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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: November 19, 1997
AT&T CAPITAL CORPORATION
A Delaware Commission File I.R.S. Employer
Corporation No. 1-11237 No. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number (973) 397-3000
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2
Form 8-K November 19, 1997
Item 1. CHANGES IN CONTROL OF THE REGISTRANT
Item 5. OTHER EVENTS
Newcourt Credit Group Inc. a Canadian corporation ("Newcourt"), and AT&T Capital
Corporation ("AT&T Capital" or the "Company") announced on November 17, 1997,
that Newcourt, the Company and the stockholders of the Company have entered into
a Stock Purchase Agreement (a copy of which is attached hereto as Exhibit A)
under which Newcourt will acquire all of the outstanding shares of the Company's
common stock, subject to certain conditions. The aggregate purchase price to be
paid to the current stockholders of AT&T Capital for the shares will be US$1.03
billion in cash and 17.6 million Newcourt common shares. Such shares may not be
transferred for periods ranging from 6 to 18 months following the closing. The
closing is expected to occur in approximately 60 to 90 days. The joint press
release of Newcourt and the Company is attached hereto as Exhibit 99.
The cash portion (US$1.03 billion) of the purchase price to be paid by Newcourt
will be raised through the issuance by Newcourt of approximately 35 million
Newcourt common shares at approximately US$32.500 (C$46.00) per share to the
public in Canada and the United States. The remaining portion of the purchase
price will be paid by Newcourt through the issuance of approximately 17.6
million Newcourt common shares directly to certain of the current shareholders
of AT&T Capital.
Toronto-based Newcourt is one of North America's leading sources of asset-based
financing serving the corporate, commercial and institutional markets, with
owned and managed loans of more than US$7.13 billion (C$10.0 billion) at
September 30, 1997, and an international network of more than 42 offices. Mr.
Steven K. Hudson, president and CEO of Newcourt, will continue as president and
CEO of the combined companies.
Newcourt intends for the Company to operate as a wholly-owned subsidiary of
Newcourt which will continue to issue commercial paper and medium and long-term
debt in the public markets. The current intent of Newcourt is for the Company
and Newcourt on a consolidated basis to securitize approximately 40-45% of their
new consolidated volumes and to move to a consolidated debt to tangible equity
ratio of approximately 5.5:1, with the result that, following the closing, the
securitization and leverage policies of the Company would be adjusted to achieve
those targets. Newcourt has also indicated that, following the closing, Newcourt
intends to guarantee the Company's outstanding commercial paper and outstanding
medium-term and long-term debt securities and, in connection therewith, the
Company may also guarantee Newcourt's outstanding indebtedness. Newcourt's
aggregate outstanding indebtedness, as of September 30, 1997, was US$1.87
billion (C$2.58 billion). The Company's Trust Originated Preferred Securities
of $200 million, that were issued by a subsidiary of AT&T Capital in October,
1996, are not effected by the transaction with Newcourt.
In connection with the execution and delivery of the Stock Purchase Agreement,
Lucent Technologies, Inc. ("Lucent"), pursuant to the terms of the Operating
Agreement between Lucent and the Company, consented to the change of control
contemplated by the sale of the outstanding stock of the Company to Newcourt by
the current stockholders of the Company. In addition, the Company and Newcourt
agreed to negotiate with Lucent to amend the terms of such Operating Agreement
and to submit a related proposal to Lucent by December 31, 1997. Such proposal
is expected to address certain economic terms, the scope of business
covered by the
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3
Form 8-K November 19, 1997
agreement, the length of the renewal term and certain other matters, taking into
account the terms and tenor of other similar vendor finance program agreements,
with any economic benefits to Lucent arising from any such amendment being
retroactive to October 1, 1997. Any amendment of the terms of the Operating
Agreement could have a material effect on the Company.
Newcourt has advised the Company that Newcourt is currently a "foreign private
issuer", as defined in Rule 3b-4 under the Securities Exchange Act of 1934 as
amended, and a reporting company under such Act. Attached hereto as Exhibit B
are (i) Newcourt's Prospectus dated November 17, 1997 filed by Newcourt with the
Securities and Exchange Commission (the "Commission"), and (ii) Newcourt's
Reports on Form 6-K setting forth its consolidated financial statements as of,
and for the respective three, six and nine month periods ended, March 31, 1997,
June 30, 1997, and September 30, 1997, heretofore filed by Newcourt with the
Commission.
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Form 8-K November 19, 1997
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99. Press Release issued by Newcourt and the Company dated November
17, 1997.
A) Stock Purchase Agreement dated as of November 17, 1997, among the
Company, Newcourt, Hercules Holdings (Cayman) Limited and other
selling stockholders of the Company.
B) (1) Newcourt's Prospectus dated November 17, 1997
(2) Newcourt's Reports on Form 6-K setting forth its consolidated
financial statements as of, and for the respective three, six and
nine month periods ended, March 31, 1997, June 30, 1997, and
September 30, 1997.
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Form 8-K November 19, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T CAPITAL CORPORATION
RAMON OLIU, JR.
_______________
By: Ramon Oliu, Jr.
Senior Vice President and
Chief Financial Officer
November 19, 1997
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Form 8-K November 19, 1997
EXHIBIT INDEX
Exhibit
99. Press Release issued by Newcourt and the Company dated November
17, 1997.
A) Stock Purchase Agreement dated as of November 17, 1997, among the
Company, Newcourt, Hercules Holdings (Cayman) Limited and other
selling stockholders of the Company.
B) (1) Newcourt's Prospectus dated November 17, 1997
(2) Newcourt's Reports on Form 6-K setting forth its consolidated
financial statements as of, and for the respective three, six and
nine month periods ended, March 31, 1997, June 30, 1997, and
September 30, 1997.
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as ..........'L'
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Exhibit 99
AT&T Capital Corporation
NEWCOURT CREDIT GROUP FORGES GLOBAL ALLIANCE WITH AT&T CAPITAL CREATES ONE OF
WORLD'S LARGEST ASSET FINANCE COMPANIES
For immediate release: Monday, November 17, 1997
- ------------------------------------------------
Toronto, Ontario and Morristown, New Jersey, November 17, 1997 -
Newcourt Credit Group and AT&T Capital Corporation announced today that the two
industry leaders have entered into an agreement under which Newcourt will
acquire all of the outstanding shares of AT&T Capital. The combined entity will
form one of the world's largest asset finance companies with a market
capitalization in excess of US$4.5 billion (C$6.3 billion, UK'L'2.7
billion).
The combined company will become a global enterprise with tremendous
financial strength and marketing capability and will be well positioned to
provide innovative customer financing solutions and long term shareholder value.
It will employ more than 5,000 staff servicing customers in 24 countries around
the world. Newcourt and AT&T Capital had combined 1996 new business volumes of
US$9.4 billion (C$13.2 billion, UK'L'5.5 billion) and owned and managed
assets of US$17.8 billion (C$25.1, UK'L'10.5) at the end of 1996.
The total consideration will be US$1.61 billion (C$2.3 billion,
UK'L'950 million), comprised of US$1.06 billion (C$1.49 billion,
UK'L'625 million) cash and approximately 17.6 million Newcourt common
shares, which constitutes a 13% stake in the combined company. AT&T Capital's
shareholders have agreed not to sell the Newcourt common shares acquired as part
consideration for periods ranging from 6 to 18 months following closing. The
selling shareholders have also agreed that US$28.1 million of the cash
consideration will be escrowed in respect of AT&T Capital employee share options
and incentive-based compensation. The transaction, which is subject to certain
conditions including regulatory approvals, is expected to close at the end of
January 1998.
"The new company combines the best of Newcourt's entrepreneurial drive
with the global reach of AT&T Capital," noted Steven K. Hudson, president and
CEO of Newcourt Credit Group. "It also enables us to accelerate the pace at
which we are offering international commercial finance services to our major
equipment manufacturing partners."
"Over the past year, we have made great progress in maintaining and
building relations with major international vendor clients and in developing a
platform from which to promote our products internationally," said David Banks,
chief executive officer at AT&T Capital. "By joining forces, AT&T Capital and
Newcourt will set a new standard in delivering value to our customers."
New Jersey-based AT&T Capital became a privately held company in October
1996 when it was bought by a leasing consortium including
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Exhibit 99
AT&T Capital Corporation
management and Hercules Holding (Cayman) Ltd., a holding company ultimately
financed by investment bank Nomura International plc.
"Our objective from the outset has been to support management's efforts
to build AT&T Capital into a world-class global competitor," said Guy Hands,
Managing Director of Nomura International. "With this transaction, the company
will achieve that objective much sooner than we ever anticipated. Nomura
International is demonstrating its continuing commitment to the combined company
by maintaining an indirect 13% equity interest through Hercules." Two Nomura
appointed representatives, including Guy Hands, will serve on the Board of
Directors of the combined company.
The cash consideration of US$1.06 billion (C$1.49 billion, UK'L'625
million) will be entirely financed with equity by issuing approximately 35
million Newcourt Credit Group common shares at C$46.00 per share to the public
in Canada and the United States on a bought deal basis. CIBC Wood Gundy
Securities Inc. will lead the syndicate of underwriters for the offering.
Hercules Holding (Cayman) is a subsidiary of Hercules Holding U.K.,
which is a company structured and financed by Nomura International plc.
Nomura International plc is the wholly-owned European subsidiary of The
Nomura Securities Co. Ltd., one of the world's largest investment banks. Its
major activities in Europe include the origination, trading and sales of
securities, research, principal finance, securitization and emerging markets
corporate finance.
AT&T Capital is a global leader in providing equipment leasing, finance
and related services to approximately 500,000 commercial customers of all sizes
in 23 countries. The company had total owned and managed assets of US$13.6
billion (C$19.2 billion, UK'L' 8.0 billion) at September 30, 1997.
Newcourt Credit Group is one of North America's leading sources of
asset-based financing serving the corporate, commercial and institutional
markets, with owned and managed loans of more than US$7.1 billion (C$10.0
billion, UK'L'4.2 billion) at September 30, 1997 and an international
network of 42 offices.
This press release is not an offer of securities for sale in the United
States. Securities may not be offered or sold in the United States absent
registration or an exemption from registration. A portion of the public offering
of common shares referred to above is being made in the United States pursuant
to a registration statement filed today. The public offering of common shares to
be made in the United States will be made by means of a prospectus that may be
obtained from Newcourt Credit Group that will contain detailed information about
Newcourt and its management, as well as financial statements.
####
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EXECUTION COPY
================================================================================
STOCK PURCHASE AGREEMENT
among
HERCULES HOLDINGS (CAYMAN) LIMITED,
AT&T CAPITAL CORPORATION,
THE STOCKHOLDERS THEREOF LISTED ON EXHIBIT A HERETO
and
NEWCOURT CREDIT GROUP INC.
