New Worlds New Rules
Newcourt
1997 First Quarter Report
To Shareholders
For the Three Months Ended March 31
NCT
FINANCIAL SUMMARY
Newcourt Credit Group
(unaudited, in thousands of Canadian dollars, except for share data)
Three months ended
March 31 March 31
1997 1996
Income Statement $ $
Securitization and syndication fees 22,737 14,526
Net income from affiliated companies
and management and other fees 9,920 7,339
Net finance income 16,008 7,666
Total asset finance income 48,665 29,531
Operating income before taxes 18,108 10,005
Net income 14,125 8,003
Fully diluted earnings per share (1) 0.23 0.17
Dividends per share (1) 0.035 0.03
As at
March 31 December 31
1997 1996
Balance Sheet $ $
Total assets 2,247,460 2,164,494
Debt 1,519,963 1,543,144
Shareholders' equity 651,687 515,934
Common shares outstanding 32,609,260 30,091,344
Three months ended
March 31 March 31
1997 1996
Asset Financings $ $
Originations during the period 1,368,777 1,024,996
As at
March 31 December 31
1997 1996
$ $
Total finance assets owned and managed 6,722,161 6,625,990
(1) reflects 2 for 1 stock division of common shares effective
April 14, 1997
MESSAGE TO SHAREHOLDERS
Newcourt Credit Group
Newcourt earned net income of $14.1 million for the three month period ending
March 31, 1997, representing a 76% increase over the $8.0 million reported
for the same period in 1996. First quarter earnings per share amounted to
$0.23 versus $0.17 for the same three month period last year. During the
period, the number of issued and outstanding common shares increased by
2,517,916 to 32,609,260 (pre-split) as of March 31, 1997.
Following the end of the period, the Company subdivided its common shares on
a two-for-one basis and as of April 14, 1997 had 65,218,520 common shares
issued and outstanding.
New loan originations for the quarter amounted to $1.4 billion versus $1.0
billion for the same period in 1996, representing a 34% increase. Of this
total, $911 million or 67% were attributable to transactions in the
commercial market. Fifty-eight percent (58%) of the new commercial
financings were sourced from the U.S. and international markets. Newcourt's
activities in the corporate finance market account for the remaining 33%
($458 million) of the Company's new loans during the quarter.
Total asset finance income for the three month period rose 65% to $48.7
million from approximately $29.5 million during the same quarter in 1996.
Fee-based income represented approximately two-thirds of the Company's
revenue mix, accounting for $32.7 million (67%) of total asset finance income
compared with $21.9 million (74%) in 1996.
These results are in line with management's 1997 business plan and, in part,
reflect the investment which the Company has made in geographically expanding
its loan origination capabilities, particularly in the United States market.
Following the end of the quarter, two strategic U.S.-based initiatives were
concluded by the Company, which together underscore the progress that
Newcourt has achieved in developing a broadly-based presence in the North
American market.
On April 14, 1997, the Company's commercial finance business unit, Newcourt
Financial, established a joint venture with Dell Computer Corporation to
create Dell Financial Services. This entity is the exclusive
page one
MESSAGE TO SHAREHOLDERS
Newcourt Credit Group
provider of sales financing and asset management services to Dell in the United
States. Dell and Newcourt are in the process of expanding the
mandate of Dell Financial Services to facilitate the service needs of Dell's
international operations. Fundamental to Newcourt's growth strategy is the
development of long-term relationships with leading equipment manufacturers,
such as Dell.
On April 30, 1997, Newcourt Credit Group commenced trading of its common
shares on the New York Stock Exchange under the trading symbol "NCT".
Establishing its presence in the U.S. and internationally has been a key
element of Newcourt's growth strategy for the past three years. However,
care has been taken to ensure that as the Company moves into new regions it
remains focused on those segments of the asset-based lending market in which
it has already developed a high level of expertise. For example, the
strategic alliances which we have established with our major loan
origination and funding partners provide the primary incentive for the decision
to enter new geographic markets. Through these alliances, we are quickly able
to tap into the new sources of loan volume needed to offset the initial entry
costs.
Having successfully applied this strategy in securing our entry to the U.S.
market, Newcourt plans to follow this same approach as the Company
establishes its presence in other international markets. As the Company's
loan origination and funding partners seek access to these new markets,
Newcourt will be there to provide the services which these partners have come
to value from us in North America.
/s/ David J. Sharpless /s/ Steven K. Hudson
David J. Sharpless Steven K. Hudson
Chairman President and
Chief Executive Officer
page two
FINANCIAL HIGHLIGHTS
Newcourt Credit Group
NEW ASSET FINANCINGS INCREASED OVER Q1/96
During the first quarter of 1997, Newcourt originated $1.4 billion of new
asset-based financings.
Originations in the commercial finance market totaled $911 million, up 59%
from the $574 million recorded in 1996. Volumes in the corporate market
were $458 million compared with $451 million in the previous year.
REVENUE INCREASES
Total asset finance income for the first quarter totaled $48.7 million
versus $29.5 million for the first quarter of 1996, representing an increase
of 65%. Fee-based and affiliate income accounted for two-thirds of revenue
growing from $21.9 million in the first quarter of 1996 to $32.7 million in
the current period.
page three
FINANCIAL HIGHLIGHTS
Newcourt Credit Group
NET INCOME UP 76%
Net income for the 3 months ending March 31, 1997 was $14.1 million
representing a 76% increase over the $8.0 million reported for the same
period last year.
OWNED AND MANAGED LOANS
EXCEED $6.7 BILLION
At the end of the first quarter of 1997, Newcourt's portfolio of owned and
managed assets grew to more than $6.7 billion. The owned portion of the
portfolio was $2.0 billion, while the managed portion accounted for the
remaining $4.7 billion.
page four
BUSINESS HIGHLIGHTS
Newcourt Credit Group
LOAN ORIGINATION - COMMERCIAL FINANCE
New vendor programs established
During the period, Newcourt Financial established new vendor agreements in
each of the Company's core market segments. Newcourt currently has more
than 170 significant vendor programs in place across North America.
Significant joint venture created with Dell
In early April, after a thorough six-month search and selection process,
U.S.-based computer manufacturer Dell Computer Corporation announced its
selection of Newcourt as its exclusive partner in the creation of a joint
venture. Dell Financial Services is the exclusive financing source for
Dell in the United States and will eventually provide similar services on a
worldwide basis.
LOAN ORIGINATION - CORPORATE FINANCE
$214 million of refinancing and advisory services for
aircraft
Newcourt Capital provided advisory services to ATR for a transaction
involving 15 ATR 42-500 aircraft acquired by Air Littoral. As well,
Newcourt provided refinancing for 3 ATR 72 aircraft operated by Royal Air
Cambodge.
$2.7 billion backlog of mandated transactions
Newcourt Capital's backlog of $2.7 billion of mandated transactions for the
first quarter is a 58% increase over the $1.7 billion reported for the same
three month period of 1996.
LOAN FUNDING & MANAGEMENT
$126.2 million equity issue completed
Late in the first quarter, Newcourt announced it successfully completed a
treasury offering of 2,475,000 common shares at $51.00 per share. The
transaction, completed March 11, 1997, succeeded in raising $126.2 million
of new equity.
Final approval for New York Stock Exchange listing attained
During the quarter, final approval was given to Newcourt for an April 30,
1997 listing of the Company's common shares on the New York Stock Exchange.
