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