregate annual sales assistance fees from the amounts that would have been paid if the prior formula had been maintained. The Intercompany Agreement provides, among other things, that AT&T Capital will administer for a fee various portfolios of financing and leasing assets, including certain portfolios which prior to AT&T Capital's initial public offering had been owned by AT&T Capital. In addition, AT&T Capital provides certain of the same services for Lucent and NCR. Pursuant to the License Agreement, AT&T has licensed certain trade names and service marks, including the "AT&T" trade name, to AT&T Capital for use in the leasing and financing business of AT&T Capital and certain of its subsidiaries and, in the case of the "AT&T" trade name, to use as part of the corporate names of AT&T Capital and certain subsidiaries. The initial term of each of the Operating Agreements, the Intercompany Agreement, the License Agreement and the Agreement Supplements is scheduled to end on August 4, 2000. In addition, AT&T has the right under the License Agreement, after two years' prior notice, to require AT&T Capital to discontinue use of the "AT&T" trade name as part of AT&T Capital's corporate or "doing business" name. As of the date hereof, AT&T has not provided any such notice. - 14 - AT&T CAPITAL'S RECENT FINANCIAL PERFORMANCE For the nine month period ended September 30, 1997, AT&T Capital reported revenues of U.S.$1.3 billion and net income of U.S.$35.8 million. See "Unaudited Interim Consolidated Statements of AT&T Capital Corporation". Portfolio revenue (which includes revenue from finance receivables and capital leases, and rentals of operating leases) in the first nine months of 1997 accounted for U.S.$1,041.7 million (or 80.1% of total revenues), compared to U.S.$1,147.1 million (or 83.7% of total revenues) for the comparable 1996 period. The decrease in portfolio revenue reflects AT&T Capital's increased securitizations which produced gains from the sale of assets and higher service fees. The securitization of U.S.$3.1 billion of assets in the fourth quarter of 1996 (which resulted in a U.S$149.3 million pre-tax gain), higher leverage and the distributions on preferred securities resulting from AT&T Capital's recapitalization in connection with its merger in the fourth quarter of 1996 with Hercules (the "Merger"), combined to reduce net income for the period. Somewhat offsetting these factors were increases in revenue from securitizations and loan sales, operating lease margin (rental revenue less depreciation) and other revenue. AT&T Capital's significant securitization during the fourth quarter of 1996, together with its post-Merger recapitalization, has resulted in 1997 quarterly income results which are significantly less than the comparable 1996 periods. Net interest margin declined during the period due to the effects of securitizing higher yielding assets, the run-off of relatively higher yielding leases and higher relative interest expense due to increased leverage associated with AT&T Capital's post-merger capital structure. AT&T Capital's securitizations have generally included small-ticket products having higher yields and margins as compared to larger ticket products. As securitizations occur, the proportion of these higher yielding products in AT&T Capital's owned portfolio is reduced, thereby causing a decrease in yields. Higher yields are not necessarily associated with higher profitability, since these assets commonly carry higher credit provisions and servicing costs. Operating and administrative expenses have increased in 1997 due primarily to severance payments, certain systems investments and costs associated with managing a higher level of assets. As a percentage of owned and managed assets, annualized operating and administrative expenses for the nine months ended September 30, 1997 were 3.96% improved from 4.03% for the comparable 1996 period. The Company's objective is to reduce this ratio to 3.5% or lower. AT&T CAPITAL FUNDING ARRANGEMENTS AT&T Capital finances its asset finance business, in addition to its capital resources, through a U.S.$3.0 billion commercial paper program (of which U.S.$1.9 billion was outstanding at September 30, 1997) and through medium and long term debt program (of which U.S.$4.9 billion was outstanding at September 30, 1997). The commercial paper program is supported by a back up credit facility from a syndicate of lending institutions in the amount of U.S.$2.0 billion. The medium and long term debt program was established under AT&T Capital's registration statement filed with the United States Securities and Exchange Commission (the "SEC") qualifying the issuance of up to U.S.$4.0 billion of debt securities. - 15 - DEBT COVENANTS Included in AT&T Capital's MTN indenture are debt covenants, the most significant of which place some limitations on AT&T Capital's ability to merge or consolidate into other corporations or sell all or substantially all of its assets. In addition, the MTN debt covenants limit the issuance of secured debt, subject to numerous exceptions. PREFERRED SECURITIES In 1996, Capita Preferred Trust, a newly formed trust sponsored by AT&T Capital, issued U.S.$200 million of perpetual Trust Originated Preferred Securities ("TOPrS"). Holders of the TOPrS are entitled to receive cash distributions at an annual percentage rate of 9.06%, which are guaranteed by AT&T Capital. The original issue price of each security was U.S.$25 per share. Distributions on the TOPrS are payable quarterly in arrears on each March 31, June 30, September 30, and December 31. Under U.S. GAAP, the TOPrS are called "Company-obligated preferred securities of subsidiary", since the securities are issued by a consolidated entity of AT&T Capital. AT&T Capital reports the securities in the mezzanine section (between Total Liabilities and Shareowners' Equity) of its balance sheet. Distributions associated with the TOPrS are stated as "Distribution on Company-obligated preferred securities of subsidiary" on the income statement, and are tax deductible and paid out of pre-tax earnings. See "Audited Consolidated Financial Statements of AT&T Capital Corporation". REVOLVING CREDIT FACILITIES As at September 30, 1997, AT&T Capital has a U.S.$2.0 billion revolving credit facility to serve as a back-stop to its commercial paper program of which U.S.$1.2 billion is in the form of a 364-day term and U.S.$0.8 billion is in the form of a 5-year term. AT&T Capital also maintains foreign bank lines which principally support the daily funding needs of its overseas businesses. SECURITIZATION PROGRAMS In 1996, AT&T Capital established a new funding strategy related to an increased use of securitization. As part of this initiative, AT&T Capital expects to securitize approximately one-third of its annual loan originations, which would be consistent with its ongoing diversified financing strategy to manage leverage. In addition, securitization represents an economically attractive means of diversifying AT&T Capital's funding sources. AT&T Capital's asset profile supports its securitization objectives. Approximately 60% of its portfolio is small-ticket assets, with an average transaction size of approximately U.S.$10,000, thereby providing diversification of risk and liquidity. AT&T Capital has more than 11 years of experience in originating and servicing these assets, which gives it an extensive historical database as to loss experience, prepayment history and asset origination, utilizing prudent underwriting standards. In October 1996, AT&T Capital completed its first public securitization through its issue of U.S.$3.1 billion of small-ticket equipment lease-backed securities through the Capita Equipment Receivables Trust 1996-1. The transaction, which established AT&T Capital's presence as a significant issuer of highly diversified small-ticket equipment lease-backed securities, was greater than the public market's then U.S.$2 billion outstanding balance in equipment lease-backed securities. The U.S.$3.1 billion securitization completed in 1996 resulted in a U.S.$149.3 million one-time pre-tax gain for AT&T Capital. ASSET/LIABILITY MANAGEMENT AT&T Capital has established a comprehensive funding and investment policy while managing interest risk and maintaining adequate liquidity. AT&T Capital's approach to the management of interest rate and currency risks includes a matched funding discipline, continual evaluation of assets, review of liability and capital structure, assessment of funding options and the monitoring of pricing guidelines. Specifically AT&T Capital: (i) matches the duration and maturity structure of its liabilities to that of its portfolio assets; (ii) actively manages interest rate risk (the risk of earnings volatility attributable to changes in interest rates) in an effort to protect the margins on existing transactions; and (iii) uses derivatives to match-fund its portfolio and thereby manage interest rate and currency risk. AT&T Capital generates a substantial portion of its funds to support its operations from lease and rental receipts, but also uses external financing, including the public issuance of commercial paper, medium and long-term debt, asset-backed financing (or securitizations) and bank lines of credit. AT&T Capital's funding program includes maintaining a broad distribution of financing sources and expanding the base to minimize undue concentration. - 16 - FINANCIAL STATEMENTS RELATING TO THE ACQUISITION AT&T Capital's audited consolidated financial statements for the three years ended December 31, 1996, together with the related notes thereto, and AT&T Capital's unaudited comparative interim consolidated financial statements for the nine months ended September 30, 1997, are included in this prospectus. See "Consolidated Financial Statements of AT&T Capital Corporation" and "Unaudited Interim Consolidated Financial Statements of AT&T Capital Corporation". Also included in this prospectus are pro forma financial statements of Newcourt, together with relevant notes, assumptions and adjustments, as at and for Newcourt's financial year ended December 31, 1996, which reflect the completion on August 29, 1997 of the acquisition of Commcorp by the Corporation (see "Recent Developments"), the completion of the offering of Subscription Rights contemplated by this prospectus and the completion of the Acquisition of AT&T Capital by the Corporation. See "Unaudited Pro Forma Consolidated Financial Statements". ACQUISITION MERITS AND IMPLICATIONS POTENTIAL BENEFITS Size - The combination of Newcourt and AT&T Capital creates one of the largest providers of vendor finance in the world, and one of the largest independent non-bank commercial asset finance companies based on assets owned and managed. Upon completion of the Acquisition, Newcourt's international origination and servicing capabilities will span 24 countries around the globe. The Acquisition provides a platform to allow both Newcourt and AT&T Capital to better serve their respective manufacturing clients in Canada, the United States, and the United Kingdom and creates new opportunities for serving Newcourt's clients in Asia Pacific, Europe and Latin America. Complementary Skills - The businesses are complementary in many respects. AT&T Capital has a proven record of quality asset management with top-tier processing skills and systems, a broad range of clients, a solid credit underwriting performance and a consistent operating history. Newcourt has demonstrated its ability to originate asset finance business through innovative financing techniques, focused client service and complementary product offerings. Both companies have a conservative risk management culture. Synergies - The two companies also complement each other by providing cost savings opportunities due to geographic and business segment synergies. Significant cost savings are anticipated due primarily to the consolidation of facilities, systems, and functions in Canada, the United States and in the United Kingdom. AT&T Capital has recently embarked upon implementation of a cost reduction program. Newcourt's reputation as a low cost provider of asset finance services should help to ensure the ongoing success of AT&T Capital's cost reduction program. Access to International Capital Markets - The combined entity combines the innovative financing capabilities of Newcourt and its strong funding relationships with Canadian life insurance companies and banks with AT&T Capital's public securitization history in the United States and greater access to foreign markets due to the synergies described above. IMPLICATIONS OF THE ACQUISITION While the business combination offers the potential for significant revenue enhancements and cost savings, the Acquisition presents a number of challenges and risks to Newcourt upon the completion of the Acquisition and the integration of the two entities, including: Financial Performance - AT&T Capital's 1997 year-to-date net income declined significantly from 1996 results, reflecting reduced portfolio income arising from AT&T Capital's U.S.$3.1 billion securitization in 1996 and higher interest costs incurred due to increased leverage and lower credit ratings following the 1996 recapitalization. Newcourt's origination skills and sales culture are expected to improve volume growth. In addition, AT&T Capital is targeting to reduce its ratio of operating expenses to owned and managed assets from approximately 4.0% for the nine months ended September 30, 1997 to 3.5% or lower over the next few years. These reductions are expected to result from extensive cost savings programs and economies of scale in processing operations, administration and centralized services. Reliance on Major Customers - AT&T Capital's most significant vendor program is with Lucent. For the year ended December 31, 1996, Lucent generated over U.S.$800 million of asset origination volume for AT&T Capital. The agreements between AT&T Capital and Lucent expire on August 4, 2000. While Lucent has consented to the change of control of AT&T Capital upon completion of the Acquisition, there can be no assurance that the term of the principal agreements will be extended beyond August 4, 2000. AT&T Capital has agreed with Lucent to develop, by December 31, 1997, a new proposal relating to the extension of the principal agreements beyond the year 2000 and to the expansion of AT&T Capital's financing services to Lucent. Integration of Businesses - Both AT&T Capital and Newcourt have completed a number of acquisitions during the past five years. Integration of the two businesses will require a significant amount of management's time. Managing the integration of the businesses from a systems, employee and cultural perspective will be difficult and time consuming. Residual Assets - AT&T Capital has traditionally retained a larger proportion of residual assets than Newcourt due to the larger volume of operating and capital leases generated by AT&T Capital. - 17 - The anticipated residual or salvage value of the underlying leased equipment assets may be less than the fair market value of the equipment while under the lease or off lease, or the market value may exceed the expected residual, or salvage value. The combined entity will place less reliance on residual asset financing. Although AT&T Capital has historically received proceeds exceeding the aggregate book value of its residual values, there can be no assurance that such performance can continue. Dependence on External Sources of Funding - AT&T Capital's commercial finance business requires substantial amounts of cash to support its operations. These cash requirements increase as the volume of AT&T Capital's owned and managed assets and its servicing portfolio grow. AT&T Capital's primary cash requirements include: (i) lease and loan originations, (ii) interest and principal payments on AT&T Capital's outstanding indebtedness, (iii) ongoing administrative and operating expenses, (iv) tax payments, and (v) dividend payments on the TOPrS preferred securities. AT&T Capital's primary sources of liquidity are expected to be (a) cash generated from operations, (b) the issuance of commercial paper and medium and long-term notes in public markets, (c) public and private securitizations of its lease and loan receivables, and (d) foreign bank lines of credit. There can be no assurance that any financing sources will be available to AT&T Capital or the combined entity following completion of the Acquisition at any given time or as to the terms on which such sources may be available. The combined entity's ability to obtain funds and the cost of such funds could be affected by its credit rating and restrictions contained in existing or future debt instruments and by other events beyond its control, such as interest rates, general economic conditions and the perception of its business, results of operations, leverage, financial condition and business prospects. Sensitivity to Ratings on Debt - As a result of the consummation of the Merger in 1996 and related transactions, three major rating organizations downgraded their respective ratings on AT&T Capital's short-term and (where applicable) long-term senior unsecured debt. As a result of such downgradings, AT&T Capital's costs of borrowing increased in 1997. No assurance can be given that any or all of such rating organizations will not at any future time or from time to time establish different ratings on the combined entity's short-term or long-term debt. To the extent that any of such rating organizations assign a lower rating than the existing ratings of AT&T Capital and Newcourt, such downgrading would increase interest expense for the combined entity, limit its access to its traditional funding sources and reduce its competitiveness, particularly if any such assigned rating is not investment grade. In addition, certain ratings downgrades could result in the termination of one or more of the License Agreements with AT&T, Lucent and NCR. Any such downgrade could have a material adverse effect on the combined entity's results of operations and financial condition. Securitization Program - AT&T Capital's securitization transactions, structured as both private conduit programs and the sale of publicly offered securities, are an important part of AT&T Capital's financing to manage its leverage ratio and to transfer credit risk. Any delay in the securitization of finance receivables would cause leverage to fluctuate and postpone the recognition of the gain on such finance receivables, which could cause AT&T Capital's net income to fluctuate from period to period. Potential Conflicts Between Newcourt and AT&T Capital's Vendor Relationships - Given the number of vendor programs established by both AT&T Capital and Newcourt, there can be no assurance that conflicts between Newcourt and AT&T Capital's vendor relationships will not occur. It is possible that the loss of a large vendor relationship could result in a material loss of revenue or earnings to the combined company. International Events and Currency Exchange Rates - Newcourt intends to pursue growth opportunities in international markets and to follow its vendor relationships into new and emerging markets. AT&T Capital has pursued this strategy and has made significant investments into these foreign markets to establish a presence and to accompany its vendors. To date, AT&T Capital's international operations have not been profitable. A significant change in the value of the Canadian dollar against the currency of one or more countries where substantial revenues or earnings are recognized may materially adversely affect financial performance of the combined company. These risks will be managed in a number of ways including foreign currency contracts, derivative instruments and utilizing local capital markets to fund the international operations. - 18 - RECENT DEVELOPMENTS On March 11, 1997, pursuant to a prospectus dated February 28, 1997, the Corporation issued and sold 2,475,000 Common Shares in its capital at a price of $51.00 per share (prior to giving effect to the subdivision of Newcourt's Common Shares as described below) for net proceeds of $121,176,000. Effective April 14, 1997, the Corporation subdivided all of its issued and outstanding and all of its reserved and unissued Common Shares on a two for one basis. On April 29, 1997, the Corporation's Common Shares were listed and posted for trading on the New York Stock Exchange. Concurrent with such listing, the Corporation's Common Shares were also registered with the United States Securities and Exchange Commission pursuant to section 12(b) of the Securities Exchange Act of 1934. On August 26, 1997, pursuant to a prospectus dated August 15, 1997, the Corporation issued and sold 7,260,000 Common Shares in its capital at a price of $38.50 per share for net proceeds of $268,729,600. On August 26, 1997, the Corporation filed a replacement prospectus supplement dated August 26, 1997 to the Corporation's short form shelf prospectus dated October 17, 1996 increasing the aggregate principal amount of 1996 series medium term notes issuable thereunder from $350,000,000 to $500,000,000. On August 29, 1997, the Corporation acquired all of the issued and outstanding shares of Commcorp Financial Services Inc. ("Commcorp"), a Canadian asset-finance and associated management service company. The Corporation acquired four finance units of Commcorp for approximately $366,000,000, of which $89,000,000 was paid in cash and the remaining $277,000,000 was satisfied by the issuance of 8.2 million Common Shares. As part of the acquisition, Newcourt acquired established Commcorp offices in 11 Canadian cities and 510 employees. Newcourt's pro forma financial statements as at and for the year ended December 31, 1996, which are included in this prospectus in respect of the proposed Acquisition, reflect the acquisition of Commcorp by the Corporation. See "Newcourt Credit Group Inc. - Unaudited Pro Forma Consolidated Financial Statements". On September 5, 1997, the Corporation acquired the business technology finance division of Lloyds Bowmaker Limited, an asset finance company based in the United Kingdom, for an aggregate purchase price of $493,000,000. As part of the acquisition, Newcourt acquired $422,000,000 of asset finance contracts and lease portfolios and 160 employees. On September 24, 1997, the Corporation issued and sold 1,700,000 Common Shares at a price of $50.10 per share on a private placement basis to a Canadian chartered bank. Net proceeds to the Corporation were $85,170,000. On November 13, 1997, the Corporation filed a short form shelf prospectus dated November 12, 1997 establishing the Corporation's 1997 series medium term note program in the aggregate principal amount of $500,000,000. DETAILS OF THE OFFERING The offering consists of 35,000,000 Subscription Rights, each representing the right to acquire one Common Share of the Corporation. The Corporation will issue and sell Subscription Rights to the Underwriters at a price of $46 per Subscription Right. The Underwriters will sell Fully Paid Subscription Rights to the public in both Canada and the United States at a price of $46 per Fully Paid Subscription Right and will sell Instalment Receipt Subscription Rights to the public at a price of $47.10 per Instalment Receipt Subscription Right. The Instalment Receipt Subscription Rights are being sold by the Underwriters on an instalment basis. The Financial Institutions have agreed to provide non-recourse financing to the Underwriters to fund that portion of the Underwriters' cost of the Instalment Receipt Subscription Rights not funded by the first instalment paid by the holders acquiring Instalment Receipt Subscription Rights under this offering. Such financing will be secured by cash collateral pending the Acquisition Closing, a pledge of the Instalment Receipt Subscription Rights and the underlying Common Shares when issued on the Acquisition Closing, and an assignment by way of security of the final instalment payable by holders of Instalment Receipt Subscription Rights. SUBSCRIPTION RIGHTS The following is a summary of the material attributes and characteristics of the Subscription Rights and of the rights and obligations of registered holders thereof. This summary does not purport to be complete and reference is made to the subscription rights agreement to be dated as of the date of Closing (the "Subscription Rights Agreement") among the Corporation, CIBC Wood Gundy Securities Inc. on behalf of the Underwriters, and Montreal Trust Company of Canada as depository (the "Depository"). The Subscription Rights Agreement will be available for inspection in draft form prior to Closing and, subsequent to Closing in definitive form until the completion of distribution, at the principal stock and bond transfer offices of the Depository in Toronto. For the purposes of this description of the material attributes and characteristics of the Subscription Rights, a "holder" means a person who is shown on a register of holders of Subscription Rights. Subscription Rights will be issued at the Closing pursuant to the Subscription Rights Agreement. Pursuant to the Subscription Rights Agreement, the proceeds from the sale of the Subscription Rights (the "Deposited Funds") will be delivered on behalf of the Corporation to and held by the Depository and invested in short-term obligations of or guaranteed by the Government of Canada (and other approved investments) pending the Acquisition Closing, and prior to the Acquisition Closing will be subject to security interests in favour of the holders of the Subscription Rights, the Underwriters and the Financial Institutions. Subscriptions and payment for the Fully Paid Subscription Rights will be evidenced by transferable Fully Paid Subscription Right certificates in fully registered form - 19 - and subscriptions and payment of the first instalment of the purchase price for Instalment Receipt Subscription Rights will be evidenced by transferable Instalment Receipt certificates in fully registered form. Each Subscription Right constitutes an agreement whereby the holder will acquire one Common Share upon the Acquisition Closing. If the Acquisition Closing occurs on or before February 27, 1998 (the "Termination Date"): (i) in the case of Fully Paid Subscription Rights, Common Shares will be issued to holders of record of such Fully Paid Subscription Rights as at the Acquisition Closing, and certificates representing such Common Shares will be delivered to such holders as soon as practicable thereafter; and (ii) in the case of Instalment Receipt Subscription Rights, Common Shares will be acquired by holders of Instalment Receipt Subscription Rights pursuant to the Instalment Receipt Subscription Rights without further action on the part of such holders, the final instalment of the purchase price of such Common Shares will become payable on December 3, 1998 by the holders of the Instalment Receipt Subscription Rights and the Instalment Receipts will thereafter represent beneficial ownership of such Common Shares. In the event the Acquisition Closing does not occur on or before the Termination Date, the Subscription Rights will automatically terminate and holders of Subscription Rights will receive (i) in the case of Fully Paid Subscription Rights, an amount equal to the subscription price therefor, and (ii) in the case of Instalment Receipt Subscription Rights, an amount equal to the first instalment thereon, plus, in either case, interest equal to a pro rata share of the interest actually earned on such amount between Closing and the Termination Date, net of any applicable withholding taxes. The balance of the issue price of the Instalment Receipt Subscription Rights, plus interest at the rate payable by the Underwriters to the Financial Institutions, will be payable by the Corporation to the Underwriters under the terms of the Subscription Rights Agreement and will be paid by the Corporation, on behalf of the Underwriters, to the Financial Institutions in repayment in full of the loan by the Financial Institutions referred to above. Upon such repayment and payment, the Instalment Receipt Subscription Rights and the related Instalment Receipts shall be cancelled and shall be of no further force or effect. On the Acquisition Closing, the security interests in the Deposited Funds will be released against a joint notice from the Corporation and CIBC Wood Gundy Securities Inc., on behalf of the Underwriters, to the Depository, confirming that the conditions of the acquisition of the Common Shares pursuant to the Subscription Rights and the finalization of all matters relating to the Acquisition Closing have been fulfilled to their satisfaction. The transfer register with respect to the Subscription Rights shall be closed at the close of business on the date of the Acquisition Closing. The Corporation shall, as soon as practicable, issue a press release setting out the date of the Acquisition Closing and the date on which the Subscription Rights transfer register will be closed. The Subscription Rights Agreement will provide for adjustments to the number of Common Shares that a holder of a Subscription Right is entitled to acquire pursuant to the Subscription Rights in certain circumstances while the Subscription Rights remain outstanding pending the Acquisition Closing, including any subdivision, consolidation or reclassification of the Common Shares. No fraction of a Common Share shall be issued upon the exercise of the Subscription Rights. In lieu of such fraction of a share, the holder will receive a cash payment which will be equal to the market price of such fractional right. HOLDERS OF SUBSCRIPTION RIGHTS ARE NOT SHAREHOLDERS OF THE CORPORATION. HOLDERS OF FULLY PAID SUBSCRIPTION RIGHTS WILL BE ENTITLED ONLY TO ACQUIRE COMMON SHARES (AND CERTIFICATES THEREFOR) UPON COMPLETION OF THE ACQUISITION CLOSING, AND HOLDERS OF INSTALMENT RECEIPT SUBSCRIPTION RIGHTS WILL BE ENTITLED ONLY TO RECEIVE INSTALMENT RECEIPT CERTIFICATES REPRESENTING THE INSTALMENT RECEIPT SUBSCRIPTION RIGHTS (AND THE COMMON SHARES TO BE ACQUIRED PURSUANT TO SUCH INSTALMENT RECEIPT SUBSCRIPTION RIGHTS) OR TO REPAYMENT FROM THE CORPORATION OF THE SUBSCRIPTION PRICE PAID IN RESPECT OF A FULLY PAID SUBSCRIPTION RIGHT AND THE AMOUNT OF THE FIRST INSTALMENT IN RESPECT OF AN INSTALMENT RECEIPT SUBSCRIPTION RIGHT, AND, IN EITHER CASE, INTEREST EQUAL TO A PRO RATA SHARE OF ALL INTEREST ACCRUED THEREON (NET OF ANY APPLICABLE WITHHOLDING TAX), AS SET OUT IN THE SUBSCRIPTION RIGHTS AGREEMENT. Regulatory relief is being sought for and on behalf of the Corporation in certain Provinces of Canada to permit the distribution of Common Shares to holders of Subscription Rights upon the automatic exercise of the Subscription Rights to acquire Common Shares on the Acquisition Closing. Certificates in fully registered form will be issued on Closing to purchasers of Fully Paid Subscription Rights and will be transferable at the principal offices of Montreal Trust Company of Canada in Toronto, Montreal and Vancouver. The first instalment of $29.00 per Instalment Receipt Subscription Right is payable on Closing and, if the Acquisition Closing occurs prior to the Termination Date, the final instalment of $18.10 per Common Share will be payable on or before December 3, 1998. The final instalment payment must be received in full by the Custodian no later than 4:00 p.m. (local time at the place of payment) on the due date. INSTALMENT RECEIPTS THE INSTALMENT RECEIPTS WILL BE OFFERED IN CANADA AND WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES. The following is a summary of the material attributes and characteristics of the instalment receipts representing beneficial ownership of the Instalment Receipt Subscription Rights (and the Common Shares which will be acquired pursuant to the Instalment Receipt Subscription Rights on the Acquisition Closing) (the "Instalment Receipts") and of the rights and obligations of registered holders thereof. This summary does not purport to be complete and reference is made to the Instalment Receipt Agreement relating to the Instalment Receipts to be dated as of the date of Closing (the "Instalment Receipt Agreement") among the Corporation, CIBC Wood Gundy Securities Inc. on behalf of the Underwriters, Canadian Imperial Bank of Commerce, as agent for the Financial Institutions, Montreal Trust Company of Canada (the "Custodian") and MTCC Security Agent Corporation (the "Security Agent"), - 20 - which will hold the Instalment Receipt Subscription Rights and Common Shares pledged to the Financial Institutions as security for the final instalment payable pursuant to the Instalment Receipts. The Instalment Receipt Agreement will be available for inspection in draft form prior to Closing and, subsequent to Closing in definitive form until the completion of distribution, at the principal stock and bond transfer offices of the Custodian in Toronto. For the purposes of this description of the material attributes and characteristics of the Instalment Receipts, a "holder" means a person who is shown on the register of holders of Instalment Receipts maintained under the Instalment Receipt Agreement. INSTALMENT RECEIPTS WILL NOT BE SOLD IN THE UNITED STATES OR TO U.S. PERSONS. Holders of Instalment Receipts will be bound by the terms of the Instalment Receipt Agreement. The Instalment Receipt Agreement will provide that legal title to the Instalment Receipt Subscription Rights (and legal title to the Common Shares acquired upon the exercise of the Instalment Receipt Subscription Rights) will be held by the Custodian until the final instalment payment has been fully paid to the Custodian on or before the due date. The Instalment Receipt Subscription Rights, and the Common Shares acquired pursuant to the Instalment Receipt Subscription Rights upon the Acquisition Closing, will be issued by the Corporation and pledged to the Financial Institutions as security for the non-recourse financing provided to the Underwriters by the Financial Institutions and will be held in the possession of the Security Agent subject to the terms of the Instalment Receipt Agreement. By acquiring and holding an Instalment Receipt, the holder thereof acknowledges that the Instalment Receipt Subscription Rights and the underlying Common Shares will be held as continuing security for the non-recourse financing provided to the Underwriters by the Financial Institutions and that such security will remain in effect and be binding and effective notwithstanding any transfer of or other dealings with the Instalment Receipt and the rights evidenced or arising thereby. An Instalment Receipt will, among other things, evidence that the first instalment has been paid in respect of the number of Instalment Receipt Subscription Rights (and on the Acquisition Closing, the number of Common Shares acquired pursuant to the Instalment Receipt Subscription Rights) specified thereon and the right of the holder thereof, subject to compliance with the provisions of the Instalment Receipt Agreement, to become the registered holder of such Common Shares upon payment in full of the final instalment in respect of such Common Shares. The Instalment Receipt Agreement will