Canadian and U.S. commercial loans securitized
Newcourt's Treasury department completed the securitization of $714 million
of commercial loans in the first quarter. Of that amount, $316 million were
sold to Canadian investors, with the remaining $398 million purchased by U.S.
investors.
page five
CONSOLIDATED STATEMENTS OF
INCOME AND RETAINED EARNINGS
Newcourt Credit Group
(unaudited, in thousands of Canadian dollars, except for per share data)
Three Months Ended
March 31 March 31
1997 1996
$ $
Fee and affiliate income
Securitization and syndication fees 22,737 14,526
Net income from affiliated companies 4,055 1,672
Management and other fees 5,865 5,667
32,657 21,865
Net finance income 16,008 7,666
Total asset finance income 48,665 29,531
Operating expenses 30,557 19,526
Operating income before taxes 18,108 10,005
Provision for income taxes 3,983 2,002
Net income for the period 14,125 8,003
Retained earnings, beginning of period 100,774 56,942
Dividends paid (2,107) (1,372)
Options purchased (173) 0
Retained earnings, end of period 112,619 63,573
Earnings per share:
Basic (1) $ 0.23 $ 0.17
Fully diluted (1) $ 0.23 $ 0.17
(1) reflects 2 for 1 stock division of common shares effective April 14,
1997
page six
CONSOLIDATED BALANCE SHEETS
Newcourt Credit Group
(unaudited, in thousands of Canadian dollars)
March 31 December 31
1997 1996
$ $
Assets
Investment in finance assets 1,111,352 1,072,277
Assets held for securitization
and syndication 774,882 774,000
Investment in affiliated companies 170,254 162,308
Accounts receivable 51,598 36,900
Fixed assets 49,267 40,859
Other assets 90,107 78,150
Total Assets 2,247,460 2,164,494
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued liabilities 62,342 93,338
Debt 1,519,963 1,543,144
Deferred income taxes 13,468 12,078
Total Liabilities 1,595,773 1,648,560
Shareholders' Equity
Share capital 539,068 415,160
Retained earnings 112,619 100,774
Total Shareholders' Equity 651,687 515,934
Total Liabilities and Shareholders' Equity 2,247,460 2,164,494
page seven
CONSOLIDATED STATEMENTS OF CASH FLOWS
Newcourt Credit Group
(unaudited, in thousands of Canadian dollars)
Three Months Ended
March 31 March 31
1997 1996
$ $
Operating Activities
Net income for the period 14,125 8,003
Add items not requiring an outlay of cash
Deferred income taxes 2,782 1,206
Depreciation and amortization 2,711 1,066
Net change in non-cash assets and liabilities
related to operations ( 59,957) ( 12,376)
Cash used in operating activities ( 40,339) ( 2,101)
Investing Activities
Finance assets, underwritten and purchased (946,532) (694,519)
Finance assets, securitized and syndicated 714,064 219,352
Finance assets, repayments and others 192,511 54,376
Finance assets and assets
held for securitization and syndication ( 39,957) (420,791)
Investment in affiliated companies ( 7,946) 1,913
Purchase of fixed assets ( 10,205) ( 3,183)
Cash used in investing activities ( 58,108) (422,061)
Financing Activities
Debt issued, net ( 23,181) 424,736
Issue of common shares, net 121,400 798
Deferred tax on share issue 2,508 0
Dividends paid ( 2,107) ( 1,372)
Options purchased ( 173) 0
Cash provided by financing activities 98,447 424,162
page eight
INFORMATION
Newcourt Credit Group
HEAD OFFICE
BCE Place
181 Bay Street
Suite 3500, P.O. Box 827
Toronto, Ontario
Canada M5J 2T3
Telephone: (416) 594-2400
Facsimile: (416) 594-5995
STOCK EXCHANGE LISTINGS
Toronto
Montreal
New York
STOCK SYMBOL
NCT
TRANSFER AGENT AND
REGISTRAR
Montreal Trust
151 Front Street West
8th Floor
Toronto, Ontario
M5J 2N1
Telephone: (416) 981-9500
Facsimile: (416) 981-9800
INVESTOR RELATIONS CONTACT
John Sadler
Senior Vice President
Corporate Affairs
Telephone: (416) 777-6126
Facsimile: (416) 594-5230
COMMON SHARE PRICE
FOR THE QUARTER
Pre Post
Split
High $ 55.45 27.73
Low $ 46.10 23.05
Close $ 55.10 27.55
Number of common shares issued and outstanding: 65,218,520 (1)
<Fn1> reflects 2 for 1 stock division of common shares effective
April 14, 1997.
</Fn1>
Foreign Exchange Rates
All amounts are expressed in Canadian dollars, unless otherwise specified. For
the periods indicated, the average U.S. exchange rates for the quarter ended
March 31 and the quarter end mid-market rates, payable in Canadian dollars,
based on Bloomberg are:
1997 1996
(Canadian Dollars per U.S. Dollar)
Average $1.36 $1.37
Quarter End $1.38 $1.36
PROFILE
Newcourt Credit Group
Newcourt Credit Group is a North American non-bank financial services company
active in the origination, management and sale of asset-based loans.
Through its network of 34 offices in North America, Europe and Australia, the
Company serves two distinct segments of the asset-based finance market -
commercial finance and corporate finance. In these markets, Newcourt
specializes in financing a broad range of equipment and capital assets
through secured loans, conditional sales contracts and leases.
Newcourt Credit Group has over $6.7 billion in owned and managed loans.
[LOGO]
Printed in Canada on a Heidelberg press
CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
(Unaudited)
June 30, 1997
Newcourt Credit Group Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
[in thousands of Canadian dollars]
June 30, December 31,
1997 1996
$ $
ASSETS
Investment in finance assets [note 3] 1,199,348 1,072,277
Assets held for securitization and
syndication [note 4] 679,308 774,000
Investment in affiliated companies [note 5] 171,154 162,308
Accounts receivable 37,562 36,900
Fixed assets [note 6] 92,401 40,859
Other assets [note 7] 98,285 78,150
Total Assets 2,278,058 2,164,494
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities 87,281 93,338
Debt [note 8] 1,504,718 1,543,144
Deferred income taxes 15,908 12,078
Total Liabilities 1,607,907 1,648,560
Shareholders' Equity
Share capital [note 9] 540,821 415,160
Retained earnings 129,330 100,774
Total Shareholders' Equity 670,151 515,934
Total Liabilities and Shareholders' Equity 2,278,058 2,164,494
See accompanying notes
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(Unaudited)
[in thousands of Canadian dollars, except for per share amounts]
Six Months Ended
June 30, June 30,
1997 1996
$ $
Fee and affiliate income
Securitization and syndication fees [note 4] 61,605 32,041
Net income from affiliated companies [notes 5 & 8] 5,385 2,895
Management and other fees 12,721 11,022
79,711 45,958
Net finance income [note 8] 31,842 20,584
Total asset finance income 111,553 66,542
Operating expenses 68,539 42,294
Operating income before taxes 43,014 24,248
Provision for income taxes [note 11] 9,023 5,020
Net income for the period 33,991 19,228
Retained earnings, beginning of period 100,774 56,942
Dividends paid (4,391) (2,977)
Options purchased [note 10] (1,044) (31)
Retained earnings, end of period 129,330 73,162
Earnings per share: [note 9]
Basic $0.54 $0.40
Fully Diluted $0.54 $0.40
See accompanying notes
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[in thousands of Canadian dollars]
Six Months Ended
June 30, June 30,
1997 1996
$ $
OPERATING ACTIVITIES
Net income for the period 33,991 19,228
Add items not requiring an outlay of cash
Deferred income taxes 7,076 4,489
Depreciation and amortization 4,613 2,305
Net change in non-cash assets and liabilities
related to operations (32,187) (12,257)
Cash provided by operating activities 13,493 13,765
INVESTING ACTIVITIES
Finance assets, underwritten and purchased (2,285,665) (1,805,115)
Finance assets, securitized and syndicated 1,791,316 627,590
Finance assets, repayments and others 461,970 452,161
Finance assets and assets held for securitization
and syndication (32,379) (725,364)
Investment in affiliated companies (8,846) 1,342
Purchase of fixed assets (54,068) (7,477)
Cash used in investing activities (95,293) (731,499)
FINANCING ACTIVITIES
Debt issued, net (38,426) 613,015
Issue of common shares, net 123,153 107,727
Deferred tax on share issue 2,508 -
Dividends paid on common and special shares (4,391) (2,977)
Options purchased (1,044) (31)
Cash provided by financing activities 81,800 717,734
See accompanying notes
1. THE COMPANY
The Company is an independent, non-bank financial services company which
originates, sells and manages asset-based financings by way of secured loans,
leases and conditional sales contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied. The more
significant accounting policies are summarized below:
Principles of consolidation
The consolidated financial statements of the Company include the accounts of
all its wholly-owned subsidiaries. All inter-company transactions and
balances have been eliminated.