for the purchase and sale
of
the outstanding capital stock
of
AT&T CAPITAL CORPORATION
Dated as of November 17, 1997
================================================================================
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS.............................................. 2
ARTICLE II
PURCHASE AND DELIVERY OF STOCK............................. 12
2.1 Delivery of Stock..................................................... 12
2.2 Consideration for Stock............................................... 12
2.3 Indemnity Escrow...................................................... 13
ARTICLE III
CLOSING DATE............................................. 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF SELLERS.............................................. 14
4.1 Representations and Warranties of Sellers............................. 14
(a) Organization, Good Standing and
Qualification......................................................... 14
(b) Authority............................................................. 14
(c) Non-Contravention..................................................... 14
(d) Consents, etc......................................................... 15
(e) Share Ownership....................................................... 15
(f) Brokers and Finders................................................... 16
(g) Limitation on Liability............................................... 16
(h) Bank Act (Canada)..................................................... 16
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY........................................... 16
5.1 Representations and Warranties of
the Company........................................................... 16
(a) Organization, Good Standing and
Qualification......................................................... 16
(b) Capital Structure..................................................... 17
(c) Authority............................................................. 18
(d) Governmental Filings; Consents; No
Violations............................................................ 18
(e) Company Reports; Financial Statements................................. 20
(f) Absence of Certain Changes............................................ 20
(g) Litigation and Liabilities............................................ 21
(h) Compliance with Laws; Licenses........................................ 23
(i) Receivables........................................................... 24
(j) Material Contracts.................................................... 24
(k) Environmental Matters................................................. 25
(l) Taxes................................................................. 26
(m) Labor Matters......................................................... 27
(n) Intellectual Property................................................. 27
(o) Insurance............................................................. 28
(p) Lucent and Other Agreements........................................... 29
(q) Brokers and Finders................................................... 29
(r) Bank Act (Canada)..................................................... 29
(s) Employee Benefits..................................................... 29
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF PURCHASER............................................ 32
6.1 Representations and Warranties of Purchaser................................ 32
(a) Organization, Good Standing and
Qualification......................................................... 32
(b) Capital Structure..................................................... 33
(c) Authority............................................................. 34
(d) Governmental Filings; Consents; No
Violations............................................................ 35
(e) Purchaser Reports; Financial Statements............................... 36
(f) Absence of Certain Changes............................................ 37
(g) Liabilities........................................................... 38
(h) Compliance with Laws; Licenses........................................ 38
(i) Other Agreements...................................................... 39
(j) Brokers and Finders................................................... 40
(k) Available Funds....................................................... 40
(l) Validity of Shares.................................................... 41
(m) Investment Intent..................................................... 41
(n) Bank Act (Canada)..................................................... 41
(o) Limitation on Liability............................................... 41
ARTICLE VII
COVENANTS.............................................. 42
7.1 Interim Operations of the Company.......................................... 42
7.2 Interim Operations of Purchaser............................................ 45
7.3 Access; Confidentiality.................................................... 47
7.4 Filings; Other Actions; Notification....................................... 48
7.5 Publicity.................................................................. 50
7.6 Indemnification; Directors' and Officers'
Liability Insurance........................................................ 50
7.7 Reasonable Best Efforts and Cooperation.................................... 52
7.8 Further Assurances......................................................... 52
7.9 Expenses................................................................... 52
7.10 Taxes...................................................................... 52
7.11 Reporting Issuer Status and Listing........................................ 53
7.12 Execution of Indemnity Escrow Agreement.................................... 53
ARTICLE VIII
CONDITIONS TO THE CLOSING.................................... 53
8.1 Conditions of Obligation of Each Party..................................... 53
(a) No Injunction......................................................... 53
(b) Regulatory Authorizations............................................. 53
8.2 Additional Conditions to the Obligations
of Purchaser............................................................... 54
(a) Representations and Warranties........................................ 54
(b) Performance of Covenants.............................................. 54
(c) Certificate........................................................... 54
(d) Legal Opinion......................................................... 54
8.3 Additional Conditions to the Obligations
of Seller.................................................................. 54
(a) Representations and Warranties........................................ 55
(b) Performance of Covenants.............................................. 55
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(c) Certificate........................................................... 55
(d) Listing............................................................... 55
(e) Human Resources Agreement............................................. 55
(f) Legal Opinion......................................................... 55
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER............................... 55
9.1 Termination................................................................ 55
9.2 Effect of Termination...................................................... 58
ARTICLE X
GENERAL PROVISIONS......................................... 58
10.1 Survival and Indemnification.......................................... 58
(a) Survival.............................................................. 58
(b) Indemnification by Sellers............................................ 59
(c) Indemnification by Purchaser.......................................... 61
(d) Limitations on Indemnification........................................ 61
(e) Materiality Qualification............................................. 62
(f) Claims................................................................ 62
(g) Termination of Indemnification........................................ 63
(h) Exclusive Remedy...................................................... 64
(i) Insurance............................................................. 64
(j) Mitigation............................................................ 64
(k) Subrogation........................................................... 64
10.2 Notices................................................................... 65
10.3 Interpretation............................................................ 66
10.4 Amendment and Modification; Waiver........................................ 66
10.5 Entire Agreement.......................................................... 67
10.6 Third Party Beneficiaries................................................. 67
10.7 Assignment; Binding Effect................................................ 67
10.8 Governing Law............................................................. 67
10.9 Counterparts.............................................................. 69
10.10 Severability.............................................................. 69
Exhibit A: Stockholders of the Company
Exhibit B: Form of Custody Agreement and Power of Attorney
Exhibit C: Transfer Restriction Agreement
Exhibit D: Shareholders' Agreement
Exhibit E: Investment Agreement
Exhibit F: Registration Rights Agreement
Exhibit G: Human Resources Agreement
Exhibit H: Underwriting Agreement
Exhibit I-1: Form of Opinion of Counsel to the Company
Exhibit I-2: Form of Opinion of Counsel to Hercules
Exhibit I-3 Form of Opinion of Counsel to Nomura International
plc
Exhibit J: Form of Opinion of Purchaser
Exhibit K: AF Claim Procedure
Exhibit L: Form of Indemnity Escrow Agreement
Exhibit M: Form of Exclusivity Letter
Seller Disclosure Schedule
Company Disclosure Schedule
Purchaser Disclosure Schedule
</TABLE>
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STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of November 17, 1997
("Agreement"), among HERCULES HOLDINGS (CAYMAN) LIMITED, a Cayman Islands
company ("Hercules"), AT&T CAPITAL CORPORATION, a Delaware corporation (the
"Company"), those stockholders of the Company listed on Exhibit A hereto (the
"Selling Stockholders" and, together with Hercules, individually a "Seller" and
collectively the "Sellers") and NEWCOURT CREDIT GROUP INC., an Ontario
corporation ("Purchaser").
WITNESSETH
WHEREAS, each Seller owns that number of shares ("Shares") of the
common stock, par value US$.01 per share ("Common Stock"), of the Company set
forth opposite the name of such Seller on Exhibit A hereto, which together
constitute all of the issued and outstanding shares of Common Stock of the
Company (the "Stock"); and
WHEREAS, under the Custody Agreement and Power of Attorney
(defined herein), Hercules may convey the Shares owned by the Selling
Stockholders on their behalf; and
WHEREAS, on the terms and subject to the conditions set forth
herein, in consideration for a combination of cash and common shares of
Purchaser (the "Purchaser Common Shares"), Hercules desires on its behalf and on
behalf of the Selling Stockholders to sell and Purchaser desires to purchase the
Stock; and
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition to Purchaser's willingness to enter into this
Agreement, Hercules, the other Selling Stockholders and Purchaser have entered
into a share restriction agreement (the "Transfer Restriction Agreement") and
Hercules and certain stockholders of Purchaser have entered into a shareholders'
voting agreement (the "Shareholders' Agreement"), and Hercules, Purchaser and
certain stockholders of Purchaser have entered into an investment agreement (the
"Investment Agreement", and together with the Shareholders' Agreement and the
Transfer Restriction Agreement, the "Stockholders' Agreements") each dated as of
the date hereof, copies of which are attached hereto as Exhibits C, D and E,
respectively; and
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition and inducement to the Sellers' willingness to enter
into this Agreement, Sellers and Purchaser have entered into a registration
rights agreement (the "Registration Rights Agreement") dated as of the date
hereof, a copy of which is attached as Exhibit F hereto; and
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2
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition and inducement to the Company's willingness to
enter into this Agreement, the Company and Purchaser have entered into a human
resources agreement (the "Human Resources Agreement") dated as of the date
hereof, a copy of which is attached as Exhibit G hereto; and
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition to the Company's willingness to enter into this
Agreement, Purchaser has entered into an underwriting agreement with CIBC Wood
Gundy Securities Inc., Goldman Sachs Canada, Merrill Lynch Canada Inc.,
ScotiaMcLeod Inc., Nesbitt Burns Inc., RBC Dominion Securities Inc., Midland
Walwyn Capital Inc. and TD Securities Inc. (the "Underwriters"), a copy of which
is attached as Exhibit H hereto (the "Underwriting Agreement") and certain other
agreements regarding a public offering of common shares of Purchaser; and
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
The following terms when used in this Agreement shall have the
following meanings:
"AF Claim Procedure" means the indemnity claim procedure set
forth in Exhibit K attached hereto.
"AF Representation" is defined in Section 10.1(a)(ii).
"Affiliate" of a specified Person means a Person that directly,
or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person.
"Agreement" is defined in the introductory paragraph
hereof.
"1996 Annual Report" is defined in Section 5.1(g).
"Article IV Surviving Representations" is defined in
Section 10.1(a).
"Auburn Facility" is defined in the AF Claim Procedure.
"Audit Date" is defined in Section 5.1(e).
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3
"Bankruptcy and Equity Exception" means that enforceability may
be affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, and by general equitable
principles.
"Bought-Deal Financing" is defined in Section 6.1(k).
"Business Day" means any day which is not a Saturday, Sunday or a
day on which banks in New York City, Toronto or London are authorized or
obligated by law or executive order to be closed.
"CAL Claim" is defined in the CAL Claim Indemnification
Agreement.
"CAL Claim Indemnification Agreement" means the CAL Claim
Indemnification Agreement dated as of November 17, 1997 between Hercules
and Purchaser.
"Canadian GAAP" means the accounting principles recommended in
Canada, from time to time, in the Handbook of the Canadian Institute of
Chartered Accountants.
"Cash Consideration" means an amount of cash equal to the sum of
(a) US$1,031,951,747, (b) the product of (i) the per share amount of any
dividend declared on Purchaser Common Shares from and after the date of
this Agreement through the Closing and (ii) the number of Purchaser
Common Shares constituting the Common Share Consideration, and (c) the
product of (i) US$1,031,951,747 plus the amount calculated under clause
(b) hereof, (ii) the Equity Escrow Rate and (iii) a fraction the
numerator of which is the number of days that have elapsed during the
period from January 1, 1998 through the Closing Date and the denominator
of which is 365; provided that the amount in clause (c) shall not
accrue, and shall therefore not be added as part of the Cash
Consideration, during any period of delay of the Closing beyond January
1, 1998 that results from a wilful breach of any covenant or agreement
hereunder by Hercules.
"Closing" is defined in Article III.
"Closing Date" is defined in Article III.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Common Share Consideration" means 17,633,857 Purchaser
Common Shares.
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4
"Common Stock" is defined in the recitals to this
Agreement.
"Company" is defined in the introductory paragraph
hereof.
"Company Disclosure Schedule" means the disclosure schedule
delivered by the Company to Purchaser at the time of execution hereof.
"Company IP Rights" is defined in Section 5.1(n).
"Company License and Computer Rights" is defined in
Section 5.1(n).
"Company Material Adverse Effect" means a material adverse effect
on the financial condition or results of operations of the Company and
its Subsidiaries taken as a whole; provided, however, that any such
effect resulting from any change after the date hereof and prior to the
Closing (i) in any law, rule or regulation or generally accepted
accounting principles or interpretations thereof that applies generally
to companies operating in the same industries as the Company or (ii) in
general economic or business conditions in the industries in which the
Company operates, shall not be considered when determining if a Company
Material Adverse Effect has occurred.
"Company Material Breaches" is defined in Section
5.1(d)(ii).
"Company Material Subsidiary" means AT&T Commercial Finance
Corporation, AT&T Capital Leasing Services, Inc., AT&T Credit
Corporation, AT&T Systems Leasing Corporation, AT&T Capital Canada,
Inc., NCR Credit Corp., AT&T Capital Limited and The Capita Corporation
Hong Kong Limited.
"Company Options" means any options or rights to
acquire Shares.
"Company Plans" is defined in Section 5.1(s)(i).
"Company Properties" is defined in Section 5.1(k).
"Company Reports" is defined in Section 5.1(e).
"Company Subsidiary" means each Subsidiary of the
Company as of the date of this Agreement.
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5
"Confidentiality Agreement" means the Confidentiality Agreement,
dated August 29, 1997, as amended to the date hereof, among Hercules,
the Company and Purchaser relating to the confidentiality of certain
information provided to Purchaser with respect to the Company.
"Contract" means any written agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation not otherwise
terminable on 90 days' or less notice.
"Costs" is defined in Section 7.6(a).
"CSR" is defined in Section 6.1(e)
"Current Premium" is defined in Section 7.6(b).
"Custody Agreement and Power of Attorney" means each of the
agreements dated as of November 12, 1997 between Hercules and each of
the Selling Stockholders, substantially in the form attached hereto as
Exhibit B.
"D&O Insurance" is defined in Section 7.6(b).
"Deductible" is defined in Section 10.1(d).
"Dell Agreements" is defined in Section 6.1(i).
"Derivatives" is defined in Section 5.1(g)(iii).
"Disclosure Schedules" means the collective reference
to the Company Disclosure Schedule, the Seller Disclosure
Schedule and the Purchaser Disclosure Schedule.
"Dollars", "US$" and "$" means the lawful currency of
the United States of America.
"Environmental Law" means (i) any federal, state, provincial,
foreign or local law, statute, ordinance, rule, regulation, code,
license, permit, order, judgment, decree, injunction or agreement with
any Governmental Entity (A) relating to the protection, preservation or
restoration of the environment (including air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface
land, plant and animal life or any other natural resource), or (B) the
use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of
Hazardous Substances, in each case as amended and as now in effect and
(ii) the federal Comprehensive Environmental Response Compensation and
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6
Liability Act of 1980, the Superfund Amendments and Reauthorization Act,
the federal Water Pollution Control Act of 1972, the federal Clean Air
Act, the federal Clean Water Act, the federal Resource Conservation and
Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments
thereto), the federal Solid Waste Disposal and the federal Toxic
Substances Control Act and the federal Insecticide, Fungicide and
Rodenticide Act, each as amended and as now in effect.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
"ERISA Affiliate" is defined in Section 5.1(s)(iv).
"Escrow Arrangement" is defined in Section 6.1(k).
"Equity Escrow Rate" means the annualized rate of return
(expressed as a percentage) earned on the proceeds from the Bought-Deal
Financing that are placed in escrow pending the Closing during the
period from January 1, 1998 through the second Business Day immediately
preceding the Closing Date, as reported to the Purchaser and Hercules in
writing by the escrow agent thereunder.
"Escrow Shares" is defined in Section 2.3.
"Exchange Act" means the United States Securities
Exchange Act of 1934, as amended.
"Exchange Offer" means any offer to certain of the Selling
Stockholders by Purchaser to exchange their Shares for a number of
Purchaser Common Shares.
"Exclusivity Letter" is defined in Section 9.1(d).
"Financing Documents" is defined in Section 6.1(k).
"Government Antitrust Entity" is defined in Section
7.4(b).
"Governmental Entity" means any United States or foreign
governmental or regulatory authority, court, agency, ministry,
commission, crown corporation, body or other governmental entity.
"Hazardous Substance" means any substance presently listed,
defined, designated, judicially interpreted or classified as hazardous,
toxic, radioactive or dangerous, under any Environmental Law, including
any toxic waste,
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7
hazardous substance, toxic substance, hazardous waste, petroleum
radioactive material, friable asbestos and polychlorinated biphenyls.
"Hercules" is defined in the introductory paragraph
hereof.
"Hercules Information" is defined in Section 6.1(o).
"Hercules Surviving Representations" is defined in
Section 10.1(a).
"Holder" is defined in Section 10.1(b).
"HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Human Resources Agreement" is defined in the recitals
to this Agreement.
"Indemnified Parties" is defined in Section 7.6(a).
"Indemnified Person" is defined in Section 10.1(c).
"Indemnity Escrow Agent" means such Indemnity Escrow Agent as the
Purchaser and Hercules shall reasonably agree upon prior to Closing,
appointed pursuant to the Indemnity Escrow Agreement.
"Indemnity Escrow Agreement" is defined in Section 2.3.
"Indemnity Escrow" is defined in Section 2.3.
"Installment Receipt and Pledge Agreement" means the installment
receipt and pledge agreement among Purchaser, CIBC Wood Gundy Inc. and
Canadian Imperial Bank of Commerce to be entered into in connection with
the Bought-Deal Financing.
"Instalment Receivables Loan Agreement" is defined in
the Underwriting Agreement.
"Investment Agreement" is defined in the recitals to
this Agreement.
"Knowledge", when used in this Agreement with respect to either
the Company or Purchaser, shall mean the actual knowledge of one or more
of the duly elected or appointed executive officers of the Company or
Purchaser,
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8
respectively, and does not include information of which they may be
deemed to have constructive knowledge only.
"Law" means any law, by-law, ordinance, protocol, code,
guideline, policy, direction, regulation, judgment, order, writ, decree,
arbitration award, license or permit of any Governmental Entity.
"Leadership Forum" means the list of employees of the Company set
forth in Section 5.1(f)(iii) of the Company Disclosure Schedule.
"License" means any governmental or non-governmental
permit, franchise, concession or license.
"Lien" means any lien, pledge, security interest, claim
or other encumbrance.
"Losses and Expenses" is defined in Section 10.1(b).
"Lucent Agreements" is defined in Section 5.1(p).
"ME" means the Montreal Exchange.
"NYSE" means the New York Stock Exchange.
"Other Agreements" is defined in Section 5.1(p).
"Pension Plan" is defined in Section 5.1(s)(iii).
"Person" means an individual, sole proprietorship, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity of
whatever nature and any person in such person's capacity as trustee,
executor, administrator or other legal representative.
"Plan of Merger" is defined in Section 5.1(l).
"Pledge Agreement" means any of the Pledge Agreements entered
into between the Selling Stockholders and the Company.
"Preference Shares" is defined in Section 6.1(b).
"Preferred Shares" is defined in Section 5.1(b).
"Purchase Price" means the Cash Consideration plus the
Common Share Consideration.
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9
"Purchaser" is defined in the introductory paragraph
hereof.
"Purchaser Common Share Agreements" is defined in
Section 6.1(i).
"Purchaser Common Shares" is defined in the recitals to
this Agreement.
"Purchaser Confidentiality Agreement" means the Confidentiality
Agreement, dated October 21, 1997, between Purchaser and each of
Hercules and the Company relating to the confidentiality of certain
information provided to Hercules or the Company with respect to
Purchaser.
"Purchaser Disclosure Schedule" means the disclosure schedule
delivered by Purchaser to Sellers at the time of execution hereof.
"Purchaser Indemnified Person" is defined in Section
10.1(b).
"Purchaser Material Adverse Effect" means a material adverse
effect on the financial condition or results of operations of Purchaser
and its Subsidiaries taken as a whole; provided, however, that any such
effect resulting from any change after the date hereof and prior to the
Closing (i) in any law, rule or regulation or generally accepted
accounting principles or interpretations thereof that applies generally
to companies operating in the same industries as Purchaser or (ii) in
general economic or business conditions in the industries in which
Purchaser operates, shall not be considered when determining if a
Purchaser Material Adverse Effect has occurred.
"Purchaser Material Breaches" is defined in Section
6.1(d)(ii).
"Purchaser Material Subsidiary" means those entities described as
such in Section 6.1(a)(ii) of the Purchaser Disclosure Schedule.
"Purchaser Options" means any options or rights to
acquire Purchaser Common Shares.
"Purchaser Reports" is defined in Section 6.1(e).
"Purchaser Surviving Representations" is defined in
Section 10.1(a).
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10
"Receivables" of a Person means all loans, equipment leases, sale
contracts, credit or financing agreements or arrangements, portfolio
servicing agreements, account receivable invoices and other obligations
or rights to payments owned by such Person or any of its Subsidiaries.
"Registration Rights Agreement" is defined in the
recitals to this Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the United States Securities Act
of 1933, as amended.
"Seller" and "Sellers" are defined in the introductory
paragraph hereof.
"Seller Disclosure Schedule" means the disclosure schedule
delivered by Sellers to Purchaser at the time of execution hereof.
"Seller Indemnified Person" is defined in Section
10.1(c).
"Selling Stockholders" is defined in the introductory
paragraph hereof.
"Sellers' Surviving Representations" is defined in
Section 10.1(a).
"Shareholders' Agreement" is defined in the recitals to
this Agreement.
"Shares" is defined in the recitals to this Agreement.
"Special Shares" means Purchaser's non-voting special shares,
which are convertible into Purchaser Common Shares on a share-for-share
basis.
"Stock" is defined in the recitals to this Agreement.
"Stockholders' Agreements" is defined in the recitals
to this Agreement.
"Subsidiary" means, with respect to a party, any entity, whether
incorporated or unincorporated, of which at least a majority of the
securities or ownership interests having by their terms ordinary voting
power to elect a majority of the board of directors or other persons
performing similar functions is directly or indirectly owned
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11
or controlled by such party or by one or more of its respective
Subsidiaries or by such party and any one or more of its respective
Subsidiaries.
"Tax" (including, with correlative meaning, the terms "Taxes",
"Taxable" and "Taxing") includes all federal, state, local and foreign
income, profits, franchise, gross receipts, environmental, customs duty,
capital stock, severances, stamp, payroll, sales, employment,
unemployment, disability, use, property, withholding, excise,
production, value added, occupancy and other taxes, duties or
assessments of any nature whatsoever, together with all interest,
penalties and additions imposed with respect to such amounts and any
interest in respect of such penalties and additions.
"Tax Return" includes all returns and reports (including
elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating
to Taxes.
"TOPrS" means the 9.06% Trust Originated Preferred Securities
publicly issued in October 1996 by Capita Preferred Trust.
"Transfer Restriction Agreement" is defined in the
recitals to this Agreement.
"TSE" means The Toronto Stock Exchange.
"Underwriters" is defined in the recitals to this
Agreement.
"Underwriting Agreement" is defined in the recitals to
this Agreement.
"U.S. GAAP" means generally accepted accounting
principles in the United States.
"Voting Debt" of any Person means any bonds, debentures, notes or
other obligations the holders of which have the right to vote (or which
are convertible into or exercisable for securities having the right to
vote) with the stockholders of such Person on any matter.
"Voting Trust Agreement" means the Voting Trust Agreement dated
as of October 1, 1996 among the Sellers and Thomas Wajnert, as trustee
thereunder, as amended.
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12
ARTICLE II
PURCHASE AND DELIVERY OF STOCK
2.1 Delivery of Stock. (a) On the terms and subject to the
conditions of this Agreement, Hercules shall, on behalf of itself and
the other Sellers, at the Closing on the Closing Date, transfer, assign
and deliver to Purchaser or its designee certificates evidencing the
Stock. Such certificates evidencing the Stock shall be in form suitable
for transfer and (i) duly endorsed in blank or (ii) be accompanied by
stock transfer powers duly executed in blank, in either case with all
necessary stock transfer tax stamps affixed and cancelled.
(b) In the event that, subsequent to the date hereof and prior to
Closing, Hercules or any of its Affiliates acquires Shares of any
Selling Stockholder pursuant to the terms of the stock purchase
agreement to which such Selling Stockholder is a party, then such
Selling Stockholder shall be relieved of its obligations hereunder with
respect to such Shares and Hercules shall have the right and shall be
obligated to deliver such Shares to Purchaser on the terms and subject
to the conditions hereof. No such transaction shall affect Purchaser's
right to acquire all of the Stock or the Sellers' right to obtain the
aggregate Cash Consideration and Common Share Consideration in respect
thereof, subject in each case to the terms and conditions of this
Agreement. In such event, Exhibit A hereto will be appropriately
adjusted to reflect the transfer of Shares from such Selling Stockholder
to Hercules.
2.2 Consideration for Stock. On the terms and subject to the
conditions of this Agreement, Purchaser shall, at the Closing on the Closing
Date, and against delivery of certificates evidencing the Stock and any related
stock transfer forms as provided in Section 2.1:
(a) deliver to Hercules, for the account of itself and the other
Sellers, the Cash Consideration, by wire transfers of funds immediately
available in New York City or London to such account or accounts as
Hercules shall designate in writing to Purchaser not less than one
Business Day prior to the Closing Date; and
(b) deliver to Hercules or its designee, for the account of
itself and the other Sellers, certificates in such number as Hercules
shall designate in writing to the Purchaser not less than one Business
Day prior to the Closing Date (duly endorsed in blank, or accompanied by
stock transfer powers duly executed in blank, with all
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13
necessary stock transfer tax stamps affixed and cancelled) evidencing
the Common Share Consideration.
2.3 Indemnity Escrow. Immediately after the Closing, Hercules
shall deposit or cause to be deposited with the Indemnity Escrow Agent
the Common Share Consideration (the "Escrow Shares") to be used, to the
extent necessary, to fund indemnity payments for which Holders may
become liable under Section 10.1(b) (the "Indemnity Escrow"). All
matters relating to the Indemnity Escrow, to the extent not referred to
in this Agreement, shall be governed by the agreement among the
Indemnity Escrow Agent, Purchaser and Hercules to be executed prior to
Closing substantially in the form attached as Exhibit L hereto, with
such changes as the Indemnity Escrow Agent may reasonably request (the
"Indemnity Escrow Agreement"); provided that in the event of any
conflict between the terms of this Agreement and the Indemnity Escrow
Agreement, the terms of this Agreement shall be controlling. The
Indemnity Escrow Agent shall hold and transfer the Escrow Shares in
accordance with the Indemnity Escrow Agreement and the provisions of
Section 10.1(b) hereof. The Indemnity Escrow shall not be used for any
other purpose.
ARTICLE III
CLOSING DATE
Unless this Agreement shall have been terminated and the
transactions herein abandoned pursuant to Section 9.1, subject to the provisions
of Article VIII, the closing (the "Closing") of the purchase and sale of the
Stock provided for in Article II shall take place at the offices of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York at 10:00 a.m., New
York City time, on the later of (i) the second Business Day following the
satisfaction or waiver of the conditions set forth in Section 8.1(b) and (ii)
January 30, 1998, or at such other place and time or on such other date as the
parties may agree. The date on which the Closing occurs is herein called the
"Closing Date".
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14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLERS
4.1 Representations and Warranties of Sellers. Each Seller
severally represents and warrants to Purchaser that, except as set forth on the
specific section of the Seller Disclosure Schedule referenced to in any
particular representation and warranty referenced below:
(a) Organization, Good Standing and Qualification. In the case of
Hercules only, Hercules is a corporation duly organized, validly
existing and in good standing under the laws of the Cayman Islands and
Hercules has delivered to Purchaser complete and correct copies of its
Memorandum and Articles of Association or other comparable documents.
(b) Authority. Such Seller has all requisite power and authority
and has taken all actions necessary in order to execute, deliver and
perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. Each of this Agreement and any Custody
Agreement and Power of Attorney, the Transfer Restriction Agreement and,
in the case of Hercules only, the Indemnity Escrow Agreement to which
such Seller is a party constitutes a valid and legally binding agreement
of such Seller enforceable against such Seller in accordance with its
terms, except as affected by the Bankruptcy and Equity Exception.
(c) Non-Contravention. The execution and delivery of this
Agreement by such Seller does not, and the consummation of the
transactions contemplated hereby and the performance by such Seller of
the obligations which such Seller is obligated to perform hereunder will
not: (a) in the case of Hercules only, violate any provision of any
organizational documents of such Seller; or (b) assuming that all
consents, authorizations, orders or approvals of, filings or
registrations with, and notices to, each Governmental Entity listed in
Section 4.1(d)(i) of the Seller Disclosure Schedule and all consents
listed in Section 4.1(d)(ii) of the Seller Disclosure Schedule have been
obtained or made, (i) violate any Law, order, judgment or decree to
which such Seller or its Shares are subject, or (ii) violate, result in
the termination or the acceleration of, or conflict with or constitute a
default under, any Contract to which such Seller is a party or by which
any of its property is bound, except, in the case of clauses (i) and
(ii), for such violations, terminations, accelerations, conflicts or
defaults as would not prevent, materially delay or
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15
materially impair such Seller's ability to consummate the transactions
contemplated by this Agreement.
(d) Consents, etc. (i) Except as described in Section 4.1(d)(i)
of the Seller Disclosure Schedule, no consent, authorization, order or
approval of, filing or registration with, or notice to, any Governmental
Entity and (ii) except as described in Section 4.1(d)(ii) of the Seller
Disclosure Schedule, no consent, authorization, approval, waiver, order,
license, certificate or permit or act of or from, or notice to, any
party to any Contract to which such Seller is a party or by which any of
its property is bound is required for the execution and delivery of this
Agreement by such Seller and the consummation by such Seller of the
transactions contemplated hereby, except in each case for any such
consent, authorization, approval, waiver, order, license, certificate or
permit or act of or from, filing or registration with, or notice to, any
Person the failure of which to be obtained or made would not prevent,
materially delay or materially impair such Seller's ability to
consummate the transactions contemplated by this Agreement.
