FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of a Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month(s) of: January 1, 1998 to December 31, 1998
NEWCOURT CREDIT GROUP INC.
BCE Place, 181 Bay Street
Suite 3500, P.O. Box 827
Toronto, Ontario
Canada, M5J 2T3
[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]
Form 20-F / / Form 40-F /X/
[Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.]
Yes / / No /X/
[If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b)]
82-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 26, 1999
NEWCOURT CREDIT GROUP INC.
By: John P. Stevenson
Corporate Secretary
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
For the years ended December 31, 1998 and
December 31, 1997
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Newcourt Credit Group Inc.
We have audited the consolidated balance sheets of
Newcourt Credit Group Inc. as at December 31, 1998
and 1997 and the consolidated statements of income
and retained earnings and cash flows for the years
then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform an audit
to obtain reasonable assurance whether the
financial statements are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit
also includes assessing the accounting principles
used and significant estimates made by management,
as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial
statements present fairly, in all material
respects, the financial position of the Company as
at December 31, 1998 and 1997 and the results of
its operations and its cash flows for the years
then ended in accordance with accounting principles
generally accepted in Canada.
Toronto, Canada Ernst & Young LLP
February 22, 1999 Chartered Accountants
<PAGE>
<TABLE>
<CAPTION>
Newcourt Credit Group Inc.
CONSOLIDATED BALANCE SHEETS
[in thousands of Canadian dollars]
As at December 31
1998 1997
$ $
<S> <C> <C>
ASSETS
Cash 1,550,221 7,413
Cash held in escrow [Note 11] 0 1,771,000
Finance assets held for investment
[Notes 3 and 5] 13,365,986 2,185,568
Equipment under operating lease [Note 4] 3,373,451 275,833
Finance assets held for sale [Note 6] 2,394,488 1,091,398
Investment in affiliated companies 302,437 173,918
Accounts receivable, prepaids and other 482,613 181,736
Property and equipment, net [Note 7] 145,699 87,396
Goodwill [Note 8] 1,896,657 408,754
Future income tax asset [Note 13] 227,292 0
Total Assets 23,738,844 6,183,016
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities 1,039,032 303,968
Debt [Note 10] 18,015,185 2,789,816
Future income tax liability [Note 13] 0 27,739
Total Liabilities 19,054,217 3,121,523
Shareholders' Equity
Share capital [Note 11] 4,334,723 2,935,402
Retained earnings 349,904 126,091
Total Shareholders' Equity 4,684,627 3,061,493
Total Liabilities and Shareholders'
Equity 23,738,844 6,183,016
See accompanying Notes
On behalf of the Board:
(Signed) "David F. Banks" (Signed) "Steven K. Hudson"
David F. Banks Steven K. Hudson
Chairman Chief Executive Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
[in thousands of Canadian dollars, except for per share amounts]
Years ended December 31
1998 1997
$ $
<S> <C> <C>
Asset finance income
Net finance and rental income 815,787 84,349
Gain on sale of finance assets [Note 6] 452,119 188,837
Management and other fees 230,685 45,249
Total asset finance income 1,498,591 318,435
Operating and administrative 465,747 84,774
Salaries and wages 443,447 94,160
Goodwill amortization, depreciation and
other expense [Note 8] 117,304 20,427
Operating income before restructuring charges
and taxes 472,093 119,074
Restructuring charges [Note 9] 0 103,000
Operating income before income taxes 472,093 16,074
Provision for (recovery of) income taxes [Note 13] 177,726 (20,347)
Net income for the year 294,367 36,421
Retained earnings, beginning of year 126,091 100,774
Dividends paid on common shares (26,001) (10,004)
Premium on redemption of preferred securities and other(44,553) (1,100)
Retained earnings, end of year 349,904 126,091
Earnings per common share:
Basic $2.06 $0.52
Fully diluted $2.06 $0.52
See accompanying Notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[in thousands of Canadian dollars]
Years ended December 31
1998 1997
$ $
<S> <C> <C>
OPERATING ACTIVITIES
Net income for the year 294,367 36,421
Add (deduct) items not requiring an outlay (inflow) of cash
Future income taxes 101,551 (23,516)
Goodwill amortization, depreciation and other expense 117,304 20,427
Restructuring charges 0 74,225
Cash flow from operations 513,222 107,557
Net change in non-cash assets and liabilities [Note 20] (171,643) (130,332)
Cash provided by (used in) operating activities 341,579 (22,775)
INVESTING ACTIVITIES
Finance assets, underwritten and purchased (19,888,800) (6,033,608)
Finance assets, sold 11,605,676 4,336,050
Finance assets, repayments and others 4,835,614 1,079,027
Finance assets and assets held for sale (3,447,510) (618,531)
Business acquisitions (1,645,029) (621,902)
Investment in affiliated companies (128,519) 8,821
Purchase of property and equipment (46,633) (35,992)
Cash used in investing activities (5,267,691) (1,267,604)
FINANCING ACTIVITIES
Issuance of debt 120,440,387 5,673,486
Repayment of debt (115,920,409) (4,887,721)
Redemption of preferred securities (330,903) 0
Issue of common shares, net 2,272,134 452,535
Future tax on share issue costs 33,712 18,312
Dividends paid on common shares (26,001) (10,004)
Cash provided by financing activities 6,468,920 1,246,608
Increase (decrease) in cash during the year 1,542,808 (43,771)
Cash, beginning of year 7,413 51,184
Cash, end of year 1,550,221 7,413
See accompanying Notes
</TABLE>
<PAGE>
1. NATURE OF THE COMPANY'S OPERATIONS
Newcourt Credit Group Inc. (the "Company") is an
independent, non-bank financial services enterprise
with operations primarily in the United States,
Canada and Europe. The Company also has supporting
operations in Latin America and Asia. The Company
originates, invests in and sells asset-based
financings including secured loans, leases and
conditional sales contracts. For asset-based
financings sold to institutional investors the
Company generally continues to manage these
financings on behalf of the investors for a fee.
The Company's origination activities focus on the
commercial and corporate finance segments of the
asset-based financing market.
The Company originates leases and loans in the
commercial finance market predominantly through
vendor finance programs. These agreements are
established with select equipment manufacturers,
dealers and distributors to provide equipment sales
and inventory financing. The Company also serves
the corporate finance market through financing
services it delivers to major corporations, public
sector institutions and governments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been
prepared in accordance with accounting principles
generally accepted in Canada, consistently applied
("Canadian GAAP"). Except as indicated in Note 21,
these consolidated financial statements conform, in
all material respects, with accounting principles
generally accepted in the United States ("U.S.
GAAP"). The more significant accounting policies
are summarized below:
<PAGE>
Principles of consolidation
The consolidated financial statements of the
Company include the accounts of all its wholly-
owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
The Company accounts for its investment in foreign
and domestic affiliates in which it has significant
influence using the equity method.