Investment in finance assets
Investment in finance assets is comprised of loans, the aggregate of finance
lease receivables less unearned income and long term securitization
receivable. Earned lease income is recognized on an actuarial basis which
produces a constant rate of return on the net investment in the leases.
Recognition of interest income is suspended when, in management's view, a
loss is likely to occur but in no event later than 90 days after an account
has gone into arrears.
Deferred Costs
Direct incremental costs of acquisition of finance assets and of investing in
affiliated companies are deferred and amortized over the expected period of
future benefit. Costs incurred during the pre-operating period of new
business ventures are deferred and amortized over the expected period of
future benefit.
Allowance for credit losses
Losses on finance assets and the carrying value of repossessed assets are
determined by discounting at the rate of interest inherent in the original
asset the expected future cash flows of the finance assets including
realization of collateral values and estimated recoveries under third party
guarantees and vendor support agreements.
General allowances are established for probable losses on loans whose
impairment cannot otherwise be measured.
Securitizations of finance assets
The Company sells the majority of its asset-based financing originations to
securitization vehicles.
The securitization transactions are accounted for as sales of finance assets,
resulting in the removal of the assets from the Company's consolidated
balance sheets and the computation of a gain on sale. Proceeds on sale are
computed as the aggregate of the initial cash consideration and the present
value of any additional sale proceeds, net of a provision for anticipated
credit losses on the securitized assets and the amount of a normal servicing
fee. The sale of finance assets is recorded when the significant risks and
rewards of ownership are transferred.
Income is earned on the long term securitization receivable and is recognized
on an accrual basis. The carrying value of this asset is reduced, as
required, based upon changes in the Company's share of the estimated credit
losses on the securitized assets. The Company continues to manage the
securitized assets and recognizes income equal to a normal servicing fee over
the term of the securitized assets.
Syndications
Other finance assets are underwritten and sold to institutional investors for
cash. These transactions generate syndication fees for the Company, which
generally continues to service these assets on behalf of the investors.
Fees received for syndicating finance assets are included in income when the
related transaction is substantially complete provided the yield on any
portion of the asset retained by the Company is at least equal to the average
yield earned by the other participants involved.
Fixed assets
Fixed assets are recorded at cost. Depreciation is provided on a straight-
line basis at rates designed to write off the assets over their estimated
useful lives as follows:
Building 20 years
Furniture and fixtures 10 years
Computers and office equipment 5 years
Goodwill
Goodwill is recorded at cost less accumulated amortization. Amortization is
provided on a straight-line basis over a period not to exceed 20 years.
Goodwill is evaluated annually and if considered permanently impaired, is
written down.
Lease inducements
The Company recognizes the benefits of lease inducements, including rent-free
periods, as a reduction of rental expense over the term of the lease.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated using
the temporal method, whereby monetary assets are converted into Canadian
dollars at exchange rates in effect at the consolidated balance sheet dates.
Gains and losses on finance assets and debt are deferred and amortized over
the remaining lives of the related items on a straight-line basis.
Non-monetary assets are translated at historical rates. Revenue and expenses
are translated at the exchange rate in effect on the date of the transaction.
Income taxes
Deferred income taxes are provided for all significant timing differences
between accounting and taxable income. The timing differences result
principally from the excess of depreciation claimed for income tax purposes
over the recovery of leased equipment cost recorded in the accounts, lease
revenue recorded in the accounts which is not yet taxable and the allowance
for credit losses which is not yet deductible for income tax purposes.
Earnings per Common Share
Earnings per common share is computed based on the weighted average number of
common shares outstanding during the period. Fully diluted earnings per
common share has been computed based on the weighted average number of common
shares outstanding after giving effect to the exercise of all outstanding
options to acquire common shares.
Derivative Financial Instruments
Derivative financial instruments are used to hedge the Company's exposure to
interest and currency risk by creating positions which are opposite to, and
offset, on-balance sheet positions which arise from normal operations. The
most frequently used derivatives are interest rate and currency swaps, bond
forwards and foreign exchange forward contracts.
Contract and notional amounts associated with derivative financial
instruments are not recorded as assets or liabilities on the balance sheet.
Off-balance sheet treatment is accorded where exchange of the underlying
asset or liability has not occurred or is not assured, or where notional
amounts are used solely to determine cash flows to be exchanged.
Swaps and bond forward contracts are accounted for on the accrual basis. Net
accrued interest receivable/payable and deferred gains/losses are recorded
in other assets or other liabilities, as appropriate. Realized gains/losses
on terminated contracts are deferred and amortized over the remaining life of
the related position.
3. INVESTMENT IN FINANCE ASSETS
The investment in finance assets consists of loans, leases and the Company's
investment in long term securitization receivable outstanding at
June 30, 1997, which are due as follows:
Leases Net
Long term investment
Minimum Unearned Net securitization in finance
Loans payments income investment receivable assets
$ $ $ $ $ $
1997 214,133 62,014 11,255 50,759 73,639 338,531
1998 51,388 114,864 19,200 95,664 48,910 195,962
1999 44,803 101,844 14,617 87,227 31,907 163,937
2000 39,929 70,485 10,346 60,139 18,817 118,885
2001 40,848 47,846 7,017 40,829 7,622 89,299
Thereafter 170,152 115,347 12,027 103,320 19,262 292,734
------- ------- ------ ------- ------- ---------
561,253 512,400 74,462 437,938 200,157 1,199,348
At December 31, 1996, the investments in loans, leases and long term
securitization receivable were $571,801, $346,521 and $153,955 respectively.
Included in investment in finance assets is US$497,121 [December 31, 1996 -
US$600,367].
Substantially all of the investment in finance assets bear interest at
varying levels of fixed rates of interest. There are no significant
concentrations.
An analysis of the Company's allowance for credit losses and investment in
finance assets is as follows:
June 30, December 31,
1997 1996
$ $
Investment in finance assets 1,199,348 1,072,277
Allowance for credit losses, beginning of period 16,465 5,089
Provisions for credit losses during the period
including acquisitions 2,134 14,496
Write-offs, net of recoveries (4,374) (3,120)
Allowance for credit losses, end of period 14,225 16,465
Allowance as a percentage of finance assets 1.2% 1.5%
Finance assets in arrears (90 days and over) 3,739 6,353
Arrears as a percentage of finance assets 0.3% 0.6%
Finance assets in repossession, at estimated net
realizable value 3,735 7,391
Credit provisions against finance assets acquired during the period amounted
to Nil [December 31, 1996 - $11,357].
The Company has an additional specific credit loss reserve of $1,544
[December 31, 1996 - $1,928] relating to the Company's long term
securitization receivable, representing its interest in the CIP I, II, III,
IV, V and VI securitization vehicles. Beyond this specific credit loss
reserve further losses may be provided for by a reduction in the yield earned
on the long term securitization receivable.
4. SECURITIZATIONS
The Company has a securitization program under which finance assets
originated by the Company are sold to securitization vehicles. As a result
of this program, a substantial amount of the Company's asset finance income
is derived from gains on the sale of securitized finance assets and
management fees relating to such assets. The Company continues to be
responsible for the administration and collection of the receivables on
behalf of the investors.
Financing contracts are sold to limited partnerships funded by institutional
investors through the issuance of senior and junior asset-backed instruments
(92% and 8% respectively). The Company retains a one-third interest in the
junior instrument. Consideration for the sales consist of an initial cash
payment and additional sale proceeds, representing the Company's interest in
cashflows of the limited partnership. The sales are non-recourse to the
Company, except to the extent of the long term receivable
Floating rate contracts are sold through public multi-seller securitization
vehicles for cash consideration and additional sale proceeds. The Company
provides the multi-seller with protection from certain risks of ownership by
providing an over collateralization reserve which represents the Company's
interest in the cash flows of the assets sold.
