CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
(Unaudited)
June 30, 1997
<PAGE>
Newcourt Credit Group Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
[in thousands of Canadian dollars]
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(Unaudited)
[in thousands of Canadian dollars, except for per share amounts]
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[in thousands of Canadian dollars]
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Leases Net
Long term investment
Minimum Unearned Net securitization in finance
Loans payments income investment receivable assets
<C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
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
</TABLE>
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.
<PAGE>
An analysis of the Company's allowance for credit losses and investment in
finance assets is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
As at June 30, 1997, the Company had commitments or substantially completed
commitments to fund or support the funding of the following amounts:
<TABLE>
<CAPTION>
<S> <C>
$
Commercial Finance 3,497,000
Corporate Finance 675,000
4,172,000
</TABLE>
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:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
Accumulated Accumulated
Cost depreciation Cost depreciation
<S> <C> <C> <C> <C>
$ $ $ $
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
</TABLE>
<PAGE>
7. OTHER ASSETS
Included in other assets is goodwill of $60,162 [December 31, 1996 - $54,200].
8. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
As of June 30, 1997, scheduled repayments are as follows:
<S> <C>
$
1997 621,712
1998 68,546
1999 82,816
2000 141,454
2001 173,471
Thereafter 416,719
1,504,718
<PAGE>
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:
</TABLE>
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
1997 1996
<S> <C> <C> <C> <C>
# $ # $
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
</TABLE>
<PAGE>
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].
<PAGE>
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:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
$
1997 3,556
1998 6,449
1999 7,487
2000 7,593
2001 7,637
Thereafter 38,450
71,172
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
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
<Fn1> Notional principal amounts are the contract amounts used in determining
payments.
</Fn1>
<Fn2> Credit risk exposure is the replacement cost of all contracts without
taking into account any netting arrangements. All counterparties are
investment grade financial institutions.
</Fn2>
</TABLE>
15. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.