Finance assets held for investment
Net investment in finance assets is comprised of
loans, capital lease receivables, retained interest
in receivables securitized net of an allowance for
credit losses. Income is recognized on finance
assets held for investment on an actuarial basis
which produces a constant rate of return on the
investment in finance assets.
Recognition of finance income is generally
suspended when, in management's view, a loss is
likely to occur but in no event later than 90 days
after an account has gone into arrears. Accrual is
resumed when the receivable becomes contractually
current and management believes there is no longer
any significant probability of loss.
Allowance for credit losses
Repossessed assets are specifically reserved for at
their estimated net realizable value based on
estimated collateral values and recoveries under
third party guarantees and vendor support
agreements.
<PAGE>
Management also routinely assesses the portfolio on
an item-by-item basis and establishes specific
allowances for those accounts considered doubtful.
General allowances are established for probable
losses on loans which cannot be determined on an
item-by-item basis. This provision is established
by applying historical loss trends to various
segments of the portfolio according to external and
internal credit ratings.
Gain on sale of finance assets
The Company sells certain of its asset-based
finance assets to securitization vehicles.
Securitization transactions are accounted for as
sales of finance assets. These sales are non-
recourse to the Company except to the extent of the
Company's retained interest in these securitization
vehicles. These transactions result in the removal
of the assets from the Company's consolidated
balance sheets, the recording of assets received
and a gain on sale when the significant risks and
rewards of ownership are transferred to the
purchaser. The assets received are generally cash
and a retained interest in the cash flows of the
receivables sold. Such retained interest (or
securitization investments) is recorded at
estimated fair value and may include cash
collateral accounts, excess spread assets, and
securities backed by the transferred assets.
Proceeds on sale are computed as the aggregate of
the initial cash consideration and the present
value of any additional sale proceeds, net of a
provision for anticipated credit losses on the
securitized assets and the amount of an arm's
length servicing fee.
<PAGE>
Income is earned on the securitization investments
on an accrual basis. The carrying value of this
asset is reduced, as required, based on changes in
the Company's share of the estimated credit losses
and the effects of changes in the payment rate on
the securitized assets. The Company continues to
manage the securitized assets and recognizes income
equal to an arm's length servicing fee over the
term of the securitized assets.
Certain finance assets are underwritten and sold to
institutional investors for cash. These
transactions generate syndication fees for the
Company. The Company generally continues to
service these assets on behalf of the investors for
a fee. Fees received for syndicating finance
assets are included in income when the related
transaction is substantially complete provided the
yield on any portion of the assets retained by the
Company is at least equal to the average yield
earned by the other participants involved.
Equipment under operating lease
Equipment under operating lease is generally
depreciated over the estimated useful life of the
asset. Depreciation is generally calculated on a
straight-line basis over the term of the lease to
the estimated unguaranteed residual value at the
end of the lease term. Rental revenue is
recognized on a straight-line basis over the
related lease term.
Estimated unguaranteed residual values
<PAGE>
Estimated unguaranteed residual values are
established upon acquisition and leasing of the
equipment based upon the estimated value of the
equipment at the end of the lease term. Values are
determined on the basis of studies prepared by the
Company, historical experience and industry data.
Although it is reasonably possible that a change in
the unguaranteed residual values could occur in the
near term, the Company actively manages its
residual values by communicating with lessees and
vendors during the lease term to encourage lessees
to extend their leases or upgrade and enhance their
leased equipment. Residual values are continually
reviewed and monitored by the Company. Declines in
residual values for capital leases are recognized
as an immediate charge to income. Declines in
residual values for operating leases are recognized
as adjustments to depreciation expense over the
shorter of the useful life of the asset or the
remaining term of the lease.
Deferred costs
Direct incremental costs of acquisition of finance
assets and operating leases are deferred and
amortized over the shorter of the term of the
finance asset or operating lease and the expected
period of future benefit. As finance assets are
securitized, the unamortized portion of the
acquisition costs related to the assets being
securitized is expensed. Costs incurred during the
pre-operating period of new business ventures are
deferred and amortized over the expected period of
future benefit.
<PAGE>
Property and equipment
Property and equipment are recorded at cost less
accumulated depreciation. Depreciation is provided
on a straight-line basis at the following rates:
Buildings 20 years
Furniture and fixtures 10 years
Computers and office equipment 5 years
Goodwill
Goodwill is recorded at cost less accumulated
amortization. The Company's amortization periods
for goodwill range from 20 to 35 years. The
valuation and amortization of goodwill is evaluated
on an ongoing basis and, if considered permanently
impaired, goodwill is written down. The
determination as to whether there has been an
impairment in value is made by comparing the
carrying value of the goodwill to the projected
undiscounted net revenue stream to be generated by
the related activity.
Foreign currency translation
Prior to 1998, assets and liabilities denominated
in foreign currencies of certain foreign operations
were translated using the temporal method, whereby
monetary assets and liabilities were converted into
Canadian dollars at exchange rates in effect at the
consolidated balance sheet dates. Gains and losses
on finance assets and debt were deferred and
amortized over the remaining lives of the related
items on a straight-line basis. Non-monetary
assets and liabilities were translated at
historical rates. Revenue and expenses were
translated at the exchange rate in effect on the
date of the transaction.
<PAGE>
As a consequence of the acquisition of AT&T Capital
Corporation ("AT&T Capital"), the Company's foreign
operations function financially and operationally
independent of the parent and therefore are
considered, for the purposes of foreign currency
translation, to be self-sustaining operations. As
a result, the assets and liabilities of these
operations are translated into Canadian dollars at
rates in effect at the consolidated balance sheet
dates. Revenue and expenses are translated at the
average exchange rates prevailing during the year.
Unrealized foreign exchange currency translation
gains and losses on these self-sustaining
operations are included in share capital.
Income taxes
The Company accounts for income taxes using the
liability method of income tax allocation.
Earnings per common share
Basic earnings per common share is computed based
on the weighted average number of common shares
outstanding during the year. Fully diluted
earnings per common share has been computed based
on the weighted average number of common shares
outstanding after giving effect to the exercise of
all outstanding dilutive options to acquire common
shares and any other dilutive items.
Derivative financial instruments
The Company uses derivative financial instruments
in conjunction with its interest rate and currency
risk management strategies. Derivative financial
instruments are used to hedge exposure to interest
rate and foreign exchange rate risk arising during
the normal course of business. Contract and
notional amounts associated with derivative
<PAGE>
financial instruments are not recorded as assets or
liabilities on the consolidated balance sheets.
The most frequently used derivative financial
instruments are various types of interest rate
swaps and foreign exchange contracts. Currency
swaps and bond forwards are also used.