require the Custodian to mail to the holders of Instalment Receipts thereunder, as determined on a date being not more than 14 days before the date of mailing, notice of the applicable due date for the final instalment and the amount of such instalment. Such notice will be required to be mailed not less than 30 days prior to the applicable due date and the Custodian shall also publish particulars of the notice in major English and French language newspapers in Canada not later than November 15, 1998. Payment of the final instalment is required in full when due whether or not a holder receives a notice of the due date from the Custodian. Subject to compliance with the provisions of the Instalment Receipt Agreement, as soon as practicable after timely payment of the final instalment and presentation and surrender of the certificate evidencing the Instalment Receipt, the Common Shares represented thereby will be registered in the name of, and a certificate evidencing such Common Shares will be forwarded to, the holder of the Instalment Receipt without additional charge. If the Acquisition Closing has occurred on or before the Termination Date, a holder of an Instalment Receipt will be entitled to make payment, in accordance with the provisions of the Instalment Receipt Agreement, of the final instalment at any time prior to the due date with respect to any Common Shares represented thereby and to thereupon become the registered holder of such Common Shares. RIGHTS AND PRIVILEGES Under the Instalment Receipt Agreement, after completion of the Acquisition Closing, holders of Instalment Receipts will have the same rights and privileges and be subject to the same limitations as registered holders of Common Shares of the Corporation, except for certain rights and privileges, described below, which are limited under the Instalment Receipt Agreement in order to protect the value of the collateral secured by the pledge to the Financial Institutions of the Instalment Receipt Subscription Rights and Common Shares represented by the Instalment Receipts or except where the exercise of such rights and privileges would not be practicable. In particular, after completion of the Acquisition Closing a holder of Instalment Receipts will be entitled, in the manner set forth in the Instalment Receipt Agreement, unless such holder has defaulted on its obligations thereunder, to participate fully in all dividends and other distributions on the Common Shares represented by such Instalment Receipts, to exercise the votes attached to the Common Shares represented by such Instalment Receipts and to receive all information circulars, proxy material, financial statements and other material sent to holders of Common Shares of the Corporation in like manner as if the holder were the registered holder of the Common Shares. In particular, the Instalment Receipt Agreement will contain the following provisions with respect to the rights of holders of Instalment Receipts after the Acquisition Closing: (a) dividends on Common Shares represented by Instalment Receipts that are payable in cash will be remitted, net of any applicable withholding taxes, to persons who, on the applicable record date in respect of such dividend, are holders of the Instalment Receipts; (b) dividends on Common Shares represented by Instalment Receipts that are paid in additional Common Shares ("Stock Dividends") will be registered in the name of the Custodian and will be held by the Security Agent as security for the performance of the obligations of the holders of the Instalment Receipts to pay the final instalment and upon payment of the final instalment shall be distributed to the holders according to their entitlement; - 21 - (c) if the Corporation issues or distributes (including on liquidation, dissolution or winding-up of the Corporation) to all, or substantially all, of the holders of Common Shares any: (i) securities; (ii) options, rights or warrants to purchase any securities; (iii) securities convertible into or exchangeable for securities, property or other assets; (iv) evidences of indebtedness; or (v) other property or assets, whether of the Corporation or of any other person (excluding cash dividends, Stock Dividends and securities, cash or other property issued or delivered pursuant to a Reorganization as defined in paragraph (d)) (collectively, the "Distributed Property"), the Custodian will, as promptly as commercially reasonable, sell the Distributed Property issued or distributed in respect of Common Shares represented by Instalment Receipts. The net proceeds from such sale will firstly be applied pro rata in reduction of the unpaid balance of the final instalment payable on the Common Shares by all holders. Any balance remaining will be remitted by the Custodian, net of any applicable withholding taxes, to the holders according to their entitlement; and (d) upon any subdivision, consolidation, reclassification or other change of the Common Shares or any reorganization, amalgamation, arrangement, merger, transfer or sale of all, or substantially all, of the assets or other similar transaction affecting the Corporation (a "Reorganization"), the appropriate kind and number of shares or other securities or property resulting from such Reorganization shall be substituted for the Common Shares represented by an Instalment Receipt, and will be registered in the name of the Custodian and held by the Security Agent as security for the performance of the obligations of the holder. TRANSFER OF INSTALMENT RECEIPTS Instalment Receipts will be transferable at the principal offices of Montreal Trust Company of Canada in Toronto, Montreal and Vancouver. Upon registration of the transfer of an Instalment Receipt, the transferee will acquire the transferor's rights, subject to the pledge in favour of the Financial Institutions and become subject to the obligations of a holder of Instalment Receipts under the Instalment Receipt Agreement, including the assumption by the transferee of the obligation to pay the final instalment if the Acquisition Closing occurs prior to the Termination Date. The person requesting registration of the transfer of an Instalment Receipt is deemed to warrant such person's authority to do so as or on behalf of the transferee. Upon registration of such transfer, the transferor will cease to have any further rights or obligations thereunder (other than certain obligations specified in the Instalment Receipt Agreement including any amounts owing to the Financial Institutions in respect of withholding taxes on distributions). No transfer of an Instalment Receipt tendered for registration after the due date for the final instalment will be accepted for registration (except where an intermediary holds Instalment Receipts on behalf of non-registered holders and such non-registered holder has failed to pay the final instalment when due, or with the express consent of the Financial Institutions). LIABILITY OF INSTALMENT RECEIPT HOLDERS Pursuant to the Instalment Receipt Agreement, the Instalment Receipt Subscription Rights and the underlying Common Shares will be pledged to the Financial Institutions to secure payment of the non-recourse financing provided by the Financial Institutions to fund a portion of the Underwriters' cost of the Instalment Receipt Subscription Rights. If payment of the final instalment is not duly received in full by the Custodian from a holder of Instalment Receipts when due, the Instalment Receipt Agreement will provide that any Common Shares (and any securities or property substituted therefor or in addition thereto) then remaining pledged under the Instalment Receipt Agreement may, at the option of the Financial Institutions, subject to complying with applicable law, be acquired by the Financial Institutions in full satisfaction of the obligations secured thereby. The Instalment Receipt Agreement will further provide that the Financial Institutions may direct the Custodian to sell the Common Shares (and any securities or property substituted therefor or in addition thereto) in respect of which payment of the final instalment was not duly received, in accordance with the requirements of applicable law and of the Instalment Receipt Agreement, and remit to the holder of the Instalment Receipt the holder's pro rata portion of the proceeds of such sale after deducting therefrom the amount of the remaining unpaid instalment, the amount of any applicable withholding taxes and the holder's pro rata portion of the costs of such sale. THE INSTALMENT RECEIPT AGREEMENT WILL PROVIDE THAT, UNLESS THE FINANCIAL INSTITUTIONS SHALL HAVE ACQUIRED THE COMMON SHARES (AND ANY SECURITIES OR PROPERTY SUBSTITUTED THEREFOR OR IN ADDITION THERETO) IN FULL SATISFACTION OF THE OBLIGATIONS OF A HOLDER, THE FOREGOING SHALL NOT LIMIT ANY OTHER REMEDIES AVAILABLE TO THE FINANCIAL INSTITUTIONS AGAINST THE HOLDER OF AN INSTALMENT RECEIPT IN THE EVENT THE PROCEEDS OF ANY SALE OF COMMON SHARES ARE INSUFFICIENT TO COVER THE AMOUNT OF THE FINAL INSTALMENT AND THE COSTS OF SALE AND, ACCORDINGLY, THE HOLDER SHALL IN SUCH CIRCUMSTANCES REMAIN LIABLE TO THE FINANCIAL INSTITUTIONS FOR ANY SUCH DEFICIENCY. GENERAL The Custodian may require holders of Instalment Receipts from time to time to furnish such information and documents as may be necessary or appropriate to comply with any fiscal or other laws or regulations relating to the Common Shares or to rights and obligations represented by Instalment Receipts. The Custodian and the Security Agent shall not be responsible for any taxes, duties, or other governmental charges or expenses which are or may become payable in respect of the Instalment Receipts, or the Instalment Receipt Subscription Rights or the Common Shares represented by the Instalment Receipts, as the case may be. In this regard, the Custodian and the Security Agent shall be entitled to deduct or withhold from any payment or other distribution required or contemplated by the Instalment Receipt Agreement the appropriate amount of money or property, or to require holders of Instalment Receipts to make any required payments, and to withhold delivery of certificates representing the Common Shares from defaulting holders of Instalment Receipts until satisfactory provision for payment is made in respect of any non-resident Canadian withholding and other taxes. - 22 - The Corporation will be liable for charges and expenses of the Custodian and the Security Agent except for any taxes, duties or other governmental charges or expenses which may be payable by holders of Instalment Receipts as described above. Apart from the changes which do not materially prejudice the holders of Instalment Receipts as a group (which may be made by the Custodian without the consent of such holders), the Instalment Receipt Agreement may not be amended without the affirmative vote of the holders of Instalment Receipts entitled to not less than two-thirds of the Common Shares represented by Instalment Receipts which are represented and voted at a meeting duly called for the purpose. The procedure for such meetings will be substantially similar to that governing meetings of holders of Common Shares. U.S. FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the principal U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of the Common Shares to a holder thereof. This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase the Common Shares. In particular, this summary deals only with U.S. Holders (as defined below) that are initial purchasers of the Common Shares and that will hold the Common Shares as capital assets, and does not address the tax treatment of special classes of U.S. Holders, such as dealers or traders in securities or currencies, banks, insurance companies, tax-exempt entities, persons that will hold the Common Shares as a position in a "straddle" or as part of a "hedging" or "conversion" transaction for U.S. federal income tax purposes, persons that own (or are deemed to own for U.S. tax purposes) 10% or more (by voting power or value) of the shares of the Corporation and holders whose "functional currency" is not the U.S. dollar. As used herein, the term "U.S. Holder" means a holder of the Common Shares who is a citizen of or resident in the United States, a corporation or partnership created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust (i) the administration over which a U.S. court can exercise primary supervision and (ii) all of the substantial decisions of which one or more U.S. fiduciaries have the authority to control. Notwithstanding the preceding sentence, to the extent provided in U.S. Treasury Regulations, certain trusts in existence on August 20, 1996, and treated as United States persons prior to such date, that elect to continue to be treated as United States persons also will be a U.S. Holder. This summary is based on the tax laws of the United States as in effect on the date of this Prospectus (including the Internal Revenue Code of 1986, as amended (the "Code")), judicial decisions, administrative pronouncements, and existing and proposed U.S. Treasury Regulations available as of the date hereof, changes to any of which after the date of this Prospectus could apply on a retroactive basis and affect the tax consequences described herein. Prospective purchasers should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of the Common Shares in light of their particular circumstances, including in particular, the effect of any foreign, and U.S. state and local tax laws. Treatment of Subscription Rights The characterization of the Fully Paid Subscription Rights for U.S. federal income tax purposes before the Acquisition Closing (the "Closing Date") is not entirely clear. Before the Closing Date, the Fully Paid Subscription Rights may be viewed as representing a right to receive Common Shares that are delivered on or before the Closing Date. Under this view, a U.S. Holder would be treated as having acquired an interest in the Common Shares on the Closing Date at a cost equal to the purchase price paid by the U.S. Holder for the Fully Paid Subscription Rights. If the Common Shares are not delivered by the Termination Date, any interest payable to U.S. Holders with respect to the return of the amount paid for the Fully Paid Subscription Rights would be taxable as ordinary interest income on the Termination Date or when received by the U.S. Holder, depending on the U.S. Holder's method of tax accounting. Alternatively, during the period prior to the Closing Date, the Fully Paid Subscription Rights may be viewed as representing an interest in the escrowed funds consisting of the amounts paid for the Fully Paid Subscription Rights. Under this view, a U.S. Holder's share of the interest earnings on such escrowed funds would be taxable as ordinary interest income at the time it is received by the escrow agent or accrued, depending on the U.S. Holder's method of tax accounting, regardless of whether these earnings were distributed to the U.S. Holder. On the Closing Date, a U.S. Holder would be deemed to have acquired the Common Shares at a cost equal to the price paid for the Fully Paid Subscription Rights plus such U.S. Holder's share of interest earnings on the escrowed funds. Dividends on Common Shares Subject to the discussion below under the caption "Potential Passive Foreign Investment Company Status," the gross amount of any distribution of cash (including the amount of any Canadian taxes withheld therefrom) paid to a U.S. Holder on the Common Shares generally will be subject to U.S. federal income taxation as foreign source dividend income at the time of receipt, to the extent paid out of current or accumulated earnings and profits, as determined under U.S federal income taxation principles. Distributions on the Common Shares that constitute dividend income will not be eligible for the dividends received deduction generally allowed to corporations under the Code. To the extent that the amount of any distribution on the Common Shares exceeds the Corporation's current and accumulated earnings and profits for a taxable year, the distribution will first be treated as tax-free return of capital to the extent of the U.S. Holder's adjusted tax basis in the Common Shares and will be applied against and reduce such basis. To the - 23 - extent that such distribution exceeds the U.S. Holder's adjusted basis in the Common Shares, the distribution will be taxed as capital gain. Any such dividend on the Common Shares paid in Canadian dollars will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the Canadian dollars. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Sale or Exchange of Common Shares Subject to the discussion below under the caption "Potential Passive Foreign Investment Company Status," gain or loss realized by a U.S. Holder on the sale or exchange of Common Shares will be recognized for U.S. federal income tax purposes as capital gain or loss in an amount equal to the difference between the U.S. Holder's adjusted tax basis in the Common Shares and the amount realized on such sale or exchange. In the case of a noncorporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. Holder's holding period for such Common Shares exceeds one year and will be further reduced if such Commons Shares were held for more than 18 months. Subject to certain limitations, including limitations on U.S. foreign tax credits generally, a U.S. Holder may elect to deduct in computing its taxable income, or credit against its U.S. federal income tax liability, Canadian taxes withheld from dividend paid to the U.S. Holder. For purposes of calculating the U.S. foreign tax credit, dividends paid by the Corporation generally will constitute foreign source "passive income", or in the case of certain U.S. Holders, "financial services income." The calculation of U.S. foreign tax credits involves the application of rules that depend on a U.S. Holder's particular circumstances. U.S. Holders of Common Shares should consult their own tax advisors regarding the application of the U.S. foreign tax credit rules to distributions made on the Common Shares. Potential Passive Foreign Investment Company Status A non-U.S. corporation will be classified as a "passive foreign investment company" (a "PFIC") for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (i) at least 75% of its gross income is "passive income" or (ii) on average at least 50% of the gross value of its assets is attributable to assets that produce "passive income" or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. Based on its estimate of gross income and the average value of its gross assets, the Corporation believes that it will not be classified as a PFIC for its current taxable year. The Corporation's status in future years will depend on its assets and activities in those years. The Corporation has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC. If the Corporation were a PFIC, a U.S. Holder of the Common Shares generally would be subject to potentially punitive imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, the Common Shares. U.S. Holders should consult their own tax advisors regarding the tax consequences which would arise if the Corporation were treated as a PFIC. Information Reporting and Backup Withholding Tax U.S. information reporting requirements and backup withholding tax generally will apply to certain payments to certain non-corporate holders of Common Shares. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, Common Shares by a payor within the United States to a holder of Common Shares (other than an "exempt recipient," which includes corporations and certain other persons). A payor within the United States will be required to withhold 31% of any payment of proceeds from the sale or exchange of Common Shares within the United States to a holder (other than an "exempt recipient") if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with such backup withholding tax requirements. Recently-issued Treasury Regulations would modify certain of the rules discussed above generally with respect to payments on the Common Shares made after December 31, 1998. In particular, a payor within the United States will be required to withhold 31% of any payments of dividends on, or proceeds from the sale of, Common Shares within the United States to a Non-U.S. Holder if such holder fails to provide an appropriate certification. In the case of such payments by a payor within the United States to a foreign partnership (other than payments to a foreign partnership that qualifies as a "withholding foreign partnership" within the meaning of such Treasury Regulations and payments to a foreign partnership that are effectively connected with the conduct of a trade or business in the United States), the partners of such partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a Non-U.S. Holder only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is unreliable. - 24 - CANADIAN FEDERAL INCOME TAX CONSIDERATIONS The following is a general summary of the principal Canadian federal income tax considerations under the Income Tax Act (Canada) (the "Canadian Tax Act"), to holders who, at all material times, are not resident in Canada and do not carry on business in Canada for the purposes of the Act and are residents of the United States and do not have a "permanent establishment" or "fixed base" in Canada for the purposes of the Canada-United States Income Tax Convention ("U.S. Residents"). If an amount in respect of a Subscription Right is repaid to U.S. Residents with interest upon the termination of the Subscription Rights in the circumstances referred to above, such interest will generally be subject to Canadian withholding tax at the rate of 10%. Dividends paid or credited or deemed under the Canadian Tax Act to be paid or credited to a U.S. Resident will generally be subject to withholding tax at the rate of 15%. A U.S. Resident will not be subject to tax under the Canadian Tax Act in respect of any capital gain on the disposition of Subscription Rights or Common Shares provided that, at no time during the five years immediately preceding the disposition of the Subscription Rights or Common Shares, 25% or more of the issued shares of any class of the capital stock of the Corporation belonged to the U.S. Residents to persons with whom the U.S. Resident does not deal at arm's length, or the US Resident and persons with whom the US Resident does not deal at arm's length. The foregoing is not exhaustive of all Canadian federal income tax consequences and does not take into account or anticipate any changes in law or administrative or assessing practices in Canada. It is of a general nature only and is not intended to be, and should not be construed to be, legal or tax advice to any investor and no representation with respect to the tax consequences to any investor is made. Potential investors are urged to consult with their own tax advisors with respect to the tax consequences to them of holding or disposing of Subscription Rights or Common Shares. DIVIDENDS The Corporation's Board of Directors has established a policy to pay dividends on the Corporation's equity shares (Common Shares and Special Shares) of between 10% and 20% of the Corporation's after-tax net income (after providing for the payment of dividends on any of the Corporation's Preference Shares). Any payment of dividends (including the amounts thereof) is at the discretion of the Board of Directors and is dependant upon the Corporation's results of operations, financial conditions and other factors that the Board of Directors deems relevant. Since completion of Newcourt's initial public offering of Common Shares in February 1994, the Corporation has declared and paid a quarterly dividend (after adjusting for the subdivision of Newcourt's Common Shares - See "Recent Developments") of $0.025 per equity share (Common and Special Shares) in May, August and November of 1994 and in February and August of 1995, a quarterly dividend of $0.030 per equity share in November of 1995 and February, May and August of 1996, a quarterly dividend of $0.035 per equity share in November, 1996 and February, May and August, 1997 and a quarterly dividend of $0.04 per equity share in November 1997. DESCRIPTION OF SHARE CAPITAL The authorized capital of the Corporation consists of an unlimited number of Common Shares, Special Shares and Class A Preference Shares. COMMON SHARES Each Common Share of the Corporation is entitled to one vote at meetings of the shareholders of the Corporation and to receive dividends if, as and when declared by the Board of Directors. Subject to the prior rights of holders of Class A Preference Shares, holders of Common Shares will participate equally in any distribution of the assets of the Corporation upon its liquidation, dissolution or winding-up. SPECIAL SHARES The Special Shares carry exactly the same rights, privileges, restrictions and conditions of the Common Shares, except that holders of the Special Shares are not entitled to vote at any meeting of the shareholders of the Corporation. The holders of such Special Shares are entitled to convert their Special Shares into Common Shares on a share-for-share basis. There are no Special Shares outstanding. CLASS A PREFERENCE SHARES The Class A Preference Shares are issuable in series. Holders of such preference shares are not entitled to notice of, or to attend or to vote at, any meeting of the shareholders of the Corporation, except as may be specifically provided in the provisions attaching to any series. The Class A Preference Shares rank senior to the Common Shares and Special Shares with respect to the payment of dividends and distributions in the event of the liquidation, dissolution or winding-up of the Corporation. The Board of Directors of the Corporation is empowered to fix, before the issue thereof, the number of Class A Preference Shares of each series - 25 - and the designation, rights, privileges, restrictions and conditions attaching to the Class A Preference Shares of each series. There are no Class A Preference Shares outstanding. USE OF PROCEEDS The estimated net proceeds to be received by the Corporation, after deducting the estimated expenses of issue of $10 million and the Underwriters' fees of $__________, will be $__________. The Corporation will use $__________ of the net proceeds of the issue to finance the cash portion of the purchase price for the Acquisition (see "Acquisition of AT&T Capital Corporation") and the remainder will be used for working capital and general corporate purposes. The Stock Purchase Agreement relating to the Acquisition provides that it is subject to certain closing conditions, including receipt of all regulatory approvals on terms satisfactory to the Corporation. The net proceeds from the issue and sale of the Subscription Rights will be held by Montreal Trust Company of Canada as depository pending the Acquisition Closing. While the Corporation expects to complete the Acquisition on the terms set out in the Stock Purchase Agreement, there can be no assurance that it will do so. PLAN OF DISTRIBUTION Pursuant to an agreement (the "Underwriting Agreement") dated November 17, 1997 among the Corporation and CIBC Wood Gundy Securities Inc., Goldman Sachs Canada, Merrill Lynch Canada Inc., ScotiaMcLeod Inc., Midland Walwyn Capital Inc., Nesbitt Burns Inc., RBC Dominion Securities Inc., Midland Walwyn Capital Inc. and TD Securities Inc., (collectively the "Underwriters"), the Corporation has agreed to issue and sell and the Underwriters have severally agreed to purchase on December 3, 1997 or such later date as the Underwriters and the Corporation may agree but in any event not later than January 3, 1998, all but not less than all the 35,000,000 Subscription Rights and to offer in the United States up to 3,500,000 Fully Paid Subscription Rights offered hereby at a price of Cdn.$46 per Fully Paid Subscription Right. The Underwriting Agreement provides for the Corporation to pay the Underwriters a fee of Cdn.$1.84 per Fully Paid Subscription Right sold pursuant to the offering, subject to adjustment thereof in the event the Acquisition Closing does not occur by the Termination Date. Certain members of management of Newcourt or its affiliates and of AT&T Capital will purchase up to 2.1 million Subscription Rights of the Subscription Rights offered by this Prospectus, for an aggregate purchase price of up to Cdn.$100,000,000, for which no fee will be paid to the Underwriters. The offering price for the Fully Paid Subscription Rights offered hereby has been determined by negotiation between the Corporation and the Underwriters. Concurrently with the offering of the Fully Paid Subscription Rights in the United States, the Corporation is offering subscription rights evidenced by the Instalment Receipt Subscription Rights. THE INSTALMENT RECEIPT SUBSCRIPTION RIGHTS WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES. See "Details of Offering". The Underwriting Agreement provides that the Underwriters may, at their discretion, terminate their obligations thereunder upon the occurrence of certain stated events. In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Subscription Rights offered and sold pursuant to the Underwriting Agreement if any of the Subscription Rights being sold pursuant to the Underwriting Agreement are purchased. The Corporation has also granted to the Underwriters an Over-Allotment Option to acquire at the issue price of the Subscription Rights, up to an aggregate of 3,500,000 additional Subscription Rights. The Underwriters may exercise such Over- Allotment Option in whole or in part at any time up to the Closing of this offering to cover over-allotments, if any, or for market stabilization purposes. Pursuant to policy statements of the Ontario Securities Commission and the Commission des valeurs mobilieres du Quebec, the Underwriters may not, throughout the period of distribution under this Prospectus, bid for or purchase the Subscription Rights. The foregoing restriction is subject to exceptions, on the condition that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in, or raising the price of, the Subscription Rights. Such exceptions include a bid or purchase permitted under the by-laws and rules of The Toronto Stock Exchange and the Montreal Exchange relating to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution, provided that the bid or purchase was not engaged in for the purpose of creating actual or apparent active trading in, or raising the price of the Subscription Rights. Pursuant to the first-mentioned exception, in connection with this offering and subject to applicable Canadian and United States law, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Subscription Rights at levels other than those which might otherwise prevail on the open market. Such transactions, if commenced, may be discontinued at any time. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Subscription Rights or Common Shares in accordance with Regulation M of the Securities Exchange Act of 1934, as amended. Specifically, the Underwriters may overallot the offering, creating a syndicate short position in the Common Shares for their own account. The Underwriters may bid for and purchase Subscription Rights or Common Shares in the open market to cover syndicate short positions. In addition, the Underwriters may bid for and purchase Subscription Rights or Common Shares in the open market to stabilize the price of the Subscription Rights or Common Shares. These activities may stabilize or maintain the market - 26 - price of the Subscription Rights or Common Shares above independent market levels. The Underwriters are not required to engage in these activities, and may end these activities at any time. This offering is being made pursuant to the provisions of Rule 2710, the Corporate Financing Rule of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"). As there is a bona fide independent market for the Common Shares, this offering is being conducted in compliance with Rule 2720(c)(3) of such Conduct Rules. In the Underwriting Agreement, the Corporation has agreed to indemnify the Underwriters in respect of certain liabilities, including liabilities under the United States Securities Act of 1933, as amended. PRICE RANGE AND TRADING VOLUME FOR COMMON SHARES The Common Shares of the Corporation are listed and traded on The Toronto Stock Exchange, the Montreal Exchange and the New York Stock Exchange. The following table sets forth the high and low closing sale prices and the approximate trading volumes for the Newcourt Common Shares on The Toronto Stock Exchange for the periods indicated:
PRICE RANGE ----------- APPROXIMATE 1995 HIGH LOW TRADING VOLUME ---- --- -------------- First Quarter $16.50 $15.25 645,153 Second Quarter 18.50 16.00 1,114,034 Third Quarter 18.88 17.50 1,318,631 Fourth Quarter 21.00 16.50 3,639,406 1996 First Quarter $27.25 $21.00 4,341,977 Second Quarter 33.65 27.00 3,494,939 Third Quarter 38.50 31.75 3,758,222 Fourth Quarter 49.35 36.50 4,895,319 1997 First Quarter $56.40 $46.00 5,714,681 Second Quarter(1) 37.50 27.45 10,070,619 Third Quarter 54.75 35.75 14,767,610 October 55.40 36.00 4,064,575 November (to November 14) 53.00 49.75 2,451,530