(e) Share Ownership. (i) Such Seller is the owner of,
beneficially and of record, all right, title and interest in and to the
number of Shares set forth opposite such Seller's name in Exhibit A
hereto. As of the Closing, such Seller will have good and marketable
title to all such Shares and the absolute right to sell, assign and
transfer the same to Purchaser, free and clear of any Lien (other than,
in the case of any Selling Stockholder, Liens, which shall not survive
the Closing, imposed by the Custody Agreement and Power of Attorney, the
Pledge Agreement and the Voting Trust Agreement to which such Selling
Stockholder is a party, and Liens created or incurred by Purchaser or
any of its Affiliates). Such Seller is not a party to any option,
warrant, right, contract, call, put or other agreement providing for the
disposition or acquisition of any of the capital stock of the Company,
including such Shares (other than each subscription agreement, stock
purchase agreement and sale participation agreement to which such Seller
is a party (each of which will terminate and have no further force and
effect as of the Closing), this Agreement and, in the case of any
Selling Stockholder, the Custody Agreement and Power of Attorney to
which such Selling Stockholder is a party).
(ii) In the case of each Selling Stockholder, Hercules has
the power and authority under the Custody Agreement and Power of
Attorney to which such Selling Stockholder is a party to convey the
Shares owned by such
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16
Selling Stockholder to Purchaser without further consent by such Selling
Stockholder. Under the terms of the Custody Agreement and Power of
Attorney to which such Selling Stockholder is a party, such Selling
Stockholder has delivered to and deposited in custody with Hercules
(acting as custodian and attorney-in-fact) certificates representing the
Shares owned by such Selling Stockholder (duly endorsed in blank by the
registered owner or owners thereof) and has irrevocably appointed said
custodian and attorney-in-fact as such Selling Stockholder's agent and
attorney-in-fact with full power and authority to act under such Custody
Agreement and Power of Attorney on such Selling Stockholder's behalf
with respect to the conveyance of such Shares.
(f) Brokers and Finders. Such Seller has not employed any broker
or finder or incurred any liability for any brokerage fees, commissions
or finders fees in connection with the transactions contemplated by this
Agreement, except that Hercules has employed Morgan Stanley & Co. and
Nomura International plc to act as Sellers' financial advisors.
(g) Limitation on Liability. Each Seller understands and agrees
that neither Purchaser nor any of its respective Affiliates are making
any representation and warranty whatsoever, express or implied, other
than those representations and warranties of Purchaser expressly set
forth in Article VI. Each Seller understands and agrees that, following
the Closing, it shall not be entitled to indemnification from Purchaser
with respect to any claims arising out of any breach by Purchaser of
this Agreement, including any breach of a representation and warranty,
except as expressly provided in Section 10.1.
(h) Bank Act (Canada). In the case of Hercules only,
Hercules is not a "financial institution" as such term is
defined in the Bank Act (Canada).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
5.1 Representations and Warranties of the Company. The Company
hereby represents and warrants to Purchaser that, except as set forth on the
specific section of the Company Disclosure Schedule referenced to in any
particular representation and warranty referenced below:
(a) Organization, Good Standing and Qualification.
Each of the Company and the Company Material Subsidiaries is
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17
a corporation duly organized, validly existing and in good standing
under the laws of its respective jurisdiction of organization and has
all requisite corporate or similar power and authority to own and
operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction where the
ownership or operation of its properties or conduct of its business
requires such qualification, except where the failure to be so qualified
or in good standing, when taken together with all other such failures,
would not reasonably be expected to have a Company Material Adverse
Effect. The Company has made available to Purchaser a complete and
correct copy of the Company's and its Subsidiaries' certificates of
incorporation and by-laws (or comparable documents), each as amended to
date. The Company's and its Subsidiaries' certificates of incorporation,
by-laws and other comparable documents so delivered are in full force
and effect, and neither the Company nor any of its Subsidiaries is in
default or violation of any provisions thereof except for such defaults
or violations which, when taken together with all other such defaults or
violations, would not reasonably be expected to have a Company Material
Adverse Effect. Section 5.1(a) of the Company Disclosure Schedule
contains a correct and complete list of each jurisdiction where the
Company and each of its Subsidiaries is organized and qualified to do
business. The only Subsidiaries of the Company are those set forth in
the Company Disclosure Schedule. Except as set forth in Section 5.1(a)
of the Company Disclosure Schedule, and except for securities acquired
in the ordinary course of business, including in connection with the
realization on collateral positions and the acquisition of securities as
part of any financing transaction, neither the Company nor any of its
Subsidiaries owns less than 100% of the outstanding voting securities or
other equity interests of any corporation, joint venture or other entity
(other than investments in marketable securities of any Person, none of
which exceed 5% of the outstanding capital stock or other equity
interests of such Person).
(b) Capital Structure. The authorized capital stock of the
Company consists of 150,000,000 Shares, of which 90,337,379 Shares were
outstanding on November 17, 1997, and 10,000,000 shares of preferred
stock, par value US$.01 per share (the "Preferred Shares"), of which
none are currently outstanding. All of the outstanding Shares have been
duly authorized and are validly issued, fully paid and nonassessable.
The Company has no Shares or Preferred Shares reserved for issuance. As
of November 17, 1997,
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18
there were 4,333,055 Shares subject to outstanding Company Options. No
Shares have been issued and no Company Options have been authorized,
issued or granted on November 17, 1997. Section 5.1(b) of the Company
Disclosure Schedule contains a correct and complete list of each
outstanding Company Option, including the holder, date of grant,
exercise price and number of Shares subject thereto. Each of the
outstanding shares of capital stock or other equity securities of each
of the Company's Subsidiaries is duly authorized, validly issued, fully
paid and nonassessable and, except for directors' qualifying shares,
owned by the Company or a direct or indirect wholly owned subsidiary of
the Company, free and clear of any Lien. Except as set forth above and
in Section 5.1(b) of the Company Disclosure Schedule, there are no
preemptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or sell any shares of
capital stock or other equity securities of the Company or any of its
Subsidiaries or any securities or obligations convertible or
exchangeable into or exercisable for, or giving any Person a right to
subscribe for or acquire, any equity securities of the Company or any of
its Subsidiaries, and no securities or obligations evidencing such
rights are authorized, issued or outstanding. The Company does not have
outstanding Voting Debt.
(c) Authority. The Company has all requisite corporate power and
authority and has taken all corporate action necessary in order to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement
constitutes a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms, except as
affected by the Bankruptcy and Equity Exception.
(d) Governmental Filings; Consents; No Violations. (i) Other than
the filings and/or notices (A) pursuant to Section 7.4, (B) under the
HSR Act, the Competition Act (Canada), the Exon-Florio provisions of the
United States Defense Production Act and the Exchange Act and (C) set
forth in Section 5.1(d)(i) of the Company Disclosure Schedule, no
notices, reports or other filings are required to be made by the Company
or any of its Subsidiaries with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by the
Company or any of its Subsidiaries from, any Governmental Entity, in
connection with the execution and delivery of this Agreement by the
Company and the consummation by the Company of the
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19
transactions contemplated hereby, except those as to which the failure
to make or obtain are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent, materially
delay or materially impair the ability of the Sellers to consummate the
transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this
Agreement by the Company do not, and the consummation by the Company of
the transactions contemplated hereby will not, constitute or result in
(A) a breach or violation of, or a default under, the certificate of
incorporation or by-laws of the Company or the comparable governing
instruments of any of its Subsidiaries, (B) a breach or violation of, or
a default under, the acceleration of any material obligations or the
creation of a Lien on any material assets of the Company or any of its
Subsidiaries (with or without notice, lapse of time or both) pursuant
to, or (except as set forth in Section 5.1(d)(ii) of the Company
Disclosure Schedule) give rise to any right of termination under, any
provision of any Contracts of the Company or any of its Subsidiaries or
any Law or License to which the Company or any of its Subsidiaries is
subject or (C) any change in the rights or obligations of any party
under any of the Contracts, except, in the case of clause (B) or (C)
above, for any breach, violation, default, acceleration, creation or
change that, individually or in the aggregate, is not reasonably likely
to have a Company Material Adverse Effect or prevent, materially delay
or materially impair the ability of Sellers to consummate the
transactions contemplated by this Agreement (collectively, "Company
Material Breaches"). Section 5.1(d)(ii) of the Company Disclosure
Schedule sets forth a correct and complete list of each Contract and
License of the Company and its Subsidiaries pursuant to which a consent
or waiver is required prior to consummation of the transactions
contemplated by this Agreement in order to avoid the occurrence of a
Company Material Breach under such Contract or License.
(iii) Neither the Company nor any of its Subsidiaries is
in breach or default under any Contract other than such breaches or
defaults that, individually or in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect. No event has
occurred (except for the execution of this Agreement) which either
entitles, or would upon notice or with the lapse of time or both,
entitle the holder of any indebtedness of the Company or any of its
Subsidiaries to accelerate, or which does accelerate, the maturity of
any indebtedness which is
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20
material to the Company and its Subsidiaries taken as a
whole.
(e) Company Reports; Financial Statements. The Company has
delivered to Purchaser each registration statement, Exchange Act report,
proxy statement or information statement prepared by the Company since
December 31, 1996 (the "Audit Date"), including (i) the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and (ii) the
Company's Quarterly Reports on Form 10-Q for the periods ended March 31,
1997, June 30, 1997 and September 30, 1997, each in the form (including
exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date
hereof, the "Company Reports"). As of their respective dates, the
Company Reports did not, and any Company Reports filed with the SEC
subsequent to the date hereof will not, contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading. As of their
respective dates, the Company Reports complied, and any Company Reports
filed with the SEC subsequent to the date hereof will comply, as to
form, in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be. Each of the consolidated
balance sheets included in or incorporated by reference into the Company
Reports (including the related notes and schedules) fairly presents the
consolidated financial position of the Company and its Subsidiaries as
of its date and each of the consolidated statements of income and of
changes in financial position included in or incorporated by reference
into the Company Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings and changes
in financial position, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments that are not
expected to be material in amount or effect), in each case in accordance
with U.S. GAAP consistently applied during the periods involved (except
as may be noted therein and except for the permitted omission of certain
footnote disclosures in the unaudited financial statements).
(f) Absence of Certain Changes. (i) Except as
disclosed in the Company Reports or in Section 5.1(f)(i) of
the Company Disclosure Schedule prior to the date hereof,
from the Audit Date to the date hereof, the Company and its
Subsidiaries have conducted their respective businesses only
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21
in, and have not engaged in any transaction other than according to, the
ordinary and usual course of such businesses and there is not and has
not been (A) any change in the financial condition, properties, business
or results of operations of the Company and its Subsidiaries; or (B) any
damage, destruction or other casualty loss with respect to any material
asset or property owned, leased or otherwise used by the Company or any
of the Company Material Subsidiaries, whether or not covered by
insurance, with such exceptions to this Section 5.1(f)(i) that would
not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect.
(ii) Except as disclosed in the Company Reports filed
prior to the date hereof or in Section 5.1(f)(ii) of the Company
Disclosure Schedule, since the Audit Date to the date hereof, there is
not and has not been (A) any declaration, setting aside or payment of
any dividend or other distribution in respect of the capital stock of
the Company (which for the avoidance of doubt shall not include any
payments made to holders of the TOPrS); or (B) any change by the Company
in accounting principles, practices or methods, except as required by
Law or U.S. GAAP; or (C) any event or action which, if it had taken
place or been taken following the execution of this Agreement would not
have been permitted by Section 7.1(a) without the prior written consent
of Purchaser.
(iii) From the Audit Date to the date hereof, except as
provided for herein or as disclosed in the Company Reports prior to the
date hereof or as set forth in Section 5.1(f)(iii) of the Company
Disclosure Schedule, there has not been any material increase in the
compensation payable or that could become payable by the Company and its
Subsidiaries to their executive officers or members of the Leadership
Forum or any amendment of any Company Plan other than increases or
amendments in the ordinary course and compensation arrangements for
newly-hired executives.
(g) Litigation and Liabilities. (i) Except as set forth in
Section 5.1(g)(i) of the Company Disclosure Schedule or the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(the "1996 Annual Report"), there are no civil, criminal or
administrative actions, suits, claims, hearings, investigations or
proceedings pending or, to the Knowledge of the Company, threatened
against the Company or any of its Subsidiaries or any other facts or
circumstances which to the Knowledge of the Company are reasonably
likely to result in any such suits, claims, hearings, investigations or
proceedings other
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22
than such suits, claims, hearings, investigations or proceedings that,
individually or in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect. There are no judgments, decrees,
injunctions, rules or orders of any Governmental Entity outstanding
against the Company or any of its Subsidiaries other than such
judgments, decrees, injunctions, rules or orders that, individually or
in the aggregate, would not reasonably be expected to have a Company
Material Adverse Effect.
(ii) There are no liabilities or obligations, whether
accrued, absolute, fixed, contingent or otherwise, of the Company and
its Subsidiaries as of the date hereof that would be required to be
reflected on a balance sheet prepared in accordance with U.S. GAAP that
are not so reflected on the consolidated balance sheet of the Company
and its consolidated Subsidiaries as of September 30, 1997, except such
liabilities or obligations that are described in Section 5.1(g)(ii) of
the Company Disclosure Schedule or such liabilities or obligations which
(when considered net of any associated financial benefit or asset of the
Company or such Subsidiary created or arising in connection therewith)
would not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect. For the avoidance of doubt, the
representation and warranty in this Section 5.1(g)(ii) shall not be
deemed to include any representation or warranty as to the amount or
quality of any assets of the Company or any of its Subsidiaries
(including any receivables or residuals) or the lack of any impairment
thereof.