An undivided ownership interest in eligible inventory finance loans and
revolving loans is sold on a revolving basis to a multi-seller securitization
trust. The Company provides the multi-seller with protection from certain
risks of ownership by providing an over collateralization reserve and a cash
security subject to a dollar floor.
During the period, the Company generated gross securitization income of
$48,327 [1996 - $24,993] which is included in Securitization and syndication
fees.
Included in investment in finance assets is the long term securitization
receivable comprised of (i) $190,104 [December 31, 1996 - $143,971] of
additional sales proceeds which represents the Company's interest in the cash
flows of the securitization vehicles, (ii) $7,565 [December 31, 1996 -
$7,534] of securitization proceeds from the sale of assets to certain
securitization vehicles which are received over the term of the securitized
assets as excess servicing fees which have a first priority on all the cash
flows of the vehicles and (iii) $2,488 [December 31, 1996 - $2,450]
representing the additional cash security provided to the multi-seller
securitization trust.
As at June 30, 1997, the Company had commitments or substantially completed
commitments to fund or support the funding of the following amounts:
$
Commercial Finance 3,497,000
Corporate Finance 675,000
---------
4,172,000
5. INVESTMENT IN AFFILIATED COMPANIES
Investment in affiliated companies includes the Company's investment in its
foreign affiliates through which the international based operations of the
Company are conducted and additional investments in other affiliated companies.
6. FIXED ASSETS
Fixed assets consist of the following:
June 30, 1997 December 31, 1996
Accumulated Accumulated
Cost depreciation Cost depreciation
$ $ $ $
Land and building 36,310 345 5,590 1,011
Furniture and fixtures 32,164 4,816 19,982 3,767
Computers and office equipment 36,114 8,909 25,041 6,767
Other 2,007 124 1,914 123
------- ------ ------ ------
106,595 14,194 52,527 11,668
Net book value 92,401 40,859
7. OTHER ASSETS
Included in other assets is goodwill of $60,162 [December 31, 1996 - $54,200].
8. DEBT
Debt consists of the following:
June 30, December 31,
1997 1996
$ $
Unsecured Fixed Rate Debt
U.S. senior notes, bearing interest varying
from 6.95% to 7.12%, maturing in the years
2000 to 2005 143,793 143,186
U.S. senior notes, bearing interest at 8.26%,
maturing in the year 2005 137,601 137,020
Medium term notes, bearing interest rates
varying from 5.80% to 8.25% maturing in the
years 1997 to 2003 358,088 328,050
7.625% debenture, maturing in June, 2001 124,773 124,745
6.45% debenture, maturing in June, 2002 149,757 149,733
Other
Commercial paper and other short term borrowings 399,160 545,841
Fixed rate debt 191,546 114,569
--------- ---------
1,504,718 1,543,144
Interest expense on the amount of debt outstanding during the period was
$59,941 [1996 - $43,723], of which $6,880 [1996 - $5,293] has been netted
against income from affiliates, and the balance $53,061 [1996 - $38,430]
included in net finance income.
On May 14, 1997, the Company renewed and increased its Canadian bank facility
to $450 million and its U.S. bank facility to US$600 million. The Canadian
bank facility and one-third of the U.S. bank facility is a 364-day committed
unsecured revolving credit facility with a syndicate of Canadian, U.S. and
international banks. The remaining two-thirds of the U.S. bank facility is a
three-year committed unsecured revolving credit facility. These credit
facilities are used as interim funding pending syndication, sale,
securitization, collection of proceeds of financings assets, or as support
for the Company's $400 million Canadian commercial paper program and its
US$420 million U.S. commercial paper program.
Short term borrowings are net of cash on hand and short term investments of
$78,590 [December 31, 1996 - $51,184], these have been used by the Company,
subsequent to the period, to pay down commercial paper and bank facilities.
Included in debt is US$1,049,897 [December 31, 1996 - US$990,243] of which
US$984,897 [December 31, 1996 - US$925,243] was used to fund leases and loans
which are repayable in U.S. dollars, and the remainder was swapped into
floating rate Canadian dollar debt.
As of June 30, 1997, scheduled repayments are as follows:
$
1997 621,712
1998 68,546
1999 82,816
2000 141,454
2001 173,471
Thereafter 416,719
---------
1,504,718
9. SHARE CAPITAL
Authorized -
The Company's authorized share capital consists of the following:
[i] Unlimited Common Shares with voting rights;
[ii] Unlimited Special Shares without voting rights convertible into Common
Shares on a share-for-share basis;
[iii] Unlimited Class A Preference Shares issuable in series.
Outstanding -
The following is a summary of the changes in share capital during the period:
Six months ended Year ended
June 30, December 31,
1997 1996
# $ # $
Common Shares
Outstanding, beginning of period 60,182,688 415,160 22,664,466 188,166
Proceeds of share issue, net 4,950,000 123,159 7,150,000 224,434
Conversion of special shares - - 199,325 86
Others 14,645 483 74,303 2,430
Stock options exercised 286,792 2,019 3,250 44
2:1 share division - - 30,091,344 -
Outstanding, end of period 65,434,125 540,821 60,182,688 415,160
Special Shares
Outstanding, beginning of period - - 199,325 86
Conversion to common shares - - (199,325) (86)
Outstanding, end of period - - - -
Total Share Capital 65,434,125 540,821 60,182,688 415,160
Public Offering
On April 22, 1996, the Company completed a public offering of 3,850,000
(7,700,000 post split) Common Shares at $28.50 per share for gross proceeds
of $109,725. Expenses of this issue, net of deferred income tax recoveries
of $2,292, amounted to $2,802.
On September 30, 1996, the Company completed a public offering of 3,300,000
(6,600,000 post split) Common Shares at $36.50 per share for gross proceeds
of $120,450. Expenses of this issue, net of deferred income tax recoveries
of $2,404, amounted to $2,939.
On March 11, 1997, the Company completed a public offering of 2,475,000
(4,950,000 post split) Common Shares at $51.00 per share for gross proceeds
of $126,225. Expenses of this issue, net of deferred income tax recoveries
of $2,508, amounted to $3,066.
Special Shares
On July 2, 1996, the remaining 199,325 Special Shares were converted into
199,325 (398,650 post split) Common Shares.
Common Shares
Effective April 14, 1997, the Company subdivided on a two-for-one basis all
of the Company's issued and outstanding Common Shares and all the Company's
Common Shares reserved for issuance.
10. EMPLOYEE STOCK OPTION PLAN
During the period, the Company's Stock Option Plan as approved by the
shareholders at the Annual General Meeting was amended. Under the amended
Plan, the Company may issue 9,046,878 common shares to employees and
directors of the Company at the discretion of the Board of Directors. The
number of shares which may be issued under options to any employee or
director shall not exceed in the aggregate 5% of the total of the outstanding
shares. During the period the Company issued 2,445,848 options. As of
June 30, 1997, 3,792,130 options were outstanding under the plan [December 31,
1996 - 1,687,726] expiring at various dates from November 19, 1997 through
February 6, 2007 at prices ranging from $6.075 to $24.25. 508,474
options have been exercised since the plan's inception.
During 1997, the Company purchased 54,568 [1996 - 4,682] options at their
fair market value resulting in a cash distribution of $1,044 [1996 - $31].
11. INCOME TAXES
The Company's provision for income taxes is lower than the statutory rate
prevailing in Canada due to lower income tax rates on income earned from
operations outside Canada and the dividend deduction available as earnings
are repatriated from exempt surplus.