- ---------- Note: (1) Effective April 14, 1997, the outstanding Common Shares were subdivided on a two-for-one basis. On November 14, 1997, the closing price of the Common Shares on The Toronto Stock Exchange was $51.30. The Corporation's Common Shares were listed on the New York Stock Exchange on April 29, 1997 and the closing sale price of the Common Shares on the New York Stock Exchange on November 14, 1997 was U.S.$36.31. ELIGIBILITY FOR INVESTMENT In the opinion of Blake, Cassels & Graydon, counsel to the Corporation, and Fasken Campbell Godfrey, counsel to the Underwriters, the Subscription Rights and the Common Shares which may be acquired pursuant to such Subscription Rights, if issued on the date hereof, would be qualified investments, as at such date, under the Income Tax Act (Canada) (the "Tax Act") for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans (other than deferred profit sharing plans to which contribution payments are made by Newcourt or a corporation with which Newcourt does not deal at arm's length within the meaning of the Tax Act is an employer) and, assuming that the Tax Act is amended as provided in Bill C-69 which was introduced in the House of Commons but not passed during the Second Session, would not be "foreign property" as defined in Part XI of the Tax Act. No opinion is expressed as to whether the Subscription Rights or Common Shares will be foreign property in the unlikely event that the proposed amendments are not enacted. - 27 - LEGAL MATTERS The matters referred to under "Eligibility for Investment" and certain other legal matters relating to the Subscription Rights offered by this prospectus will be passed upon by Blake, Cassels & Graydon, Toronto on behalf of the Corporation and by Fasken Campbell Godfrey, Toronto on behalf of the Underwriters. Certain matters relating to the Subscription Rights offered by this prospectus (and the underlying Common Shares) will be passed upon by White & Case, New York on behalf of the Corporation and Shearman & Sterling, Toronto and New York, on behalf of the Underwriters. As of November 7, 1997, the partners and associates of Blake, Cassels & Graydon as a group beneficially owned, directly or indirectly, less than one per cent of the outstanding Common Shares of the Corporation. As of November 7, 1997, the partners and associates of Fasken Campbell Godfrey as a group beneficially owned, directly or indirectly, less than one per cent of the outstanding Common Shares of the Corporation. AUDITORS, TRANSFER AGENT AND REGISTRAR The auditors of the Corporation are Ernst & Young, Chartered Accountants, Ernst & Young Tower, 222 Bay Street, Toronto, Ontario, M5K 1J7. The transfer agent and registrar for the Subscription Rights, the Instalment Receipts and the Common Shares in Canada is Montreal Trust Company of Canada at its principal transfer office in Toronto, Montreal and Vancouver and, in the United States, the transfer agent and registrar for the Common Shares is the New York office of a Canadian chartered bank. PURCHASERS' STATUTORY RIGHTS Securities legislation in several of the Provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the Provinces, securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, damages where the prospectus and any amendment contain a misrepresentation or are not delivered to the purchaser, provided that such remedies are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's Province. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's Province for the particulars of these rights or consult with a legal advisor. - 28 - NEWCOURT CREDIT GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F-1 COMPILATION REPORT To the Directors of Newcourt Credit Group Inc. We have reviewed, as to compilation only, the accompanying unaudited pro forma consolidated balance sheet of Newcourt Credit Group Inc. as at December 31, 1996 and the unaudited pro forma consolidated statement of income for the year then ended. These unaudited pro forma consolidated financial statements have been prepared solely for inclusion in this prospectus. In our opinion, these unaudited pro forma consolidated financial statements have been properly compiled to give effect to the proposed transactions and the assumptions described in the notes thereto. November 17, 1997 Ernst & Young Chartered Accountants Toronto, Canada COMMENTS FOR UNITED STATES READERS ON CANADA AND UNITED STATES REPORTING DIFFERENCES The above report, provided solely pursuant to Canadian requirements, is expressed in accordance with standards of reporting generally accepted in Canada. Such standards contemplate the expression of an opinion with respect to the compilation of pro forma financial statements. United States standards do not provide for the expression of an opinion on the compilation of pro forma financial statements. To report in conformity with United States standards on the reasonableness of the pro forma adjustments and their application to the pro forma financial statements requires an examination or review substantially greater in scope than the review we have conducted. Consequently, we are unable to express any opinion in accordance with standards of reporting generally accepted in the United States with respect to the compilation of the accompanying unaudited pro forma financial information. November 17, 1997 Ernst & Young Chartered Accountants Toronto, Canada F-2 NEWCOURT CREDIT GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (in thousands of Canadian dollars)
AS AT As at As at --------------- ---------------- ----------------- DEC. 31/96 Dec. 31/96 Dec. 31/96 Pro Forma Newcourt/ AT&T Pro Forma Pro Forma NEWCOURT Commcorp Capital Adjustments Reference Consolidated --------------------------------------------------------------------------------------------------- [Note 2] [Note 3] ASSETS Investment in finance assets $964,539 $1,189,953 $2,855,841 $4,045,794 Investment in capital leases 5,683,088 5,683,088 Investment in operating leases 107,738 107,738 1,923,036 2,030,774 Assets held for securitization and syndication 774,000 1,174,000 1,174,000 Investment in affiliated companies 162,308 186,557 186,557 Accounts receivable 36,900 36,900 36,900 Fixed assets 40,859 55,136 55,136 Goodwill 54,279 268,451 176,306 $1,420,518 5 (a) 1,865,275 Other assets 23,871 71,918 917,747 989,665 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,164,494 $3,090,653 $11,556,018 $1,420,518 $16,067,189 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $93,338 $152,578 $805,466 $958,044 Debt 1,543,144 1,825,406 9,450,719 11,276,125 Deferred income taxes 12,078 74,792 48,886 123,678 Payables to affiliates and former affiliates 191,425 191,425 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,648,560 2,052,776 10,496,496 12,549,272 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 7,201 274,040 281,241 - ----------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital 415,160 929,902 1,236 2,204,764 5 (b) (c) 3,135,902 Paid in capital 686,813 (686,813) 5 (b) (c) Recourse loans to senior executives (21,508) 21,508 5 (b) (c) Foreign currency translation (6,535) 6,535 5 (b) (c) Retained earnings 100,774 100,774 125,476 (125,476) 5 (a) 100,774 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 515,934 1,030,676 785,482 1,420,518 3,236,676 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,164,494 $3,090,653 $11,556,018 $1,420,518 $16,067,189 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes F-3 NEWCOURT CREDIT GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (in thousands of Canadian dollars, except per share amounts)
YEAR ENDED Year Ended Year Ended ---------------- ---------------- ----------------- DEC. 31/96 Dec. 31/96 Dec. 31/96 Pro Forma Newcourt/ AT&T Pro Forma Pro Forma NEWCOURT Commcorp Capital Adjustments Reference Consolidated ---------------------------------------------------------------------------------------------------- [Note 2] [Note 3] FEE AND AFFILIATE INCOME Securitization and syndication fees $106,514 $123,781 $194,625 $318,406 Net income from affiliated companies 8,549 8,549 8,549 Management fees 4,140 16,429 263,630 280,059 --------------- ---------------- ---------------- ------------- 119,203 148,759 458,255 607,014 Net rental revenue from operating leases 7,047 7,047 329,207 336,254 Net finance income 45,339 95,431 366,823 462,254 --------------- ---------------- ---------------- ------------- TOTAL ASSET FINANCE INCOME 171,589 251,237 1,154,285 1,405,522 Operating expenses 107,439 172,794 773,973 71,000 5 (d) 1,017,767 --------------- ---------------- ---------------- ---------------- ------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 64,150 78,443 380,312 (71,000) 387,755 Provision for income taxes 13,469 26,621 150,082 176,703 Minority interest 1,915 4,530 6,445 --------------- ---------------- ---------------- ---------------- ------------- NET INCOME FOR THE YEAR $50,681 $49,907 $225,700 $(71,000) $204,607 =============== ================ ================ ================ ============= Earnings per Common Share 6 ________ =============
See accompanying notes F-4 NEWCOURT CREDIT GROUP INC. Notes to the Unaudited Pro Forma Consolidated Balance Sheet and Unaudited Pro Forma Consolidated Statement of Income as at and for the year ended December 31, 1996 (unaudited) 1. BASIS OF PRESENTATION The unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statement of income have been prepared using the following information: (a) Audited consolidated financial statements of Newcourt for the fiscal year ended December 31, 1996, which are incorporated by reference in this prospectus; (b) Audited consolidated financial statements of Commcorp Financial Services Inc. ("Commcorp") for the fiscal year ended October 31, 1996; (c) Audited consolidated financial statements of AT&T Capital Corporation ("AT&T Capital") for the fiscal year ended December 31, 1996, which are included in this prospectus; and (d) Such other supplementary information as was considered necessary to reflect the proposed transaction in these pro forma financial statements. The unaudited pro forma consolidated financial statements of Newcourt should be read in conjunction with the consolidated financial statements, including notes thereto, of Newcourt and AT&T Capital. The unaudited pro forma consolidated financial statements are not intended to reflect the results of operations or the financial position that would have actually resulted had the transaction been effected on the date indicated or the results which may be obtained in the future. Certain of the financial statement items of AT&T Capital and Commcorp have been reclassified to conform to the presentation format used by Newcourt. 2. PRO FORMA NEWCOURT/COMMCORP On August 29, 1997, Newcourt acquired all of the outstanding shares of Commcorp in exchange for cash and Newcourt shares totalling $366 million (the "Commcorp Acquisition"). The Commcorp Acquisition was accounted for as a purchase and the results of operations of Commcorp have been included in the results of Newcourt from the date of acquisition. For the purposes of these unaudited pro forma consolidated financial statements, the financial position and results of operations of Newcourt and Commcorp ("Pro Forma Newcourt/Commcorp") have been combined to give effect to the Commcorp Acquisition as if it had occurred on December 31, 1996 and January 1, 1996 in the case of the unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated statement of income respectively. Accordingly, the following adjustments have been made to reflect the acquisition of Commcorp: (a) Issuance of treasury shares by Newcourt in amount of $277 million to satisfy a portion of the purchase price. (b) Issuance of $254 million of common shares for cash of which $89 million was used to satisfy the remaining portion of the purchase price. (c) The difference between the proceeds of the share issue of $243 million (net of issue costs) and the cash portion of the purchase price of $89 million was used to reduce outstanding debt. (d) Amortization of goodwill over a twenty year period. (e) Reduction of interest expense relating to the proceeds of the common share offering exceeding the cash portion of the purchase price. (f) No adjustment has been made for restructuring costs to integrate the operations of Commcorp with Newcourt. A restructuring charge of $26.4 million (after tax) was charged to income by Newcourt in the third quarter of 1997. F-5 The pro forma consolidated statements of Newcourt contained in the Corporation's prospectus dated August 15, 1997 and comprising the unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated statement of income as at and for the year ended December 31, 1996, and the related notes and assumptions thereto, which result in the Pro Forma Newcourt/Commcorp, have been incorporated by reference herein. 3. AT&T CAPITAL CORPORATION The consolidated financial statements of AT&T Capital as at and for the year ended December 31, 1996, included elsewhere in the prospectus, were prepared in accordance with accounting principles generally accepted in the United States and are expressed in United States dollars. For the purposes of these unaudited pro forma consolidated financial statements, the following adjustments have been made to the consolidated balance sheet and consolidated income statement of AT&T Capital to conform them to Newcourt's basis of presentation. (a) Differences between Accounting Principles Generally Accepted in Canada and the United States [GAAP]. (i) As a result of the reorganization during 1996, certain of the assets of AT&T Capital were revalued for tax but not for accounting purposes. Under U.S. GAAP, such revaluation results in additional deferred taxes which, in this case, were offset by an increase in additional paid-in capital. Under Canadian GAAP, such deferred taxes are not recorded. Accordingly, both deferred taxes and additional paid-in capital were reduced by U.S.$159.6 million for Canadian GAAP purposes. (ii) In prior years, AT&T Capital acquired certain companies which, for U.S. GAAP purposes, were accounted for using the pooling of interests method. Under Canadian GAAP, such acquisitions would be accounted for using the purchase method. At December 31, 1996 the remaining portion of unamortized goodwill would have been U.S.$24.1 million. For the year ended December 31, 1996, additional amortization of goodwill of U.S.$ 3.1 million has been recorded for Canadian GAAP purposes. (iii) In prior years, AT&T Capital entered into several leveraged leases. Under U.S. GAAP, AT&T Capital discloses its investment in capital leases net of the related non-recourse debt. For Canadian GAAP purposes, such lease receivables and non-recourse debt are disclosed on a gross basis unless a legal right of set-off exists. Accordingly, for Canadian GAAP purposes, net investment in capital leases and long-term debt has been increased by U.S.$222.5 million. (iv) AT&T Capital has investments in several joint ventures which, for U.S. GAAP purposes, have been accounted for using the equity method. Under Canadian GAAP, such joint ventures are accounted for using proportionate consolidation. Accordingly, net investment in capital leases and long-term debt have been increased by U.S.$63 million and U.S.$12 million respectively and net investment in finance assets has been reduced by U.S.$51 million (to eliminate inter-company balances) as at December 31, 1996 for Canadian GAAP purposes. The adjustment to consolidated revenues and expenses of AT&T Capital is not significant. (v) As discussed in the consolidated financial statements of AT&T Capital, AT&T Capital entered into a number of securitization transactions during 1996 and in prior years. Under U.S. GAAP, each of these transactions was accounted for as a sale of receivables. Under Canadian GAAP, however, certain of these transactions would be accounted for as financings. Accordingly, net investment in capital leases and long- term debt was increased by U.S.$213.5 million and U.S.$198.0 million respectively and other assets and deferred taxes was decreased by U.S.$22.3 million and U.S.$7.8 million respectively under Canadian GAAP as at December 31, 1996. In addition, capital lease revenue was increased by U.S.$51.9 million, revenue from securitizations was decreased by U.S.$22.2 million, interest expense was increased by U.S.$25.7 million and other revenue was decreased by U.S.$3.9 million for Canadian GAAP purposes. The following tables summarizes the differences between what was reported by AT&T Capital in its consolidated financial statements under US GAAP and what has been reflected herein for Canadian GAAP purposes as at and for the year ended December 31, 1996: F-6
[millions of U.S. dollars] Net income for the year ended December 31, 1996 as reported under U.S. GAAP $168.5 Impact of accounting for securitizations as financings under Canadian GAAP Net finance income (net of an adjustment to interest expense of $25.7) 26.2 Securitization and syndication fees (22.2) Other Revenue (3.9) Amortization of goodwill related to acquisitions accounted for as purchases under Canadian GAAP (3.1) ------ Net income for the year ended December 31, 1996 under Canadian GAAP $165.5 ======= Shareholders' equity as at December 31, 1996 as reported under U.S. GAAP $707.3 Elimination of merger related deferred tax asset (159.6) Unamortized goodwill related to acquisitions accounted for as purchases under Canadian GAAP 24.1 Net impact of securitizations reported as financings under Canadian GAAP in prior periods 1.5 ------ Shareholders' equity as at December 31, 1996 under Canadian GAAP $573.3 =======
(b) Currency The consolidated financial statements of AT&T Capital are expressed in United States dollars. For the purposes of these unaudited pro forma consolidated financial statements, the consolidated balance sheet of AT&T Capital has been translated into Canadian dollars using the December 31, 1996 exchange rate of 1.3702 and the consolidated statement of income has been translated into Canadian dollars using the weighted average exchange rate for the year ended December 31, 1996 of 1.3636. 4. PRO FORMA ASSUMPTIONS (a) The acquisition, pursuant to an agreement dated November 17, 1997, whereby Newcourt has agreed to purchase all of the issued and outstanding Common Shares of AT&T Capital, subject to satisfaction of certain closing conditions, for approximately $2.2 billion payable as follows: (i) $1.45 billion by means of cash payment at closing; and (ii) $753 million by the issue of approximately 17.2 million Newcourt Common Shares from treasury at closing. (b) The acquisition of AT&T Capital has been accounted for using the purchase method. The difference between the purchase price and estimated fair value of the net assets acquired has been allocated to goodwill. The amount assigned to goodwill will be amortized to income over twenty years. (c) The issuance of approximately 35 million Common Shares pursuant to this prospectus for net proceeds (after the underwriters' fees and the expenses of issue) of $__________ billion. F-7 5. PRO FORMA ADJUSTMENTS The pro forma adjustments contained in these unaudited pro forma consolidated financial statements are based on estimates and assumptions by management of Newcourt based on available information. The adjustments for the actual acquisition may differ as a result of changes arising from evaluation of the fair value of AT&T Capital's net assets by Newcourt after the effective date of acquisition. The following adjustments have been made to reflect the proposed transactions: (a) To reflect the purchase of all of the issued and outstanding common shares of AT&T Capital. (b) Issuance of treasury shares by Newcourt in amount of $753 million to satisfy a portion of the purchase price. (c) Issuance of $1.45 billion of Common Shares by means of this prospectus which will be used to satisfy the remaining portion of the purchase price. (d) Amortization of goodwill over a twenty year period (e) No adjustment has been made for restructuring costs to integrate the operations of AT&T Capital with Newcourt which are anticipated to be between $90 and $100 million, after tax. These will be charged to income as incurred. 6. EARNINGS PER SHARE Earnings per share reflects the issuance of approximately 52.2 million Common Shares arising from the acquisition of AT&T Capital and the issuance of Common Shares pursuant to this prospectus and the issuance of 15 million Common Shares arising from the acquisition of Commcorp combined with the average number of Common Shares outstanding (subsequent to the subdivision of the Common Shares) during the period. 7. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The unaudited pro forma consolidated financial statements have been prepared using the consolidated financial statements of Newcourt and Commcorp prepared in accordance with Canadian GAAP and using the consolidated financial statements of AT&T Capital, adjusted to conform to Canadian GAAP. Had these unaudited pro forma consolidated financial statements been prepared using the U.S. GAAP results of Newcourt, Commcorp and AT&T Capital as described in the notes to each of the respective financial statements, the following balances would have been reflected in these unaudited pro forma consolidated financial statements:
U.S. CANADIAN GAAP GAAP ---- ---- (millions of Canadian dollars) Investment in finance assets $4,329 $4,046 Assets held for Securitization and Syndication 2,574 1,174 Debt 12,290 11,276 Securitization and Syndication fees 349 318 Management fees 285 280 Net finance income 427 462 Net income for the year 209 205
F-8 NEWCOURT CREDIT GROUP INC. SUPPLEMENT TO THE UNAUDITED COMPARATIVE INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 F-9 RECONCILIATION TO UNITED STATES ACCOUNTING PRINCIPLES The unaudited interim consolidated financial statements of the Corporation for the nine months ended September 30, 1997 (the "Interim Statements") were prepared in accordance with accounting principles generally accepted in Canada [GAAP]. As required by the regulations of the Securities and Exchange Commission, the following summarizes the material differences between U.S. and Canadian GAAP as they apply to the Interim Statements: (a) 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. (b) 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. (c) For Canadian GAAP purposes, finance assets sold to securitization vehicles are not consolidated for financial reporting. Under U.S. GAAP, the Corporation is required to consolidate certain of these securitization vehicles. In addition, U.S. GAAP requires the Corporation to equity account for its interest in certain other securitization vehicles. Accordingly, for U.S. GAAP purposes, the Corporation 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 sheet. The Corporation will recognize the deferred gains in income as the related finance assets are collected. (d) The restructuring charge was reduced for costs that would have been accrued as an adjustment to the liabilities assumed through the purchase under U.S. GAAP, rather than expensed as permitted by Canadian GAAP. THE FOLLOWING TABLES PRESENT THE AMOUNTS THAT WOULD HAVE BEEN REPORTED FOR U.S. GAAP PURPOSES IN 1997 AND 1996:
NINE MONTHS ENDED SEPT. 30, 1997 SEPT. 30, 1996 $ $ -------------- -------------- (thousands, except per share amounts) Net income for the year - Canadian GAAP 33,135 33,110 Difference in accounting for foreign exchange gains (losses) (net of income taxes recovery of $164 [1996 - ($895)]) (202) 1,103 Difference in accounting for options retired (1,100) (163) Difference in accounting for securitization transactions (net of income tax of $268 [1996 - $506]) 4,188 633 Difference in accounting for restructuring charge (net of income tax recovery of $15,300 [1996 - Nil] 18,700 --- - -------------------------------------------------------------------------------- Net income for the year - U.S. GAAP 54,721 34,683 ================================================================================= Primary and fully diluted earnings per share $ 0.81 $0.69 =================================================================================
F-10 CHANGES IN BALANCE SHEET ITEMS, AS COMPUTED UNDER U.S. GAAP:
AS AT SEPTEMBER 30, 1997 $ -------------- (thousands) Increase in investment in finance assets 147,744 Increase in accrued liabilities 1,744 Increase in debt 1,421,430 Increase in subordinated debt 19,197 Decrease in other assets (3,861) Increase in assets held for securitization and syndication 1,279,000
CHANGES IN SHAREHOLDERS' EQUITY, AS COMPUTED UNDER U.S. GAAP:
AS AT SEPTEMBER 30, 1997 $ ------------- (thousands) Retained earnings, beginning of year 85,966 Net income for the year 54,721 Dividends paid on common shares (6,681) ------------------------------------------------------------------- Retained earnings, end of year 134,006 Share Capital 1,174,392 - ---------------------------------------------------------------------- Total Shareholders' Equity 1,308,398 =====================================================================
F-11 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 * The following Unaudited Interim Consolidated Financial Statements of AT&T Capital Corporation, together with the notes thereto, have been obtained from AT&T Capital Corporation's Form 10-Q for the nine months ended September 30, 1997 filed with the United States Securities and Exchange Commission under applicable U.S. laws and regulations. F-12 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars)
AS AT SEPTEMBER 30 AS AT DECEMBER 31 ------------------ ----------------- (UNAUDITED) 1997 1996* ---- ---- ASSETS Cash and cash equivalents $ 44,703 $ - Net investment in finance receivables 2,353,302 2,135,250 Net investment in capital leases 3,633,915 3,648,731 Investment in operating leases, net of accumulated depreciation of $910,137 in 1997 and $777,905 in 1996 1,669,505 1,403,470 Deferred charges and other assets 837,957 788,935 Deferred income taxes 246,306 116,126 ----------- ---------- TOTAL ASSETS $ 8,785,688 $ 8,092,512 =========== =========== LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY: LIABILITIES Short-term notes, less unamortized discounts of $20,649 in 1997 and $3,112 in 1996 $ 2,209,121 $ 1,867,247 Income taxes and other payables 475,748 580,575 Payables to affiliates and Former Affiliates 41,637 139,706 Medium and long-term debt 5,109,607 4,597,677 ----------- --------- TOTAL LIABILITIES 7,836,113 7,185,205 ----------- ---------- COMMITMENTS AND CONTINGENCIES Preferred Securities: Company-obligated preferred securities 200,000 200,000 ------- ------- Shareowners' Equity: Common stock, one cent par value: Authorized 150,000,000 shares, issued and outstanding, 90,337,379 shares in 1997 and 90,198,571 shares in 1996 903 902 Additional paid-in-capital 636,942 633,676 Recourse loans to senior executives (16,259) (15,697) Unrealized gain on marketable securities, net of taxes 5,889 - Foreign currency translation adjustments (3,737) (3,502) Retained earnings 125,837 91,928 -------- -------- TOTAL SHAREOWNERS' EQUITY 749,575 707,307 -------- -------- TOTAL LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY $8,785,688 $ 8,092,512 ========== ===========
* Certain 1996 amounts have been reclassified to conform to the 1997 presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. F-13 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME (in thousands of U.S. dollars)
NINE MONTHS ENDED SEPTEMBER 30 ------------------- (UNAUDITED) 1997 1996* ---- ----- REVENUES: Finance revenue $166,417 $ 149,357 Capital lease revenue 267,773 492,357 Rental revenue on operating leases (a) 607,576 505,380 Revenue from securitization and loan sales 42,447 13,855 Equipment sales 35,127 72,608 Other revenue, net 181,838 136,937 --------- --------- TOTAL REVENUES 1,301,178 1,370,494 --------- --------- EXPENSES: Interest 327,071 350,359 Operating and administrative 402,930 375,172 Depreciation on operating leases 402,367 329,336 Cost of equipment sales 31,652 61,677 Provision for credit losses 67,193 71,454 --------- --------- TOTAL EXPENSES 1,231,213 1,187,998 --------- --------- Distributions on Preferred Securities 13,590 - --------- --------- Income before income taxes 56,375 182,496 --------- --------- Provision for income taxes 20,577 67,206 --------- --------- NET INCOME $ 35,798 $ 115,290 ========= =========
(a) Includes $21,481 and $22,821 for the three months ended September 30, 1997 and 1996, respectively, and $64,339 and $67,224 for the nine months ended September 30, 1997 and 1996, respectively, from AT&T Corporation, Lucent Technologies Inc. and NCR Corporation. * Certain 1996 amounts have been reclassified to conform to the 1997 presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. F-14 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (in thousands of U.S. dollars)
NINE MONTHS ENDED SEPTEMBER 30 ------------------- (UNAUDITED) 1997 1996* ---- ----- Common stock Balance at beginning of year $ 902 $ 470 Stock issuances, net 1 1 -------- ---------- Balance, end of period 903 471 -------- ---------- Additional Paid-in capital Balance at beginning of year 633,676 783,244 Stock issuances, net 4,202 2,919 Other (936) - --------- ---------- Balance, end of period 636,942 786,163 -------- ---------- Recourse loans to senior executives Balance at beginning of year (15,697) (20,512) Loans made (4,679) (411) Loans repaid 4,117 - -------- ---------- Balance, end of period (16,259) (20,923) --------- ----------- Unrealized gain on marketable securities Balance at beginning of year - - Unrealized gain 5,889 - -------- ---------- Balance, end of period 5,889 - -------- ---------- Foreign currency translation adjustments Balance at beginning of year (3,502) (2,173) Unrealized translation loss (235) (631) --------- ----------- Balance, end of period (3,737) (2,804) --------- ----------- Retained earnings Balance at beginning of year 91,928 355,096 Net income 35,798 115,290 Dividends - (15,491) Other (1,889) - --------- ---------- Balance, end of period 125,837 454,895 -------- ---------- Total Shareowners' Equity $749,575 $1,217,802 ======== ==========
* Certain 1996 amounts have been reclassified to conform to the 1997 presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. F-15 AT&T CAPITAL CORPORATION UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands of U.S. dollars)
NINE MONTHS ENDED SEPTEMBER 30 -------------------- (UNAUDITED) 1997 1996* ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 35,798 $ 115,290 Non-cash items included in income: Depreciation and amortization 440,039 387,183 Deferred taxes (123,443) (17,034) Provision for credit losses 67,193 71,454 Revenue from securitizations and loan sales (42,447) (13,855) (Increase) decrease as deferred charges and other assets 15,860 (63,995) (Decrease) in income taxes and other payables (109,937) (109,789) (Decrease) increase in payables to Affiliates and Former Affiliates (26,935) 1,782 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 256,128 371,036 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of finance asset portfolios -- (148,109) Financings and lease equipment purchases (4,576,049) (4,170,561) Principal collections from customers 2,516,046 2,999,188 Cash proceeds from securitizations and loan sales 959,806 248,720 ----------- ----------- NET CASH USED FOR INVESTING ACTIVITIES (1,100,197) (1,070,762) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES Increase in short-term notes, net 341,875 790,842 Additions to medium and long-term debt 2,327,525 1,288,102 Repayments of medium and long-term debt (1,780,628) (1,101,718) Decrease in payables to affiliates and Former Affiliates -- (247,397) Dividends paid -- (15,490) ----------- ----------- Net Cash Provided by Financing Activities 888,772 714,339 ----------- ----------- Net increase in Cash and Cash Equivalents 44,703 14,613 Cash and Cash Equivalents at Beginning of Period -- 3,961 ----------- ----------- Cash and Cash Equivalents at End of Period $ 44,703 $ 18,574 =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES: In the first nine months of 1996 and 1997, the Company entered into capital lease obligations of $24,456 and $3,500, respectively, for equipment that was subleased. *Certain 1996 amounts have been reclassified to conform to the 1997 presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. F-16 AT&T CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by AT&T Capital Corporation and its subsidiaries ("AT&T Capital" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown. The results for interim periods are not necessarily indicative of financial results for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and the current year's previously issued Form 10-Qs. 2. RECENT PRONOUNCEMENTS Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It allows companies to choose either 1) a fair value method of valuing stock-based compensation plans which will affect reported net income, or 2) to continue to follow the existing accounting rules for stock option accounting but disclose what the impacts would have been had the fair value method been adopted. The Company adopted the disclosure alternative which requires annual disclosure of the pro forma net income and earnings per share amounts assuming the fair value method was adopted on January 1, 1995. As a result, the adoption of this standard did not have any impact on the Company's consolidated financial statements. In June 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practical. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. This statement was effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and its application is prospective. In December 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued. Management does not expect the adoption of either standard to have a material impact on the Company's consolidated financial statements. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure". SFAS No. 129, which is applicable to all entities, requires disclosure of information about the liquidation preference of preferred stock, redeemable stock, and certain other disclosures. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997 which for the Company will be 1997. Management does not expect that the adoption of SFAS No. 129 to have any impact on the Company's consolidated financial statements. In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires total comprehensive income to be reported in a financial statement. Comprehensive income is defined as the total of net income and all other non-owner changes in equity. SFAS No. 130 is effective for financial statements for periods beginning after December 15, 1997 which for the Company will be 1998. Comparative information for earlier years will be restated. In June 1997, the FASB Issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 establishes a new model for segment reporting. The Statement requires reporting of financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. It also requires reporting of certain information about products and services, geographic areas of operation, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 which for the Company will be 1998. Comparative information for earlier years will be restated. F-17 3. DERIVATIVE DISCLOSURE For a discussion regarding the Company's derivatives and related accounting policies, see Notes 2, 11 and 15 to the Consolidated Financial Statements included in the Company's 1996 Annual Report filed on Form 10- K. In addition, the following information is provided pursuant to the SEC's Financial Reporting Release No. 48 issued in 1997, the purpose of which is to enhance disclosures regarding derivatives and other financial instruments. Foreign Currency Forward Exchange Contracts The Company enters into foreign currency forward exchange contracts to manage foreign exchange risk (primarily British pounds and Canadian dollars). In the event of an early termination, sale or extinguishment of such a contract that is determined to be a hedge, the gain or loss shall continue to be deferred over the remaining term of the contract. The exchange of the principal amount under the foreign currency forward exchange contracts is reflected in the statement of cash flows in the "short-term notes, net" amount since the underlying amount is generally commercial paper. Interest Rate Swaps and Currency Swaps Interest rate swaps and the interest component of the currency swaps generally include the exchange of interest payments without the exchange of underlying principal amounts. The difference between the two interest payments is recorded as an adjustment to interest expense and is reflected in the statement of cash flows in the "net income" amount. The exchange of the principal amount under the currency swap is reflected in the statement of cash flows in the "short-term notes, net" amount since the underlying amount is generally commercial paper. 4. SUBSIDIARY DEBENTURES The table below shows summarized consolidated financial information for AT&T Capital Leasing Services, Inc. and AT&T Capital Services Corporation, both wholly owned subsidiaries of the Company. The Company has guaranteed, on a subordinated basis, payment on debentures issued by these subsidiaries.