(iii) Except as set forth in Section 5.1(g)(iii) of the
Company Disclosure Schedule or in the 1996 Annual Report, neither the
Company nor any of its Subsidiaries has any indebtedness, obligation or
liability of any kind relating to forward commodity contracts, commodity
futures and options, currency futures and options, stock index futures
and options, or interest rate swaps, options, caps, collars or floors,
or any hybrids of the foregoing derivative products (collectively
"Derivatives"), in each case which is material to the Company and its
Subsidiaries taken as a whole. Section 5.1(g)(iii) of the Company
Disclosure Schedule sets forth as to each Derivative (A) the applicable
notional amount, (B) the aggregate credit exposure of the Company or its
Subsidiary, as the case may be, (C) the existence of any netting
arrangements and (D) the counterparties.
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23
(h) Compliance with Laws; Licenses. (i) Except as set forth in
the Company Reports prior to the date hereof, the businesses of each of
the Company and its Subsidiaries have not been, and are not being,
conducted in violation of any applicable Laws, except for possible
violations that are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent, materially
delay or materially impair the ability of Sellers to consummate the
transactions contemplated by this Agreement. Except as set forth in the
Company Reports prior to the date hereof or in Section 5.1(h) of the
Company Disclosure Schedule, no investigation or review by any
Governmental Entity with respect to the Company or any of its
Subsidiaries is pending or, to the Knowledge of the Company, threatened,
nor has any Governmental Entity indicated to the Company an intention to
conduct the same, except for those the outcome of which are not,
individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect or prevent, materially delay or materially
impair the ability of Sellers to consummate the transactions
contemplated by this Agreement. To the Knowledge of the Company, no
material change is required in the Company's or any of the Company
Material Subsidiaries' processes, properties or procedures in connection
with any such Laws, and neither the Company nor any of the Company
Material Subsidiaries has received any notice or communication of any
material noncompliance with any such Laws that has not been cured in all
material respects.
(ii) The Company and its Subsidiaries hold all Licenses
from, and have made all filings, applications and registrations with,
each Governmental Entity and other Persons necessary for the operation
of their respective businesses as presently conducted, except in each
case for such Licenses, filings, applications and registrations, the
failure of which to hold or make, individually or in the aggregate,
would not reasonably be expected to have a Company Material Adverse
Effect; all such Licenses are in full force and effect, except for such
Licenses, the failure of which to be in full force and effect,
individually or in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect and no proceedings are pending
or, to the Knowledge of the Company, threatened by any Governmental
Entity or other Person for the suspension, revocation or termination of
any such License, except for such suspensions, revocations or
terminations that, individually or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in default in any
respect under any such License, except for such defaults
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24
that, individually or in the aggregate, would not reasonably be expected
to have a Company Material Adverse Effect, and, except for statutory or
regulatory restrictions of general application and except as set forth
in Section 5.1(h)(ii) of the Company Disclosure Schedule, no
Governmental Entity has placed any restriction on the business or
properties of the Company or any of its Subsidiaries, except for such
restrictions that, individually or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect.
(i) Receivables. All of the Receivables of the Company, together
with any instruments securing the same, (i) were made for valuable
consideration, (ii) to the Knowledge of the Company, constitute valid
obligations in all respects of the Persons shown as indebted thereon by
the records of the Company or its Subsidiaries and (iii) to the
Knowledge of the Company are legally enforceable in all respects
according to their terms (subject to the Bankruptcy and Equity
Exception), except in the case of clauses (i), (ii) and (iii) for such
Receivables, the failure of which to satisfy the requirements of such
clauses, individually or in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect. All of the
Receivables, together with any instruments securing same, (A) set forth
on Section 5.1(i) of the Company Disclosure Schedule are freely
assignable by the Company or its Subsidiaries (as the case may be) and
(B) other than those Receivables otherwise designated on Section 5.1(i)
of the Company Disclosure Schedule, are not subject to any valid right
of set-off or similar claim, except in the case of Receivables the
failure of which to be freely assignable or not subject to any valid
right of set-off or similar claim, individually or in the aggregate,
could not reasonably be expected to have a Company Material Adverse
Effect. The amounts shown on the records of the Company and its
Subsidiaries to be owing and unpaid on the respective Receivables
reflect, in all respects material to the Company, the true and correct
outstanding balances owing and unpaid thereon as of the respective dates
indicated therein.
(j) Material Contracts. Except as set forth in the Company
Reports prior to the date hereof or as disclosed in Section 5.1(j) of
the Company Disclosure Schedule, none of the Company or its Subsidiaries
has entered into or is otherwise bound by (i) any contract which
contains restrictions with respect to payment of dividends or any other
distributions in respect of its capital stock (except for those
contracts which restrict the payment of dividends upon the occurrence of
an event of default), (ii) any
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25
material guarantee or other contingent liability in respect of any
indebtedness or obligation of any Person (other than (A) the endorsement
of negotiable instruments for collection in the ordinary course of
business, (B) guarantees of letter of credit reimbursement obligations,
purchase orders and similar obligations issued for the benefit of
customers in the ordinary course of business and (C) guarantees of
indebtedness of or performance by any wholly owned Subsidiary of the
Company), (iii) any management service or consulting contract not
terminable on less than 90 days' notice which is reasonably expected to
involve the payment by the Company in any year of an amount in excess of
US$500,000, (iv) any Contract which would limit or restrict in any
manner the right or ability of the Company or any Subsidiary after the
Closing Date to engage in any line of business, or to compete with any
Persons, or (v) any Contract not entered into in the ordinary course of
business which is reasonably expected to involve the payment by the
Company of US$2,500,000 or more in any year and is not cancellable
without penalty within 90 days. Each Contract set forth in the Company
Disclosure Schedule in reference to this Section 5.1(j) is in full force
and effect and there exist no defaults or events of default or event,
occurrence, condition or act on the part of the Company or, to the
Company's Knowledge, any other party to such Contracts (including the
consummation of the transactions contemplated hereby) which, with the
giving of notice or the lapse of time, would reasonably be expected to
result in a Company Material Adverse Effect.
(k) Environmental Matters. Except as disclosed in the Company
Reports prior to the date hereof and except for such matters that,
individually or in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect, (i) to the Company's Knowledge,
the Company and its Subsidiaries are in compliance with all applicable
Environmental Laws; (ii) to the Company's Knowledge, all properties
owned or operated by the Company or its Subsidiaries (the "Company
Properties") are not contaminated with any Hazardous Substance in
violation of any applicable Environmental Law and have not been operated
as a sanitary landfill or hazardous waste disposal site; (iii) neither
the Company nor any of its Subsidiaries has received any notices, demand
letters or requests for information from any Governmental Entity or any
third party indicating that the Company may be in violation of any
Environmental Law and none of the Company, its Subsidiaries or any of
the Company Properties are subject to any court order, administrative
order or decree arising under any Environmental Law; and (iv) to the
Company's Knowledge, no Hazardous Substance has
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26
been disposed of, transferred, released or transported from any of the
Company Properties during the time such Company Property was owned or
operated by the Company or one of its Subsidiaries other than as
permitted under applicable Environmental Law.
(l) Taxes. Except to the extent that any breach, failure or
inaccuracy, individually or in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect:
(i) all Tax Returns that are required to be filed by or
with respect to the Company and each of its Subsidiaries have been duly
filed and all such Tax Returns are complete and accurate.
(ii) all Taxes shown to be due on the material
Tax Returns referred to in clause (i) have been paid in
full;
(iii) those Tax Returns referred to in clause (i) Section
5.1(l)(i) that are currently under examination by the Internal Revenue
Service or the appropriate state, local or foreign Taxing authority are
set forth in Section 5.1(l) of the Company Disclosure Schedule;
(iv) all assessments made as a result of the
examinations referred to in Section 5.1(l)(iii) have been
paid in full; and
(v) no waivers of statutes of limitation have been given
by or requested with respect to any Tax Returns of the Company or any of
its Subsidiaries other than those set forth in Section 5.1(l) of the
Company Disclosure Schedule.
Except as set forth in Section 5.1(l) of the Company Disclosure
Schedule, all amounts payable by the Company or any of its Subsidiaries
pursuant to Section 6.13(b) or 6.13(e) of the Agreement and Plan of
Merger among AT&T Capital Corporation, AT&T Corp., Hercules and Antigua
Acquisition Corporation, dated as of June 5, 1996, as amended to date
(the "Plan of Merger"), have been paid, and neither the Company nor any
of its Subsidiaries has any continuing liability with respect to any tax
sharing agreements referred to in Section 6.13(e) of the Plan of Merger
or otherwise. In addition, neither the Company nor any of its
Subsidiaries has indemnified or otherwise become obligated to any Person
with respect to any income tax liability.
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27
(m) Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to or otherwise bound by any collective
bargaining agreement, contract or other agreement or understanding with
a labor union or labor organization relating to employees of the
Company, nor is the Company or any of its Subsidiaries the subject of
any proceeding asserting that the Company or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain
with any labor union or labor organization nor is there, nor has there
been for the past five years, any labor strike, dispute, walkout, work
stoppage, slow-down or lockout involving the Company or any of its
Subsidiaries pending or, to the Knowledge of the Company, threatened,
except in each case for those exceptions that would not, individually or
in the aggregate, reasonably be expected to have a Company Material
Adverse Effect. There have been no material work stoppages or other such
controversies during the past five years from the date hereof. The
Company and its Subsidiaries are in compliance in all respects with all
applicable Laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and are not engaged in
any unfair labor practice, except in each case with those exceptions
that would not, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect.
(n) Intellectual Property. (i) Section 5.1(n)(i) of the Company
Disclosure Schedule lists, as of the date of this Agreement: (A) all
material foreign and domestic patents and patent applications which are
owned by the Company and its Subsidiaries; and (B) all material foreign
and domestic copyright registrations, trademark registrations, trademark
registration applications, service mark registrations, service mark
registration applications and trade names which are owned by the Company
and its Subsidiaries (collectively the "Company IP Rights"). Section
5.1(n)(i) of the Company Disclosure Schedule also lists: (1) all
material license agreements of foreign or domestic patent, trademark or
service mark rights entered into by or primarily for use by the Company
and its Subsidiaries; and (2) all material computer programs, databases
and other computer software utilized by the databases and other computer
software used by the Company and its Subsidiaries as of the Closing Date
(collectively the "Company License and Computer Rights").
(ii) Except as disclosed in the Company Reports filed with
the SEC prior to the date hereof, the Company owns, or is licensed to
use, all of the Company IP Rights
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28
and the Company License and Computer Rights, with such exceptions and
would not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect.
(iii) Unless otherwise indicated in Section 5.1(n)(iii) of
the Company Disclosure Schedule: (A) there are no existing or, to the
Knowledge of the Company, threatened claims by any third party based on
the use by, or challenging the ownership of, the Company IP Rights or
the Company License and Computer Rights; (B) to the Knowledge of the
Company, (1) none of the products, apparatus, methods or services which
the Company or any of its Subsidiaries makes, offers, sells or provides
infringes upon the intellectual property of others and (2) none of the
intellectual property of the Company or its Subsidiaries is being
infringed by others; (C) each item of Company IP Rights and Company
License and Computer Rights has been duly registered with, filed in or
issued by the appropriate domestic or foreign governmental agency, to
the extent required to protect such property, and each such
registration, filing and issuance remains in full force and effect; (D)
none of the Company or its Subsidiaries has received any oral or written
claim or demand from any person pertaining to or challenging the right
of the Company or its Subsidiaries to use any Company IP Rights or
Company License and Computer Rights, and no proceedings have been
instituted, are pending or, to the Knowledge of the Company, threatened
which challenge such rights; and (E) no litigation or claim is pending
or, to the Knowledge of the Company, threatened wherein the Company or
any of its Subsidiaries is accused of infringing or otherwise violating
the intellectual property right of another, or of breaching a contract
conveying rights regarding intellectual property, except in the case of
each of clauses (A), (B), (C), (D) and (E) for such exceptions that
would not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect. Within the six-year period
immediately prior to the date of this Agreement, to the Knowledge of the
Company, neither the Company nor its Subsidiaries made use of any
intellectual property material to the operation of their respective
businesses at the Closing Date other than rights under the Company IP
Rights and the Company License and Computer Rights, except as set forth
in Section 5.1(n)(iii) of the Company Disclosure Schedule and except
such uses as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
(o) Insurance. True and complete copies of all
material insurance policies maintained by the Company and
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29
its Subsidiaries (or, to the extent not yet finalized and available, the
commitments with respect thereto), together with written descriptions of
all formal self-insurance policies and programs maintained for the
benefit of the Company or any of its Subsidiaries by the Company or any
of its Affiliates, have been made available to Purchaser. Such material
policies provide coverage for the operations of the Company and its
Subsidiaries in amounts and covering such risks as the Company believes
is necessary to conduct its business. Neither the Company nor any of its
Subsidiaries has received formal notice that any such policy is invalid
or unenforceable.
(p) Lucent and Other Agreements. Section 5.1(p) of the Company
Disclosure Schedule sets forth a list of each operating agreement,
license agreement, intercompany agreement and other agreement which
involves annual payments in excess of $1,000,000 between the Company, on
the one hand, and each of Lucent Technologies Inc., AT&T Corp. or NCR
Corporation, on the other hand (all such agreements with Lucent
Technologies Inc. being referred to herein as the "Lucent Agreements"
and all such agreements with either AT&T Corp. or NCR Corporation being
referred to herein as the "Other Agreements"). Each Lucent Agreement is
in full force and effect and is a valid and binding agreement of the
parties thereto enforceable against each such party in accordance with
its terms, except as affected by the Bankruptcy and Equity Exception.