Swaps and forward contracts are accounted for on
the accrual basis when cash flows of the
derivatives are matched to a specific on balance
sheet position. Net accrued interest
receivable/payable and deferred losses/gains are
recorded in accounts receivable, prepaids and
others or accounts payable and accrued liabilities,
as appropriate. Realized losses/gains on
terminated contracts are deferred and amortized
over the remaining life of any applicable
corresponding position.
Foreign exchange contracts are used to hedge the
Company's net investment in certain of its self
sustaining operations. Gains and losses on these
foreign exchange contracts are credited or charged
to the cumulative translation adjustment account.
<PAGE>
Use of estimates
The preparation of consolidated financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at
the date of the consolidated financial statements
and the reported amounts of revenue and expense
during the reporting period. Actual results could
differ from those estimates. Significant areas in
which estimates are used include residual values,
income taxes, retained interests in securitized
assets and related reserves, allowance for credit
losses, valuation of finance assets held for sale,
restructuring reserves and contingencies.
<PAGE>
<TABLE>
<CAPTION>
3. FINANCE ASSETS HELD FOR INVESTMENT
Finance assets held for investment consist of:
1998 1997
$ $
<S> <C> <C>
Leases 6,207,826 1,116,967
Estimated unguaranteed residual values 946,958 57,421
Unearned income (2,094,662) (190,020)
Net leases 5,060,122 984,368
Loans 7,661,725 888,694
Allowance for credit losses (285,104) (38,563)
Securitization investments [Note 6] 929,243 351,069
Finance assets held for investment 13,365,986 2,185,568
As at December 31, 1998, the minimum annual payments are as follows:
Leases Loans
$ $
<S> <C> <C>
1999 2,756,957 1,645,407
2000 1,498,115 1,206,589
2001 971,360 869,506
2002 536,220 779,485
2003 346,190 678,701
Thereafter 98,984 2,482,037
Total 6,207,826 7,661,725
Included in finance assets held for investment is US$6,394,845 [1997 -
US$693,758].
Substantially all of the finance assets held for investment bear interest at
varying levels of fixed rates of interest.
The loans included in finance assets held for investment are collateralized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4. EQUIPMENT UNDER OPERATING LEASE
Equipment under operating lease consists of:
1998 1997
$ $
<S> <C> <C>
Original equipment cost:
Information technology 2,254,660 364,608
Telecommunications 825,038 0
Transportation 902,771 0
Manufacturing 541,365 0
Healthcare 47,260 0
General equipment and other 449,474 0
5,020,568 364,608
Less: accumulated depreciation (1,735,206) (88,775)
Rental receivables, net 88,089 0
Equipment under operating lease 3,373,451 275,833
Minimum annual future rentals to be received on non-cancelable operating leases as at December 31, 1998, are as follows:
$
<S> <C>
1999 967,088
2000 693,188
2001 344,681
2002 129,523
2003 55,350
Thereafter 3,140
2,192,970
Included in equipment under operating lease is US$1,765,768 [1997 -
US$182,824].
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5. ALLOWANCE FOR CREDIT LOSSES
An analysis of the Company's allowance for credit losses is as follows:
1998 1997
$ $
<S> <C> <C>
Finance assets held for investment and equipment under
operating lease 16,739,437 2,461,401
Allowance for credit losses, beginning of year 38,563 16,465
Provision for credit losses during the year 149,217 2,598
Provision for credit losses from acquisition, net of sales 204,907 28,443
Write-offs, net of recoveries (107,583) (8,943)
Allowance for credit losses, end of year 285,104 38,563
Allowance as a percentage of investment assets 1.7% 1.6%
Investment assets in arrears (90 days and over) 222,908 13,619
Arrears as a percentage of investment assets 1.3% 0.6%
Assets in repossession, at estimated net realizable value 131,212 6,023
</TABLE>
<PAGE>
6. SECURITIZATIONS
The Company has securitization programs under which
finance assets originated by the Company are sold
to securitization vehicles. These sales are non-
recourse to the Company except to the extent of the
Company's retained interest in such securitization
vehicles. The Company's responsibility is limited
to that of servicer which includes the
administration and collection of the receivables on
behalf of the investors. Under these programs, the
Company has securitized finance assets during the
year as follows:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
North American term vehicles 6,302,829 2,174,038
North American conduits 3,965,089 1,838,268
Foreign conduits 389,388 0
Total 10,657,306 4,012,306
</TABLE>
The Company's term securitizations have senior-
subordinate structures which are financed by the
issuance of credit tranched securities. These
securities have ratings ranging from triple A to
single B and are sold to third party institutional
investors.
The Company's conduit securitizations are also
senior-subordinate structures and are financed by
the issuance of commercial paper.
Securitization investments represent the Company's
retained interest in the cash flows of the finance
assets sold. Such retained interest includes cash
collateral accounts, excess spread assets,
securities backed by the transferred assets and
servicing fees.
<PAGE>
<TABLE>
<CAPTION>
Net securitization income which is generally received in cash and the Company's
investment in securitization investments are as follows:
1998 1997
$ $
<S> <C> <C>
Net securitization income (included
in gain on sale of finance assets) 383,758 140,133
Securitization investments:
Cash collateral accounts 387,431 22,839
Excess spread assets and securities backed by
the transferred assets 541,812 328,230
Total 929,243 351,069
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1998 1997
Accumulated Accumulated
Cost depreciation Cost depreciation
$ $ $ $
<S> <C> <C> <C> <C>
Land and buildings 44,765 25,313 14,654 3,281
Furniture and fixtures 85,472 41,443 48,658 15,143
Computers and office equipment 160,222 82,911 56,552 17,300
Other 6,068 1,161 4,182 926
296,527 150,828 124,046 36,650
Net book value 145,699 87,396
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
8. GOODWILL AND ACQUISITIONS
On January 12, 1998, the Company purchased all of the outstanding common
shares of AT&T Capital for approximately US$1.7 billion (Cdn $2.4 billion), of
which approximately US$1.15 billion (Cdn $1.6 billion) was paid in cash and
the remaining US$550 million (Cdn $790 million) was satisfied through the
issuance of approximately 17.6 million common shares of the Company. AT&T
Capital is a full-service, diversified equipment leasing and finance company
that operates predominantly in the United States.