AT&T CAPITAL LEASING SERVICES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS) (UNAUDITED) 1997 1996 ---- ---- Total revenues $98,042 $176,342 Interest expense 32,428 59,653 Operating and administrative expense 62,235 61,848 Provision for credit losses 31,179 32,393 Income (loss) before taxes (29,926) 20,719 Net (loss) income (18,118) 12,477
F-18
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ -------- (unaudited) Total assets $829,478 $628,945 Total debt 729,082 507,180 Total liabilities 782,540 597,203 Total shareowner's equity 46,938 31,742
AT&T CAPITAL SERVICES CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS) (UNAUDITED) 1997 1996 ---- ---- Total revenues $ 86,512 $ 81,188 Interest expense 5,089 3,656 Operating and administrative expenses 34,881 32,620 Provision for credit losses 1,139 - Income before taxes 4,983 9,601 Net income 2,930 5,723
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ -------- (unaudited) Total assets $149,399 $161,232 Total debt 112,193 116,545 Total liabilities 135,186 145,565 Total shareowner's equity 14,213 15,667
5. SALE OF EQUITY SECURITIES In October 1997, the Company recognized a pre-tax gain of $12.4 million on the disposition of certain equity securities. On September 30, 1997, these securities were classified as available for sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") and, therefore, the related unrecognized after tax gain of $5.9 million was included in shareowners' equity. The Company receives equity securities (e.g., warrants and common stock) in connection with the structuring of some of its complex capital markets transactions. As of September 30, 1997, no other such equity security was required to be marked to market pursuant to SFAS No. 115. 6. SUBSEQUENT EVENTS On November 4, 1997 the Company announced that it had plans to exit certain businesses which represent approximately 11% and 9% of the Company's assets and revenues, respectively, at and for the first nine months of 1997. On November 6, the Company entered into a definitive agreement for the sale of one of these businesses, its inventory financing business unit, which represented 2% and less than 1/2% of the Company's assets and revenues, respectively, at and for the first nine months of 1997. Management does not expect to recognize a loss on the sale of these businesses. On November 4, 1997, the Company confirmed that it was engaged in discussions about a possible business combination with Newcourt Credit Group, a major asset finance company headquartered in Toronto, Canada ("Newcourt"). On November 4, 1997, Newcourt also confirmed discussions with the Company regarding a "possible business combination to be financed by equity issued by Newcourt pursuant to a prospectus and a share exchange with [the Company's] shareholders". No definitive agreement regarding any such transaction has been signed at the time of this filing. F-19 Due to such possible business combination, the Company currently is not issuing medium and long-term debt in the public market. Therefore, subsequent to September 30, 1997, the Company issued notes of $500 million in aggregate principal amount to an affiliate to fund interim cash flow requirements. Because of such possible business combination, one of the Company's rating agencies, Moody's Investors Service, has placed the Company's rating "On Review with Direction Uncertain". F-20 AT&T CAPITAL CORPORATION AUDITED CONSOLIDATED FINANCIAL STATEMENTS * The following Audited Consolidated Financial Statements of AT&T Capital Corporation, together with the notes thereto, have been obtained from AT&T Capital Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 filed with the United States Securities and Exchange Commission under applicable U.S. laws and regulations. F-21 REPORT OF INDEPENDENT AUDITORS To the Shareowners of AT&T Capital Corporation We have audited the consolidated balance sheets of AT&T Capital Corporation and Subsidiaries at December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareowners' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 applicable in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AT&T Capital Corporation and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles applicable in the United States. COOPERS & LYBRAND L.L.P. 1301 Avenue of Americas New York, New York March 6, 1997 F-22 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars)
AS AT DECEMBER 31 -------------------------------- 1996 1995 ---- ---- ASSETS Cash and cash equivalents $ -- $ 3,961 Net investments in finance receivables 2,135,250 1,800,636 Net investment in capital leases 3,648,731 6,187,131 Net investments in operating leases, net of accumulated depreciation of $872,024 in 1996 and $777,905 in 1995 1,403,470 1,117,636 Deferred charges and other assets 788,935 431,895 Deferred income taxes 116,126 -- Net assets of discontinued operations ----------- ----------- TOTAL ASSETS $8,092,512 $9,541,259 ========== ========== LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY: Short-term notes, less unamortized discounts of $5,720 in 1996 and $3,112 in 1995 $ 1,867,247 $ 2,212,351 Income taxes and other payables 580,575 581,000 Deferred Income taxes -- 555,296 Payables to Affiliates and Former Affiliates 139,706 360,429 Medium and long-term debt 4,597,677 4,716,058 ----------- ----------- TOTAL LIABILITIES 7,185,205 8,425,134 ----------- ----------- COMMITMENTS AND CONTINGENCIES Preferred Securities: Company-obligated preferred securities of subsidiary 200,000 -- ----------- ----------- Shareowners' Equity: Common stock, one cent par value: Authorized 150,000,000 shares, issued and outstanding, 90,337,379 shares in 1996 and 90,198,571 shares in 1995 902 470 Additional paid-in-capital 633,676 783,244 Recourse loans to senior executives (15,697) (20,512) Unrealized gain on marketable securities Foreign currency translation adjustments (3,502) (2,173) Retained earnings 91,928 355,096 ----------- ----------- TOTAL SHAREOWNERS' EQUITY 707,307 1,116,125 ----------- ----------- TOTAL LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY $8,092,512 $9,541,259 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-23 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of U.S. dollars)
YEAR ENDED DECEMBER 31 ----------------------------------------- 1996 1995* 1994* ---- ----- ---- REVENUES: Finance revenue $ 204,204 $ 174,523 $120,800 Capital lease revenue 598,203 586,141 477,875 Rental revenue on operating leases (a) 697,020 560,964 475,375 Revenue from securitization and loan sales 164,899 16,374 16,311 Equipment sales 90,631 48,724 126,567 Other revenue, net 197,233 190,309 167,151 --------- --------- -------- TOTAL REVENUES 1,952,190 1,577,035 1,384,079 --------- --------- --------- EXPENSES: Interest 458,039 411,040 271,812 Operating and administrative 564,489 473,663 427,187 Depreciation on operating leases 455,595 354,509 313,583 Cost of equipment sales 78,538 43,370 116,995 Provision for credit losses 113,605 86,214 80,888 --------- --------- --------- TOTAL EXPENSES 1,670,266 1,368,796 1,210,465 --------- --------- --------- Distribution on Company - obligated preferred securities of subsidiary 3,322 - - Income before income taxes 278,602 208,239 173,614 Provision for income taxes 110,063 80,684 73,278 --------- --------- -------- NET INCOME $ 168,539 $ 127,555 $ 100,336 ========== ========= =========
(a) Includes $21,187 for the three months ended June 30, 1996 and $44,403 for the six months ended June 30, 1996, respectively, from AT&T Capital Parent, ("AT&T") herein, "AT&T/Lucent/NCR" of the "Former Affiliates". * Certain amounts have been reclassified to conform to the 1996 presentation. The accompanying notes are an integral part of these Consolidated Financial Statements. F-24 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (in thousands of U.S. dollars)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ---- ---- ---- Common stock Balance at beginning of year $ 470 $ 470 $ 469 Repurchase and retirement of shares in connection with the Merger (471) - - Stock issuances: New shares issued as a result of the Merger 902 - - Pension and benefit plans 1 - 1 -------- ---------- ---------- Balance at end of year 902 470 470 -------- ---------- ---------- Additional Paid-in capital Balance at beginning of year 783,244 782,785 780,591 Repurchase and retirement of shares in connection with the Merger (1,660,174) - - Stock issuances: New shares issued as a result of the Merger 821,583 - - Pension and benefit plans 1,695 459 2,194 Tax impacts of the Merger: Capital contribution from Former Affiliates for lost tax depreciation 279,876 - - Reduction of deferred tax liabilities as a result of Section 338(h)10 election 232,929 - - Establishment of goodwill-deferred tax asset as a result of Section 338(h)10 election 161,999 - - Establishment of current tax receivable relating to tax benefit generated by Hercules buyout of employee stock options 16,011 - - Other (3,487) - - --------- ---------- ---------- Balance at end of year 633,676 783,244 782,785 -------- ---------- ---------- Recourse loans to senior executives Balance at beginning of year (20,512) (19,651) (17,788) Loans made (1,381) (2,613) (2,760) Loans repaid 6,196 1,752 897 -------- ---------- ---------- Balance at end of year (15,697) (20,512) (19,651) --------- ----------- ----------- Foreign currency translation adjustments Balance at beginning of year (2,173) (2,158) (2,603) Unrealized translation (loss) gain (1,329) (15) 445 --------- ----------- ---------- Balance at end of year (3,502) (2,173) (2,158) --------- ----------- ----------- Retained earnings Balance at beginning of year 355,096 246,772 163,774 Repurchase and retirement of shares in connection with the Merger (416,217) - - Net income 168,539 127,555 100,336 Cash dividends paid (15,490) (19,231) (17,338) --------- ----------- ----------- Balance at end of year 91,928 355,096 246,772 -------- ---------- ---------- Total Shareowners' Equity $707,307 $1,116,125 $1,008,218 ======== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-25 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars)
YEAR ENDED DECEMBER 31 ------------------------------------------- 1996 1995* 1994* ---- ----- ----- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 168,539 $ 127,555 $ 100,336 Non-cash items included in income: Depreciation and amortization 509,957 412,044 353,954 Deferred taxes (269,972) (2,772) 106,384 Provision for credit losses 113,605 86,214 80,888 Revenue from securitizations and loan sales (164,899) (16,374) (16,311) (Increase) decrease as deferred charges and other assets (11,274) 26,596 (130,927) (Decrease) increase in income taxes and other payables (35,131) 50,362 3,068 Decrease (increase) in payables to Affiliates and Former Affiliates (18,481) (3,509) (10,257) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 292,344 680,116 487,135 ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of businesses, net of cash acquired (148,109) (294,472) (234,375) Purchase of finance asset portfolios (7,339) (19,769) (217,939) Financings and lease equipment purchases (6,051,483) (5,467,773) (5,031,041) Principal collections from customers, net of amounts included in income 3,998,239 3,855,592 3,553,620 Cash proceeds from securitizations and loan sales 3,390,396 291,476 306,406 Increase in payables to affiliates 25,451 -- -- ----------- ----------- ----------- NET CASH PROVIDED (USED) FOR INVESTING ACTIVITIES 1,207,155 (1,634,946) (1,623,329) ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES (Decrease) increase in short-term notes, net (345,104) (207,045) 523,370 Additions to medium and long-term debt 2,011,705 2,905,920 2,142,993 Repayments of medium and long-term debt (2,135,693) (1,828,426) (1,448,470) (Decrease) increase in payables to affiliates and Former Affiliates (247,400) 53,109 (9,897) Dividends paid (15,490) (19,231) (17,338) Issuance of Company-obligated preferred securities 200,000 -- -- Proceeds from interim bridge-loan to fund merger 1,255,286 -- -- Repayment of interim bridge loan to fund merger (1,255,286) -- -- Repurchase of Company Common Stock (2,076,863) -- -- Capital contributions from affiliates and Former Affiliates 1,101,459 -- -- Other merger related items 3,926 -- -- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES (1,503,460) 904,327 1,190,658 ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents (3,961) (50,503) 54,464 Cash and Cash Equivalents at Beginning of Period 3,961 54,464 -- ----------- ----------- ----------- Cash and Cash Equivalents at End of Period $ -- $ 3,961 $ 54,464 =========== =========== ===========
Interest paid, including discount on commercial paper, was $443.4 million, $365.5 million and $254.0 million during 1996, 1995 and 1994, respectively. Net income taxes paid were $373.5 million, $27.8 million and $55.7 million during 1996, 1995 and 1994, respectively. F-26 NON CASH INVESTING AND FINANCING ACTIVITIES: In conjunction with the Merger, additional paid-in capital increased due to the elimination of deferred tax liabilities of $232.9 million as a result of the Section 338(h)(10) election under the Internal Revenue Code, as amended, and similar elections in certain state and local jurisdictions and the establishment of a deferred tax asset of $162.0 million associated with the step-up in basis to fair value for tax purposes which was not done for book purposes ("push-down accounting") due to the Company's significant level of public debt outstanding. See Notes 1 and 12. Also, certain management members of the Company exchanged their existing shares of Company common stock for new shares totalling $29 million. See Note 1. In 1996, 1995 and 1994, the Company entered into capital lease obligations of $35.6 million, $105.2 million and $41.4 million, respectively, for equipment that was subleased. In 1996 and 1995, the Company assumed debt in conjunction with acquisitions of $3.4 million and $473.0 million, respectively. * Certain amounts have been reclassified to conform to the 1996 presentation. The accompanying notes are an integral part of these Consolidated Financial Statements. F-27 AT&T CAPITAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars) 1. THE COMPANY AND BACKGROUND Description of the Company AT&T Capital Corporation ("AT&T Capital" or the "Company") is a full service, diversified equipment leasing and finance company that operates predominantly in the United States; however, it also has operations in Europe, Canada, the Asia/Pacific Region, Mexico and South America. The Company operates primarily in one business segment - equipment leasing and financing. This segment represents more than 90% of consolidated revenues, net income and total assets. The Company leases and finances equipment manufactured and distributed by AT&T ("AT&T"), Lucent Technologies Inc. ("Lucent") and NCR Corporation ("NCR") (herein, "AT&T/Lucent/NCR" or the "Former Affiliates") and numerous other companies. The Company also provides inventory financing for equipment dealers and distributors, Small Business Administration ("SBA") lending, and equipment management and remarketing services. In addition, the Company offers its customers high-technology equipment rental and certain other equipment administration services. At December 31, 1996, AT&T Capital's portfolio assets were comprised of general equipment (consists of general office, manufacturing and medical equipment) aggregating 27%, transportation equipment of 23%, information technology equipment of 22%, telecommunications equipment totalling 18%, and real estate of 10%. AT&T Capital's portfolio assets are diversified among a large customer base, as well as numerous industries and geographic regions. The Company's customers are diversified across many industries including manufacturing, services, communications and retail, as well as many small and mid-size business customers and federal, state and local governments and their agencies. At December 31, 1996, on an owned basis, the Company's 98 largest customers (after AT&T and Lucent) accounted for approximately 24% of the Company's net portfolio assets, and no customer (with the exception of AT&T and Lucent) accounted for more than 1% of such net portfolio assets. Other than AT&T/Lucent/NCR, as of December 31, 1996, management is not aware of any significant concentration of business transacted with a particular customer, supplier or lender that could severely impact the Company's operations. Also, the Company does not have a concentration regarding the types of financing products or available sources of debt, labour or services, or licenses or other rights that could severely impact its operations. Sale of the Company and Related Transactions On September 20, 1995, AT&T announced a plan to pursue the public or private sale of its remaining 86% interest in AT&T Capital. On such date, AT&T also announced a plan to separate (the "Separation") into three publicly-held stand-alone global businesses (AT&T, Lucent and NCR). In connection with the Separation, AT&T sold approximately 17.6% of its equity interest in Lucent in an initial public offering on April 10, 1996 and spun-off its entire remaining equity interest in Lucent to AT&T shareowners on September 30, 1996. On December 31, 1996 AT&T spun off its 100% interest in NCR to AT&T shareowners. On June 5, 1996, AT&T Capital entered into an Agreement and Plan of Merger ("the Merger Agreement") with AT&T, Hercules and Antigua Acquisition Corporation ("Antigua"). Hercules is an indirect wholly-owned subsidiary of GRS Holding Company, Ltd., which owns a U.K. rail leasing business. On September 30, 1996 the Company, pursuant to a Gross Profit Tax Deferral Interest Free Loan Agreement (the "GPTD Agreement") between the Company and AT&T, made a payment of $247.4 million to AT&T for full repayment of such loans. See Note 12 for additional discussion of GPTD and other tax implications of the Merger. F-28 On October 1, 1996, the Company completed a merger (the "Merger") pursuant to which Antigua, a wholly-owned subsidiary of Hercules, was merged with and into the Company. As a result of the Merger, AT&T Capital's shareowners received $45 in cash for each outstanding share of the Company's common stock, and Hercules and certain management team members (the "Management Investors") became the sole owners of the Company's common stock. The aggregate purchase price for the then outstanding shares of the Company's outstanding common stock and the aggregate amount necessary to cash-out the Company's stock options in accordance with the Merger Agreement (the "Merger Consideration") was approximately $2.2 billion. The Merger Consideration was comprised of (i) a loan from Goldman Sachs Credit Partners L.P. in the amount of approximately $1.3 billion, which was to mature on October 30, 1996 and was repaid by the Company from a portion of the proceeds of a $3.1 billion offering of equipment receivable-backed securities by affiliates of the Company on October 15, 1996 (see Note 6) and (ii) equity contributions (collectively, the "Equity Contributions") represented by (a) capital contributions of $871 million from Hercules, (b) exchange by the Management Investors of approximately $29 million and (c) the settlement of approximately $5 million of recourse loans to senior executives. Also, in connection with the Merger, the Company, through a consolidated subsidiary, issued to the public $200 million of company-obligated preferred securities (see Note 9) and the proceeds of which were used to pay down short term debt. In connection with the Merger, the Company incurred a $47.6 million expense relating to the accelerated payout of the Company's Share Performance Incentive Plan ("SPIP") and other payments to certain officers of the Company (see Note 13), an $11.0 million expense relating to the Company's Merger related and other transaction costs offset by a $6.2 million credit related to the reversal of tax reserves no longer needed as a result of the AT&T tax indemnity payment described further in Note 12. On October 15, 1996 the Company securitized $3.1 billion of lease and loan receivables. As previously noted a portion of the Securitization proceeds were used to finance the Merger transaction. In connection with the Securitization the Company recorded an after-tax gain of approximately $79 million. See Note 6 for a further discussion of securitizations. On October 25, 1996 the Company, through a subsidiary, issued to the public eight million shares of company- obligated preferred securities for $25 per share. Holders of the securities will be entitled to receive cash distributions at an annual rate of 9.06%, which is guaranteed by the Company. See Note 9 for further discussion of the preferred offering. Relationship of the Company with the Former Affiliates In the second quarter of 1996, the Company executed an Operating Agreement (pursuant to which, among other things, the Company serves as preferred provider of financing services and has certain related and other rights and privileges in connection with the financing of equipment to the customers of AT&T/Lucent/NCR) with each of Lucent and NCR, and entered into letter agreements with Lucent and NCR regarding the applicability to Lucent and NCR of specified provisions of a License Agreement (the "License Agreement") and the Intercompany Agreement (Note 14) between the Company and AT&T (see Note 12). None of the Former Affiliates is required to renew the term of its Operating Agreement beyond the expiration of the current term on August 4, 2000. Although the Company will seek to maintain and improve its existing relationships with Lucent, NCR and AT&T and seek to extend each of the Operating Agreements beyond August 4, 2000, no assurance can be given that the Operating Agreements, License Agreements or Intercompany Agreements, will be extended beyond such date or, if extended, that the terms and conditions thereof will not be modified in a manner adverse to the Company. Failure to renew NCR's and Lucent's Operating Agreements on terms not adverse to the Company could have a material adverse effect on the Company (see the Risk Factors included in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations). Pursuant to the License Agreement, AT&T has licensed to the Company and certain of its subsidiaries certain trade names and service marks, including but not limited to the AT&T Capital Corporation, AT&T Credit Corporation, AT&T Systems Leasing and AT&T Automotive Services names. The License Agreement provides that AT&T may require (as a result of their disposition of the Company and upon one year's notice and generally at AT&T's expense) the Company to discontinue the use of the "AT&T" name as part of its corporate name. The Company's subsidiaries may, notwithstanding such event, continue to use the other AT&T licensed names (including NCR) and service marks pursuant to the License Agreement (e.g., as part of such subsidiaries' corporate names and for marketing purposes), subject to extensive restrictions on the use thereof in connection with the issuance of securities and incurrence of indebtedness. As of the date of these financial statements, AT&T has not made such request. F-29 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements reflect, and the future consolidated financial statements of the Company will reflect, the historical cost of the Company's assets and liabilities. Adjustments to the Company's consolidated financial statements to reflect the fair value of the Company's assets and liabilities as of the merger date ("push down" accounting) will not be reflected due to the existence of substantial publicly traded debt of the Company. Consolidation The accompanying consolidated financial statements include all majority-owned subsidiaries. The accounts of operations located outside of the United States are included on the basis of their fiscal years, ended either November 30, or December 31. 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 revenues and expenses during the period reported. Actual results could differ from those estimates. Significant areas in which estimates are used include residual values, income taxes, securitization reserves, allowance for credit losses and contingencies. Revenue Recognition for Finance Receivables and Capital Leases For loans and other financing contracts ("Finance Receivables"), revenue is recognized over the life of the contract using the interest method. For leases classified as Capital Leases, the difference between (i) the sum of the minimum lease payments due and the estimated unguaranteed residual values and (ii) the asset purchase price paid by the Company is initially recorded as unearned income. The difference is subsequently amortized over the life of the lease contract and recognized as revenue, using the interest method. Accrual of income on portfolio assets is generally suspended when a loan or a lease becomes contractually delinquent for 90 days or more (or earlier if deemed necessary). Accrual is resumed when the receivable becomes contractually current and management believes there is no longer any significant probability of loss. Investment in Operating Leases Equipment under Operating Leases is generally depreciated over the estimated useful life of the asset. During the term of the related lease, annual depreciation is generally calculated on a straight-line basis on the estimated residual values at the end of the respective lease terms. Rental revenue is recognized on a straight-line basis over the related lease terms. 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. They are determined on the basis of studies prepared by the Company, professional appraisals, 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 working 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 reviewed by the Company at least annually. 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. F-30 Upon the sale or securitization of substantially all of the receivables associated with a capital lease, the associated residual value is frozen at its then current book value. Such residual value ceases to accrete to its estimated value at the end of the lease term. Allowance for Credit Losses In connection with the financing of leases and other receivables, the Company records an allowance for credit losses to provide for estimated losses in the portfolio. The allowance for credit losses is estimated by management considering delinquencies and problem assets, an assessment of overall risks and evaluation of probable losses in the portfolio given its diversification, and a review of historical loss experience. Although currently deemed adequate by management, it is reasonably possible that a change in the estimate could occur in the near term as a result of changes in the above mentioned factors. The Company's reserve policy is based on an analysis of the aging of the Company's portfolio, a review of all non-accrual receivables and leases, and prior collection experience. An account is charged off when analysis indicates that the account is uncollectible. Additionally, Company policy generally requires the "at risk" portion (the amount of the receivable not covered by estimated equipment or other collateral value) of accounts 180 days past due to be reserved for or charged off. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Other Assets The cost of property and equipment is depreciated on a straight-line basis over their estimated useful lives, which generally range from three to twenty-five years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the related assets on a straight-line basis. Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets on the date of acquisition, and is amortized as a charge against income on a straight line basis generally over three to twenty year periods. Goodwill in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value. The accompanying consolidated balance sheet caption Deferred Charges and Other Assets includes $104.6 million and $114.7 million of goodwill at December 31, 1996 and 1995, respectively. The accompanying consolidated statements of income caption Operating and Administrative Expenses includes $12.6 million, $13.2 million and $10.7 million of goodwill for the years ended December 31, 1996, 1995 and 1994, respectively. See Note 3, "Acquisitions" for discussion of the Company's recent acquisition activities. Securitization Recourse Reserves The Company securitized certain portfolio assets as part of its funding strategy. The securitization agreements provide for limited recourse to the Company for certain uncollectible amounts. The Company recorded the present value of such recourse obligations using a discount rate of 6.5%. These recourse obligations would have been approximately $3.9 million higher had the Company not discounted these recourse obligations. Derivative Financial Instruments The Company enters into derivative financial instruments, mainly interest rate swaps and currency swaps, to hedge interest rate and foreign currency exchange risk and to match fund assets and liabilities. Interest rate swaps generally involve the exchange of interest payments without the exchange of underlying notional principal amounts. Currency swaps generally involve both the exchange of principal and interest payments in distinct currencies. The criteria which must be satisfied for hedges are as follows: (1) the asset or liability to be hedged exposes AT&T Capital, as a whole, to interest rate or currency exchange risk, (2) the derivative acts to reduce the interest rate or currency exchange risk by reducing the sensitivity to interest rate or currency exchange movements, and (3) the derivative is designated and effective as a hedge. F-31 For interest rate swaps, the Company records the net interest to be received or paid as an adjustment to interest expense. In the event of an early termination of a swap contract, the gain or loss on swap accounted for as a hedge is amortized over the remaining life of the related transaction. The Company does not enter into speculative swaps; however, if the underlying transaction associated with a swap accounted for as a hedge is terminated early, the swap is then considered speculative. The gain or loss on a speculative swap is recognized immediately. The Company enters into foreign exchange contracts as a hedge against assets and liabilities denominated in foreign currencies. Gains and losses are recognized on the contracts and offset foreign exchange gains or losses on the related assets and liabilities. Foreign Currency Translation The financial statements of the Company's foreign operations are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation", the resulting translation adjustments are recorded as a separate component of shareowners' equity. A transaction gain or loss realized upon settlement of a foreign currency transaction generally is included in determining net income for the period in which the transaction is settled. Impairment of Long-Lived Assets Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This standard requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment has occurred when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. If an impairment occurred, the measurement of the impairment is based on the fair value of the asset. Since adoption, no impairment losses have been recognized. 3. ACQUISITIONS In the third quarter of 1996, the Company acquired the operating assets and lease portfolio of Municipal Leasing Corporation. This Canadian operation has been financing office equipment and automobiles for the past 15 years and had approximately $160 million in assets at the time of the acquisition. On January 4, 1995, the Company acquired the vendor leasing and finance companies of Banco Central Hispano and certain of its affiliates ("CFH Leasing International") located in the United Kingdom, Germany, France, Italy, Belgium and the Netherlands. CFH Leasing International provides financial services to equipment manufacturers and vendors and had approximately $540 million in assets at the time of acquisition., In addition, on June 30, 1995, the Company acquired two relatively small businesses, a United States mid-range computer asset business with approximately $180 million in assets and an Australian equipment finance company with approximately $40 million in assets. The above acquisitions were accounted for under the purchase method and the total cash paid, net of cash acquired, for all of the above was $294.5 million. The Company assumed certain existing debt associated with these acquisitions. The results of operations are included in the income statement of the Company from the respective acquisition dates. F-32 4. NET INVESTMENT IN FINANCE RECEIVABLES AND CAPITAL LEASES Finance receivables and capital leases consisted of the following:
FINANCE RECEIVABLES CAPITAL LEASES ------------------------- -------------------------- At December 31, 1996 1995 1996 1995 - -------------------------------------------------------------------------------------- Receivables $ 2,294,054 $ 1,959,004 $ 4,056,152 $ 6,846,834 Estimated unguaranteed residual values - - 380,325 734,140 Unearned income (105,289) (104,170) (680,670) (1,230,418) Allowance for credit losses (53,515) (54,198) (107,076) (163,425) - -------------------------------------------------------------------------------------- Net investment $ 2,135,250 $ 1,800,636 $ 3,648,731 $ 6,187,131 - --------------------------------------------------------------------------------------
For a discussion regarding the Company's securitization activities, see Notes 1 and 6. The schedule of maturities at December 31, 1996 for the finance receivables and capital leases is as follows:
FINANCE CAPITAL RECEIVABLES LEASES - -------------------------------------------------------------------------------- 1997 $ 611,030 $1,658,499 1998 313,448 1,096,906 1999 217,864 664,340 2000 207,054 329,225 2001 220,470 144,106 2002 and thereafter 724,188 163,076 - -------------------------------------------------------------------------------- TOTAL $2,294,054 $4,056,152 - --------------------------------------------------------------------------------
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", and No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These standards require that impaired loans be measured based on the present value of expected cash flows, discounted at the loan's effective interest rate or, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent, as well as requiring certain related disclosures. The adoption of these statements did not have a material effect on the Company's consolidated financial statements. The amount of impaired loans at December 31, 1996 and 1995 was not material. F-33 5. NET INVESTMENT IN OPERATING LEASES The following is a summary of equipment under operating leases at December 31, 1996 and 1995, including equipment on lease to Former Affiliates (see Notes 1 and 14):
At December 31, 1996 1995 - -------------------------------------------------------------------------------- 1997 $ 673,298 $ 628,857 1998 557,567 378,426 1999 550,242 456,575 2000 354,658 254,984 - -------------------------------------------------------------------------------- 2,135,765 1,718,842 Less: Accumulated depreciation (777,905) (642,728) Rental receivables, net 45,610 41,522 - -------------------------------------------------------------------------------- Net investment in operating leases $ 1,403,470 $ 1,117,636 - --------------------------------------------------------------------------------
Minimum future rentals to be received on non-cancellable operating leases as of December 31, 1996, are as follows: 1997 $ 565,921 1998 335,728 1999 180,844 2000 66,367 2001 22,296 2002 and thereafter 3,330 - -------------------------------------------------------------------------------- TOTAL MINIMUM FUTURE RENTALS $1,174,486 - --------------------------------------------------------------------------------
6. SECURITIZATIONS AND LOAN SALES In 1996, the Company securitized approximately $3.4 billion of lease and loan receivables and recorded a $149.3 million pre-tax gain. Total proceeds from the 1996 securitizations was approximately $3.1 billion. The 1996 activity includes the Securitization of $3.1 billion of lease and loan receivables (which includes $0.3 billion of receivables previously sold and repurchased by the Company). A portion of the Securitization proceeds were used to finance the Merger transaction (see Note 1). For the years ended December 31, 1995 and 1994, the Company securitized portions of its capital lease portfolio amounting to $74.8 million and $259.1 million, with proceeds received of $86.8 million and $287.6 million, respectively. The Company recorded pre-tax gains on securitizations of $5.9 million and $14.8 million for 1995 and 1994, respectively. Included in other assets at December 31, 1996 and 1995, is approximately $195.9 million and $61.5 million of retained interests in the securitized receivables. These retained interests act as a credit enhancement for the purchasers and are repaid to the Company over the life of the securitized receivables. The securitization agreements provide for limited recourse to the Company for any uncollectible amounts. The Company's maximum exposure under these recourse provisions, in the unlikely event that all such receivables became uncollectible, amounted to $104.9 million at December 31, 1996 and $254.8 million at December 31, 1995. A portion of the gains have been deferred to record an estimate of the losses under recourse provisions for the lease receivables securitized (see Note 2). Under the agreements, the Company services these accounts for a fee on behalf of the purchasers. At December 31, 1996 and 1995, $2,984.7 million and $559.0 million, respectively, of receivables previously securitized remained outstanding. On a periodic basis, the Company sells the guaranteed portion of SBA loans in the secondary market. The gain on these sales is (1) decreased by an adjustment to reduce the carrying value of the retained unguaranteed portion of the loan to its fair value and (2) adjusted for any excess servicing fees to be received. For the years ended December 31, 1996, 1995 and 1994 the Company sold approximately $170.2 million, $146.7 million and $15.7 million, with proceeds received of $184.9 million, $157.2 million, and $19.6 million, respectively. The Company recorded pre-tax gains on SBA loan sales of $15.6 million, $10.5 million and $1.5 million for 1996, 1995 and 1994, respectively. F-34 7. OTHER REVENUE Other revenue consisted of the following:
For the Years Ended December 31, 1996 1995* 1994* Net gain on sale of leased and off-lease equipment $ 86,639 $ 86,987 $ 76,453 Portfolio servicing fees 20,303 23,584 27,203 Other fee related revenue 51,449 44,105 38,871 Other portfolio related revenue 38,842 35,633 24,624 - -------------------------------------------------------------------------------------- TOTAL OTHER REVENUE $197,233 $190,309 $167,151 - --------------------------------------------------------------------------------------
* Certain amounts have been reclassified to conform to the 1996 presentation. 8. DEBT Commercial Paper Commercial paper is generally issued at a discount with the majority maturing within 90 days. As of December 31, 1996 the maturities of commercial paper ranged up to 45 days. As of December 31, 1996 the maturities of commercial paper ranged up to 45 days. As of December 31, 1995 the maturities of commercial paper ranged up to four months. Interest rates ranged from 5.60% to 7.20% and 5.48% to 5.83% at December 31, 1996 and 1995, respectively. The discount amortized on commercial paper, which reflects the cost of such debt, amounted to $100.3 million, $94.0 million and $69.3 million in 1996, 1995 and 1994, respectively. In September 1996, the Company renegotiated its back-up credit facility of $1.8 billion. This facility, negotiated with a consortium of 24 lending institutions, supports the commercial paper issued by the Company. At December 31, 1996 this facility was unused. Under the most restrictive provision of the Company's back-up facility, the Company is required to maintain a minimum consolidated tangible net worth (based on a formula that includes a portion of current net income) of $546.9 million at December 31, 1996. The Company is in compliance with this and all other covenants of the agreement. To meet local funding requirements, the Company's foreign operations have available lines of credit of approximately $362.9 million, of which approximately $26.2 million was available at December 31, 1996. These facilities are generally renewed annually. Facility fees paid for the revolving and foreign credit arrangements were not material in 1996 or 1995. Data with respect to short-term notes (principally commercial paper) are as follows:
1996 1995 1994 End of year balance, net $1,867,247 $2,212,351 $2,176,877 Weighted average interest rate at December 31, 6.1% 5.9% 5.8% Highest month-end balance $3,021,459 $2,212,351 $2,176,877 Average month-end balance (a) $2,154,614 $1,921,298 $1,741,872 Weighted average interest rate (b) 5.7% 5.3% 4.3%
- -------------------------------------------------------------------------------- (a) The average month-end balance was computed by dividing the total of the outstanding month-end balances by the number of months. (b) The weighted average interest rate during the year is calculated by dividing the interest charged for the year by the average month-end balance. F-35 Medium and Long-term Debt Medium and long-term debt outstanding at December 31, 1996 and 1995, consisted of the following:
MATURITIES 1996 1995 4.44% - 5.99% Medium-term notes 1996 - 2001 $1,331,900 $ 716,900 6.00%-6.99% Medium-term notes 1996 - 2000 1,621,525 1,466,025 7.00%-8.08% Medium-term notes 1996 - 2005 621,625 1,043,825 Floating rate Medium-term notes Interest periodically reprices based on various indices. As of December 31, 1996 and 1995, the average interest rate ranged from 5.47%-5.65% and 4.93%-5.74%, respectively. 1996 - 1997 682,000 1,129,500 Other long-term debt 1996 - 2002 340,627 359,808 - -------------------------------------------------------------------------------------- Total medium and long-term debt $4,597,677 $4,716,058 - --------------------------------------------------------------------------------------
The Company's medium and long-term debt matures as follows: 1997 $2,418,753 1998 1,326,375 1999 611,346 2000 88,599 2001 34,773 2002 and thereafter 117,831 - -------------------------------------------------------------------------------- TOTAL $4,597,677 - --------------------------------------------------------------------------------
To reduce exposure to interest rate movements, the Company enters into interest rate swap agreements (see Note 15). The weighted average interest rate on average total debt outstanding, including the effect of these swaps, was 6.38% and 6.60% for the years ended December 31, 1996 and 1995, respectively. During the fourth quarter of 1996, the Company filed with the Securities and Exchange Commission (the "SEC") a debt registration statement in the amount of $4.0 billion. The SEC declared this registration statement effective on January 3, 1997. As of February 28, 1997, the Company had issued $1.2 billion of debt under this registration statement. In connection with transactions preceding the initial public offering of the Company's stock in 1993, AT&T issued a guarantee on all of the Company's debt outstanding at that date. As of December 31, 1996 and 1995, $189,675 and $319,200 of medium and long-term debt was guaranteed by AT&T, respectively. 9. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY In the fourth quarter of 1996, Capita Preferred Trust (the "Trust") issued $200 million of Trust Originated Preferred Securities (the "Preferred Securities") to the public (the "Offering"). The Trust invested the proceeds received from the Offering and its issuance of common securities to the Company in exchange for Partnership Preferred Securities of its affiliate, Capita Preferred Funding L.P. (the "Partnership"). The Trust and the Partnership are consolidated subsidiaries of the Company. The Partnership, in turn, used proceeds from the issuance of the Partnership Preferred Securities and a Company capital contribution to invest primarily in 20-year debentures of the Company and two wholly-owned subsidiaries (the "Debentures"). Payments in respect to the Debentures issued by the Company's subsidiaries have been guaranteed, on a subordinated basis, by the Company. Holders of the 8,000,000 shares of Preferred Securities will be entitled to receive quarterly cash distributions at an annual rate of 9.06% and a liquidation amount of $25 per share. Under the terms of the Offering, the Company issued an irrevocable guarantee, to the extent the Trust has funds available therefore, on the distributions, redemption and liquidation of the Preferred Securities. Distribution will be made on the Preferred Securities to the extent that the Trust had funds available, which is dependent on the payment of distributions on the Partnership Preferred Securities by the Partnership to its limited partner, the Trust. Distributions on the Partnership Preferred Securities will be declared and paid only as determined in the sole discretion of the Company in its capacity as the general partner of the Partnership. The Partnership's ability to pay such distributions to the Trust is dependent on the receipt of interest payments on the Debentures from the Company and its two subsidiaries. F-36 The table below shows summarized consolidated financial information of the Company's two subsidiaries, AT&T Capital Leasing Services, Inc. and AT&T Capital Services Corporation which have issued the Debentures. The summarized financial information includes transactions with the Company that are eliminated in consolidation.
AT&T Capital Leasing Services, Inc. At or for the years ended December 31, 1996 1995 1994 ---- ---- ---- Total revenues $ 244,560 $ 197,537 $ 158,973 Interest expense 69,490 62,420 35,741 Operating and administrative expenses 86,121 85,621 77,607 Provision for credit losses 51,862 39,996 33,942 Income before income taxes 34,509 7,234 9,134 Net income 20,733 4,241 5,465 Total assets 628,943 1,387,325 Total debt 507,180 1,061,640 Total liabilities 597,203 1,214,257 Total shareowner's equity 31,742 173,068 - ----------------------------------------------------------------------------------------
AT&T Capital Services Corporation At or for the years ended December 31, 1996 1995 1994 ---- ---- ---- Total revenues $ 111,572 $ 84,732 $ 70,134 Interest expense 5,157 4,046 2,864 Operating and administrative expenses 46,423 36,108 33,420 Provision for credit losses 650 107 - Income before income taxes 10,260 7,724 1,837 Net income 6,098 4,385 954 Total assets 161,232 116,952 Total debt 116,545 72,635 Total liabilities 145,565 99,031 Total shareowner's equity 15,667 17,921 - ----------------------------------------------------------------------------------------
The significant decrease in AT&T Capital Leasing Services, Inc. total assets is due to significant securitization activity. See Note 6 for further discussion of securitizations. 10. DIVIDENDS On February 29, 1996, shareowners of record as of February 9, 1996, were paid a fourth quarter 1995 dividend of $.11 per share. During 1996, the Company's Board of Directors declared dividends each of $.11 per share to shareowners of record as of May 10, 1996 and August 9, 1996 payable on May 31, 1996 and August 30, 1996, respectively. As a result of the Merger, the Company anticipates that it will no longer pay dividends in the short term. 11. FAIR VALUE DISCLOSURES Fair value is a subjective and imprecise measurement that is based on assumptions and market data which require significant judgment and may only be valid at a particular point in time. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. Accordingly, management cannot provide assurance that the fair values presented are indicative of the amounts that the Company could realize in a current market exchange. The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 1996 and 1995: Cash and Cash Equivalents The carrying amount is a reasonable estimate of fair value. F-37 Net Investment in Finance Receivables The fair value of the finance receivable portfolio 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. Short-term Notes (Commercial Paper and Other Short-term Notes) The carrying amount is a reasonable estimate of fair value for commercial paper. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of other short-term notes. Gross Profit Tax Deferral Payable to AT&T The fair value of the gross profit tax deferral was estimated by discounting the expected future cash flows using the Company's current cost of debt. Based on the announcement that AT&T intended to sell its interest in the Company, this amount for 1995 had been calculated based on the assumption that the amount would have been repaid by December 31, 1996. On September 30, 1996 the Company repaid the then outstanding balance of $247.4 million to AT&T for full repayment of such loans (see Note 1). Medium and Long-term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Interest Rate and Currency Swap Agreements The fair value of interest rate and currency swaps is estimated by discounting the expected future cash flows using an estimated rate at which the Company could terminate the swaps in the market today. Foreign Exchange Contracts The fair value of foreign exchange contracts is estimated based on current market quotes obtained from dealers for foreign exchange contracts with the same remaining terms. Credit Facilities The fair values of the credit facilities are based on fees currently paid for similar arrangements. The following table summarizes the carrying and fair values of on-balance sheet instruments (as determined using the methods described above):
DECEMBER 31, 1996 DECEMBER 31, 1995 - --------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ - $ - $ 3,961 $ 3,961 Net investment in finance receivables (Note 4) 2,135,250 2,140,878 1,800,636 1,844,617 Liabilities: Short-term notes (Note 8) 1,867,247 1,867,247 2,212,351 2,212,403 Gross profit tax deferral payable to AT&T (Note 12) - - 248,902 237,845 Medium and long-term debt (Note 8) 4,597,677 4,663,012 4,716,058 4,844,594 - ---------------------------------------------------------------------------------------
Matching maturities of its portfolio assets and debt is a key component of the financial strategy used by the Company to manage interest rate risk. Based on unaudited calculations performed by the Company, the increased fair value of the Company's debt (including the effects of interest rate and currency swaps, as shown F-38 below) has been offset by the increased fair value of the Company's portfolio assets at December 31, 1996 and December 31, 1995, respectively. The fair value of the Company's lease portfolio is not a required disclosure under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments" and, therefore, only the fair value of the finance receivable portfolio has been disclosed. The following tables summarize the carrying and fair values of off-balance sheet financial instruments (as determined using methods described above):
DECEMBER 31, 1996 - --------------------------------------------------------------------------------------- CARRYING AMOUNT FAIR VALUE RECEIVABLE PAYABLE RECEIVABLE PAYABLE - --------------------------------------------------------------------------------------- Interest rate swap agreements $ 258 $ (2,662) $ 14,247 $ (26,318) Currency swap agreement 69 (1,255) 3,407 (14,870) Foreign currency forward exchange contracts 7,807 (21,405) (931) (25,654) - ---------------------------------------------------------------------------------------
DECEMBER 31, 1995 - --------------------------------------------------------------------------------------- CARRYING AMOUNT FAIR VALUE RECEIVABLE PAYABLE RECEIVABLE PAYABLE - --------------------------------------------------------------------------------------- Interest rate swap agreements $ 3,681 $(1,477) $ 2,234 $(53,359) Currency swap agreements 278 (1,185) 7,066 (8,235) Foreign currency forward exchange contracts 13,104 (814) (3,036) (2,227) - ---------------------------------------------------------------------------------------
Hedging the net cash inflows from foreign denominated assets is a key component of the financial strategy used by the Company to manage its exposure to foreign currency fluctuations. Based on unaudited calculations performed by the Company, the decreased fair value of the Company's forward exchange contracts is generally offset by an increase in the fair value of the Company's foreign denominated assets. The Company has unused revolving credit facilities totalling $1.8 billion and approximately $26.2 million of unused foreign credit facilities. The fair value of the credit facilities is based upon fees currently paid for similar arrangements which are not material (see Note 8). 12. INCOME TAXES As a result of the Merger, the Company is no longer included in the consolidated federal and state returns of AT&T and will file a stand-alone consolidated federal income tax return ("Tax Deconsolidation"). When the Company was included in AT&T's returns, the Company's income tax expense would not have differed materially from that reported had the Company filed tax returns on a stand-alone basis. In connection with the Merger, Hercules and AT&T made an election under Section 338(h)(10) of the Internal Revenue Service Code (the "Section 338(h)(10) election") and similar elections under state and local laws. Under these elections the Merger was deemed to be an asset sale for tax purposes resulting in the elimination of substantially all deferred tax liabilities as of the Merger date. In addition, the Company stepped-up its assets and liabilities to their fair value for tax purposes, which was not done for book purposes ("push-down accounting") due to the Company's significant level of public debt outstanding. Such difference between books and taxes, generated a deferred tax asset, the "Merger-related tax goodwill". In connection with AT&T's sale of its 86% interest in the Company, AT&T agreed to pay the Company approximately $280 million for lost tax depreciation relating to the Section 338(h)(10) election. The Company offset such receivable from AT&T with amounts owed to AT&T for income taxes due as of the Merger date. The Company is also entitled to a tax deduction for the cash-out of the Company's stock options by Hercules. The tax benefit of such payment reduced the Company's current tax liability by approximately $16.0 million. At F-39 December 31, 1996 and 1995 the Company had a current tax receivable of $6.9 million and current taxes payable of $30.6 million, respectively. As part of the GPTD Agreement the Company has, in the past, received interest free loans to the extent of the tax deferrals generated by transactions between AT&T and the Company. On September 30, 1996 the Company, pursuant to the GPTD Agreement, made a payment of $247.4 million to AT&T for full repayment of such loans. The GPTD Agreement required the Company to repay such loans immediately prior to the Company no longer being a member of AT&T's consolidated group for federal income tax purposes., These interest free loans amounted to $248.9 million at December 31, 1995. The average balance outstanding for such loans was $248.9 million, $245.9 million and $213.2 million for the nine months ended September 30, 1996 and the years ending December 31, 1995 and 1994, respectively. Also on September 30, 1996, pursuant to the Merger Agreement, the Company made a $35.0 million payment to AT&T in exchange for AT&T assuming all tax liabilities associated with federal and combined state taxes for periods prior to the consummation of the Merger. In addition, following Tax Deconsolidation, it is possible that the Company could be subject to the federal alternative minimum tax. A Company's alternative minimum tax liability is computed by applying the alternative minimum tax rate, which is lower than the regular tax rate, to a measure of taxable income that is broader than that used in computing the regular tax. Payments of any alternative minimum tax incurred by the Company after a Tax Deconsolidation would be available in the future as credits against the Company's regular tax liability.