The Company has not received any notice that it is in default under any
of the Other Agreements.
(q) Brokers and Finders. Neither the Company nor any of its
Subsidiaries nor any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability
for any brokerage fees, commissions or finders fees in connection with
the transactions contemplated by this Agreement, subject, however, to
the understanding set forth in Section 7.9 hereof.
(r) Bank Act (Canada). The Company is in compliance in all
material respects with the Bank Act (Canada).
(s) Employee Benefits. Except to the extent that any breach,
failure or inaccuracy, individually or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect:
(i) Section 5.1(s) of the Company Disclosure Schedule
contains a true and complete list of each "employee benefit
plan" (within the meaning of
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30
section 3(3) of ERISA, including, without limitation,
multiemployer plans (within the meaning of ERISA section 3(37)),
stock purchase, stock option, severance, employment, change-in-
control, fringe benefit, collective bargaining, bonus, incentive,
deferred compensation and all other written employee benefit
plans, agreements, programs, policies or other arrangements,
whether or not subject to ERISA (including any funding mechanism
therefor now in effect or required in the future as a result of
the transactions contemplated by this Agreement or otherwise),
under which the Company or any of its Subsidiaries has any
present or future liability other than solely as a result of its
status as an ERISA Affiliate of a plan sponsor or any
contributing employer (provided, that, with respect to plans,
agreements, programs, policies and arrangements maintained
outside the United States, Section 5.1(s) of the Company
Disclosure Schedule contains a true and complete list of each
written plan, agreement, program, policy and arrangement). All
such plans, agreements, programs, policies and arrangements are
collectively referred to herein as "Company Plans".
(ii) To the extent requested by Purchaser, with
respect to each Company Plan for U.S. based employees, the
Company has delivered or made available to Purchaser a current,
accurate and complete copy (or, to the extent no such copy
exists, an accurate description) thereof and, to the extent
applicable: (A) any related trust agreement or other funding
instrument; (B) the most recent determination letter, if
applicable; (C) any summary plan description; and (D) for the
three most recent years (I) the Form 5500 and attached schedules
and (II) audited financial statements.
(iii) All Company Plans are in substantial compliance
with all applicable laws, including the Code and ERISA. The
Company has received a favorable determination letter from the
Internal Revenue Service with respect to the qualified status of
each Company Plan that is an "employee pension benefit plan"
within the meaning of section 3(2) of ERISA (a "Pension Plan")
and that is intended to be qualified under section 401(a) of the
Code and the plan is so qualified and,
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31
nothing has occurred, whether by action or failure to act, that
would be reasonably expected to cause the loss of such
qualification. Except as disclosed in Section 5.1(g)(i) of the
Company Disclosure Schedule, there is no pending or threatened
action, suit or claim relating to the Company Plans and, to the
knowledge of the Company, no facts exist which could give rise to
any such action, suit or claim. Neither the Company nor any
Subsidiary has engaged in any transactions with respect to any
Company Plan that could reasonably be expected to subject the
Company or any of its Subsidiaries to a tax or penalty imposed by
section 4975 of the Code.
(iv) As of the date hereof, no liability under Title
IV of ERISA has been or is expected to be incurred by the Company
or any Subsidiary with respect to any ongoing, frozen or
terminated "single-employer plan", within the meaning of section
4001(a)(15) of ERISA, currently or formerly maintained by any of
them, or the single- employer plan of any entity which is
considered one employer with the Company under section 4001 of
ERISA or section 414 of the Code (an "ERISA Affiliate") other
than the payment of premiums of the Pension Benefit Guaranty
Corporation. None of the Company, its Subsidiaries or any ERISA
Affiliate have contributed, or been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any
time during the six-year period prior to the date hereof.
(v) (A) No event has occurred and no condition exists
that would be reasonably likely to subject the Company or its
Subsidiaries to any tax, fine, lien or penalty imposed by ERISA,
the Code or other applicable laws, rules and regulations with
respect to a Company Plan; and (B) for each Company Plan with
resect to which a Form 5500 has been field, no material change
has occurred with respect to the matters covered by the most
recent Form 5500 since the date thereof.
(vi) All contributions required to be made by the
Company or any of its Subsidiaries under the terms of any Company
Plan have been timely made or have been reflected on the most
recent consolidated balance sheet filed or incorporated by
reference in the Company Reports prior to the
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32
date hereof. Neither any Company Plan nor any single-employer
plan of an ERISA Affiliate has had an "accumulated funding
deficiency" (whether or not waived) within the meaning of section
412 of the Code or section 302 of ERISA. Neither the Company nor
its Subsidiaries has provided, or is required to provide,
security to any Pension Plan or to any single-employer plan of an
ERISA Affiliate pursuant to section 401(a)(29) of the Code.
(vii) With respect to each single-employer plan of an
ERISA Affiliate, as of the last day of the most recent plan year
ended prior to the date hereof, the actuarially determined
present value of all "benefit liabilities" within the meaning of
section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in such actuarial valuation) did
not exceed the then current value of the assets of any such
single- employer plan. Neither the Company nor its Subsidiaries
maintain or contribute to a Company Plan subject to Title IV of
ERISA.
Notwithstanding anything in this Agreement to the contrary, the
Company shall be deemed to have made no representation or warranty whatsoever
and the Sellers shall be deemed to have granted no indemnity with respect to any
matter arising from, relating to or otherwise in respect of, the levels of
compensation (including bonuses and or severance arrangements) or the numbers or
ownership of outstanding stock options or phantom equity interests or stock
appreciation rights owned by employees of the Company or its Subsidiaries.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
6.1 Representations and Warranties of Purchaser. Purchaser
represents and warrants to Sellers that, except as set forth on the specific
section of the Purchaser Disclosure Schedule referenced to in any particular
representation and warranty referenced below:
(a) Organization, Good Standing and Qualification.
(i) Each of Purchaser and its Subsidiaries is a corporation
duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of organization and
has all requisite corporate or similar power and authority
to own and operate its properties and assets and to carry on
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33
its business as presently conducted and is qualified to do business and
is in good standing as a foreign corporation in each jurisdiction where
the ownership or operation of its properties or conduct of its business
requires such qualification, except where the failure to be so qualified
or in good standing, when taken together with all other such failures,
would not reasonably be expected to have a Purchaser Material Adverse
Effect.
(ii) Section 6.1(a)(ii) of the Purchaser Disclosure
Schedule contains a complete list of each Subsidiary of Purchaser and
each Purchaser Material Subsidiary. Purchaser has made available to
Hercules a complete and correct copy of the certificates of
incorporation and by-laws (or comparable documents), each as amended to
date, of the Purchaser and each of the Purchaser Material Subsidiaries
(other than those of Newcourt DFS Inc.). Purchaser's and the Purchaser
Material Subsidiaries' certificates of incorporation and by-laws (or
comparable documents) so made available are in full force and effect,
and neither Purchaser nor any of its Subsidiaries is in default or
violation of any provisions of its respective certificate of
incorporation or by-laws except for such defaults or violations which,
when taken together with all other such defaults or violations, would
not reasonably be expected to have a Purchaser Material Adverse Effect.
Section 6.1(a)(ii) of the Purchaser Disclosure Schedule contains a
correct and complete list of each jurisdiction where Purchaser and each
of the Purchaser Material Subsidiaries is organized and qualified to do
business. Except as set forth in Section 6.1(a)(ii) of the Purchaser
Disclosure Schedule, and except for securities acquired in the ordinary
course of business, including in connection with the realization on
collateral positions and the acquisition of securities as part of any
financing transaction, neither Purchaser nor any of its Subsidiaries
owns less than 100% of the outstanding voting securities or other equity
interests of any corporation, joint venture or other entity that would
qualify as a Purchaser Material Subsidiary (other than investments in
marketable securities of any Person, none of which exceed 5% of the
outstanding capital stock or other equity interests of such Person).
(b) Capital Structure. The authorized capital stock of Purchaser
consists of an unlimited number of Purchaser Common Shares, of which
82,675,910 shares were outstanding on November 17, 1997; an unlimited
number of Special Shares, of which no shares were outstanding on
November 17, 1997; and an unlimited number of Class A preference shares
issuable in series ("Preference Shares"), of which no shares
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34
were outstanding on November 17, 1997. All of the outstanding shares of
capital stock have been duly authorized and are validly issued, fully
paid and nonassessable. As of the date hereof, there are 4,228,490
outstanding Purchaser Options. On the date of this Agreement, no
Purchaser Common Shares, Special Shares or Preference Shares have been
issued except Purchaser Common Shares issued upon the exercise of
Purchaser Options. As of the date hereof, there are 3,845,010 Purchaser
Options that are "in-the-money" (by an aggregate amount of Canadian
$112.6 million), assuming that Purchaser Common Shares have a market
value of Canadian $50 per share. Each of the outstanding shares of
capital stock or other equity securities of each Purchaser Material
Subsidiary is duly authorized, validly issued, fully paid and
nonassessable and, except for directors' qualifying shares, owned by
Purchaser or a direct or indirect wholly owned Subsidiary of Purchaser,
free and clear of any Lien. Except as set forth in Section 6.1(b) of the
Purchaser's Disclosure Schedule, there are no preemptive or other
outstanding rights, options, warrants, conversion rights, stock
appreciation rights, redemption rights, repurchase rights, agreements,
arrangements or commitments to issue or sell any shares of capital stock
or other equity securities of Purchaser or any Purchaser Material
Subsidiary or any securities or obligations convertible or exchangeable
into or exercisable for, or giving any Person a right to subscribe for
or acquire, any equity securities of Purchaser or any Purchaser Material
Subsidiary, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. Purchaser does not have outstanding
Voting Debt.
(c) Authority. No vote, or other approval or consent or other
evidence of approval of holders of capital stock of Purchaser is
necessary (as a matter of law, as required by the TSE, ME or NYSE or
otherwise) to approve this Agreement, the Investment Agreement, the
Transfer Restriction Agreement, the Registration Rights Agreement, the
Financing Documents or any of the transactions contemplated hereby and
thereby (including the Bought-Deal Financing). Purchaser has all
requisite corporate power and authority and has taken all corporate
action necessary in order to execute, deliver and perform its
obligations under this Agreement, the Investment Agreement, the Transfer
Restriction Agreement, the Registration Rights Agreement and the
Financing Documents and to consummate the transactions contemplated
hereby and thereby. Each of this Agreement, the Investment Agreement,
the Transfer Restriction Agreement, the Registration Rights Agreement
and the
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35
Financing Documents constitutes a valid and legally binding agreement of
Purchaser enforceable against Purchaser in accordance with its terms,
except as affected by the Bankruptcy and Equity Exception.
(d) Governmental Filings; Consents; No Violations. (i) Other than
the filings and/or notices (A) pursuant to Section 7.4, (B) under the
HSR Act, the Exon-Florio provisions of the United States Defense
Production Act, the Competition Act (Canada), the Exchange Act and the
applicable rules of the NYSE, TSE and ME and (C) set forth in Section
6.1(d)(i) of the Purchaser Disclosure Schedule, no notices, reports or
other filings are required to be made by Purchaser or any of its
Subsidiaries with, nor are any consents, registrations, approvals,
permits or authorizations required to be obtained by Purchaser or any of
its Subsidiaries from, any Governmental Entity, in connection with the
execution and delivery of this Agreement, the Investment Agreement, the
Transfer Restriction Agreement, the Registration Rights Agreement and
the Financing Documents by Purchaser and the consummation by Purchaser
of the transactions contemplated hereby and thereby, except those as to
which the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Purchaser Material Adverse Effect
or prevent, materially delay or materially impair the ability of
Purchaser to consummate the transactions contemplated by this Agreement,
the Investment Agreement, the Transfer Restriction Agreement, the
Registration Rights Agreement and the Financing Documents.
(ii) The execution, delivery and performance of this
Agreement, the Investment Agreement, the Transfer Restriction Agreement,
the Registration Rights Agreement and the Financing Documents by
Purchaser do not, and the consummation by Purchaser of the transactions
contemplated hereby and thereby will not, constitute or result in (A) a
breach or violation of, or a default under, the certificate of
incorporation or by-laws of Purchaser or the comparable governing
instruments of any of its Subsidiaries, (B) a breach or violation of, or
a default under, the acceleration of any material obligations or the
creation of a Lien on any material assets of Purchaser or any of its
Subsidiaries (with or without notice, lapse of time or both) pursuant
to, any provision of any Contracts of Purchaser or any of its
Subsidiaries or any Law or License to which Purchaser or any of its
Subsidiaries is subject or (C) any change in the rights or obligations
of any party under any of the Contracts (including, without limitation,
the Dell Agreements), except, in the case of clause (B) or (C) above,
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36
for any breach, violation, default, acceleration, creation or change
that, individually or in the aggregate, is not reasonably likely to have
a Purchaser Material Adverse Effect or prevent, materially delay or
materially impair the ability of Purchaser to consummate the
transactions contemplated by this Agreement, the Investment Agreement,
the Transfer Restriction Agreement, the Registration Rights Agreement
and the Financing Documents (collectively, "Purchaser Material
Breaches"). Section 6.1(d)(ii) of the Purchaser Disclosure Schedule sets
forth a correct and complete list of each Contract and License of
Purchaser and its Subsidiaries pursuant to which a consent or waiver is
required prior to consummation of the transactions contemplated by this
Agreement, the Investment Agreement, the Transfer Restriction Agreement,
the Registration Rights Agreement and the Financing Documents in order
to avoid the occurrence of a Purchaser Material Breach under such
Contract or License.