The following table reconciles tax expense calculated at the statutory rates
with the actual income tax expense:
June 30, June 30,
1997 1996
$ $
Income before income taxes 43,014 24,248
Statutory rate of income taxes 45% 45%
Income taxes at the statutory rate 19,356 10,912
Effect on income taxes of
Deductibility of dividends from exempt surplus (10,219) (4,105)
Recognition of losses carry over - (296)
Large corporations tax 745 531
Other (859) (2,022)
Net provision 9,023 5,020
Allocation of provision
Current 1,947 531
Deferred 7,076 4,489
------- ------
9,023 5,020
12. FINANCE ASSETS UNDER MANAGEMENT
Included in finance assets under management are finance assets which have
been securitized or syndicated by the Company and are not reflected on the
balance sheet.
Securitized finance assets are described in Note 4. Syndicated finance
assets are assets which have been sold to investors without recourse or
credit enhancement.
Finance assets under management are as follows:
June 30, December 31,
1997 1996
$ $
Securitized finance assets 2,990,296 2,731,341
Syndicated finance assets 1,150,249 1,230,221
Syndicated finance assets of
affiliated companies 637,044 655,843
--------- ---------
4,777,589 4,617,405
13. LEASE COMMITMENTS
Future minimum annual payments on a cash basis under leases for premises over
the next 5 years and thereafter are as follows:
$
1997 3,556
1998 6,449
1999 7,487
2000 7,593
2001 7,637
Thereafter 38,450
------
71,172
14. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into derivative
contracts and other hedging transactions to manage asset/liability exposures,
specifically exposures to market interest rate and foreign currency risk.
Market risk represents the potential for changes in the value of assets and
liabilities due to fluctuations in interest and foreign exchange rates.
The notional principal amounts of the Company's derivatives and the current
credit exposure are as follows:
Current
credit
exposure
Notional principal amounts maturing (1) (2)
Total Total
Under 1 to 5 Over June 30 Dec. 31 June 30
1 year years 5 years 1997 1996 1997
$ $ $ $ $ $
Interest rate contracts
Bond forwards 1,218,310 - - 1,218,310 808,925 -
Interest rate swaps 33,587 344,522 52,382 430,491 403,669 13,841
--------- ------- ------ --------- --------- ------
1,251,897 344,522 52,382 1,648,801 1,212,594 13,841
Foreign exchange contracts
Spot and forward contracts 16,555 - - 16,555 16,243 -
Cross currency swaps 543,000 84,181 77,472 704,673 619,119 1,965
--------- ------- ------ --------- --------- ------
559,555 84,181 77,472 721,208 635,362 1,965
Total derivatives 1,811,452 428,703 129,854 2,370,009 1,847,956 15,806
(1) Notional principal amounts are the contract amounts used in determining
payments.
(2) Credit risk exposure is the replacement cost of all contracts without
taking into account any netting arrangements. All counterparties are
investment grade financial institutions.
15. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.
November 3, 1997
British Columbia Securities Commission
Alberta Securities Commission Agency
Saskatchewan Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Commission des valeurs mobilieres du Quebec
Administrator of the Securities Act, New Brunswick
Nova Scotia Securities Commission
Registrar of Securities, Prince Edward Island
Securities Commission of Newfoundland
Dear Sirs/Madam:
Re: Newcourt Credit Group Inc. (the "Company")
We are the auditors of the Company and under the date of February 6, 1997,
we reported on the following consolidated financial statements incorporated
by reference in the Short Form Shelf Prospectus dated October 17, 1996
relating to the proposed distribution of up to $650,000,000 of Debt
Securities of the Company on a continuous basis (the "Shelf Prospectus") :
Consolidated balance sheets as at December 31, 1996 and 1995; and
Consolidated statements of income and retained earnings and cash
flows for each of the years in the two year period ended December 31, 1996.
The following unaudited interim consolidated financial statements are
incorporated by reference in the Shelf Prospectus:
Consolidated balance sheet as at September 30, 1997 with comparative
figures as at December 31, 1996; and
Consolidated statements of income and retained earnings and cash flows
for the nine months and three months ended September 30, 1997 with comparative
figures for the nine months and three months ended September 30, 1996.
We have not audited any financial statements of the Company as at any date or
for any period subsequent to December 31, 1996. Although we have performed an
audit for the year ended December 31, 1996, the purpose and therefore the scope
of the audit was to enable us to express our opinion on the consolidated
financial statements as at December 31, 1996 and for the year then ended, but
not on the
consolidated financial statements for any interim period within that year.
Therefore, we are unable to and do not express an opinion on the unaudited
interim consolidated balance sheet as at September 30, 1997 and on the
unaudited interim consolidated statements of income and retained earnings
and cash flows for the nine months and three months ended September 30,
1997 and 1996 nor on the financial position, results of operations or changes
in financial position as at any date or for any period subsequent to December
31, 1996.
We have, however, performed review procedures which meet the standards
established by The Canadian Institute of Chartered Accountants relating to
unaudited interim financial statements in prospectuses. Based on the results
of these procedures, we have no reason to believe that the unaudited interim
consolidated financial statements are not presented, in all material respects,
in accordance with generally accepted accounting principles.
The procedures referred to in the preceding paragraph do not constitute an
audit and would not necessarily reveal material adjustments which might be
required in order for the unaudited interim consolidated financial statements
to present fairly, in all material respects, the financial position of the
Company as at September 30, 1997, and the results of its operations and
changes in financial position for the nine months and three months ended
September 30, 1997 and 1996, in accordance with generally accepted
accounting principles.
This letter is provided solely for the purpose of assisting the securities
regulatory authorities to which it is addressed in discharging their
responsibilities and should not be relied upon for any other purpose.
Yours sincerely,
ERNST & YOUNG [signed]
November 3, 1997
To: Applicable Securities Commissions or
Other Regulatory Bodies in Canada
Dear Sirs/Madams:
Set forth below is the basis for the calculations of the updated interest and
asset coverages deemed, pursuant to the provisions of National Policy
Statement No. 44, to be incorporated by reference in our Final Short Form
Shelf Prospectus dated October 17, 1996 in respect of the distribution of up
to $650,000,000 aggregate principal amount of Debt Securities.
The coverage ratios are stated in terms of total consolidated debt (including
Secured Subordinated Debt), reflecting the equal ranking of both short and
long term debt, thereby reducing or eliminating the potential that this
information could be considered misleading.
Reference will be made to those financial information items used in the
following calculations which are not clearly identifiable in the documents
incorporated by reference in the Final Short Form Shelf Prospectus or in the
documents referenced by those documents. Specifically, these documents
are the Corporation's annual audited consolidated financial statements for
the year ended December 31, 1996 and the Corporation's unaudited
consolidated interim financial statements for the nine months ended
September 30, 1997.
Interest Coverage
Sept. 30, 1997 December 31, 1996
($000's)
Consolidated income before income tax 49,556 64,150
Add: Interest on Consolidated Total Debt 120,461 104,601
------- -------
170,017 168,751
Interest on Consolidated Total Debt 120,461 104,601
Interest coverage on Consolidated Total Debt 1.41 Times 1.61 Times
Asset Coverage
No adjustment has been made for deferred income taxes as at December 31,
1996 or September 30, 1997, as these amounts are not material.