For the Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Current: Federal $ 289,942 $59,252 $(13,494) State and local 68,409 13,415 (23,150) Foreign 21,384 10,789 3,538 - ------------------------------------------------------------------------------------------- TOTAL CURRENT PORTION 379,735 83,456 (33,106) - ------------------------------------------------------------------------------------------- Deferred Federal (221,720) (5,460) 72,729 State and local (49,878) 205 33,655 Foreign 1,926 2,483 -- - ------------------------------------------------------------------------------------------- TOTAL DEFERRED PORTION (269,672) (2,772) 106,384 - ------------------------------------------------------------------------------------------- TOTAL PROVISION FOR INCOME TAXES $110,063 $80,684 $73,278 - -------------------------------------------------------------------------------------------
The Company recorded tax credits of $20,762, $10,850 and $3,446 in 1996, 1995 and 1994, respectively. F-40 Deferred income tax assets (liabilities) consist of the following:
AT DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------------------- Gross deferred income tax liabilities: Lease related differences $ (999) $(692,440) Securitization-related (54,519) (2) Pensions (1,176) Other (5,347) (51,618) - ------------------------------------------------------------------------------------------- GROSS DEFERRED INCOME TAX LIABILITIES (62,041) (744,060) - ------------------------------------------------------------------------------------------- Gross deferred income tax assets: Merger-related tax goodwill 159,604 Allowance for credit losses 5,644 124,186 Pensions -- 11,718 State and foreign net operating losses 7,205 17,926 Deferred Foreign Tax Credit 23,237 7,000 Other 4,476 32,982 - ------------------------------------------------------------------------------------------- GROSS DEFERRED INCOME TAX ASSETS 200,166 193,812 - ------------------------------------------------------------------------------------------- Valuation allowance (21,999) (5,048) - ------------------------------------------------------------------------------------------- NET DEFERRED INCOME TAX ASSETS (LIABILITIES) $116,126 $(555,296) - -------------------------------------------------------------------------------------------
* Certain 1995 amounts have been reclassified to conform to the 1996 presentation. As a result of the step-up allowed under the Section 338(h)(10) election, substantially all the deferred tax liabilities arising from lease related differences were eliminated. In addition, the Merger-related tax goodwill created a deferred tax asset. A valuation allowance has been recorded to offset certain deferred tax assets due to the uncertainty of realizing the benefit of foreign tax credits and foreign net operating loss carryforwards. A valuation allowance has not been established for non-foreign deferred tax assets. Management believes that based upon its consistent history of profitable operations, coupled with its forecast of taxable income, which employs certain tax-planning strategies, it is probable that non-foreign deferred tax assets of approximately $135 million will be realized on future tax returns, primarily through the generation of future taxable income. The ultimate realization of the deferred tax assets will require aggregate taxable income of approximately $320 million to $350 million in future years. A reconciliation between the federal statutory tax rate and the Company's effective tax rate is shown below:
For the Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax effect 4.3 4.2 3.9 Tax exempt income (1.4) (1.6) (1.7) Goodwill 0.3 0.5 1.2 Foreign Taxes 1.0 1.0 (0.1) Other 0.3 0.4 3.9 - ------------------------------------------------------------------------------------------- EFFECTIVE TAX RATE 39.5% 38.7% 42.2% - -------------------------------------------------------------------------------------------
The Company has no available AMT credit carryforwards at December 31, 1996 to reduce future federal income taxes payable. For the years ended December 31, 1996, 1995 and 1994, the consolidated income (loss) before income taxes and cumulative effect of accounting change by domestic and foreign source was $296,876 and $(18,274), $210,296 and $(2,057), $177,662 and $(4,048), respectively. F-41 13. PENSION AND BENEFIT PLANS Pension Effective January 1, 1994, all employees of the Company and its domestic subsidiaries were covered by the AT&T Capital Retirement and Savings Plan ("RSP"), a qualified defined contribution plan. Under a defined contribution plan, the amount of future pension benefits is based solely on the amount contributed and the returns earned on those amounts. The RSP has a profit sharing component (including a cash or deferred arrangement) under Section 401(k) of the Internal Revenue Code and a money purchase component. The Company's annual contribution under the profit sharing component, which is discretionary above 5%, is expected to equal approximately 9% of employee pay (i.e., aggregate base salaries and annual incentives of participants in the RSP). In addition, under the money purchase component, the Company matches an amount equal to 662/3% of the first 6% of compensation that each employee contributes to the RSP under Section 401(k). RSP participants can select from a variety of funds within the RSP to invest their allotments. The Company recorded $14,954, $14,367 and $13,525 of pension expense in 1996, 1995 and 1994, respectively, related to the RSP. In addition, in 1996, 1995 and 1994 the Company recorded pension expense of $2,649, $2,431 and $1,366, respectively in connection with the RSP-related nonqualified defined contribution plans. The Company also sponsors various international plans which are available to certain employees of its international subsidiaries. The plans are similar to the RSP in that they enable employees of the Company to contribute a percentage of their salary to provide for post-retirement income. The Company recorded $1,736, $1,412 and $1,034 of pension expense in 1996, 1995 and 1994, respectively related to the various international plans. At the date of the Merger, as a result of the change in control provisions in the RSP, all participants became fully vested. The Company sponsors three unfunded supplemental nonqualified defined benefit retirement plans that provide certain employees with additional benefits after retirement. Components of net periodic pension cost for the years ended December 31, were:
1995 1994 - ------------------------------------------------------------------------------------------- Service cost - benefits earned $ 595 $ 456 Interest cost on projected benefit obligation 608 450 Amortization 490 365 Settlement loss* 455 -- - ------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST AFTER SETTLEMENT LOSS $2,148 $1,271 - -------------------------------------------------------------------------------------------
*In 1996, lump sums were paid to certain participants upon separation of their service. F-42 The funded status of the plans at December 31 was:
1996 1995 - ------------------------------------------------------------------------------------------- Accumulated benefit obligations: Vested benefit obligation $5,926 $1,495 Non-vested benefit obligation 1,104 5,471 Total 7,030 6,966 Additional benefits on estimated future salary level 1,306 1,434 Total projected benefit obligation 8,336 8,400 Plan assets at fair value -- -- Unfunded projected benefit obligation 8,336 8,400 Unrecognized prior service cost 4,413 4,845 Unrecognized net loss 1,413 945 Additional liability 4,773 4,458 Accrued pension liability recorded 7,283 7,068 - --------------------------------------------------------------------------------------------
At December 31, 1996 and 1995, the projected benefit obligation was determined using assumed weighted average discount rates of 7.50% and 7.0% respectively, and assumed long-term rates of increase in future compensation levels of 4.5% or 5.5% in both years, depending on the plan. Share Performance Incentive Plan Prior to the Merger, the Company's Share Performance Incentive Plan, as amended ("SPIP") was designed to provide the opportunity for cash incentive awards to key employees at the end of five three-year performance periods. The first such period terminated on June 30, 1996, with each of the other performance periods ending on the annual anniversary date through and including June 30, 2000. These incentive awards were generally based on the performance of the Company's stock price and dividend yield relative to the interest rate on three-year treasury notes and the total return on the stock relative to a specified peer group of financial services companies over three year performance periods. The estimated compensation expense relating to the SPIP has been charged against income over the respective performance periods. As a result of the Merger, the SPIP provided an accelerated payout and additional amounts to certain key employees resulting in a pre-tax charge of $36.2 million for year ended December 31, 1996. The Company discontinued the SPIO effective October 1, 1996 (the Merger date). Leveraged Stock Purchase Plan Prior to the Merger, under the Company's Leveraged Stock Purchase Plan ("LSPP"), 2,000,000 shares of common stock and options to purchase common stock were reserved for purchase or grant. The terms and provisions of the LSPP required certain senior management employees to purchase an aggregate of 851,716 shares of common stock in conjunction with the Company's initial public offering at the offering price of $21.50 per share ("offering price"). The eligible employees had the option of borrowing from the Company, on a recourse basis, 88.5% to 97.7% of the purchase price of the shares. The recourse loans would have matured on August 4, 2000, and had a stated interest rate of 6.0% compounded on an annual basis. The purchased shares were pledged as collateral for the recourse loans. Sale of these shares was restricted prior to August 4, 1996, and was contingent upon repayment of the loan and certain other requirements. The recourse loans were shown on the balance sheet as a reduction of equity. In addition, under the LSPP, the same senior management employees were granted premium priced stock options which provided participants with an opportunity to purchase up to 1,095,040 shares of Company stock at an exercise price equal to 125% of the offering price ($26.875 per share). The options were exercisable during the period from August 4, 1996 through August 4, 2003. No options were cancelled during 1996. Options cancelled during 1995 and 1994 were 102,852 and 54,895, respectively. Options exercised during 1996 prior to the Merger were 53,352. Pursuant to the terms of the LSPP, no further purchases of stock, Company loans or option grants were made under the LSPP subsequent to December 31, 1993. F-43 1993 Long Term Incentive Plan Prior to the Merger, under the Company's 1993 Long Term Incentive Plan ("1993 LTIP") the Company granted various stock-based and other awards to employees of the Company. The number of shares available for grant or purchase under the 1993 LTIP were 3,500,000 (following approval by the Company's shareowners of an additional 1,500,000 shares on April 19, 1996). Similar to the LSPP, eligible employees purchasing stock under the 1993 LTIP had the option of borrowing from the Company, on a recourse basis, 88.5% to 97.7% of the purchase price of the shares. The recourse loans, which were due seven years from the loan date, had stated interest rates ranging from 6.0% to 7.92% compounded on an annual basis. The purchases shares were pledged as collateral for the recourse loans. Sale of these shares was prohibited for a three-year period and was contingent upon repayment of the loan and certain other requirements. The recourse loans were shown on the balance sheet as a reduction of equity. Awards under the 1993 LTIP were made to executives and employees of the Company at the Company's discretion. The following table summarizes the option activity relating to the 1993 LTIP through the Merger date:
SHARES UNDER OPTION NUMBER PRICE PER SHARE - --------------------------------------------------------------------------------------------- Options outstanding at December 31, 1993 686,303 $21.50 Changes in 1994: Options exercised (274) $21.50 Options cancelled (85,367) $21.50-26.15 Options granted 502,707 $21.81-30.63 - --------------------------------------------------------------------------------------------- Options outstanding at December 31, 1994 1,103,369 $21.50-30.63 Changes in 1995: Options exercised (16,978) $21.50-26.15 Options cancelled (79,605) $21.50-26.15 Options granted 345,036 $21.50-47.03 - --------------------------------------------------------------------------------------------- Options outstanding at December 31, 1995 1,351,822 $21.50-47.03 Changes in 1996 prior to merger date: Options exercised (70,195) $21.50-26.15 Options cancelled (42,937) $21.50-38.63 Options granted 5,206 $38.25-38.63 Options outstanding at October 1, 1996 1,243,896 $21.50-47.03 prior to Merger - --------------------------------------------------------------------------------------------- Options exercisable at December 31, 1996 -- -- Options exercisable at December 31, 1995 59,157 $21.50-26.56 - ---------------------------------------------------------------------------------------------
Upon consummation of the October 1, 1996 Merger Agreement, all option holders received from Hercules $45 in cash for each option. As a result no compensation cost was incurred by the Company relating to the cashout of these options. As part of the same Merger Agreement, most of the senior management employees who were participants in the LSPP and 1993 LTIP, were given the opportunity to exchange all of the Company pre-Merger shares, purchased under the above mentioned plans, for an equal value of the Company's post-Merger shares, which was on the basis of 4.5 new shares for each of the Company's pre-Merger shares. Management employees who effected the exchange had their LSPP or 1993 LTIP recourse loans extended to the year 2006. The new recourse loans have a stated interest rate of 7.13% compounded on an annual basis. The exchanged shares are pledged as collateral for the recourse loans. Sale of the underlying shares is restricted and is contingent upon repayment of the loan and certain other requirements. The recourse loans are shown on the balance sheet as a reduction of equity. In addition, the Company had awarded restricted stock under the 1993 LTIP to certain employees in consideration of services rendered. During 1996, 1995 and 1994, respectively, restricted stock awards of 7,796, 19,967 and 17,801 shares were made to employees under the LTIP. As of December 31, 1996, 1995 and 1994 respectively, 0, 405,106 and 735,936 shares were available for issuance under the 1993 LTIP. The shares were not subject to stock appreciation right features. F-44 Employee Stock Purchase Plan In April 1994, the Company's shareowners approved an employee stock purchase plan effective August 1, 1994. The AT&T Capital 1994 Employee Stock Purchase Plan ("ESPP") enabled employees to purchase shares of AT&T Capital common stock at a discount. The price per share was 90% of the fair market value of the common stock at the time of its purchase. No compensation expenses was recorded in connection with the ESPP. The maximum aggregate number of shares of common stock that could have been purchased under the ESPP was 500,000. During 1996, 1995 and 1994, 10,074, 27,965 and 13,484 shares were purchased by employees at prices ranging from $38.88 to $41.63; $22.05 to $36.00 and $19.02 to $21.83 per share, respectively. As a result of the Merger agreement, the ESPP was discontinued on June 5, 1996. 1996 Long Term Incentive Plan Effective on the Merger date, the Company discontinued the LSPP and the 1993 LTIP. A new fixed option plan, the 1996 Long Term Incentive Plan (1996 LTIP) was adopted the same date. Under the 1996 LTIP, certain members of management who effected an exchange of pre-Merger shares in the Company received options to purchase new shares of the Company having exercise prices aggregating $29.25 million. Additional options to purchase the Company's stock having exercise prices aggregating $9.75 million will also be available for grant to the same group. In addition, options to purchase the Company's stock having exercise prices aggregating $64 million will be available for grant to general members. These grants will be made annually over a 5 year period. The Board of Directors may also consider grants over time, commencing after 1997, of options to purchase the Company's stock with exercise prices aggregating a further $13 million to junior management. Awards under the 1996 LTIP are made to members of the Company at the Company's discretion. All stock options granted under the 1996 LTIP shall be at a price no less than fair market value on the date of the grant, expire after 10 years and vest over a five year period. In October, 1996, 5,062,200 options, with an aggregate value of approximately $51 million were granted under the 1996 LTIP. A further 50,000 options, with an aggregate value of $0.5 million were granted to Board members. The grants were made at an exercise price of $10 each, being equal to the fair market value of the Company's common stock at the date of grant. Under the plan, options having exercise prices aggregating $52 million were available for grant to December 31, 1996. Effective January 1, 1996 the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It allows companies to choose either 1) a fair value method of valuing stock-based compensation plans which will affect reported net income, or 2) to continue to follow the existing accounting rules for stock option accounting but disclose what the impacts would have been had the new standard been adopted. The Company adopted the disclosure alternative which requires disclosure of the pro forma net income amount assuming the fair value method was adopted on January 1, 1995. As a result, the adoption of this standard did not have any impact on the Company's consolidated financial statements. If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards in 1996 and 1995, in accordance with the provisions of SFAS 123, on a pro forma basis, the Company's net income would have been reduced by $1.3 million and $0.6 million for 1996 and 1995. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in the future are anticipated. The weighted average fair values at date of grant for pre-Merger options granted during 1996 and 1995 were $6.71 and $7.03 per share, respectively. The minimum value at date of grant for post-Merger options granted in 1996 was $2.61 per share. For 1996, as a result of the Merger and the related accelerated vesting of all prior option grants, the fair value was determined as being the difference between the grant price and the final cash settlement price of $45 per share for all option grants made in 1996. For post-Merger option grants, the minimum value was estimated using the following assumptions: (a) Risk free interest rate of 6.2% and (b) expected life of 5 years. For 1995, the fair value was estimated using the Black-Scholes option-pricing model using the following assumptions: (a) Expected volatility rate of 24.3%, (b) Risk free interest rate of 7.4%, (c) Expected dividend yield of 0% and (d) Expected life of 3 years. F-45 Severance plans In 1995, the Company's Compensation Committee and Board of Directors approved broad-based plans that provide for benefits to members upon certain terminations of employment. Such benefits are calculated using annual base pay and annual incentive awards as well as other factors. No accrual for these benefits have been reflected in the consolidated financial statement because the amount cannot be reasonably estimated. 14. RELATED-PARTY TRANSACTIONS Nomura On October 1, 1996 the Company entered into an Advisory Agreement with an affiliated company, Nomura International plc (the indirect beneficial owner of Hercules ("Nomura")). The agreement is for ten years and is subject to a substantial change in the beneficial ownership of the Company. Under the agreement Nomura will provide support services to the Company. As part of the same agreement, the Company incurred a securitization fee of $24 million in connection with its October 15, 1996 $3.1 billion securitization of lease and loan receivables (see Note 6). Further, Nomura earned from the Company a $2.0 million fee in connection with its October 25, 1996 issuance to the public of eight million company-obligated preferred securities of subsidiary. Nomura also receives a quarterly retainer fee of $0.75 million for certain other services provided to the Company. Such fees may increase after the first year, but not in excess of 10% of the previous year's amount. In connection with the above mentioned $3.1 billion securitization, Nomura provided an amount equal to 3.5% of the Securitization proceeds as a credit enhancement. AT&T/Lucent/NCR In 1996, rental expense under existing leases with AT&T and affiliates for the nine months through the Merger date was $3.8 million. Such expenses for the years ended 1995 and 1994 were $5.5 million and $4.1 million, respectively. The Company purchases services from AT&T and affiliates, included data processing, billing and collection, administration and other services. In 1996, the Company's expenses for such services, for the nine months through the Merger date were $13.1 million. For the years ended 1995 and 1994, such expenses amounted to $20.0 million and $20.6 million, respectively. At December 31, 1995 and 1994, the Company was the lessor to AT&T of equipment comprising $176.4 million and $268.6 million of capital leases and $220.5 million and $204.6 million of equipment under operating leases, respectively. Revenues in 1996 related to these leases through the Merger date were $67.2 million. For the year ended 1995 and 1994, such revenues were $105.8 million and $108.8 million, respectively. The Company also had an interest bearing intercompany debt payable to AT&T and affiliates of $18.3 million at December 31, 1995 and an interest bearing intercompany note receivable from AT&T and affiliates of $40.1 million at December 31, 1994. The net interest income and expense associated with intercompany borrowing were not material in 1996, 1995 or 1994. Additionally, the Company had interest free loans related to tax agreements from AT&T as more fully discussed in Note 12. The Company is also a party to Operating and License Agreements with AT&T, pursuant to which AT&T provides the Company with the right to be the preferred provider of leasing and financing services for AT&T products on a basis consistent with past practice (Note 1). The Company and AT&T have also entered into an Intercompany Agreement whereunder, among other things, the Company manages and administers, for a fee, certain lease portfolios, including the Lease Finance Assets of Old Capital and Old Credit which were not transferred to the Company. In 1996, for the nine months through the Merger date, the Company recognized service fee revenue of $4.8 million for such services. In 1995 and 1994, fee revenue of $7.6 million and $8.6 million, respectively, were earned for such services. In the second quarter of 1996, the Company executed an Operating Agreement with each of Lucent and NCR, and entered into letter agreements with Lucent and NCR regarding the applicability to Lucent and NCR of specified provisions of the License Agreement and the Intercompany Agreement between the Company and AT&T. The Company has paid a sales assistance fee ("SAF") to Lucent, which fee is related to the volume of the Company's Lucent-related business. Under the terms of its Operating Agreement with the Company, Lucent is prohibited from accepting a SAF from any other provider of leasing services. In early 1996, after a period of negotiations, the Company agreed to pay a substantial increase in the SAF for 1995, both as an absolute amount and as a percentage of volumes attributable to Lucent. After giving effect to the increase, the SAF paid by the Company to Lucent for 1995 was approximately double the 1994 fee. The Company and Lucent recently agreed F-46 to a modified formula for calculating the SAF for the remaining years of the term of Lucent's Operating Agreement (retroactive to 1996). The revised formula is expected to result in aggregate annual SAF which is approximately double the amounts that would have been paid if the pre-1995 formula had been maintained. 15. COMMITMENTS AND CONTINGENCIES Derivative Financial Instruments In the normal course of business, the Company is routinely party to various derivative financial instruments. These financial instruments are used by the Company to reduce interest rate and foreign currency exposure, as well as to meet the financing needs of its customers. At both December 31, 1996 and 1995, in management's opinion, there was no significant risk of loss in the event of nonperformance of the counterparties to derivative contracts. There were no past due amounts, nor were there any reserves for credit losses on derivatives as of December 31, 1996, 1995 and 1994. Generally, the Company does not require collateral or other security to support financial instruments with credit risk. The Company has never experienced a credit related charge-off associated with derivative transactions. Information is provided below for each significant derivative product type. The derivatives, with which the Company is involved, are primarily interest rate swaps, currency swaps, and foreign currency forward exchange contracts. Interest Rate and Currency Swaps The Company enters into interest rate and foreign currency swap agreements with major money center banks and intermediaries located in major financial centres to reduce interest rate exposure, to more closely match the maturity of its debt portfolio to that of its asset portfolio and to reduce its exposure to currency fluctuations. Interest rate swaps also allow the Company to raise funds at floating rates and effectively swap them into fixed rates that are lower than those available to the Company if fixed-rate borrowings were made directly. Foreign currency swaps are primarily used to hedge Canadian dollars. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Generic swaps' notional amounts generally do not change for the life of the contract. Amortizing and accreting swaps' notional amounts generally change based upon a predetermined amortization or accretion schedule. Currency swaps generally involve the exchange of both principal and interest payments in distinct currencies. The notional amounts shown below for interest rate swaps represent an agreed upon amount on which calculation of amounts to be exchanged are based and for currency swaps also represent the U.S. equivalent of an amount exchanged. Notional amounts do not represent the Company's exposure. Rather, the Company's exposure is limited to the current fair value of the contracts with a positive fair value at the reporting date (see Note 11). A key assumption in the information below is that rates remain constant at the reporting date levels. To the extent that rates change, the variable interest rate information will change. F-47 Activity in interest rate and currency swaps which are all held for purposes other than trading for 1996 and 1995, is summarized as follows:
GENERIC AMORTIZING GENERIC PAY CURRENCY NOTIONAL AMOUNTS PAY FIXED PAY FIXED FLOATING SWAPS TOTAL - ----------------------------------------------------------------------------------------- December 31, 1994 $1,571,800 $964,973 $175,000 $221,817 $2,933,590 Additions 124,339 373,435 240,000 151,631 889,405 Maturities/ amortization (350,000) (406,365) (175,000) (108,455) (1,039,820) Terminations (225,000) (59,400) - - (284,400) - ----------------------------------------------------------------------------------------- December 31, 1995 1,121,139 872,643 240,000 264,993 2,498,775 Additions 303,877 370,189 100,000 150,074 924,140 Maturities/ amortization (527,873) (143,364) (240,000) (94,418) (1,005,655) Terminations (119,800) (540,033) - - (659,833) - ----------------------------------------------------------------------------------------- December 31, 1996 $ 777,343 $ 559,435 $ 100,000 $ 320,649 $1,757,427 - -----------------------------------------------------------------------------------------
F-48 The schedule of maturities at December 31, 1996 for interest rate and currency swaps which are all held for purposes other than trading is as follows:
GENERIC AMORTIZING GENERIC PAY CURRENCY NOTIONAL AMOUNTS PAY FIXED PAY FIXED FLOATING SWAPS TOTAL - ----------------------------------------------------------------------------------------- Total notional amounts $ 777,343 $ 559,435 $ 100,000 $ 320,649 $1,757,427 Weighted average a pay rate 6.79% 5.99% 5.46% 3.97% 5.95% Weighted average receive rate 5.73% 4.97% 5.45% 3.06% 4.99% - ----------------------------------------------------------------------------------------- GENERIC AMORTIZING GENERIC PAY CURRENCY PAY FIXED PAY FIXED FLOATING SWAPS TOTAL - ----------------------------------------------------------------------------------------- 1997 Maturities $341,354 $217,484 $100,000 $128,334 $787,172 Weighted average pay rate 6.03% 6.02% 5.46% 4.89% 5.77% Weighted average receive rate 5.73% 4.84% 5.45% 3.80% 5.13% 1998 Maturities $230,818 $145,285 - $112,445 $488,548 Weighted average pay rate 6.86% 5.74% - 4.12% 5.90% Weighted average receive rate 5.72% 4.83% - 3.13% 4.86% 1999 Maturities $201,680 $72,898 - $75,536 $350,114 Weighted average pay rate 8.00% 5.74% - 2.04% 6.25% Weighted average receive rate 5.75% 4.74% - 1.54% 4.63% 2000 Maturities $3,491 $60,468 - $4,334 $68,293 Weighted average pay rate 6.56% 5.95% - 6.57% 6.02% Weighted average receive rate 5.59% 5.28% - 5.75% 5.33% 2001 Maturities - $33,186 - - $33,186 Weighted average pay rate - 5.92% - - 5.92% Weighted average receive rate - 5.75% - - 5.75% 2002-2017 Maturities - $30,114 - - $30,114 Weighted average pay rate 7.75% 7.75% Weighted average receive rate - 5.75% - - 5.75% - -----------------------------------------------------------------------------------------
Foreign Currency Forward Exchange Contracts The Company enters into foreign currency forward exchange contracts to manage foreign exchange risk (primarily British pounds and Canadian dollars). The U.S. dollar equivalent of such contracts was $907,283 and $658,808 at December 31, 1996 and 1995, respectively. The Company enters into these contracts to hedge the cash flows associated with foreign currency denominated assets. The term of these contracts is rarely more than three years. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar net cash inflows resulting from these assets will be adversely affected by changes in exchange rates. F-49 Certain regional office facilities and equipment of the Company are leased with renewal options of one to five years. Rental expense (including rental expense to the Former Affiliates of $4,508) for the years ended December 31, 1996, 1995 and 1994 was $21,247, $22,752 and $18,303, respectively. Rental expense associated with sublease rentals on operating leases for 1996, 1995 and 1994, was $51, $165 and $115, respectively. Minimum annual rental commitments at December 31, 1996, under these operating lease agreements are as follows: 1997 $21,095 1998 20,470 1999 18,779 2000 13,232 2001 9,677 2002 and thereafter 21,751 - -------------------------------------------------------------------------------- TOTAL $105,004 - --------------------------------------------------------------------------------
The total of minimum rentals to be received in the future under noncancelable subleases related to operating leases as of December 31, 1996, was $11,802. The total of minimum rentals to be received in the future under noncancelable subleases related to capital leases (recorded as debt) as of December 31, 1996, was $117,850. As part of its lending activities, the Company has entered into noncancelable commitments to extend credit to some of its customers. As of December 31, 1996, the Company had approximately $140,213 of such unused commitments with a remaining term in excess of one year. In the normal course of business, the Company is subject to certain lawsuits and other claims. Such matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, the ultimate monetary liability or financial impact with respect to these matters at December 31, 1996 cannot be ascertained. While these matters could impact the operating results, management believes that after final disposition, any monetary liability or financial impact to the Company would not be material to the consolidated financial statements. 16. FOREIGN OPERATIONS The following data on other geographic areas pertain to operations that are located outside the U.S. (primarily Europe, Canada, the Asia/Pacific Region and Central/South America). Net income (loss) includes certain allocated operating expenses and interest expense. Revenues between geographic areas are not material. The increase in the net loss relating to foreign operations for 1996 resulted primarily from the allocation of one-time Merger related costs. F-50 A summary of the Company's operations by geographic area is presented below.