This acquisition has been accounted for as a purchase and accordingly the
Company's consolidated financial statements include the results of operations
of the acquired business from the date of acquisition. The net assets
acquired are as follows:
$
<S> <C>
Net assets acquired at approximate fair values:
Cash 12,346
Finance assets held for investment 9,370,344
Equipment under operating lease 2,287,583
Accounts receivable, prepaids and other 498,933
Future income tax receivable 319,252
12,488,458
Accounts payable and accrued liabilities 876,647
Debt 10,213,136
Preferred securities 286,560
Restructuring accrual 200,176
11,576,519
Net assets acquired 911,939
Consideration:
Cash 1,645,029
Common shares 789,997
Total consideration 2,435,026
Goodwill 1,523,087
The Company's amortization period with respect to the acquisition of AT&T
Capital is 35 years. The goodwill amortization period was determined by the
Company based upon AT&T Capital's superior market presence, relationships with
leading manufacturers and the long-term expected future cash flows to be
provided by its ongoing operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
During 1997, the Company purchased Commcorp Financial Services Inc., the
Business Technology Finance division of Lloyds UDT and other finance
operations in the United States. Each of these acquisitions has been
accounted for as a purchase and the net assets acquired and the resulting
goodwill is as follows:
Commcorp BTF Others Total
1997 Acquisitions $ $ $ $
<S> <C> <C> <C> <C>
Net assets acquired at approximate fair values:
Finance assets held for investment 596,891 421,802 69,298 1,087,991
Investment in affiliated companies 18,471 0 1,960 20,431
Accounts receivable, prepaids and other 32,368 9,854 16,618 58,840
Property and equipment 14,143 2,195 4,678 21,016
661,873 433,851 92,554 1,188,278
Accounts payable and accrued liabilities 123,734 30,546 11,160 165,440
Debt 351,120 0 60,905 412,025
Future income tax liability 68,911 0 1,605 70,516
543,765 30,546 73,670 647,981
Net assets acquired 118,108 403,305 18,884 540,297
Consideration:
Cash 88,633 493,049 40,220 621,902
Common shares 277,295 0 0 277,295
Total consideration 365,928 493,049 40,220 899,197
Goodwill 247,820 89,744 21,336 358,900
The Company's amortization period with respect to all acquisitions prior to the AT&T
Capital acquisition is 20 years.
Goodwill amortization
1998
$
<S> <C>
AT&T Capital acquisition 41,795
1997 acquisitions 19,585
Pre-1997 acquisitions 4,640
Total 66,020
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
9. RESTRUCTURING CHARGES
In 1997, the Company recorded restructuring charges totaling $103,000,
resulting in an after tax charge of $56,650. These charges were related to
costs incurred to integrate Commcorp Financial Services Inc. and to
rationalize certain of the Company's other businesses in Canada and the United
States. The charges comprise amounts for severance and office closings and to
write-off certain redundant start-up and systems costs.
In connection with the acquisition of AT&T Capital, the Company has accrued
the estimated costs of integrating the operations of AT&T Capital in order to
reduce future costs. Integration costs include amounts for severances, head
office closures and relocation, as well as the write-off of redundant
application systems.
A breakdown of the restructuring accrual and the amounts utilized are as
follows:
1998 1997
$ $
<S> <C> <C>
Balance, beginning of year 77,262 0
Restructuring charges 0 103,000
Acquired restructuring provision 53,750 0
Restructuring charges accrued on acquisition 146,426 0
Amounts utilized (214,745) (25,738)
Balance, end of year 62,693 77,262
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
10. DEBT
Debt consists of the following:
1998 1997
$ $
<S> <C> <C>
Fixed Rate Debt
U.S. senior notes, bearing interest at rates varying from
6.84% to 8.26%, maturing in the years 2000 to 2005 781,474 292,291
Medium term notes, bearing interest at rates varying from
4.40% to 9.34%, maturing in the years 1999 to 2007 901,760 1,118,433
U.S. medium term notes, bearing interest at rates varying
from 5.53% to 8.25%, maturing in the years 1999 to 2028 9,508,769 0
7.625% debenture, maturing in June, 2001 124,858 124,802
6.45% debenture, maturing in June, 2002 149,830 149,782
Collateralized borrowings related to securitized
assets, 5.50%, maturing in 2003 190,707 0
Capital lease obligations, discounted at rates varying from
5.70% to 13.50%, maturing in 2004 401,369 0
Other fixed rate debt 525,099 270,227
Floating Rate Debt
Floating rate U.S. medium term notes, interest rate ranges
from 5.52% to 6.29%, maturing in the years 1999 to 2000 2,095,797 0
Collateralized borrowings relating to securitized assets,
based upon one month LIBOR plus 0.125%, maturing in 2001 101,931 0
Floating rate medium term notes, interest periodically reprices
based upon CDOR index, maturing in the year 2000 100,000 0
Commercial paper and other short-term borrowings 3,133,591 834,281
Total debt 18,015,185 2,789,816
Interest expense on the debt outstanding during the year was $977,186 [1997 -
$145,252], of which $30,975 [1997 - $16,363] has been deducted from management
and other fees and the balance of $946,211 [1997 - $128,889] deducted from net
finance and rental income.
</TABLE>
<PAGE>
The Company renegotiated its various bank
facilities in April 1998 to support the existing
commercial paper programs and for general corporate
purposes. The U.S. bank facility was increased to
US$2.3 billion with US$1.535 billion having a term
of 364 days and US$765 million having a term of
five years. In addition, the Canadian bank
facility was increased to $1.2 billion with a term
of 364 days. The amount of unused Canadian and
U.S. bank facilities are $0.3 billion [1997 - $750
million] and US$2.3 billion [1997 -
US$500 million], respectively. The Company is
required to maintain interest coverage, debt,
negative pledge and minimum consolidated tangible
net worth covenants in connection with these bank
facilities. The Company is in compliance with
these and all other covenants as at December 31,
1998.
The weighted average interest on commercial paper
outstanding at the end of the year is 6.11% for the
Canadian commercial paper program [1997 - 5.96%],
6.39% for the U.S. commercial paper program and
5.05% [1997 - nil] for the Australian program.
Included in debt is US$9,794,691 [1997 -
US$1,388,211] repayable in U.S. dollars, of which
US$8,671,451 [1997 - US$1,323,211] was used to fund
leases and loans which are repayable in U.S.
dollars. The remainder of this debt was used to
fund non U.S. dollar denominated assets, with
derivative financial instruments used to match fund
these assets.
During May 1998, the Securities and Exchange
Commission declared effective an AT&T Capital debt
statement of US$5 billion. As at December 31,
1998, US$1.2 billion was still outstanding.
<PAGE>
In connection with the purchase of AT&T Capital,
the Company unconditionally guarantees the debt and
liquidity facilities of AT&T Capital as to payment
of principal and interest, when and as this debt
shall become due and payable, whether at maturity
or otherwise. Also, AT&T Capital entered into an
agreement whereby it guarantees certain ndebtedness
and liquidity facilities of the Company.
<TABLE>
<CAPTION>
As at December 31, 1998, scheduled repayments of principal are as follows:
Short-term Term
Borrowings<fn1> Borrowings<fn2> Total
$ $ $
<S> <C> <C> <C>
1999 3,840,503 4,895,381 8,735,884
2000 0 3,328,257 3,328,257
2001 0 1,889,784 1,889,784
2002 0 485,496 485,496
2003 0 775,859 775,859
Thereafter 0 2,799,905 2,799,905
Total 3,840,503 14,174,682 18,015,185
<fn1> Includes commercial paper, bank facilities and other short-term
borrowings.