Consolidated net tangible asset coverage ratios have been calculated as at
December 31, 1996 and as at September 30, 1997 as follows:
Sept. 30, 1997 December 31, 1996
($000's)
Consolidated Total Assets 4,151,125 2,164,494
Less: Goodwill 401,811 54,200
Consolidated Total Assets for purposes
of coverage calculation 3,749,314 2,110,294
Consolidated Total Debt Outstanding 2,575,436 1,543,144
Consolidated Net Tangible Asset
Coverage on Total Debt 1.46 Times 1.37 Times
Sincerely,
Borden D. Rosiak
Executive Vice President
and Chief Financial Officer
CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
(Unaudited)
September 30, 1997
Newcourt Credit Group Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
[in thousands of Canadian dollars]
September 30, December 31,
1997 1996
$ $
ASSETS
Investment in finance assets [note 3] 2,330,390 1,072,277
Assets held for securitization
and syndication [note 4] 987,609 774,000
Investment in affiliated companies [note 5] 186,472 162,308
Accounts receivable, prepaids and other 129,470 54,762
Fixed assets [note 6] 115,373 40,859
Goodwill [note 7] 401,811 60,288
Total Assets 4,151,125 2,164,494
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities 210,650 93,338
Debt [note 9] 2,575,436 1,543,144
Deferred income taxes 64,519 12,078
Total Liabilities 2,850,605 1,648,560
Shareholders' Equity
Share capital [note 10] 1,174,392 415,160
Retained earnings 126,128 100,774
Total Shareholders' Equity 1,300,520 515,934
Total Liabilities and Shareholders' Equity 4,151,125 2,164,494
See accompanying notes
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
[in thousands of Canadian dollars, except for per share amounts]
Nine Months Ended
September 30, September 30,
1997 1996
$ $
Fee and affiliate income
Securitization and syndication fees [note 4] 109,206 57,480
Net income from affiliated companies [notes 5 & 9] 6,891 4,725
Management and other fees 20,968 17,322
137,065 79,527
Net finance income [note 9] 55,156 35,523
Total asset finance income 192,221 115,050
Operating expenses 116,904 73,139
Operating income before restructuring
charges and taxes 75,317 41,911
Restructuring charge [note 8] 48,000 0
Operating income before taxes 27,317 41,911
Provision for (recovery of) income
taxes [note 12] (5,818) 8,801
Net income for the period 33,135 33,110
Retained earnings, beginning of period 100,774 56,942
Dividends paid (6,681) (4,582)
Options purchased [note 11] (1,100) (163)
Retained earnings, end of period 126,128 85,307
Earnings per common share: [note 8]
Basic $0.50 $0.66
Fully Diluted $0.50 $0.66
See accompanying notes
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[in thousands of Canadian dollars]
Nine Months Ended
September 30, September 30,
1997 1996
$ $
OPERATING ACTIVITIES
Net income for the period 33,135 33,110
Add items not requiring an outlay of cash
Restructuring charge 48,000 0
Deferred income taxes (8,738) 3,248
Depreciation and amortization 11,040 3,988
Net change in non-cash assets and
liabilities related to operations (115,168) (24,515)
Cash provided by (used in) operating
activities (31,731) 15,831
INVESTING ACTIVITIES
Finance assets, underwritten and purchased (3,916,706) (2,856,627)
Finance assets, securitized and syndicated 2,898,247 1,259,880
Finance assets, repayments and others 565,430 639,512
Finance assets and assets held for
securitization and syndication (453,029) (957,235)
Business acquisitions (581,682) 0
Investment in affiliated companies (24,164) (68,698)
Purchase of fixed assets (64,722) (18,495)
Cash used in investing activities (1,123,597) (1,044,428)
FINANCING ACTIVITIES
Debt issued, net 681,172 807,504
Issue of common shares, net 473,858 225,838
Deferred tax on share issue 8,079 0
Dividends paid on common and special shares (6,681) (4,582)
Options purchased (1,100) (163)
Cash provided by financing activities 1,155,328 1,028,597
See accompanying notes
1. THE COMPANY
The Company is an independent, non-bank financial services company which
originates, sells and manages asset-based financings by way of secured loans,
leases and conditional sales contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied. The more
significant accounting policies are summarized below:
Principles of consolidation
The consolidated financial statements of the Company include the accounts of
all its wholly-owned subsidiaries. All inter-company transactions and balances
have been eliminated.
Investment in finance assets
Investment in finance assets is comprised of loans, the aggregate of finance
lease receivables less unearned income and long term securitization receivable.
Earned lease income is recognized on an actuarial basis which produces a
constant rate of return on the net investment in the leases.
Recognition of interest income is suspended when, in management's view, a loss
is likely to occur but in no event later than 90 days after an account has
gone into arrears.
Deferred Costs
Direct incremental costs of acquisition of finance assets and of investing in
affiliated companies are deferred and amortized over the expected period of
future benefit. Costs incurred during the pre-operating period of new
business ventures are deferred and amortized over the expected period of
future benefit.
Allowance for credit losses
Losses on finance assets and the carrying value of repossessed assets are
determined by discounting at the rate of interest inherent in the original
asset the expected future cash flows of the finance assets including
realization of collateral values and estimated recoveries under third party
guarantees and vendor support agreements.
General allowances are established for probable losses on loans whose
impairment cannot otherwise be measured.
Securitizations of finance assets
The Company sells the majority of its asset-based financing originations to
securitization vehicles.
The securitization transactions are accounted for as sales of finance assets,
resulting in the removal of the assets from the Company's consolidated
balance sheets and the computation of a gain on sale. Proceeds on sale are
computed as the aggregate of the initial cash consideration and the present
value of any additional sale proceeds, net of a provision for anticipated
credit losses on the securitized assets and the amount of a normal servicing
fee. The sale of finance assets is recorded when the significant risks and
rewards of ownership are transferred.
Income is earned on the long term securitization receivable and is recognized
on an accrual basis. The carrying value of this asset is reduced, as
required, based upon changes in the Company's share of the estimated credit
losses on the securitized assets. The Company continues to manage the
securitized assets and recognizes income equal to a normal servicing fee
over the term of the securitized assets.
Syndications
Other finance assets are underwritten and sold to institutional investors
for cash. These transactions generate syndication fees for the Company,
which generally continues to service these assets on behalf of the investors.
Fees received for syndicating finance assets are included in income when the
related transaction is substantially complete provided the yield on any
portion of the asset retained by the Company is at least equal to the
average yield earned by the other participants involved.
Fixed assets
Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis at rates designed to write off the assets over their
estimated useful lives as follows:
Building 20 years
Furniture and fixtures 10 years
Computers and office equipment 5 years
Goodwill
Goodwill is recorded at cost less accumulated amortization. Amortization is
provided on a straight-line basis over a period not to exceed 20 years.
Goodwill is evaluated annually and if considered permanently impaired, is
written down.
Lease inducements
The Company recognizes the benefits of lease inducements, including rent-free
periods, as a reduction of rental expense over the term of the lease.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated
using the temporal method, whereby monetary assets are converted into
Canadian dollars at exchange rates in effect at the consolidated balance
sheet dates. Gains and losses on finance assets and debt are deferred and
amortized over the remaining lives of the related items on a straight-line
basis. Non-monetary assets are translated at historical rates. Revenue and
expenses are translated at the exchange rate in effect on the date of the
transaction.
Income taxes
Deferred income taxes are provided for all significant timing differences
between accounting and taxable income. The timing differences result
principally from the excess of depreciation claimed for income tax purposes
over the recovery of leased equipment cost recorded in the accounts, lease
revenue recorded in the accounts which is not yet taxable and the allowance
for credit losses which is not yet deductible for income tax purposes.
Earnings per Common Share
Earnings per common share is computed based on the weighted average number of
common shares outstanding during the period. Fully diluted earnings per
common share has been computed based on the weighted average number of
common shares outstanding after giving effect to the exercise of all
outstanding options to acquire common shares.
Derivative Financial Instruments
Derivative financial instruments are used to hedge the Company's exposure to
interest and currency risk by creating positions which are opposite to, and
offset, on-balance sheet positions which arise from normal operations. The
most frequently used derivatives are interest rate and currency swaps, bond
forwards and foreign exchange forward contracts.
Contract and notional amounts associated with derivative financial
instruments are not recorded as assets or liabilities on the balance sheet.
Off-balance sheet treatment is accorded where exchange of the underlying
asset or liability has not occurred or is not assured, or where notional
amounts are used solely to determine cash flows to be exchanged.
Swaps and bond forward contracts are accounted for on the accrual basis.
Net accrued interest receivable/payable and deferred gains/losses are
recorded in other assets or other liabilities, as appropriate. Realized
gains/losses on terminated contracts are deferred and amortized over the
remaining life of the related position.