(iii) Neither Purchaser nor any of its Subsidiaries is in
breach or default under any Contract other than such breaches or
defaults that, individually or in the aggregate, would not reasonably be
expected to have a Purchaser Material Adverse Effect. No event has
occurred (except for the execution of this Agreement) which either
entitles, or would upon notice or with the lapse of time or both,
entitle the holder of any indebtedness of Purchaser or any of its
Subsidiaries to accelerate, or which does accelerate, the maturity of
any indebtedness which is material to Purchaser and its Subsidiaries
taken as a whole.
(e) Purchaser Reports; Financial Statements. Purchaser has made
available to Hercules each registration statement, prospectus, report,
proxy statement, information circular or material change report prepared
by Purchaser since the Audit Date, including (i) Purchaser's Annual
Report for the year ended December 31, 1996, (ii) Purchaser's Annual
Information Form for the year ended December 31, 1996, (iii) any
offering memorandum, prospectus, registration statement, proxy
statement, information circular or material change report prepared by
Purchaser or its representatives since the Audit Date, including any
prepared in connection with the financing of the transaction
contemplated by this Agreement and (iii) Purchaser's quarterly reports
for the periods ended March 31, 1997 and June 30, 1997, each in the form
(including exhibits, annexes and any amendments thereto) filed with the
securities regulatory authorities in each of the Provinces of Canada
("CSR"), SEC, NYSE, ME and/or TSE (collectively, including any such
reports filed subsequent to the date
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37
hereof, the "Purchaser Reports"). As of their respective dates, the
Purchaser Reports did not, and any Purchaser Reports filed with the CSR,
SEC, NYSE, ME and/or TSE subsequent to the date hereof will not, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading. As of their respective dates, the Purchaser Reports
complied, and any Purchaser Reports filed with the CSR, SEC, NYSE, ME
and/or TSE subsequent to the date hereof will comply, as to form, in all
material respects with the requirements of all rules and regulations of
any Governmental Entity applicable thereto, as well as those of the
NYSE, ME and TSE. Each of the consolidated balance sheets included in or
incorporated by reference into the Purchaser Reports (including the
related notes and schedules) fairly presents the consolidated financial
position of Purchaser and its Subsidiaries as of its date and each of
the consolidated statements of income and retained earnings and
consolidated statements of cash flows included in or incorporated by
reference into the Purchaser Reports (including any related notes and
schedules) fairly presents the results of operations, retained earnings
and cash flows, as the case may be, of Purchaser and its Subsidiaries
for the periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments that are not expected
to be material in amount or effect), in each case in accordance with
Canadian GAAP consistently applied during the periods involved.
(f) Absence of Certain Changes. (i) Except as disclosed in the
Purchaser Reports prior to the date hereof or in Section 6.1(f) of the
Purchaser Disclosure Schedule, from the Audit Date to the date hereof,
Purchaser and its Subsidiaries have conducted their respective
businesses only in, and have not engaged in any transaction other than
according to, the ordinary and usual course of such businesses and there
is not and has not been (A) any change in the financial condition,
properties, business or results of operations of Purchaser and its
Subsidiaries; or (B) any damage, destruction or other casualty loss with
respect to any material asset or property owned, leased or otherwise
used by Purchaser or any of the Purchaser Material Subsidiaries, whether
or not covered by insurance, with such exceptions to this Section
6.1(f)(i) that would not, individually or in the aggregate, reasonably
be expected to have a Purchaser Material Adverse Effect.
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38
(ii) Except as disclosed in the Purchaser Reports prior to
the date hereof or in Section 6.1(f) of the Purchaser Disclosure
Schedule, since the Audit Date to the date hereof, there is not and has
not been (A) any declaration, setting aside or payment of any dividend
or other distribution in respect of the capital stock of Purchaser; or
(B) any change by Purchaser in accounting principles, practices or
methods, except as required by Law or Canadian GAAP; or (C) any event or
action which, if it had taken place or been taken following the
execution of this Agreement would not have been permitted by Section 7.2
without the prior written consent of Hercules.
(g) Liabilities. There are no liabilities or obligations, whether
accrued, absolute, fixed, contingent or otherwise, of Purchaser and its
Subsidiaries as of the date hereof that would be required to be
reflected on a balance sheet prepared in accordance with Canadian GAAP
that are not so reflected on the consolidated balance sheet of Purchaser
and its consolidated Subsidiaries as of September 30, 1997, except such
liabilities or obligations that are described in Section 6.1(g) of the
Purchaser Disclosure Schedule or such liabilities or obligations which
(when considered net of any associated financial benefit or asset of
Purchaser or such Subsidiary created or arising in connection therewith)
would not, individually or in the aggregate, reasonably be expected to
have a Purchaser Material Adverse Effect. For the avoidance of doubt,
the representation and warranty in this Section 6.1(g) shall not be
deemed to include any representation or warranty as to the amount or
quality of any assets of Purchaser or any of its Subsidiaries (including
any receivables or residuals) or the lack of any impairment thereof.
(h) Compliance with Laws; Licenses. (i) Except as set forth in
the Purchaser Reports prior to the date hereof, the businesses of each
of Purchaser and its Subsidiaries have not been, and are not being,
conducted in violation of any applicable Laws, except for possible
violations that are not, individually or in the aggregate, reasonably
likely to have a Purchaser Material Adverse Effect or prevent,
materially delay or materially impair the ability of Purchaser to
consummate the transactions contemplated by this Agreement, the
Stockholders' Agreements or the Registration Rights Agreement. Except as
set forth in the Purchaser Reports prior to the date hereof, no
investigation or review (other than reviews taking place in the ordinary
course of business) by any Governmental Entity with respect to Purchaser
or any of its Subsidiaries is pending or, to the Knowledge of Purchaser,
threatened, nor has any
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39
Governmental Entity indicated to Purchaser an intention to conduct the
same, except for those the outcome of which are not, individually or in
the aggregate, reasonably likely to have a Purchaser Material Adverse
Effect or prevent, materially delay or materially impair the ability of
Purchaser to consummate the transactions contemplated by this Agreement,
the Stockholders' Agreements or the Registration Rights Agreement. To
the Knowledge of Purchaser, no material change is required in
Purchaser's or any of its Subsidiaries' processes, properties or
procedures in connection with any such Laws, and neither Purchaser nor
any of its Subsidiaries has received any notice or communication of any
material noncompliance with any such Laws that has not been cured in all
material respects.
(ii) Purchaser and its Subsidiaries hold all Licenses
from, and have made all filings, applications and registrations with,
each Governmental Entity and other Persons necessary for the operation
of their respective businesses as presently conducted, except in each
case for such Licenses, filings, applications and registrations, the
failure of which to hold or make, individually or in the aggregate,
would not reasonably be expected to have a Purchaser Material Adverse
Effect; all such Licenses are in full force and effect, except for such
Licenses, the failure of which to be in full force and effect,
individually or in the aggregate, would not reasonably be expected to
have a Purchaser Material Adverse Effect and no proceedings are pending
or, to the Knowledge of Purchaser, threatened by any Governmental Entity
or other Person for the suspension, revocation or termination of any
such License, except for such suspensions, revocations or terminations
that, individually or in the aggregate, would not reasonably be expected
to have a Purchaser Material Adverse Effect. Except as set forth in
Section 6.1(h)(ii) of the Purchaser Disclosure Schedule, neither
Purchaser nor any of its Subsidiaries is in default in any respect under
any such License, except for such defaults that, individually or in the
aggregate, would not reasonably be expected to have a Purchaser Material
Adverse Effect, and, except for statutory or regulatory restrictions of
general application, no Governmental Entity has placed any restriction
on the business or properties of Purchaser or any of its Subsidiaries,
except for such restrictions that, individually or in the aggregate,
would not reasonably be expected to have a Purchaser Material Adverse
Effect.
(i) Other Agreements. (i) Section 6.1(i)(i) of the
Purchaser Disclosure Schedule sets forth a list of each
material contract between Purchaser or any of its
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40
Subsidiaries, on the one hand, and Dell Computer Corporation or any of
its respective Subsidiaries, on the other hand (the "Dell Agreements").
Each Dell Agreement is in full force and effect and is a valid and
binding agreement of the parties thereto enforceable against each such
party in accordance with its terms, except as affected by the Bankruptcy
and Equity Exception. Purchaser has not received any notice that it is
in default under any of the Dell Agreements. Purchaser represents and
warrants that neither the execution of this Agreement nor the
consummation of the transactions contemplated hereby shall cause a
termination of any of the Dell Agreements.
(ii) Purchaser has provided Hercules with copies of each
shareholders' agreement, transfer restriction agreement, registration
rights agreement, voting agreement or other similar agreement concerning
the Purchaser Common Shares to which Purchaser is a party or of which
Purchaser has Knowledge (together with the Stockholders' Agreements, the
"Purchaser Common Share Agreements"), each as in effect on the date
hereof. All such agreements are set forth in Section 6.1(i)(ii) of the
Purchaser Disclosure Schedule.
(j) Brokers and Finders. Purchaser has not employed any broker or
finder or incurred any liability for any brokerage fees, commissions or
finders fees in connection with the transactions contemplated by this
Agreement, the Stockholders Agreement or the Registration Rights
Agreement, except that Purchaser has employed CIBC Wood Gundy Securities
Inc., Goldman, Sachs & Co. and Merrill Lynch to act as its financial
advisors, the arrangements with which have been disclosed to Sellers
prior to the date hereof and the fees of which will be borne entirely by
Purchaser.
(k) Available Funds. Attached hereto as Exhibit H is a fully
executed copy of the Underwriting Agreement and commitment letter for a
"bought deal" regarding a public offering of Purchaser Common Shares and
the commitment letter to enter into the Installment Receipt and Pledge
Agreement (which together with the other documents entered into or to be
entered into in connection with the Bought-Deal Financing are referred
to as the "Financing Documents") which, if completed in accordance with
its terms, will yield net proceeds of not less than US$1,100,000,000
(the "Bought-Deal Financing") available, subject to escrow arrangements
with respect to the public offering of subscription receipts for
Purchaser Common Shares in the Installment Receipt and Pledge Agreement
(the "Escrow Arrangement"), within three weeks following the date
hereof. After due inquiry, Purchaser has no reason to believe that any
of the
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41
conditions that it is required to satisfy under the Underwriting
Agreement or any other Financing Document will not be satisfied on a
timely basis.
(l) Validity of Shares. The issuance of the Purchaser Common
Shares comprising part of the Purchase Price has been duly authorized by
all necessary corporate action on the part of Purchaser and, when such
Purchaser Common Shares are issued and delivered in accordance with the
terms of this Agreement, such Purchaser Common Shares will be validly
issued, fully paid and nonassessable and shall be free and clear of any
Liens (other than pursuant to the Transfer Restriction Agreement and the
Indemnity Escrow Agreement or to the extent created by any Holder). The
Purchaser is a reporting issuer under the Securities Act (Ontario) and
the Securities Act (Quebec) and is not in default in any material
respect of any requirement of either such Act or the regulations
thereunder; the Purchaser Common Shares are registered under the
Exchange Act, and the Purchaser has made all filings and reports
required by the Exchange Act, the Securities Act and the rules and
regulations of the SEC thereunder; and the Purchaser is in compliance in
all material respects with all of the rules and regulations of the NYSE.
All of the issued and outstanding Purchaser Common Shares are, and the
Purchaser Common Shares to be issued under Section 2.2(b) will at the
time of such issuance be, listed and posted for trading on each of the
NYSE, TSE and ME. There is no undertaking required or other condition
imposed by any of the NYSE, TSE or ME in connection with the
transactions contemplated herein which would have the effect of
restricting the transferability of the Purchaser Common Shares.
(m) Investment Intent. Purchaser is acquiring the
Stock for its own account, for investment and not with a
view to, or for resale in connection with, the distribution
thereof.
(n) Bank Act (Canada). Purchaser is not a "financial
institution" as such term is defined in the Bank Act (Canada).
(o) Limitation on Liability. Purchaser understands and agrees
that none of the Sellers, the Company nor any of their respective
Affiliates are making any representation and warranty whatsoever,
express or implied, other than those representations and warranties of
Sellers and the Company expressly set forth in Articles IV and V,
respectively. Purchaser understands and agrees that, following the
Closing, it shall not be entitled to
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42
indemnification from Sellers with respect to any claims arising out of
any breach by Sellers or the Company of this Agreement, including any
breach of a representation and warranty, except as expressly provided in
Section 10.1. Purchaser acknowledges that neither Hercules nor the
Company nor any of their respective Affiliates, directors, officers,
employees, counsel, accountants or other representatives shall have any
liability to Purchaser or any of the underwriters in the Bought-Deal
Financing whatsoever in connection with any offering memorandum,
prospectus, registration statement or proxy statement prepared by
Purchaser or its representatives in connection with the Purchaser's
financing of the transactions contemplated by this Agreement, except
with respect to the written information about Hercules furnished by
Hercules specifically for inclusion in such documents which is set forth
in Section 6.1(o) of the Seller Disclosure Schedule (the "Hercules
Information").