For the Years Ended December 31, 1996 1995 1994 Total Revenues: United States $1,683,499 $1,370,672 $1,250,591 Foreign 268,691 206,363 133,488 - ------------------------------------------------------------------------------------- Total $1,952,190 $1,577,035 $1,384,079 - ------------------------------------------------------------------------------------- Net Income (Loss): United States $180,433 $130,587 $104,558 Foreign (11,894) (3,032) (4,222) - ------------------------------------------------------------------------------------- Total $168,539 $127,555 $100,336 - ------------------------------------------------------------------------------------- At December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------- Total Assets: United States $6,150,074 $7,868,941 $7,148,737 Foreign 1,942,438 1,672,318 873,186 - ------------------------------------------------------------------------------------- Total $8,092,512 $9,541,259 $8,021,923 - -------------------------------------------------------------------------------------
F-51 EX-99 5 EXHIBIT (B)(2) New Worlds New Rules Newcourt 1997 First Quarter Report To Shareholders For the Three Months Ended March 31 NCT FINANCIAL SUMMARY Newcourt Credit Group
(unaudited, in thousands of Canadian dollars, except for share data) Three months ended March 31 March 31 1997 1996 Income Statement $ $ Securitization and syndication fees 22,737 14,526 Net income from affiliated companies and management and other fees 9,920 7,339 Net finance income 16,008 7,666 Total asset finance income 48,665 29,531 Operating income before taxes 18,108 10,005 Net income 14,125 8,003 Fully diluted earnings per share (1) 0.23 0.17 Dividends per share (1) 0.035 0.03 As at March 31 December 31 1997 1996 Balance Sheet $ $ Total assets 2,247,460 2,164,494 Debt 1,519,963 1,543,144 Shareholders' equity 651,687 515,934 Common shares outstanding 32,609,260 30,091,344 Three months ended March 31 March 31 1997 1996 Asset Financings $ $ Originations during the period 1,368,777 1,024,996 As at March 31 December 31 1997 1996 $ $ Total finance assets owned and managed 6,722,161 6,625,990 (1) reflects 2 for 1 stock division of common shares effective April 14, 1997
MESSAGE TO SHAREHOLDERS Newcourt Credit Group Newcourt earned net income of $14.1 million for the three month period ending March 31, 1997, representing a 76% increase over the $8.0 million reported for the same period in 1996. First quarter earnings per share amounted to $0.23 versus $0.17 for the same three month period last year. During the period, the number of issued and outstanding common shares increased by 2,517,916 to 32,609,260 (pre-split) as of March 31, 1997. Following the end of the period, the Company subdivided its common shares on a two-for-one basis and as of April 14, 1997 had 65,218,520 common shares issued and outstanding. New loan originations for the quarter amounted to $1.4 billion versus $1.0 billion for the same period in 1996, representing a 34% increase. Of this total, $911 million or 67% were attributable to transactions in the commercial market. Fifty-eight percent (58%) of the new commercial financings were sourced from the U.S. and international markets. Newcourt's activities in the corporate finance market account for the remaining 33% ($458 million) of the Company's new loans during the quarter. Total asset finance income for the three month period rose 65% to $48.7 million from approximately $29.5 million during the same quarter in 1996. Fee-based income represented approximately two-thirds of the Company's revenue mix, accounting for $32.7 million (67%) of total asset finance income compared with $21.9 million (74%) in 1996. These results are in line with management's 1997 business plan and, in part, reflect the investment which the Company has made in geographically expanding its loan origination capabilities, particularly in the United States market. Following the end of the quarter, two strategic U.S.-based initiatives were concluded by the Company, which together underscore the progress that Newcourt has achieved in developing a broadly-based presence in the North American market. On April 14, 1997, the Company's commercial finance business unit, Newcourt Financial, established a joint venture with Dell Computer Corporation to create Dell Financial Services. This entity is the exclusive page one MESSAGE TO SHAREHOLDERS Newcourt Credit Group provider of sales financing and asset management services to Dell in the United States. Dell and Newcourt are in the process of expanding the mandate of Dell Financial Services to facilitate the service needs of Dell's international operations. Fundamental to Newcourt's growth strategy is the development of long-term relationships with leading equipment manufacturers, such as Dell. On April 30, 1997, Newcourt Credit Group commenced trading of its common shares on the New York Stock Exchange under the trading symbol "NCT". Establishing its presence in the U.S. and internationally has been a key element of Newcourt's growth strategy for the past three years. However, care has been taken to ensure that as the Company moves into new regions it remains focused on those segments of the asset-based lending market in which it has already developed a high level of expertise. For example, the strategic alliances which we have established with our major loan origination and funding partners provide the primary incentive for the decision to enter new geographic markets. Through these alliances, we are quickly able to tap into the new sources of loan volume needed to offset the initial entry costs. Having successfully applied this strategy in securing our entry to the U.S. market, Newcourt plans to follow this same approach as the Company establishes its presence in other international markets. As the Company's loan origination and funding partners seek access to these new markets, Newcourt will be there to provide the services which these partners have come to value from us in North America. /s/ David J. Sharpless /s/ Steven K. Hudson David J. Sharpless Steven K. Hudson Chairman President and Chief Executive Officer page two FINANCIAL HIGHLIGHTS Newcourt Credit Group NEW ASSET FINANCINGS INCREASED OVER Q1/96 During the first quarter of 1997, Newcourt originated $1.4 billion of new asset-based financings. Originations in the commercial finance market totaled $911 million, up 59% from the $574 million recorded in 1996. Volumes in the corporate market were $458 million compared with $451 million in the previous year. REVENUE INCREASES Total asset finance income for the first quarter totaled $48.7 million versus $29.5 million for the first quarter of 1996, representing an increase of 65%. Fee-based and affiliate income accounted for two-thirds of revenue growing from $21.9 million in the first quarter of 1996 to $32.7 million in the current period. page three FINANCIAL HIGHLIGHTS Newcourt Credit Group NET INCOME UP 76% Net income for the 3 months ending March 31, 1997 was $14.1 million representing a 76% increase over the $8.0 million reported for the same period last year. OWNED AND MANAGED LOANS EXCEED $6.7 BILLION At the end of the first quarter of 1997, Newcourt's portfolio of owned and managed assets grew to more than $6.7 billion. The owned portion of the portfolio was $2.0 billion, while the managed portion accounted for the remaining $4.7 billion. page four BUSINESS HIGHLIGHTS Newcourt Credit Group LOAN ORIGINATION - COMMERCIAL FINANCE New vendor programs established During the period, Newcourt Financial established new vendor agreements in each of the Company's core market segments. Newcourt currently has more than 170 significant vendor programs in place across North America. Significant joint venture created with Dell In early April, after a thorough six-month search and selection process, U.S.-based computer manufacturer Dell Computer Corporation announced its selection of Newcourt as its exclusive partner in the creation of a joint venture. Dell Financial Services is the exclusive financing source for Dell in the United States and will eventually provide similar services on a worldwide basis. LOAN ORIGINATION - CORPORATE FINANCE $214 million of refinancing and advisory services for aircraft Newcourt Capital provided advisory services to ATR for a transaction involving 15 ATR 42-500 aircraft acquired by Air Littoral. As well, Newcourt provided refinancing for 3 ATR 72 aircraft operated by Royal Air Cambodge. $2.7 billion backlog of mandated transactions Newcourt Capital's backlog of $2.7 billion of mandated transactions for the first quarter is a 58% increase over the $1.7 billion reported for the same three month period of 1996. LOAN FUNDING & MANAGEMENT $126.2 million equity issue completed Late in the first quarter, Newcourt announced it successfully completed a treasury offering of 2,475,000 common shares at $51.00 per share. The transaction, completed March 11, 1997, succeeded in raising $126.2 million of new equity. Final approval for New York Stock Exchange listing attained During the quarter, final approval was given to Newcourt for an April 30, 1997 listing of the Company's common shares on the New York Stock Exchange. Canadian and U.S. commercial loans securitized Newcourt's Treasury department completed the securitization of $714 million of commercial loans in the first quarter. Of that amount, $316 million were sold to Canadian investors, with the remaining $398 million purchased by U.S. investors. page five CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Newcourt Credit Group
(unaudited, in thousands of Canadian dollars, except for per share data) Three Months Ended March 31 March 31 1997 1996 $ $ Fee and affiliate income Securitization and syndication fees 22,737 14,526 Net income from affiliated companies 4,055 1,672 Management and other fees 5,865 5,667 32,657 21,865 Net finance income 16,008 7,666 Total asset finance income 48,665 29,531 Operating expenses 30,557 19,526 Operating income before taxes 18,108 10,005 Provision for income taxes 3,983 2,002 Net income for the period 14,125 8,003 Retained earnings, beginning of period 100,774 56,942 Dividends paid (2,107) (1,372) Options purchased (173) 0 Retained earnings, end of period 112,619 63,573 Earnings per share: Basic (1) $ 0.23 $ 0.17 Fully diluted (1) $ 0.23 $ 0.17 (1) reflects 2 for 1 stock division of common shares effective April 14, 1997
page six CONSOLIDATED BALANCE SHEETS Newcourt Credit Group
(unaudited, in thousands of Canadian dollars) March 31 December 31 1997 1996 $ $ Assets Investment in finance assets 1,111,352 1,072,277 Assets held for securitization and syndication 774,882 774,000 Investment in affiliated companies 170,254 162,308 Accounts receivable 51,598 36,900 Fixed assets 49,267 40,859 Other assets 90,107 78,150 Total Assets 2,247,460 2,164,494 Liabilities and Shareholders' Equity Liabilities Accounts payable and accrued liabilities 62,342 93,338 Debt 1,519,963 1,543,144 Deferred income taxes 13,468 12,078 Total Liabilities 1,595,773 1,648,560 Shareholders' Equity Share capital 539,068 415,160 Retained earnings 112,619 100,774 Total Shareholders' Equity 651,687 515,934 Total Liabilities and Shareholders' Equity 2,247,460 2,164,494
page seven CONSOLIDATED STATEMENTS OF CASH FLOWS Newcourt Credit Group
(unaudited, in thousands of Canadian dollars) Three Months Ended March 31 March 31 1997 1996 $ $ Operating Activities Net income for the period 14,125 8,003 Add items not requiring an outlay of cash Deferred income taxes 2,782 1,206 Depreciation and amortization 2,711 1,066 Net change in non-cash assets and liabilities related to operations ( 59,957) ( 12,376) Cash used in operating activities ( 40,339) ( 2,101) Investing Activities Finance assets, underwritten and purchased (946,532) (694,519) Finance assets, securitized and syndicated 714,064 219,352 Finance assets, repayments and others 192,511 54,376 Finance assets and assets held for securitization and syndication ( 39,957) (420,791) Investment in affiliated companies ( 7,946) 1,913 Purchase of fixed assets ( 10,205) ( 3,183) Cash used in investing activities ( 58,108) (422,061) Financing Activities Debt issued, net ( 23,181) 424,736 Issue of common shares, net 121,400 798 Deferred tax on share issue 2,508 0 Dividends paid ( 2,107) ( 1,372) Options purchased ( 173) 0 Cash provided by financing activities 98,447 424,162
page eight INFORMATION Newcourt Credit Group HEAD OFFICE BCE Place 181 Bay Street Suite 3500, P.O. Box 827 Toronto, Ontario Canada M5J 2T3 Telephone: (416) 594-2400 Facsimile: (416) 594-5995 STOCK EXCHANGE LISTINGS Toronto Montreal New York STOCK SYMBOL NCT TRANSFER AGENT AND REGISTRAR Montreal Trust 151 Front Street West 8th Floor Toronto, Ontario M5J 2N1 Telephone: (416) 981-9500 Facsimile: (416) 981-9800 INVESTOR RELATIONS CONTACT John Sadler Senior Vice President Corporate Affairs Telephone: (416) 777-6126 Facsimile: (416) 594-5230
COMMON SHARE PRICE FOR THE QUARTER Pre Post Split High $ 55.45 27.73 Low $ 46.10 23.05 Close $ 55.10 27.55 Number of common shares issued and outstanding: 65,218,520 (1) reflects 2 for 1 stock division of common shares effective April 14, 1997.
Foreign Exchange Rates All amounts are expressed in Canadian dollars, unless otherwise specified. For the periods indicated, the average U.S. exchange rates for the quarter ended March 31 and the quarter end mid-market rates, payable in Canadian dollars, based on Bloomberg are:
1997 1996 (Canadian Dollars per U.S. Dollar) Average $1.36 $1.37 Quarter End $1.38 $1.36
PROFILE Newcourt Credit Group Newcourt Credit Group is a North American non-bank financial services company active in the origination, management and sale of asset-based loans. Through its network of 34 offices in North America, Europe and Australia, the Company serves two distinct segments of the asset-based finance market - commercial finance and corporate finance. In these markets, Newcourt specializes in financing a broad range of equipment and capital assets through secured loans, conditional sales contracts and leases. Newcourt Credit Group has over $6.7 billion in owned and managed loans. [LOGO] Printed in Canada on a Heidelberg press CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. (Unaudited) June 30, 1997 Newcourt Credit Group Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) [in thousands of Canadian dollars]
June 30, December 31, 1997 1996 $ $ ASSETS Investment in finance assets [note 3] 1,199,348 1,072,277 Assets held for securitization and syndication [note 4] 679,308 774,000 Investment in affiliated companies [note 5] 171,154 162,308 Accounts receivable 37,562 36,900 Fixed assets [note 6] 92,401 40,859 Other assets [note 7] 98,285 78,150 Total Assets 2,278,058 2,164,494 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 87,281 93,338 Debt [note 8] 1,504,718 1,543,144 Deferred income taxes 15,908 12,078 Total Liabilities 1,607,907 1,648,560 Shareholders' Equity Share capital [note 9] 540,821 415,160 Retained earnings 129,330 100,774 Total Shareholders' Equity 670,151 515,934 Total Liabilities and Shareholders' Equity 2,278,058 2,164,494 See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited) [in thousands of Canadian dollars, except for per share amounts]
Six Months Ended June 30, June 30, 1997 1996 $ $ Fee and affiliate income Securitization and syndication fees [note 4] 61,605 32,041 Net income from affiliated companies [notes 5 & 8] 5,385 2,895 Management and other fees 12,721 11,022 79,711 45,958 Net finance income [note 8] 31,842 20,584 Total asset finance income 111,553 66,542 Operating expenses 68,539 42,294 Operating income before taxes 43,014 24,248 Provision for income taxes [note 11] 9,023 5,020 Net income for the period 33,991 19,228 Retained earnings, beginning of period 100,774 56,942 Dividends paid (4,391) (2,977) Options purchased [note 10] (1,044) (31) Retained earnings, end of period 129,330 73,162 Earnings per share: [note 9] Basic $0.54 $0.40 Fully Diluted $0.54 $0.40 See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) [in thousands of Canadian dollars]
Six Months Ended June 30, June 30, 1997 1996 $ $ OPERATING ACTIVITIES Net income for the period 33,991 19,228 Add items not requiring an outlay of cash Deferred income taxes 7,076 4,489 Depreciation and amortization 4,613 2,305 Net change in non-cash assets and liabilities related to operations (32,187) (12,257) Cash provided by operating activities 13,493 13,765 INVESTING ACTIVITIES Finance assets, underwritten and purchased (2,285,665) (1,805,115) Finance assets, securitized and syndicated 1,791,316 627,590 Finance assets, repayments and others 461,970 452,161 Finance assets and assets held for securitization and syndication (32,379) (725,364) Investment in affiliated companies (8,846) 1,342 Purchase of fixed assets (54,068) (7,477) Cash used in investing activities (95,293) (731,499) FINANCING ACTIVITIES Debt issued, net (38,426) 613,015 Issue of common shares, net 123,153 107,727 Deferred tax on share issue 2,508 - Dividends paid on common and special shares (4,391) (2,977) Options purchased (1,044) (31) Cash provided by financing activities 81,800 717,734 See accompanying notes
1. THE COMPANY The Company is an independent, non-bank financial services company which originates, sells and manages asset-based financings by way of secured loans, leases and conditional sales contracts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles consistently applied. The more significant accounting policies are summarized below: Principles of consolidation The consolidated financial statements of the Company include the accounts of all its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. Investment in finance assets Investment in finance assets is comprised of loans, the aggregate of finance lease receivables less unearned income and long term securitization receivable. Earned lease income is recognized on an actuarial basis which produces a constant rate of return on the net investment in the leases. Recognition of interest income is suspended when, in management's view, a loss is likely to occur but in no event later than 90 days after an account has gone into arrears. Deferred Costs Direct incremental costs of acquisition of finance assets and of investing in affiliated companies are deferred and amortized over the expected period of future benefit. Costs incurred during the pre-operating period of new business ventures are deferred and amortized over the expected period of future benefit. Allowance for credit losses Losses on finance assets and the carrying value of repossessed assets are determined by discounting at the rate of interest inherent in the original asset the expected future cash flows of the finance assets including realization of collateral values and estimated recoveries under third party guarantees and vendor support agreements. General allowances are established for probable losses on loans whose impairment cannot otherwise be measured. Securitizations of finance assets The Company sells the majority of its asset-based financing originations to securitization vehicles. The securitization transactions are accounted for as sales of finance assets, resulting in the removal of the assets from the Company's consolidated balance sheets and the computation of a gain on sale. Proceeds on sale are computed as the aggregate of the initial cash consideration and the present value of any additional sale proceeds, net of a provision for anticipated credit losses on the securitized assets and the amount of a normal servicing fee. The sale of finance assets is recorded when the significant risks and rewards of ownership are transferred. Income is earned on the long term securitization receivable and is recognized on an accrual basis. The carrying value of this asset is reduced, as required, based upon changes in the Company's share of the estimated credit losses on the securitized assets. The Company continues to manage the securitized assets and recognizes income equal to a normal servicing fee over the term of the securitized assets. Syndications Other finance assets are underwritten and sold to institutional investors for cash. These transactions generate syndication fees for the Company, which generally continues to service these assets on behalf of the investors. Fees received for syndicating finance assets are included in income when the related transaction is substantially complete provided the yield on any portion of the asset retained by the Company is at least equal to the average yield earned by the other participants involved. Fixed assets Fixed assets are recorded at cost. Depreciation is provided on a straight- line basis at rates designed to write off the assets over their estimated useful lives as follows: Building 20 years Furniture and fixtures 10 years Computers and office equipment 5 years Goodwill Goodwill is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over a period not to exceed 20 years. Goodwill is evaluated annually and if considered permanently impaired, is written down. Lease inducements The Company recognizes the benefits of lease inducements, including rent-free periods, as a reduction of rental expense over the term of the lease. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated using the temporal method, whereby monetary assets 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 are translated at historical rates. Revenue and expenses are translated at the exchange rate in effect on the date of the transaction. Income taxes Deferred income taxes are provided for all significant timing differences between accounting and taxable income. The timing differences result principally from the excess of depreciation claimed for income tax purposes over the recovery of leased equipment cost recorded in the accounts, lease revenue recorded in the accounts which is not yet taxable and the allowance for credit losses which is not yet deductible for income tax purposes. Earnings per Common Share Earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Fully diluted earnings per common share has been computed based on the weighted average number of common shares outstanding after giving effect to the exercise of all outstanding options to acquire common shares. Derivative Financial Instruments Derivative financial instruments are used to hedge the Company's exposure to interest and currency risk by creating positions which are opposite to, and offset, on-balance sheet positions which arise from normal operations. The most frequently used derivatives are interest rate and currency swaps, bond forwards and foreign exchange forward contracts. Contract and notional amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet. Off-balance sheet treatment is accorded where 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. 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 June 30, 1997, which are due as follows:
Leases Net Long term investment Minimum Unearned Net securitization in finance Loans payments income investment receivable assets $ $ $ $ $ $ 1997 214,133 62,014 11,255 50,759 73,639 338,531 1998 51,388 114,864 19,200 95,664 48,910 195,962 1999 44,803 101,844 14,617 87,227 31,907 163,937 2000 39,929 70,485 10,346 60,139 18,817 118,885 2001 40,848 47,846 7,017 40,829 7,622 89,299 Thereafter 170,152 115,347 12,027 103,320 19,262 292,734 ------- ------- ------ ------- ------- --------- 561,253 512,400 74,462 437,938 200,157 1,199,348
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$497,121 [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. An analysis of the Company's allowance for credit losses and investment in finance assets is as follows:
June 30, December 31, 1997 1996 $ $ Investment in finance assets 1,199,348 1,072,277 Allowance for credit losses, beginning of period 16,465 5,089 Provisions for credit losses during the period including acquisitions 2,134 14,496 Write-offs, net of recoveries (4,374) (3,120) Allowance for credit losses, end of period 14,225 16,465 Allowance as a percentage of finance assets 1.2% 1.5% Finance assets in arrears (90 days and over) 3,739 6,353 Arrears as a percentage of finance assets 0.3% 0.6% Finance assets in repossession, at estimated net realizable value 3,735 7,391
Credit provisions against finance assets acquired during the period amounted to Nil [December 31, 1996 - $11,357]. The Company has an additional specific credit loss reserve of $1,544 [December 31, 1996 - $1,928] relating to the Company's long term securitization receivable, representing its interest in the CIP I, II, III, IV, V and VI securitization vehicles. Beyond this specific credit loss reserve further losses may be provided for by a reduction in the yield earned on the long term securitization receivable. 4. SECURITIZATIONS The Company has a securitization program under which finance assets originated by the Company are sold to securitization vehicles. As a result of this program, a substantial 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. Consideration for the sales consist of an initial cash payment and additional sale proceeds, representing the Company's interest in cashflows of the limited partnership. The sales are non-recourse to the Company, except to the extent of the long term receivable 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 period, the Company generated gross securitization income of $48,327 [1996 - $24,993] which is included in Securitization and syndication fees. Included in investment in finance assets is the long term securitization receivable comprised of (i) $190,104 [December 31, 1996 - $143,971] of additional sales proceeds which represents the Company's interest in the cash flows of the securitization vehicles, (ii) $7,565 [December 31, 1996 - $7,534] of securitization proceeds from the sale of assets to certain securitization vehicles which are 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) $2,488 [December 31, 1996 - $2,450] representing the additional cash security provided to the multi-seller securitization trust. As at June 30, 1997, the Company had commitments or substantially completed commitments to fund or support the funding of the following amounts: $ Commercial Finance 3,497,000 Corporate Finance 675,000 --------- 4,172,000
5. INVESTMENT IN AFFILIATED COMPANIES Investment in affiliated companies includes the Company's investment in its foreign affiliates through which the international based operations of the Company are conducted and additional investments in other affiliated companies. 6. FIXED ASSETS Fixed assets consist of the following:
June 30, 1997 December 31, 1996 Accumulated Accumulated Cost depreciation Cost depreciation $ $ $ $ Land and building 36,310 345 5,590 1,011 Furniture and fixtures 32,164 4,816 19,982 3,767 Computers and office equipment 36,114 8,909 25,041 6,767 Other 2,007 124 1,914 123 ------- ------ ------ ------ 106,595 14,194 52,527 11,668 Net book value 92,401 40,859
7. OTHER ASSETS Included in other assets is goodwill of $60,162 [December 31, 1996 - $54,200]. 8. DEBT Debt consists of the following:
June 30, December 31, 1997 1996 $ $ Unsecured Fixed Rate Debt U.S. senior notes, bearing interest varying from 6.95% to 7.12%, maturing in the years 2000 to 2005 143,793 143,186 U.S. senior notes, bearing interest at 8.26%, maturing in the year 2005 137,601 137,020 Medium term notes, bearing interest rates varying from 5.80% to 8.25% maturing in the years 1997 to 2003 358,088 328,050 7.625% debenture, maturing in June, 2001 124,773 124,745 6.45% debenture, maturing in June, 2002 149,757 149,733 Other Commercial paper and other short term borrowings 399,160 545,841 Fixed rate debt 191,546 114,569 --------- --------- 1,504,718 1,543,144
Interest expense on the amount of debt outstanding during the period was $59,941 [1996 - $43,723], of which $6,880 [1996 - $5,293] has been netted against income from affiliates, and the balance $53,061 [1996 - $38,430] included in net finance income. On May 14, 1997, the Company renewed and increased its Canadian bank facility to $450 million and 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 $400 million Canadian commercial paper program and its US$420 million U.S. commercial paper program. Short term borrowings are net of cash on hand and short term investments of $78,590 [December 31, 1996 - $51,184], these have been used by the Company, subsequent to the period, to pay down commercial paper and bank facilities. Included in debt is US$1,049,897 [December 31, 1996 - US$990,243] of which US$984,897 [December 31, 1996 - US$925,243] was used to fund leases and loans which are repayable in U.S. dollars, and the remainder was swapped into floating rate Canadian dollar debt.