3. INVESTMENT IN FINANCE ASSETS
The investment in finance assets consists of loans, leases and the Company's
investment in long term securitization receivable outstanding at
September 30, 1997, which are due as follows:
Leases Net
Long term investment
Minimum Unearned Net securitization in finance
Loans payments income investment receivable assets
$ $ $ $ $ $
1997 286,535 153,557 28,074 125,483 86,272 498,290
1998 172,098 395,031 82,145 312,886 83,464 568,448
1999 134,331 312,003 50,314 261,689 61,772 457,792
2000 105,794 189,926 27,088 162,838 34,738 303,370
2001 84,892 108,085 15,042 93,043 16,472 194,407
Thereafter 194,386 111,010 18,025 92,985 20,712 308,083
------- ------- ------ ------ ------ -------
978,036 1,269,612 220,688 1,048,924 303,430 2,330,390
At December 31, 1996, the investments in loans, leases and long term
securitization receivable were $571,801, $346,521 and $153,955 respectively.
Included in investment in finance assets is US$826,410 [December 31, 1996 -
US$600,367].
Substantially all of the investment in finance assets bear interest at varying
levels of fixed rates of interest. There are no significant concentrations.
An analysis of the Company's allowance for credit losses and investment in
finance assets is as follows:
September 30, December 31,
1997 1996
$ $
Investment in finance assets 2,330,390 1,072,277
Allowance for credit losses, beginning
of period 16,465 5,089
Provisions for credit losses during the
period including acquisitions 28,944 14,496
Write-offs, net of recoveries (6,521) (3,120)
Allowance for credit losses, end of period 38,888 16,465
Allowance as a percentage of finance assets 1.7% 1.5%
Finance assets in arrears (90 days and over) 9,027 6,353
Arrears as a percentage of finance assets 0.4% 0.6%
Finance assets in repossession, at
estimated net realizable value 4,357 7,391
Credit provisions against finance assets acquired during the period
amounted to $24,310 [December 31, 1996 - $11,357].
The Company has an additional specific credit loss reserve of $1,364
[December 31, 1996 - $1,928] relating to the Company's long term
securitization receivable, representing its interest in the CIP I, II, III,
IV, V and VI securitization vehicles. Beyond this specific
credit loss reserve further losses may be provided for by a reduction in
the yield earned on the long term securitization receivable.
4. SECURITIZATIONS
The Company has a securitization program under which finance assets originated
by the Company are sold to securitization vehicles. As a result of this
program, a substantial amount of the Company's asset finance income is
derived from gains on the sale of securitized finance assets and management
fees relating to such assets. The Company continues to be responsible for
the administration and collection of the receivables on behalf of the
investors.
Financing contracts are sold to limited partnerships funded by institutional
investors through the issuance of senior and junior asset-backed instruments
(92% and 8% respectively). The Company retains a one-third interest in the
junior instrument. Consideration for the sales consist of an initial cash
payment and additional sale proceeds, representing the Company's interest in
cashflows of the limited partnership. The sales are non-recourse to the
Company, except to the extent of the long term receivable for additional sale
proceeds.
Floating rate contracts are sold through public multi-seller securitization
vehicles for cash consideration and additional sale proceeds. The Company
provides the multi-seller with protection from certain risks of ownership by
providing an over collateralization reserve which represents the Company's
interest in the cash flows of the assets sold.
An undivided ownership interest in eligible inventory finance loans and
revolving loans is sold on a revolving basis to a multi-seller
securitization trust. The Company provides the multi-seller with protection
from certain risks of ownership by providing an over collateralization
reserve and a cash security subject to a dollar floor.
During the period, the Company generated gross securitization income of
$89,092 [1996 - $45,234] which is included in Securitization and syndication
fees.
Included in investment in finance assets is the long term securitization
receivable comprised of (i) $279,630 [December 31, 1996 - $143,971] of
additional sales proceeds which represents the Company's interest in the
cash flows of the securitization vehicles, (ii) $7,308 [December 31, 1996 -
$7,534] of securitization proceeds from the sale of assets to certain
securitization vehicles which are received over the term of the securitized
assets as excess servicing fees which have a first priority on all the cash
flows of the vehicles and (iii) $16,492 [December 31, 1996 - $2,450]
representing the additional cash security provided to the multi-seller
securitization trust.
As at September 30, 1997, the Company had commitments or substantially
completed commitments to fund or support the funding of the following amounts:
$
Commercial Finance 3,488,000
Corporate Finance 640,000
---------
4,128,000
5. INVESTMENT IN AFFILIATED COMPANIES
Investment in affiliated companies includes the Company's investment in its
foreign affiliates through which the international based operations of the
Company are conducted and additional investments in other affiliated companies.
6. FIXED ASSETS
Fixed assets consist of the following:
September 30, 1997 December 31, 1996
---------------------- -------------------------
Accumulated Accumulated
Cost depreciation Cost depreciation
$ $ $ $
Land and building 37,067 390 5,590 1,011
Furniture and fixtures 35,622 5,656 19,982 3,767
Computers and office equipment 59,256 10,817 25,041 6,767
Other 416 125 1,914 123
132,361 16,988 52,527 11,668
------- ------
Net book value 115,373 40,859
7. ACQUISITIONS
On August 23, 1997, the Company acquired all of the outstanding common shares
of Commcorp Financial Services Inc. ("Commcorp") for approximately $366 million
of which $89 million was paid in cash, and the remaining $277 million through
the issuance of common shares. Commcorp provides asset finance and management
services to a broad range of industries.
On September 5, 1997, the Company purchased the Business Technology Finance
("BTF") division of Lloyds UDT for approximately $493 million paid in cash for
assets acquired less the assumption of certain business liabilities. BTF
operates primarily in four business markets: computers, business
telecommunications, photocopiers and catering/vending machines.
These acquisitions have been accounted for as purchases, and accordingly the
consolidated financial statements include the results of operations of the
acquired businesses from the dates of acquisition. The net assets acquired
are as follows:
Commcorp BTF Total
$ $ $
Net assets acquired at approximate fair values
Investment in finance assets 596,891 421,802 1,018,693
Fixed assets 14,143 2,195 16,338
Investment in affiliated companies 18,471 0 18,471
Accounts receivable 32,368 9,854 42,222
------- ------- ---------
661,873 433,851 1,095,724
Long term debt 351,120 0 351,120
Deferred taxes 68,911 0 68,911
Other 123,734 30,546 154,280
------- ------- ---------
543,765 30,546 574,311
Net assets acquired 118,108 403,305 521,413
Consideration
Cash 88,633 493,049 581,682
Common shares 277,295 0 277,295
Total consideration 365,928 493,049 858,977
------- -------- ---------
Goodwill 247,820 89,744 337,564
Upon completion of these acquisitions, total goodwill amounted to $401,811
[December 31, 1996 - $60,288].
8. RESTRUCTURING CHARGE
A restructuring charge of $48,000 comprising severances, office relocations
and system conversions was recorded in the statement of income relating to
the integration of Commcorp's operations with the Company's existing
businesses.
The effect on net income after income taxes and earnings per common share of
this change is set out below:
$
Restructuring charge 48,000
Taxes recoverable (21,600)
Net restructuring charge 26,400
Earnings per common share
Operations $0.90
Restructuring charge ($0.40)
Basic and fully diluted $0.50
9. DEBT
Debt consists of the following:
September 30, December 31,
1997 1996
$ $
Unsecured Fixed Rate Debt
U.S. senior notes, bearing interest varying
from 6.95%to 7.12%, maturing in the
years 2000 to 2005 143,655 143,186
U.S. senior notes, bearing interest at 8.26%,
maturing in the year 2005 138,130 137,020
Medium term notes, bearing interest
rates varying from 4.40% to 9.34% maturing
in the years 1997 to 2007 692,967 328,050
7.625% debenture, maturing in June, 2001 124,787 124,745
6.45% debenture, maturing in June, 2002
149,770 149,733
Other
Commercial paper and other short
term borrowings 1,069,106 545,841
Fixed rate debt 257,021 114,569
--------- ---------
2,575,436 1,543,144
Interest expense on the amount of debt outstanding during the period was
$89,630 [1996 - $73,770], of which $11,330 [1996 - $9,538] has been netted
against income from affiliates, and the balance $78,300 [1996 - $64,232]
included in net finance income.