</fn1>
<fn2> Includes senior notes, medium term notes and all debentures which were
originally issued for a term of one year or greater.
</fn2>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
11. SHARE CAPITAL
Authorized -
The Company's authorized share capital consists of the following:
[i] Unlimited common shares with voting rights;
[ii] Unlimited special shares without voting rights convertible into common
shares on a share-for-share basis; and
[iii] Unlimited Class A preference shares issuable in series.
Outstanding -
The following is a summary of the changes in share capital during the year:
1998 1997
# $ # $
<S> <C> <C> <C> <C>
Subscription rights
Outstanding, beginning of year 38,500,000 1,758,493 0 0
Exchange for common shares (38,500,000) (1,758,493) 0 0
Proceeds of rights issue, net 0 0 38,500,000 1,758,493
Outstanding, end of year 0 0 38,500,000 1,758,493
Common shares
Outstanding, beginning of year 83,070,958 1,176,909 60,182,688 415,160
Proceeds of share issue, net 0 0 13,910,000 481,030
Shares issued for subscription
Rights 38,500,000 1,725,864 0 0
Shares issued for warrants 8,668,446 572,605 0 0
Issued on acquisition [Note 8] 17,633,857 789,997 8,214,843 277,295
Stock options exercised 417,492 3,340 743,172 2,839
Others 21,881 1,396 20,255 585
Outstanding, end of year 148,312,634 4,270,111 83,070,958 1,176,909
Total 148,312,634 4,270,111 121,570,958 2,935,402
Unrealized foreign
currency translation adjustment 0 64,612 0 0
Total share capital 148,312,634 4,334,723 121,570,958 2,935,402
</TABLE>
<PAGE>
Subdivision of Common Shares
Effective April 14, 1997, the Company subdivided on
a two-for-one basis all of the Company's issued and
outstanding common shares and all of the Company's
common shares reserved for issuance.
Public Offerings
On March 11, 1997, the Company completed a public
offering of 2,475,000 (4,950,000 post split) common
shares at $51.00 per share for gross proceeds of
$126,225. Expenses of this issue, net of deferred
income tax recoveries of $2,508, amounted to
$3,066.
On August 29, 1997, the Company completed a public
offering of 7,260,000 common shares at $38.50 per
share for gross proceeds of $279,510. Expenses of
this issue, net of deferred income tax recoveries
of $5,571, amounted to $6,809.
On December 3, 1997, the Company completed a public
offering of 38,500,000 subscription rights at
$46.00 per right for gross proceeds of $1.77
billion. The proceeds were held in escrow pending
the acquisition of AT&T Capital. Expenses of this
issue, net of deferred income tax recoveries of
$36,929, amounted to $45,136.
On January 12, 1998, the subscription rights were
exchanged for 38,500,000 common shares at $46.00
per share.
On June 4, 1998, all of the special warrants
outstanding were exercised without additional
payment.
<PAGE>
Treasury Issue
On September 24, 1997, the Company completed a
private placement of 1,700,000 common shares at
$50.10 per share for proceeds of $85,170.
On January 12, 1998, the Company completed a
private placement of 17,633,857 common shares at
US$31.19 per share for proceeds of US$550,000.
On May 20, 1998, the Company completed a private
placement of 8,668,446 special warrants at US$46.14
per warrant. Each special warrant entitled the
holder thereof to acquire one common share of the
Company.
12. EMPLOYEE STOCK OPTION PLAN
During the year, amendments to the Company's Stock
Option Plan were approved by the shareholders at
the Annual General Meeting. Under the amended
Plan, the Company may issue 9,046,878 common shares
to employees and directors of the Company at the
discretion of the Board of Directors. The number
of shares which may be issued under options to any
individual employee or director shall not exceed in
the aggregate 5% of the total of the outstanding
shares. During the year, the Company issued
2,860,100 options. The exercise price of each
option equals the closing market price of the
Company's shares on the day preceding the grant of
the option. If there is no trading on the date
preceding the date of grant, then a weighted
average trading price for the five days prior to
the date of grant is used. Upon granting of an
option, the Company designates both vesting and
expiry dates of the options, of which the maximum
term is ten years. The vesting period is
determined by the Company upon granting of the
options.
<PAGE>
<TABLE>
<CAPTION>
As at December 31, 1998, the following common share options were outstanding:
Number of Shares Per Share
$ Expiry Date
<S> <C> <C> <C>
Options granted to:
Directors 30,000 7.25 February 23, 2001
22,000 14.40 February 23, 2001
12,000 24.25 February 6, 2007
20,000 24.25 May 2, 2007
18,000 26.00 May 2, 2007
Employees 415,510 12.00 January 29, 2001
328,875 24.25 February 6, 2007
2,054,998 26.00 May 2, 2007
50,000 49.50 August 16, 2004
16,000 49.50 September 16, 2007
21,350 47.20 October 30, 2007
640,400 49.05 January 8, 2008
863,050 56.80 February 4, 2008
18,000 68.50 April 29, 2008
1,300,000 31.75 October 6, 2008
Total 5,810,183
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Of the above, stock options for 467,510 common shares are exercisable as at
December 31, 1998. The remaining stock options for 5,342,673 common shares
are exercisable as follows:
Exercisable Date Number of Shares
<S> <C> <C>
1999 634,807
2000 1,335,670
2001 1,335,670
2002 1,335,665
2003 700,861
Total 5,342,673
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
13. INCOME TAXES
(a) The Company's provision for income taxes is lower than the statutory
rate prevailing in Canada due to lower income tax rates on income earned from
operations outside Canada and the dividend deduction available as foreign
earnings are repatriated.
The following table reconciles tax expense calculated at the statutory rate
with the actual income tax expense:
1998 1997
$ $
<S> <C> <C>
Income before income taxes 472,093 16,074
Statutory rate of income taxes 45% 45%
Income taxes at the statutory rate 212,442 7,233
Effect on income taxes of:
Deductible dividends (4,264) (11,705)
Foreign losses, no tax benefit booked 3,538 0
Foreign tax rate differential (63,782) (18,679)
Goodwill amortization 25,767 2,614
Large corporations tax 4,568 2,164
Other (543) (1,974)
Provision for (recovery of) income taxes 177,726 (20,347)
Allocation of provision (recovery):
Current 76,175 3,169
Future 101,551 (23,516)
Provision for (recovery of) income taxes 177,726 (20,347)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(b) The tax effect of temporary differences that give rise to significant
portions of the future income tax asset and liability are presented below:
1998 1997
$ $
<S> <C> <C>
Future income tax asset:
Net operating loss carryforward 201,779 110,172
Goodwill 218,290 0
Alternative minimum tax 20,147 0
Other 14,548 68,938
Gross future income tax asset 454,764 179,110
Less: Valuation allowance (5,807) 0
Gross future income tax asset net of
valuation allowance 448,957 179,110
Future income tax liability:
Differences in tax and accounting
basis of finance assets (76,853) (118,819)
Securitization related (122,925) (58,806)
Other (21,887) (29,224)
Gross future income tax liability (221,665) (206,849)
Total future income tax asset (liability) 227,292 (27,739)
By region:
Canada (12,309) 3,981
United States 242,195 (31,720)
Other foreign countries (2,594) 0
Total future income tax asset (liability) 227,292 (27,739)
The Company has $459,080 of non-capital losses available for tax purposes to
offset future taxable income arising from the reversal of deferred income tax
liabilities. These non-capital tax losses arise principally from timing
differences relating to depreciation and restructuring charges as well as
certain other permanent differences. Non-capital losses pertaining to the
Canadian operations of $360,975 will expire at various dates by the year 2005.