As of June 30, 1997, scheduled repayments are as follows: $ 1997 621,712 1998 68,546 1999 82,816 2000 141,454 2001 173,471 Thereafter 416,719 --------- 1,504,718
9. 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; [iii] Unlimited Class A Preference Shares issuable in series. Outstanding - The following is a summary of the changes in share capital during the period:
Six months ended Year ended June 30, December 31, 1997 1996 # $ # $ Common Shares Outstanding, beginning of period 60,182,688 415,160 22,664,466 188,166 Proceeds of share issue, net 4,950,000 123,159 7,150,000 224,434 Conversion of special shares - - 199,325 86 Others 14,645 483 74,303 2,430 Stock options exercised 286,792 2,019 3,250 44 2:1 share division - - 30,091,344 - Outstanding, end of period 65,434,125 540,821 60,182,688 415,160 Special Shares Outstanding, beginning of period - - 199,325 86 Conversion to common shares - - (199,325) (86) Outstanding, end of period - - - - Total Share Capital 65,434,125 540,821 60,182,688 415,160
Public Offering 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. 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. 10. EMPLOYEE STOCK OPTION PLAN During the period, 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 employee or director shall not exceed in the aggregate 5% of the total of the outstanding shares. During the period the Company issued 2,445,848 options. As of June 30, 1997, 3,792,130 options were outstanding under the plan [December 31, 1996 - 1,687,726] expiring at various dates from November 19, 1997 through February 6, 2007 at prices ranging from $6.075 to $24.25. 508,474 options have been exercised since the plan's inception. During 1997, the Company purchased 54,568 [1996 - 4,682] options at their fair market value resulting in a cash distribution of $1,044 [1996 - $31]. 11. INCOME TAXES 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 earnings are repatriated from exempt surplus. The following table reconciles tax expense calculated at the statutory rates with the actual income tax expense:
June 30, June 30, 1997 1996 $ $ Income before income taxes 43,014 24,248 Statutory rate of income taxes 45% 45% Income taxes at the statutory rate 19,356 10,912 Effect on income taxes of Deductibility of dividends from exempt surplus (10,219) (4,105) Recognition of losses carry over - (296) Large corporations tax 745 531 Other (859) (2,022) Net provision 9,023 5,020 Allocation of provision Current 1,947 531 Deferred 7,076 4,489 ------- ------ 9,023 5,020
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 balance sheet. 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:
June 30, December 31, 1997 1996 $ $ Securitized finance assets 2,990,296 2,731,341 Syndicated finance assets 1,150,249 1,230,221 Syndicated finance assets of affiliated companies 637,044 655,843 --------- --------- 4,777,589 4,617,405
13. LEASE COMMITMENTS Future minimum annual payments on a cash basis under leases for premises over the next 5 years and thereafter are as follows: $ 1997 3,556 1998 6,449 1999 7,487 2000 7,593 2001 7,637 Thereafter 38,450 ------ 71,172
14. 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 exposure Notional principal amounts maturing (1) (2) Total Total Under 1 to 5 Over June 30 Dec. 31 June 30 1 year years 5 years 1997 1996 1997 $ $ $ $ $ $ Interest rate contracts Bond forwards 1,218,310 - - 1,218,310 808,925 - Interest rate swaps 33,587 344,522 52,382 430,491 403,669 13,841 --------- ------- ------ --------- --------- ------ 1,251,897 344,522 52,382 1,648,801 1,212,594 13,841 Foreign exchange contracts Spot and forward contracts 16,555 - - 16,555 16,243 - Cross currency swaps 543,000 84,181 77,472 704,673 619,119 1,965 --------- ------- ------ --------- --------- ------ 559,555 84,181 77,472 721,208 635,362 1,965 Total derivatives 1,811,452 428,703 129,854 2,370,009 1,847,956 15,806 (1) Notional principal amounts are the contract amounts used in determining payments. (2) Credit risk exposure is the replacement cost of all contracts without taking into account any netting arrangements. All counterparties are investment grade financial institutions.
15. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. November 3, 1997 British Columbia Securities Commission Alberta Securities Commission Agency Saskatchewan Securities Commission Manitoba Securities Commission Ontario Securities Commission Commission des valeurs mobilieres du Quebec Administrator of the Securities Act, New Brunswick Nova Scotia Securities Commission Registrar of Securities, Prince Edward Island Securities Commission of Newfoundland Dear Sirs/Madam: Re: Newcourt Credit Group Inc. (the "Company") We are the auditors of the Company and under the date of February 6, 1997, we reported on the following consolidated financial statements incorporated by reference in the Short Form Shelf Prospectus dated October 17, 1996 relating to the proposed distribution of up to $650,000,000 of Debt Securities of the Company on a continuous basis (the "Shelf Prospectus") : Consolidated balance sheets as at December 31, 1996 and 1995; and Consolidated statements of income and retained earnings and cash flows for each of the years in the two year period ended December 31, 1996. The following unaudited interim consolidated financial statements are incorporated by reference in the Shelf Prospectus: Consolidated balance sheet as at September 30, 1997 with comparative figures as at December 31, 1996; and Consolidated statements of income and retained earnings and cash flows for the nine months and three months ended September 30, 1997 with comparative figures for the nine months and three months ended September 30, 1996. We have not audited any financial statements of the Company as at any date or for any period subsequent to December 31, 1996. Although we have performed an audit for the year ended December 31, 1996, the purpose and therefore the scope of the audit was to enable us to express our opinion on the consolidated financial statements as at December 31, 1996 and for the year then ended, but not on the consolidated financial statements for any interim period within that year. Therefore, we are unable to and do not express an opinion on the unaudited interim consolidated balance sheet as at September 30, 1997 and on the unaudited interim consolidated statements of income and retained earnings and cash flows for the nine months and three months ended September 30, 1997 and 1996 nor on the financial position, results of operations or changes in financial position as at any date or for any period subsequent to December 31, 1996. We have, however, performed review procedures which meet the standards established by The Canadian Institute of Chartered Accountants relating to unaudited interim financial statements in prospectuses. Based on the results of these procedures, we have no reason to believe that the unaudited interim consolidated financial statements are not presented, in all material respects, in accordance with generally accepted accounting principles. The procedures referred to in the preceding paragraph do not constitute an audit and would not necessarily reveal material adjustments which might be required in order for the unaudited interim consolidated financial statements to present fairly, in all material respects, the financial position of the Company as at September 30, 1997, and the results of its operations and changes in financial position for the nine months and three months ended September 30, 1997 and 1996, in accordance with generally accepted accounting principles. This letter is provided solely for the purpose of assisting the securities regulatory authorities to which it is addressed in discharging their responsibilities and should not be relied upon for any other purpose. Yours sincerely, ERNST & YOUNG [signed] November 3, 1997 To: Applicable Securities Commissions or Other Regulatory Bodies in Canada Dear Sirs/Madams: Set forth below is the basis for the calculations of the updated interest and asset coverages deemed, pursuant to the provisions of National Policy Statement No. 44, to be incorporated by reference in our Final Short Form Shelf Prospectus dated October 17, 1996 in respect of the distribution of up to $650,000,000 aggregate principal amount of Debt Securities. The coverage ratios are stated in terms of total consolidated debt (including Secured Subordinated Debt), reflecting the equal ranking of both short and long term debt, thereby reducing or eliminating the potential that this information could be considered misleading. Reference will be made to those financial information items used in the following calculations which are not clearly identifiable in the documents incorporated by reference in the Final Short Form Shelf Prospectus or in the documents referenced by those documents. Specifically, these documents are the Corporation's annual audited consolidated financial statements for the year ended December 31, 1996 and the Corporation's unaudited consolidated interim financial statements for the nine months ended September 30, 1997.
Interest Coverage Sept. 30, 1997 December 31, 1996 ($000's) Consolidated income before income tax 49,556 64,150 Add: Interest on Consolidated Total Debt 120,461 104,601 ------- ------- 170,017 168,751 Interest on Consolidated Total Debt 120,461 104,601 Interest coverage on Consolidated Total Debt 1.41 Times 1.61 Times
Asset Coverage No adjustment has been made for deferred income taxes as at December 31, 1996 or September 30, 1997, as these amounts are not material. Consolidated net tangible asset coverage ratios have been calculated as at December 31, 1996 and as at September 30, 1997 as follows:
Sept. 30, 1997 December 31, 1996 ($000's) Consolidated Total Assets 4,151,125 2,164,494 Less: Goodwill 401,811 54,200 Consolidated Total Assets for purposes of coverage calculation 3,749,314 2,110,294 Consolidated Total Debt Outstanding 2,575,436 1,543,144 Consolidated Net Tangible Asset Coverage on Total Debt 1.46 Times 1.37 Times
Sincerely, Borden D. Rosiak Executive Vice President and Chief Financial Officer CONSOLIDATED FINANCIAL STATEMENTS NEWCOURT CREDIT GROUP INC. (Unaudited) September 30, 1997
Newcourt Credit Group Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) [in thousands of Canadian dollars] September 30, December 31, 1997 1996 $ $ ASSETS Investment in finance assets [note 3] 2,330,390 1,072,277 Assets held for securitization and syndication [note 4] 987,609 774,000 Investment in affiliated companies [note 5] 186,472 162,308 Accounts receivable, prepaids and other 129,470 54,762 Fixed assets [note 6] 115,373 40,859 Goodwill [note 7] 401,811 60,288 Total Assets 4,151,125 2,164,494 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 210,650 93,338 Debt [note 9] 2,575,436 1,543,144 Deferred income taxes 64,519 12,078 Total Liabilities 2,850,605 1,648,560 Shareholders' Equity Share capital [note 10] 1,174,392 415,160 Retained earnings 126,128 100,774 Total Shareholders' Equity 1,300,520 515,934 Total Liabilities and Shareholders' Equity 4,151,125 2,164,494
See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited) [in thousands of Canadian dollars, except for per share amounts] Nine Months Ended September 30, September 30, 1997 1996 $ $ Fee and affiliate income Securitization and syndication fees [note 4] 109,206 57,480 Net income from affiliated companies [notes 5 & 9] 6,891 4,725 Management and other fees 20,968 17,322 137,065 79,527 Net finance income [note 9] 55,156 35,523 Total asset finance income 192,221 115,050 Operating expenses 116,904 73,139 Operating income before restructuring charges and taxes 75,317 41,911 Restructuring charge [note 8] 48,000 0 Operating income before taxes 27,317 41,911 Provision for (recovery of) income taxes [note 12] (5,818) 8,801 Net income for the period 33,135 33,110 Retained earnings, beginning of period 100,774 56,942 Dividends paid (6,681) (4,582) Options purchased [note 11] (1,100) (163) Retained earnings, end of period 126,128 85,307 Earnings per common share: [note 8] Basic $0.50 $0.66 Fully Diluted $0.50 $0.66
See accompanying notes
Newcourt Credit Group Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) [in thousands of Canadian dollars] Nine Months Ended September 30, September 30, 1997 1996 $ $ OPERATING ACTIVITIES Net income for the period 33,135 33,110 Add items not requiring an outlay of cash Restructuring charge 48,000 0 Deferred income taxes (8,738) 3,248 Depreciation and amortization 11,040 3,988 Net change in non-cash assets and liabilities related to operations (115,168) (24,515) Cash provided by (used in) operating activities (31,731) 15,831 INVESTING ACTIVITIES Finance assets, underwritten and purchased (3,916,706) (2,856,627) Finance assets, securitized and syndicated 2,898,247 1,259,880 Finance assets, repayments and others 565,430 639,512 Finance assets and assets held for securitization and syndication (453,029) (957,235) Business acquisitions (581,682) 0 Investment in affiliated companies (24,164) (68,698) Purchase of fixed assets (64,722) (18,495) Cash used in investing activities (1,123,597) (1,044,428) FINANCING ACTIVITIES Debt issued, net 681,172 807,504 Issue of common shares, net 473,858 225,838 Deferred tax on share issue 8,079 0 Dividends paid on common and special shares (6,681) (4,582) Options purchased (1,100) (163) Cash provided by financing activities 1,155,328 1,028,597
See accompanying notes 1. THE COMPANY The Company is an independent, non-bank financial services company which originates, sells and manages asset-based financings by way of secured loans, leases and conditional sales contracts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles consistently applied. The more significant accounting policies are summarized below: Principles of consolidation The consolidated financial statements of the Company include the accounts of all its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. Investment in finance assets Investment in finance assets is comprised of loans, the aggregate of finance lease receivables less unearned income and long term securitization receivable. Earned lease income is recognized on an actuarial basis which produces a constant rate of return on the net investment in the leases. Recognition of interest income is suspended when, in management's view, a loss is likely to occur but in no event later than 90 days after an account has gone into arrears. Deferred Costs Direct incremental costs of acquisition of finance assets and of investing in affiliated companies are deferred and amortized over the expected period of future benefit. Costs incurred during the pre-operating period of new business ventures are deferred and amortized over the expected period of future benefit. Allowance for credit losses Losses on finance assets and the carrying value of repossessed assets are determined by discounting at the rate of interest inherent in the original asset the expected future cash flows of the finance assets including realization of collateral values and estimated recoveries under third party guarantees and vendor support agreements. General allowances are established for probable losses on loans whose impairment cannot otherwise be measured. Securitizations of finance assets The Company sells the majority of its asset-based financing originations to securitization vehicles. The securitization transactions are accounted for as sales of finance assets, resulting in the removal of the assets from the Company's consolidated balance sheets and the computation of a gain on sale. Proceeds on sale are computed as the aggregate of the initial cash consideration and the present value of any additional sale proceeds, net of a provision for anticipated credit losses on the securitized assets and the amount of a normal servicing fee. The sale of finance assets is recorded when the significant risks and rewards of ownership are transferred. Income is earned on the long term securitization receivable and is recognized on an accrual basis. The carrying value of this asset is reduced, as required, based upon changes in the Company's share of the estimated credit losses on the securitized assets. The Company continues to manage the securitized assets and recognizes income equal to a normal servicing fee over the term of the securitized assets. Syndications Other finance assets are underwritten and sold to institutional investors for cash. These transactions generate syndication fees for the Company, which generally continues to service these assets on behalf of the investors. Fees received for syndicating finance assets are included in income when the related transaction is substantially complete provided the yield on any portion of the asset retained by the Company is at least equal to the average yield earned by the other participants involved. Fixed assets Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis at rates designed to write off the assets over their estimated useful lives as follows: Building 20 years Furniture and fixtures 10 years Computers and office equipment 5 years Goodwill Goodwill is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over a period not to exceed 20 years. Goodwill is evaluated annually and if considered permanently impaired, is written down. Lease inducements The Company recognizes the benefits of lease inducements, including rent-free periods, as a reduction of rental expense over the term of the lease. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated using the temporal method, whereby monetary assets 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 are translated at historical rates. Revenue and expenses are translated at the exchange rate in effect on the date of the transaction. Income taxes Deferred income taxes are provided for all significant timing differences between accounting and taxable income. The timing differences result principally from the excess of depreciation claimed for income tax purposes over the recovery of leased equipment cost recorded in the accounts, lease revenue recorded in the accounts which is not yet taxable and the allowance for credit losses which is not yet deductible for income tax purposes. Earnings per Common Share Earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Fully diluted earnings per common share has been computed based on the weighted average number of common shares outstanding after giving effect to the exercise of all outstanding options to acquire common shares. Derivative Financial Instruments Derivative financial instruments are used to hedge the Company's exposure to interest and currency risk by creating positions which are opposite to, and offset, on-balance sheet positions which arise from normal operations. The most frequently used derivatives are interest rate and currency swaps, bond forwards and foreign exchange forward contracts. Contract and notional amounts associated with derivative financial instruments are not recorded as assets or liabilities on the balance sheet. Off-balance sheet treatment is accorded where 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. 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 September 30, 1997, which are due as follows:
Leases Net Long term investment Minimum Unearned Net securitization in finance Loans payments income investment receivable assets $ $ $ $ $ $ 1997 286,535 153,557 28,074 125,483 86,272 498,290 1998 172,098 395,031 82,145 312,886 83,464 568,448 1999 134,331 312,003 50,314 261,689 61,772 457,792 2000 105,794 189,926 27,088 162,838 34,738 303,370 2001 84,892 108,085 15,042 93,043 16,472 194,407 Thereafter 194,386 111,010 18,025 92,985 20,712 308,083 ------- ------- ------ ------ ------ ------- 978,036 1,269,612 220,688 1,048,924 303,430 2,330,390
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$826,410 [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. An analysis of the Company's allowance for credit losses and investment in finance assets is as follows:
September 30, December 31, 1997 1996 $ $ Investment in finance assets 2,330,390 1,072,277 Allowance for credit losses, beginning of period 16,465 5,089 Provisions for credit losses during the period including acquisitions 28,944 14,496 Write-offs, net of recoveries (6,521) (3,120) Allowance for credit losses, end of period 38,888 16,465 Allowance as a percentage of finance assets 1.7% 1.5% Finance assets in arrears (90 days and over) 9,027 6,353 Arrears as a percentage of finance assets 0.4% 0.6% Finance assets in repossession, at estimated net realizable value 4,357 7,391
Credit provisions against finance assets acquired during the period amounted to $24,310 [December 31, 1996 - $11,357]. The Company has an additional specific credit loss reserve of $1,364 [December 31, 1996 - $1,928] relating to the Company's long term securitization receivable, representing its interest in the CIP I, II, III, IV, V and VI securitization vehicles. Beyond this specific credit loss reserve further losses may be provided for by a reduction in the yield earned on the long term securitization receivable. 4. SECURITIZATIONS The Company has a securitization program under which finance assets originated by the Company are sold to securitization vehicles. As a result of this program, a substantial 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. Consideration for the sales consist of an initial cash payment and additional sale proceeds, representing the Company's interest in cashflows of the limited partnership. The sales are non-recourse to the Company, except to the extent of the long term 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 period, the Company generated gross securitization income of $89,092 [1996 - $45,234] which is included in Securitization and syndication fees. Included in investment in finance assets is the long term securitization receivable comprised of (i) $279,630 [December 31, 1996 - $143,971] of additional sales proceeds which represents the Company's interest in the cash flows of the securitization vehicles, (ii) $7,308 [December 31, 1996 - $7,534] of securitization proceeds from the sale of assets to certain securitization vehicles which are 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) $16,492 [December 31, 1996 - $2,450] representing the additional cash security provided to the multi-seller securitization trust.
As at September 30, 1997, the Company had commitments or substantially completed commitments to fund or support the funding of the following amounts: $ Commercial Finance 3,488,000 Corporate Finance 640,000 --------- 4,128,000
5. INVESTMENT IN AFFILIATED COMPANIES Investment in affiliated companies includes the Company's investment in its foreign affiliates through which the international based operations of the Company are conducted and additional investments in other affiliated companies. 6. FIXED ASSETS
Fixed assets consist of the following: September 30, 1997 December 31, 1996 ---------------------- ------------------------- Accumulated Accumulated Cost depreciation Cost depreciation $ $ $ $ Land and building 37,067 390 5,590 1,011 Furniture and fixtures 35,622 5,656 19,982 3,767 Computers and office equipment 59,256 10,817 25,041 6,767
Other 416 125 1,914 123 132,361 16,988 52,527 11,668 ------- ------ Net book value 115,373 40,859
7. ACQUISITIONS On August 23, 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 four business markets: computers, business telecommunications, photocopiers and catering/vending machines. 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 Total $ $ $ Net assets acquired at approximate fair values Investment in finance assets 596,891 421,802 1,018,693 Fixed assets 14,143 2,195 16,338 Investment in affiliated companies 18,471 0 18,471 Accounts receivable 32,368 9,854 42,222 ------- ------- --------- 661,873 433,851 1,095,724 Long term debt 351,120 0 351,120 Deferred taxes 68,911 0 68,911 Other 123,734 30,546 154,280 ------- ------- --------- 543,765 30,546 574,311 Net assets acquired 118,108 403,305 521,413 Consideration Cash 88,633 493,049 581,682 Common shares 277,295 0 277,295 Total consideration 365,928 493,049 858,977 ------- -------- --------- Goodwill 247,820 89,744 337,564
Upon completion of these acquisitions, total goodwill amounted to $401,811 [December 31, 1996 - $60,288]. 8. RESTRUCTURING CHARGE A restructuring charge of $48,000 comprising severances, office relocations and system conversions was recorded in the statement of income relating to the integration of Commcorp's operations with the Company's existing businesses.
The effect on net income after income taxes and earnings per common share of this change is set out below: $ Restructuring charge 48,000 Taxes recoverable (21,600) Net restructuring charge 26,400 Earnings per common share Operations $0.90 Restructuring charge ($0.40) Basic and fully diluted $0.50
9. DEBT
Debt consists of the following: September 30, December 31, 1997 1996 $ $ Unsecured Fixed Rate Debt U.S. senior notes, bearing interest varying from 6.95%to 7.12%, maturing in the years 2000 to 2005 143,655 143,186 U.S. senior notes, bearing interest at 8.26%, maturing in the year 2005 138,130 137,020 Medium term notes, bearing interest rates varying from 4.40% to 9.34% maturing in the years 1997 to 2007 692,967 328,050 7.625% debenture, maturing in June, 2001 124,787 124,745 6.45% debenture, maturing in June, 2002 149,770 149,733 Other Commercial paper and other short term borrowings 1,069,106 545,841 Fixed rate debt 257,021 114,569 --------- --------- 2,575,436 1,543,144
Interest expense on the amount of debt outstanding during the period was $89,630 [1996 - $73,770], of which $11,330 [1996 - $9,538] has been netted against income from affiliates, and the balance $78,300 [1996 - $64,232] included in 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. Short term borrowings are net of cash on hand and short term investments of $96,235 [December 31, 1996 - $51,184], these have been used by the Company, subsequent to the period, to pay down commercial paper and bank facilities. Included in debt is US$1,285,596 [December 31, 1996 - US$990,243] of which US$1,220,596 [December 31, 1996 - US$925,243] was used to fund leases and loans which are repayable in U.S. dollars, and the remainder was swapped into floating rate Canadian dollar debt.
As of September 30, 1997, scheduled repayments are as follows: $ 1997 1,192,126 1998 221,002 1999 170,665 2000 198,344 2001 210,740 Thereafter 582,559 --------- 2,575,436
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; [iii] Unlimited Class A Preference Shares issuable in series. Outstanding -
The following is a summary of the changes in share capital during the period: Nine months ended Year ended September 30, December 31, 1997 1996 # $ # $ Common Shares Outstanding, beginning of period 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 Conversion of special shares 0 0 199,325 86 Stock options exercised 337,862 2,421 3,250 44 Issued on acquisition [note 7] 8,214,843 275,198 0 0 2:1 share division 0 0 30,091,344 0 Others 20,217 583 74,303 2,430 Outstanding, end of period 82,665,610 1,174,392 60,182,688 415,160 Special Shares Outstanding, beginning of period 0 0 199,325 86 Conversion to common shares 0 0 (199,325) (86) Outstanding, end of period 0 0 0 0 Total Share Capital 82,665,610 1,174,392 60,182,688 415,160
Public Offering 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. Special Shares On July 2, 1996, the remaining 199,325 Special Shares were converted into 199,325 (398,650 post split) Common Shares. Common Shares Effective April 14, 1997, the Company subdivided on a two-for-one basis all of the Company's issued and outstanding Common Shares and all the Company's Common Shares reserved for issuance. 11. EMPLOYEE STOCK OPTION PLAN During the period, 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 employee or director shall not exceed in the aggregate 5% of the total of the outstanding shares. During the period the Company issued 2,463,848 options. As of September 30, 1997, 3,752,960 options were outstanding under the plan [December 31, 1996 - 1,687,726] expiring at various dates from November 19, 1997 through February 6, 2007 at prices ranging from $6.075 to $24.25. 563,544 options have been exercised since the plan's inception. During 1997, the Company purchased 56,802 [1996 - 10,432] options at their fair market value resulting in a cash distribution of $1,100 [1996 - $163]. 12. INCOME TAXES 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 earnings are repatriated from exempt surplus. The following table reconciles tax expense calculated at the statutory rates with the actual income tax expense:
September 30, September 30, 1997 1996 $ $ Income before income taxes 27,317 41,911 Statutory rate of income taxes 45% 45% Income taxes at the statutory rate 12,293 18,860 Effect on income taxes of Deductibility of dividends from exempt surplus (13,196) (9,176) Recognition of losses carry over 0 (296) Large corporations tax 1,220 824 Foreign tax rate differential (5,651) 0 Other (484) (1,411) Net provision (5,818) 8,801 Allocation of provision Current 2,920 5,553 Deferred (8,738) 3,248 ------- ------ (5,818) 8,801
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 balance sheet. 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:
September 30, December 31, 1997 1996 $ $ Securitized finance assets 4,494,274 2,731,341 Syndicated finance assets 1,353,910 1,230,221 Syndicated finance assets of affiliated companies 633,839 655,843 --------- --------- 6,482,023 4,617,405
14. LEASE COMMITMENTS
Future minimum annual payments on a cash basis under leases for premises over the next 5 years and thereafter are as follows: $ 1997 4,762 1998 8,230 1999 8,812 2000 8,867 2001 8,874 Thereafter 46,051 ------ 85,596
15. 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 Sept. 30 Dec. 31 Sept. 30 1 year years 5 Years 1997 1996 1997 $ $ $ $ $ $ Interest rate contracts Bond forwards 1,198,764 0 0 1,198,764 808,925 0 Interest rate swaps 313,131 580,865 47,587 941,583 403,669 11,147 --------- ------- ------ --------- --------- ------ 1,511,895 580,865 47,587 2,140,347 1,212,594 11,147 Foreign exchange contracts Spot and forward contracts 93,342 - 0 93,342 16,243 0 Cross currency swaps 494,165 593,288 77,227 1,164,680 619,119 6,656 --------- ------- ------ --------- --------- ------ 587,507 593,288 77,227 1,258,022 635,362 6,656 Total derivatives 2,099,402 1,174,153 124,814 3,398,369 1,847,956 17,803 (1) Notional principal amounts are the contract amounts used in determining payments. (2) Credit risk exposure is the replacement cost of all contracts without taking into account any netting arrangements. All counterparties are investment grade financial institutions.
16. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. -----END PRIVACY-ENHANCED MESSAGE-----