On August 12, 1997, the Company increased its Canadian bank facility to
$750 million. On May 14, 1997, the Company renewed and increased its U.S.
bank facility to US$600 million. The Canadian bank facility and one-third
of the U.S. bank facility is a 364-day committed unsecured revolving credit
facility with a syndicate of Canadian, U.S. and international banks. The
remaining two-thirds of the U.S. bank facility is a three-year
committed unsecured revolving credit facility. These credit facilities are
used as interim funding pending syndication, sale, securitization, collection
of proceeds of financings assets, or as support for the Company's $750
million Canadian commercial paper program and its US$600 million U.S.
commercial paper program.
Short term borrowings are net of cash on hand and short term investments of
$96,235 [December 31, 1996 - $51,184], these have been used by the Company,
subsequent to the period, to pay down commercial paper and bank facilities.
Included in debt is US$1,285,596 [December 31, 1996 - US$990,243] of which
US$1,220,596 [December 31, 1996 - US$925,243] was used to fund leases and
loans which are repayable in U.S. dollars, and the remainder was swapped
into floating rate Canadian dollar debt.
As of September 30, 1997, scheduled repayments are as follows:
$
1997 1,192,126
1998 221,002
1999 170,665
2000 198,344
2001 210,740
Thereafter 582,559
---------
2,575,436
10. SHARE CAPITAL
Authorized -
The Company's authorized share capital consists of the following:
[i] Unlimited Common Shares with voting rights;
[ii] Unlimited Special Shares without voting rights convertible into Common
Shares on a share-for-share basis;
[iii] Unlimited Class A Preference Shares issuable in series.
Outstanding -
The following is a summary of the changes in share capital during the period:
Nine months ended Year ended
September 30, December 31,
1997 1996
# $ # $
Common Shares
Outstanding, beginning of period 60,182,688 415,160 22,664,466 188,166
Proceeds of share issue, net 13,910,000 481,030 7,150,000 224,434
Conversion of special shares 0 0 199,325 86
Stock options exercised 337,862 2,421 3,250 44
Issued on acquisition [note 7] 8,214,843 275,198 0 0
2:1 share division 0 0 30,091,344 0
Others 20,217 583 74,303 2,430
Outstanding, end of period 82,665,610 1,174,392 60,182,688 415,160
Special Shares
Outstanding, beginning of period 0 0 199,325 86
Conversion to common shares 0 0 (199,325) (86)
Outstanding, end of period 0 0 0 0
Total Share Capital 82,665,610 1,174,392 60,182,688 415,160
Public Offering
On April 22, 1996, the Company completed a public offering of 3,850,000
(7,700,000 post split) Common Shares at $28.50 per share for gross proceeds
of $109,725. Expenses of this issue, net of deferred income tax recoveries
of $2,292, amounted to $2,802.
On September 30, 1996, the Company completed a public offering of 3,300,000
(6,600,000 post split) Common Shares at $36.50 per share for gross proceeds
of $120,450. Expenses of this issue, net of deferred income tax recoveries
of $2,404, amounted to $2,939.
On March 11, 1997, the Company completed a public offering of 2,475,000
(4,950,000 post split) Common Shares at $51.00 per share for gross proceeds
of $126,225. Expenses of this issue, net of deferred income tax recoveries
of $2,508, amounted to $3,066.
On August 29, 1997, the Company completed a public offering of 7,260,000
common shares at $38.50 per share for gross proceeds of $279,510. Expenses
of this issue net of deferred income tax recoveries of $5,571 amounted to
$6,809.
Special Shares
On July 2, 1996, the remaining 199,325 Special Shares were converted into
199,325 (398,650 post split) Common Shares.
Common Shares
Effective April 14, 1997, the Company subdivided on a two-for-one basis all
of the Company's issued and outstanding Common Shares and all the Company's
Common Shares reserved for issuance.
11. EMPLOYEE STOCK OPTION PLAN
During the period, the Company's Stock Option Plan as approved by the
shareholders at the Annual General Meeting was amended. Under the amended
Plan, the Company may issue 9,046,878 common shares to employees and
directors of the Company at the discretion of the Board of Directors. The
number of shares which may be issued under options to any employee or
director shall not exceed in the aggregate 5% of the total of the
outstanding shares. During the period the Company issued 2,463,848 options.
As of September 30, 1997, 3,752,960 options were outstanding under the plan
[December 31, 1996 - 1,687,726] expiring at various dates from November 19,
1997 through February 6, 2007 at prices ranging from $6.075 to $24.25.
563,544 options have been exercised since the plan's inception.
During 1997, the Company purchased 56,802 [1996 - 10,432] options at their
fair market value resulting in a cash distribution of $1,100 [1996 - $163].
12. INCOME TAXES
The Company's provision for income taxes is lower than the statutory rate
prevailing in Canada due to lower income tax rates on income earned from
operations outside Canada and the dividend deduction available as earnings
are repatriated from exempt surplus.
The following table reconciles tax expense calculated at the statutory rates
with the actual income tax expense:
September 30, September 30,
1997 1996
$ $
Income before income taxes 27,317 41,911
Statutory rate of income taxes 45% 45%
Income taxes at the statutory rate 12,293 18,860
Effect on income taxes of
Deductibility of dividends from
exempt surplus (13,196) (9,176)
Recognition of losses carry over 0 (296)
Large corporations tax 1,220 824
Foreign tax rate differential (5,651) 0
Other (484) (1,411)
Net provision (5,818) 8,801
Allocation of provision
Current 2,920 5,553
Deferred (8,738) 3,248
------- ------
(5,818) 8,801
13. FINANCE ASSETS UNDER MANAGEMENT
Included in finance assets under management are finance assets which have been
securitized or syndicated by the Company and are not reflected on the balance
sheet.
Securitized finance assets are described in Note 4. Syndicated finance
assets are assets which have been sold to investors without recourse or
credit enhancement.
Finance assets under management are as follows:
September 30, December 31,
1997 1996
$ $
Securitized finance assets 4,494,274 2,731,341
Syndicated finance assets 1,353,910 1,230,221
Syndicated finance assets of
affiliated companies 633,839 655,843
--------- ---------
6,482,023 4,617,405
14. LEASE COMMITMENTS
Future minimum annual payments on a cash basis under leases for premises over
the next 5 years and thereafter are as follows:
$
1997 4,762
1998 8,230
1999 8,812
2000 8,867
2001 8,874
Thereafter 46,051
------
85,596
15. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into derivative
contracts and other hedging transactions to manage asset/liability exposures,
specifically exposures to market interest rate and foreign currency risk.
Market risk represents the potential for changes in the value of assets and
liabilities due to fluctuations in interest and foreign exchange rates.
The notional principal amounts of the Company's derivatives and the current
credit exposure are as follows:
Current
Credit
Notional principal amounts maturing (1) Exposure(2)
Total Total
Under 1 to 5 Over Sept. 30 Dec. 31 Sept. 30
1 year years 5 Years 1997 1996 1997
$ $ $ $ $ $
Interest rate contracts
Bond forwards 1,198,764 0 0 1,198,764 808,925 0
Interest rate swaps 313,131 580,865 47,587 941,583 403,669 11,147
--------- ------- ------ --------- --------- ------
1,511,895 580,865 47,587 2,140,347 1,212,594 11,147
Foreign exchange contracts
Spot and forward contracts 93,342 - 0 93,342 16,243 0
Cross currency swaps 494,165 593,288 77,227 1,164,680 619,119 6,656
--------- ------- ------ --------- --------- ------
587,507 593,288 77,227 1,258,022 635,362 6,656
Total derivatives 2,099,402 1,174,153 124,814 3,398,369 1,847,956 17,803
(1) Notional principal amounts are the contract amounts used in determining
payments.
(2) Credit risk exposure is the replacement cost of all contracts without
taking into account any netting arrangements. All counterparties are
investment grade financial institutions.
16. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.