Net operating losses pertaining to the U.S. operations of $98,105 will expire
at various dates by the year 2013.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(c) The income (loss) before income taxes and provision for (recovery of)
]income taxes are as follows:
1998 1997
$ $
<S> <C> <C>
Income (loss) before income taxes:
Canada 121,026 (47,023)
United States 266,269 37,057
Other foreign countries 84,798 26,040
472,093 16,074
Provision for current income taxes:
Canada 4,774 1,338
United States 60,830 758
Other foreign countries 10,571 1,073
76,175 3,169
Provision for (recovery of) future income taxes:
Canada 45,367 (38,605)
United States 51,468 13,694
Other foreign countries 4,716 1,395
101,551 (23,516)
Total provision for (recovery of) income taxes:
Current 76,175 3,169
Future 101,551 (23,516)
177,726 (20,347)
Net income (loss):
Canada 70,885 (9,756)
United States 153,971 22,605
Other foreign countries 69,511 23,572
294,367 36,421
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
14. FINANCE ASSETS UNDER MANAGEMENT
Included in finance assets under management are finance assets which have been
securitized or syndicated by the Company and are not reflected on the
consolidated balance sheets.
Securitized finance assets are described in Notes 2 and 6. Syndicated finance
assets are assets which have been sold to investors without recourse or credit
enhancement.
Finance assets under management are as follows:
1998 1997
$ $
<S> <C> <C>
Securitized finance assets 13,969,670 5,626,856
Syndicated finance assets 2,167,050 1,386,706
Syndicated finance assets of affiliated companies 646,073 616,052
Total 16,782,793 7,629,614
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
15. SEGMENT REPORTING
The Company operates in the following two segments of the finance market:
commercial finance (Newcourt Financial) and corporate finance (Newcourt
Capital). Newcourt Financial provides asset-based sales and inventory
financing in the commercial finance market. Newcourt Capital provides
structured financing on capital assets and related advisory services to
corporate and institutional borrowers. The Company does not allocate to the
segments operating and administrative costs associated with managing the
capital structure and loan origination activities of the Newcourt Financial
and Newcourt Capital segments.
Newcourt Newcourt
Financial Capital Total
$ $ $
<S> <C> <C> <C>
1998
Net finance and rental income 724,941 90,846 815,787
Gain on sale of finance assets 383,758 68,361 452,119
Management and other fees 208,621 22,064 230,685
Total asset finance income 1,317,320 181,271 1,498,591
Goodwill amortization and
depreciation expense 8,281 1,888 10,169
Segment income 716,288 147,646 863,934
Finance assets held for investment 12,163,172 1,202,814 13,365,986
Equipment under operating lease 3,373,451 0 3,373,451
1997
Net finance and rental income 70,193 14,156 84,349
Gain on sale of finance assets 140,133 48,704 188,837
Management and other fees 36,252 8,997 45,249
Total asset finance income 246,578 71,857 318,435
Goodwill amortization and
depreciation expense 9,587 226 9,813
Segment income 121,588 61,999 183,587
Finance assets held for investment 1,784,337 401,231 2,185,568
Equipment under operating lease 275,833 0 275,833
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
1998 1997
$ $
<S> <C> <C>
Total segment income 863,934 183,587
Less unallocated amounts:
Corporate and administrative expenses 391,841 167,513
Operating income before taxes 472,093 16,074
The following provides additional information of the Company's operations by
geographic region.
United Other
States Canada Countries Total
$ $ $ $
<S> <C> <C> <C> <C>
1998
Net finance and rental income 606,607 53,484 155,696 815,787
Gain on sale of finance assets 319,805 128,300 4,014 452,119
Management and other fees 160,798 37,590 32,297 230,685
Total asset finance income 1,087,210 219,374 192,007 1,498,591
Finance assets held for investment 9,227,220 1,569,936 2,568,830 13,365,986
Equipment under operating lease 2,733,763 208,443 431,245 3,373,451
1997
Net finance and rental income 27,468 43,794 13,087 84,349
Gain on sale of finance assets 87,302 86,326 15,209 188,837
Management and other fees 20,926 14,771 9,552 45,249
Total asset finance income 135,696 144,891 37,848 318,435
Finance assets held for investment 586,502 978,755 620,311 2,185,568
Equipment under operating lease 262,184 13,649 0 275,833
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
16. LEASE COMMITMENTS
Future minimum annual payments on a cash basis under leases for premises over
the next five years and thereafter are as follows:
$
<S> <C>
1999 44,859
2000 34,074
2001 23,395
2002 19,131
2003 8,061
Thereafter 51,534
Total 181,054
Rent expense amounted to $54,564 in 1998 [1997 - $9,632].
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
17. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into derivative contracts
and other hedging transactions to manage asset/liability exposures,
specifically exposures to market interest rate and foreign currency risk.
Market risk represents the potential for changes in the value of assets and
liabilities due to fluctuations in interest and foreign exchange rates.
The notional principal amounts of the Company's derivatives and the current
credit exposure are as follows:
Current
credit
Notional principal amounts maturing <fn1> exposure
<fn2>
Total
Under 1 to 5 Over Dec 31, Dec 31,
1 year years 5 years 1998 1998
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
As at December 31, 1998
Interest rate contracts
Forwards 426,541 0 0 426,541 603
Swaps 3,013,225 2,893,659 1,180,198 7,087,082 39,257
3,439,766 2,893,659 1,180,198 7,513,623 39,860
Foreign exchange contracts
Forwards 747,316 702,249 2,810 1,452,375 83,964
Swaps 948,218 1,844 185,018 1,135,080 24,244
1,695,534 704,093 187,828 2,587,455 108,208
Total derivatives 5,135,300 3,597,752 1,368,026 10,101,078 148,068
<fn1> Notional principal amounts are the contract amounts used in determining payments.
</fn1>
<fn2> Credit risk exposure represents the amount owed to the Company under such
contracts. All counterparties are investment grade financial institutions.
In addition, the fair market value of derivative financial instruments is a net
payable of approximately $234 million [1997 - $56 million].
</fn2>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Current
credit
Notional principal amounts maturing <fn1> exposure
<fn2>
Total
Under 1 to 5 Over Dec 31, Dec 31,
1 year years 5 years 1997 1997
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
As at December 31, 1997
Interest rate contracts
Forwards 986,062 0 0 986,062 0
Swaps 235,717 762,284 247,574 1,245,575 11,327
1,221,779 762,284 247,574 2,231,637 11,327
Foreign exchange contracts
Forwards 1,811,703 0 0 1,811,703 0
Swaps 637,469 620,897 76,970 1,335,336 3,458
2,449,172 620,897 76,970 3,147,039 3,458
Total derivatives 3,670,951 1,383,181 324,544 5,378,676 14,785
<fn1> Notional principal amounts are the contract amounts used in determining payments.
</fn1>
<fn2> Credit risk exposure represents the amount owed to the Company under such
contracts. All counterparties are investment grade financial institutions.
In addition, the fair market value of derivative financial instruments is a net
payable of approximately $234 million [1997 - $56 million].
</fn2>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of assets and liabilities at December 31 is as follows:
1998 1997
$ $
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets
Finance assets held for investment 13,365,986 13,626,101 2,185,568 2,189,143
Finance assets held for sale 2,394,488 2,394,488 1,091,398 1,091,398
Investment in affiliated companies 302,437 299,716 173,918 174,918
Liabilities
Debt 18,015,185 18,199,342 2,789,816 2,799,179
</TABLE>
The aggregate of the estimated fair value amounts
presented does not represent management's estimate
of the underlying value of the Company. Moreover,
fair values disclosed represent estimates of value
made at a specific point in time and may not be
reflective of future fair values.
The estimated fair value of investment in finance
assets is estimated by discounting the expected
future cash flows using the current rates at which
similar loans would be made to borrowers with
similar credit ratings and for the same remaining
maturities.
The estimated fair value of the debt reflects
changes in general interest rates which have
occurred since the debt was originated. For fixed
rate debt, estimated fair value is determined by
discounting the expected future cash flows related
to this debt at market interest rates for debt with
similar credit risks.
<PAGE>
19. SENSITIVITY TO INTEREST AND CURRENCY EXCHANGE
RATES
The Company monitors its asset/liability position
using techniques including market value,
sensitivity analysis and a value at risk model.
Value at risk measures the effect of interest rate
movements upon the market value of equity. The
value at risk tests discussed below for exposure to
interest rate and currency rate exposures are based
on a variance/co-variance model using a three-month
horizon and a 95% confidence level. The model
assumes that financial returns are normally
distributed. The value at risk model takes into
account correlations and diversification across
market factors, including currencies and interest
rates. Estimates of volatility and correlations of
market factors are drawn from the RiskMetrics
dataset as of December 31, 1998. RiskMetrics is a
leading portfolio modeling system for evaluating
risk. RiskMetrics uses market risk estimation
methodology that was developed with market risk
experience, accompanied by volatility and
correlation datasets covering the major financial
markets.
Based on the Company's overall interest rate
exposure at December 31, 1998, including
derivatives and other interest rate sensitive
instruments, a near-term change in interest rates,
within a 95% confidence level based on historical
interest rate movements, would not materially
affect on a fair values basis, the consolidated
financial position, results of operations or cash
flows of the Company.
<PAGE>
Based on the Company's overall currency rate
exposure at December 31, 1998, including
derivatives and other foreign currency sensitive
instruments, a near-term change in currency rates,
within a 95% confidence level based on historical
currency rate movements, would not materially
affect on a fair value basis the consolidated
financial position, results of operations or cash
flows of the Company.
There were no past due amounts or reserves for
credit losses at December 31, 1998, related to
derivative transactions.
<TABLE>
<CAPTION>
20. CONSOLIDATED STATEMENTS OF CASH FLOWS AND OTHER REPORTING DETAILS
1998 1997
$ $
<S> <C> <C>
Decrease (increase) in accounts receivable,
Prepaids and other 195,346 (101,297)
Decrease in accounts payable and accrued
Liabilities (366,989) (29,035)
Total
(171,643) (130,332)
Cash interest paid 845,629 147,038
Cash taxes paid 58,967 6,671
</TABLE>
<PAGE>
21. RECONCILIATION TO UNITED STATES ACCOUNTING
PRINCIPLES
(a) These consolidated financial statements have
been prepared in accordance with Canadian GAAP
which conform in all material respects with U.S.
GAAP, except as noted below:
[i] Under Canadian GAAP, the Company records its
retained interest in its securitization
transactions at fair value at the time of sale.
Under U.S. GAAP, retained interests are recorded
initially at the Company's carrying value. Certain
of the Company's retained interests are considered
available for sale securities and accordingly are
marked to market with the change in market value
being recorded as a component of comprehensive
income. In addition, certain securitization
transactions are recorded as gains under U.S. GAAP
when the assets are legally isolated, whereas under
Canadian GAAP such gains are recorded upon the
transfer of risks and rewards of ownership, and
substantial completion of the transaction.
[ii] For Canadian GAAP purposes, certain costs
relating to the restructuring of AT&T Capital's
operations are netted against the restructuring
accrual. For U.S. GAAP purposes, such amounts are
expensed in income immediately. During 1997, the
restructuring charge was reduced for costs that
would have been accrued as an adjustment to the
liabilities assumed through the purchase of
Commcorp Financial Services Inc. and the
rationalization of certain of the Company's
businesses in Canada and the United States under
U.S. GAAP, rather than expensed as permitted by
Canadian GAAP. Certain of these expenses were
recorded for U.S. GAAP purposes as incurred in
1998.
<PAGE>
[iii] For Canadian GAAP purposes, amounts paid to
employees to retire issued stock options without
issuing common stock are recorded as capital
transactions. For U.S. GAAP purposes, such amounts
paid are recorded as compensation expense.
[iv] Prior to 1998, the Company used the temporal
method in translating assets and liabilities
denominated in foreign currencies whereby
unrealized translation gains and losses on long-
term monetary items were deferred and amortized.
For U.S. GAAP purposes, deferred unrealized
translation gains and losses were recorded in
income. As a consequence of the AT&T Capital
acquisition in 1998, the Company's foreign
operations are now considered self-sustaining and
the current rate translation method is used whereby
unrealized translation gains and losses are
included in shareholders' equity in accordance with
Canadian and U.S. GAAP.
<PAGE>
<TABLE>
<CAPTION>
The following table presents the amounts that would have been reported for
U.S. GAAP purposes in 1998 and 1997:
1998 1997
$ $
<S> <C> <C>
Net income for the year - Canadian GAAP 294,367 36,421
Adjustments:
Securitization transactions (net of
income taxes of $10,462 [1997 - $4,364]) (14,623) 5,486
Restructuring charge (net of income
taxes of $28,890 [1997 - 15,600]) (38,017) 19,067
Options retired 0 (1,100)
Foreign exchange losses (net of income
taxes of nil [1997 - $6,180]) 0 (7,553)
Other (net of income taxes of $2,413
[1997 - nil] ) (7,378) 0
Net income for the year - U.S. GAAP 234,349 52,321
Other comprehensive income:
Unrealized gain on available for sale securities
(net of income taxes of $7,660 [1997- nil] ) 11,455 0
Unrealized foreign currency translation
adjustment (net of income taxes of
$29,075 [1997 - nil] ) 35,537 0
Comprehensive income - U.S. GAAP 281,341 52,321
Retained earnings, beginning of year 128,283 85,966
Dividends paid on common shares (26,001) (10,004)
Premium on redemption of preferred securities (44,343) 0
Retained earnings, end of year 339,280 128,283
Share capital 4,334,723 2,935,402
Shareholders' equity 4,674,003 3,063,685
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following sets forth the computation of basic and diluted earnings per
share :
1998 1997
$ $
<S> <C> <C>
Numerator
Net income for the year - U.S. GAAP 234,349 52,321
Less: Premium on redemption of
preferred securities (44,343) 0
Income available for the common shareholders
- U.S. GAAP 190,006 52,321
Denominator
Denominator for basic earnings per common share:
Weighted average number of shares 142,741,776 70,219,175
Effect of dilutive securities:
Employee stock options 2,117,291 1,171,555
Denominator for diluted earnings
per common share:
Adjusted weighted average number of common
shares and assumed conversions 144,859,067 71,390,730
Basic earnings per common share $1.33 $0.75
Diluted earnings per common share $1.31 $0.73
</TABLE>
<PAGE>
(b) The Company accounts for its Stock Option Plan
in accordance with Canadian GAAP on a basis
consistent with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations. Accordingly, no
compensation expense has been recognized for its
stock option plan under Canadian GAAP. Under
Canadian GAAP, amounts paid to employees to retire
issued stock options without issuing common shares
are recorded as capital transactions. Under APB
No. 25, such amounts paid are recorded as
compensation expense. FASB Statement No. 123
provides for an alternative method of accounting
for the plan for U.S. GAAP purposes. Had
compensation cost for the Company's plan been
determined based on the fair value at the grant
dates consistent with the method of FASB Statement
No. 123, the Company's net income and earnings per
share would have been reduced to the pro-forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Pro-forma net income available to
common shareholders per U.S. GAAP 189,541 51,917
Pro-forma earnings per common share:
- Basic earnings per common share $1.33 $0.74
- Fully diluted earnings per common share $1.30 $0.74
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 0.35% [1997 - 0.58%],
expected volatility of 40% [1997 - 30%], risk free interest rate of 5.0%,
[1997 - 6.3%] and expected lives of eight years [1997 - eight years].
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
# $ # $
<S> <C> <C> <C> <C>
Outstanding, beginning of year 3,441,100 21.96 1,687,726 8.63
Granted 2,860,100 43.74 2,557,298 26.00
Exercised (417,492) 8.55 (802,640) 6.83
Forfeited (73,525) 43.74 (1,284) 23.02
Outstanding, end of year 5,810,183 33.63 3,441,100 21.96
Options exercisable at year end 467,510 698,413
Weighted average fair value of
options granted during the year $22.10 $12.02
</TABLE>
<PAGE>
(c) Impending Accounting Changes: In June 1998,
the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is
required to be adopted in years beginning after
June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter
after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The
Statement will require the Company to recognize all
derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a
hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will
either be offset against the change in fair value
of the hedged assets, liabilities or firm
commitments through earnings or recognized in other
comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of
a derivative's change in fair value will be
immediately recognized in earnings. The Company
has not yet determined what the effect of Statement
133 will be on the earnings and financial position
of the Company.
In April 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-
5 "Reporting on the Costs of Start-Up Activities".
This Statement of Position is required to be
adopted in years beginning after December 15, 1998.
The Company expects to adopt the new Statement
effective January 1, 1999. This new Statement of
Position requires costs of start-up activities to
be expensed as incurred. Upon adoption, the
Company is expected to record a pre-tax charge of
approximately $23 million to income as a cumulative
effect related to this change in accounting
principle.
<PAGE>
<TABLE>
<CAPTION>
22. SUMMARIZED FINANCIAL INFORMATION OF AT&T CAPITAL CORPORATION
The table below shows summarized consolidated financial information for AT&T
Capital, an indirect wholly-owned subsidiary of the Company. The Company has
guaranteed ("Guarantee") on a full and unconditional basis the existing
registered debt securities and certain other indebtedness of AT&T Capital.
The Company has not disclosed financial statements or other information
regarding AT&T Capital on a stand-alone basis since management does not
believe that it is material to debt holders due to the Guarantee.
The following summarized consolidated financial information for AT&T Capital
has been prepared in accordance with accounting principles generally accepted
in Canada.
Year ended
December 31, 1998
$
<S> <C>
Total asset finance income 862,722
Operating expenses 611,714
Operating income before taxes 251,008
Net income for the period 144,802
December 31, 1998
$
<S> <C>
ASSETS
Cash 1,569,780
Finance assets held for investment 7,387,186
Equipment under operating lease 2,429,581
Finance assets held for sale 274,793
Receivables from affiliates and other assets 5,084,846
Total Assets 16,746,186
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Debt 14,404,220
Accrued liabilities 903,495
Total Liabilities 15,307,715
Total Shareholder's Equity 1,438,471
Total Liabilities and Shareholder's Equity 16,746,186
</TABLE>
<PAGE>
Included in total asset finance income is $99.7
million of interest income related to intercompany
receivables due from certain subsidiaries of the
Company.
Included in receivables from affiliates and other
assets is $4.4 billion of intercompany receivables
due from certain subsidiaries of the Company.
The purchase price the Company paid for AT&T
Capital has not been "pushed down" to AT&T
Capital's stand-alone financial statements.
23. YEAR 2000 ISSUE
The Year 2000 Issue arises because many
computerized systems use two digits rather than
four to identify a year. Date-sensitive systems
may recognize the Year 2000 as 1900 or some other
date, resulting in errors when information using
Year 2000 dates is processed. In addition, similar
problems may arise in some systems which use
certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1,
2000 and, if not addressed, the impact on
operations and financial reporting may range from
minor errors to significant systems failure which
could affect an entity's ability to conduct normal
business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to
the efforts of customers, suppliers, or other third
parties, will be fully resolved.
24. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements
have been reclassified from statements previously
presented to conform to the presentation of the
1998 consolidated financial statements.