ARTICLE VII
COVENANTS
7.1 Interim Operations of the Company. (a) Hercules and the
Company agree that, after the date hereof and prior to the Closing
(unless Purchaser shall otherwise approve in writing, which approval
shall not be unreasonably withheld or delayed, and except as otherwise
expressly contemplated by this Agreement or Section 7.1(a) of the
Company Disclosure Schedule and Section 7.1(a) of the Seller Disclosure
Schedule):
(i) the business of the Company and its Subsidiaries
shall, subject to the further provisions of this Section 7.1(a),
be conducted in the ordinary and usual course and, to the extent
consistent therewith, the Company and its Subsidiaries shall use
reasonable efforts to preserve its business organization intact
and maintain its existing relations and goodwill with customers,
suppliers, distributors, creditors, lessors and business
associates;
(ii) the Company shall not (A) sell or pledge any capital
stock owned by it in any of its Subsidiaries (other than pursuant
to a merger of two or more wholly owned Subsidiaries); (B) amend
its or its Subsidiaries' charter or by-laws (or comparable
documents); (C) split, combine or reclassify, or issue or
authorize the issuance of any other securities in respect of, in
lieu of or in substitution for, its outstanding shares of
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43
capital stock; (D) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property in respect
of any capital stock; or (E) repurchase, redeem or otherwise
acquire, or permit any of its Subsidiaries to purchase, redeem or
otherwise acquire, any shares of its capital stock or any
securities convertible into or exchangeable or exercisable for
any shares of its capital stock;
(iii) neither the Company nor any of its Subsidiaries
shall: (A) issue, sell, pledge, dispose of or encumber, or
authorize or propose the issuance, sale, pledge, disposition or
encumbrance of, any shares of, or securities convertible into or
exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of its
capital stock of any class (other than Shares issuable pursuant
to Company Options outstanding on the date hereof); or (B) other
than (1) pursuant to a merger of two or more wholly owned
Subsidiaries, (2) in connection with securitization transactions
undertaken in the ordinary and usual course of business, (3) in
the ordinary and usual course of business and in an amount not in
excess of US$20,000,000 in any transaction or series of new
related transactions or (4) in connection with lease renewals or
sales of leased property to the lessee thereof, transfer, lease,
license, guarantee, sell, mortgage, pledge or dispose of any
other property or assets (including capital stock of any of its
Subsidiaries) or encumber any property or assets (including
capital stock of any of its Subsidiaries); or (C) other than in
the ordinary and usual course of business, incur or modify any
material indebtedness or other liability; or (D) purchase or
acquire assets or other property (other than for the purpose of
financing the purchase or lease thereof by a third party) (x)
which purchase or acquisition is not in the ordinary and usual
course of business or (y) which assets or other property has a
fair market value in excess of US$10,000,000 in any transaction
or series of related transactions; or (E) expend funds in excess
of US$50,000 in the aggregate for environmental remedial actions
at the Auburn Facility;
(iv) neither the Company nor any of its Subsidiaries shall
terminate, establish, adopt, enter into, make any new grants or
awards under, amend or otherwise modify, any Company Plans or
employment agreements or increase the salary, wage, bonus or
other
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44
compensation of any employees (other than payments required or
permitted under the Company's retirement plans, severance plans
and annual incentive plans) except (A) grants, awards and
increases that are contemplated by existing board resolutions or
this Agreement as set forth in Section 7.1(a)(iv) of the Company
Disclosure Schedule or (B) increases occurring in the ordinary
and usual course of business (which shall include normal periodic
performance reviews and related compensation and benefit
increases) or (C) otherwise required by applicable law or the
terms of such plans;
(v) neither the Company nor any of its Subsidiaries shall
settle or compromise any claim or litigation for an amount in
excess of US$5,000,000 or, except in the ordinary and usual
course of business modify, amend or terminate any of its material
Contracts or waive, release or assign any material rights or
claims;
(vi) neither the Company nor any of its Subsidiaries shall
make any Tax election or permit any insurance policy naming it as
a beneficiary or loss- payable payee to be cancelled or
terminated except in the ordinary and usual course of business;
(vii) the Company and its Subsidiaries shall promptly
notify the Purchaser of receipt of any notice from any
significant customer of the Company or any of its Subsidiaries of
such customer's intention to terminate any material Contract with
the Company or any of its Subsidiaries;
(viii) neither the Company nor any of its Subsidiaries
shall change any accounting principle used by the Company or any
of its Subsidiaries other than as required by U.S. GAAP or
applicable law (in which case the Company will give Purchaser
notice of such change);
(ix) neither the Company nor any of its Subsidiaries shall
(A) pay any dividend or other distribution to Hercules or any of
its Affiliates in cash, stock or property (other than, for the
avoidance of doubt, the $750,000 management fee payable to
Hercules or its Affiliates by the Company on or prior to December
31, 1997, but in no event for any period or portion thereof
thereafter), (B) issue any capital stock, options, warrants or
similar instruments, or (C) transfer any property or assets to,
or make other
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45
financial accommodations to, Hercules or any of its Affiliates
(other than the $750,000 management fee payable to Hercules or
its Affiliates by the Company on or prior to December 31, 1997,
but in no event for any period or portion thereof thereafter);
(x) the Company will not make and Hercules will not cause
the Company to make any amendments or modifications to its credit
manual; and
(xi) neither the Company nor any of its Subsidiaries will
authorize or enter into any binding, non-cancellable agreement to
do any of the foregoing that may not be terminated without
penalty immediately after the Closing.
(b) Sellers agree that, after the date hereof and prior to the
Closing (unless Purchaser shall otherwise approve in writing) none of
them shall sell, assign, pledge, dispose of or encumber any Shares owned
by them or any of their Affiliates, except as contemplated by Section
2.1(b).
7.2 Interim Operations of Purchaser. Purchaser agrees that, after
the date hereof and prior to the Closing (unless Hercules shall
otherwise approve in writing, which approval shall not be unreasonably
withheld or delayed, and except as otherwise expressly contemplated by
this Agreement or Section 7.2 of the Purchaser Disclosure Schedule):
(i) the business of Purchaser and its Subsidiaries shall
be conducted in the ordinary and usual course (except to the
extent such conduct would not otherwise adversely affect the
value of the Purchaser and its Subsidiaries, taken as a whole, or
impair or delay the Purchaser's ability to consummate the
transactions contemplated by this Agreement, including the
Bought-Deal Financing, in each case, in any material respect)
and, to the extent consistent therewith, Purchaser and its
Subsidiaries shall use all reasonable efforts to preserve its
business organization intact and maintain its existing relations
and goodwill with material customers, material suppliers,
material distributors, material creditors, material lessors and
material business associates, provided that to the extent that
any of the foregoing (other than financing or credit transactions
entered into by the Purchaser) would require Purchaser to obtain
prior consent under the Investment Agreement, Purchaser shall
obtain the prior consent of Hercules,
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46
which consent right it shall exercise reasonably, in
good faith and in the best interests of the Purchaser;
(ii) Purchaser shall not (A) amend its charter or by-laws
(or comparable documents); (B) split, combine or reclassify, or
issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for, its outstanding
shares of capital stock; (C) declare, set aside or pay any
dividend payable in cash, stock or property in respect of any
capital stock, except for cash dividends declared and paid with
board approval in the ordinary course of business; or (D)
repurchase, redeem or otherwise acquire any shares of its capital
stock or any securities convertible into or exchangeable or
exercisable for any shares of its capital stock;
(iii) neither Purchaser nor any of the Purchaser Material
Subsidiaries shall issue, sell, pledge, dispose of or encumber,
or authorize or propose the issuance, sale, pledge, disposition
or encumbrance of, any shares of, or securities convertible into
or exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of, its
capital stock of any class, other than (A) Purchaser Common
Shares issuable pursuant to Purchaser Options outstanding on the
date hereof, (B) in respect of the Bought-Deal Financing, (C)
issuances of shares or grants of options for the purpose of
compensating employees, officers and directors consistent with
past business practice, provided that in no event shall the
aggregate number of shares so issued and options so granted
represent greater than 5% of the total number of shares
outstanding as of the date of this Agreement, (D) issuances of
shares for the purpose of effecting acquisitions of businesses,
properties or assets having a purchase price not in excess of
US$20,000,000 or (E) transactions solely between Purchaser and
one or more of its wholly-owned Subsidiaries or transactions
solely between or among wholly-owned Subsidiaries;
(iv) Purchaser shall not amend or authorize an amendment
to, waive or authorize any waiver of rights under, or terminate
any of the Financing Documents or any of the Purchaser Common
Share Agreements (other than the Shareholders' Agreement) to
which it is a party or any other agreement relating to the
transactions contemplated by this Agreement without the
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47
prior written approval of Hercules, which approval will
not be unreasonably withheld or delayed; and
(v) neither Purchaser nor any of its Subsidiaries will
authorize or enter into any binding, non-cancellable agreement to
do any of the foregoing that may not be terminated without
penalty immediately after the Closing.
7.3 Access; Confidentiality. (a) Upon reasonable notice, and
except as may otherwise be required by applicable law, Hercules shall
(and shall cause the Company and its Subsidiaries to) afford Purchaser's
directors, officers, employees, counsel, accountants and other
authorized representatives access, during normal business hours
throughout the period prior to the Closing, to the properties, books,
Contracts and records of the Company and, during such period, shall (and
shall cause the Company and its Subsidiaries to) furnish promptly to
Purchaser all information concerning the business, properties and
personnel of the Company as may reasonably be requested, provided that
no investigation pursuant to this Section shall affect or be deemed to
modify any representation or warranty made by Sellers, and provided,
further, that the foregoing shall not require Hercules or the Company to
permit any inspection, or to disclose any information, that in the
reasonable judgment of Hercules would result in the disclosure of any
trade secrets of third parties or violate any of its or the Company's
obligations with respect to confidentiality. All requests for
information made pursuant to this Section shall be directed to an
executive officer of Hercules or such Person as may be designated by its
executive officers, as the case may be. Any information regarding the
Company heretofore or hereafter obtained by Purchaser or its
representatives from either Hercules or the Company shall be subject to
the terms of the Confidentiality Agreement, and such information shall
be held by Purchaser and its representatives in accordance with the
terms of the Confidentiality Agreement. Purchaser agrees to comply, and
to ensure that its representatives comply, with all reasonable
restrictions imposed upon Purchaser by Hercules or the Company in
connection with the access provided pursuant hereto and, in the event
this Agreement is terminated, will indemnify and hold harmless the
Sellers for Losses and Expenses arising as a direct result of any act or
omission by Hercules, the Company or any of the Company's Subsidiaries
taken or not taken, as the case may be, at the direction of Purchaser or
its representatives.
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(b) Upon reasonable notice, and except as may otherwise be
required by applicable law, Purchaser shall (and shall cause its
Subsidiaries to) afford Hercules's directors, officers, employees,
counsel, accountants and other authorized representatives access, during
normal business hours throughout the period prior to the Closing, to the
properties, books, Contracts and records of Purchaser and, during such
period, shall (and shall cause its Subsidiaries to) furnish promptly to
Hercules all information concerning the business, properties and
personnel of Purchaser as may reasonably be requested, provided that no
investigation pursuant to this Section shall affect or be deemed to
modify any representation or warranty made by Purchaser, and provided,
further, that the foregoing shall not require Purchaser to permit any
inspection, or to disclose any information, that in the reasonable
judgment of Purchaser would result in the disclosure of any trade
secrets of third parties or violate any of its obligations with respect
to confidentiality. All requests for information made pursuant to this
Section shall be directed to an executive officer of Purchaser or such
Person as may be designated by its executive officers, as the case may
be. Any information regarding Purchaser heretofore or hereafter obtained
by Hercules or its representatives from Purchaser shall be subject to
the terms of the Purchaser Confidentiality Agreement, and such
information shall be held by Hercules and the Company and their
representatives in accordance with the terms of the Purchaser
Confidentiality Agreement. Hercules agrees to comply, and to ensure that
its representatives comply, with all reasonable restrictions imposed
upon Hercules by Purchaser in connection with the access provided
pursuant hereto and, in the event this Agreement is terminated, will
indemnify and hold harmless the Purchaser for Losses and Expenses
arising as a direct result of any act or omission by Purchaser or any of
the Purchaser's Subsidiaries taken or not taken, as the case may be, at
the direction of Hercules or its representatives.
7.4 Filings; Other Actions; Notification. (a) Sellers and
Purchaser shall cooperate with each other and use (and cause their
respective Subsidiaries to use) their respective reasonable best efforts
to prepare and file as promptly as practicable all documentation to
effect all necessary applications, notices, petitions, filings and other
documents, including notification and report under the HSR Act, the
Exon-Florio provisions of the United States Defense Production Act and
the Competition Act (Canada) and to obtain as promptly as practicable
all permits, consents, approvals and authorizations necessary or
advisable to be
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49
obtained from any Governmental Entity in connection with the
transactions contemplated by this Agreement; provided that Sellers shall
not be required to prepare and file any such documentation or to obtain
any such permits, consents, approvals and authorizations in connection
with the Purchaser's financing of its purchase of Stock under this
Agreement, all of which shall be the sole responsibility of Purchaser.
Subject to applicable laws relating to the exchange of information,
Hercules and Purchaser shall have the right to review in advance, and to
the extent practicable each will consult the other on, all the
information relating to the Company, Sellers or Purchaser, as the case
may be, and any of their respective Subsidiaries, that appear in any
filing made with, or written materials submitted to, any Governmental
Entity in connection with the transactions (including Purchaser's
financing of its purchase of Stock hereunder) contemplated by this
Agreement. In exercising the foregoing right, each of Hercules and
Purchaser shall act reasonably and as promptly as practicable.
(b) Without limiting the generality of the undertakings pursuant
to this Section, Hercules and Purchaser each agree to take or cause to
be taken the following actions: (i) provide promptly to any and all
federal, state, local or foreign court or Government Entity with
jurisdiction over enforcement of any applicable antitrust laws
("Government Antitrust Entity") information and documents requested by
any Government Antitrust Entity or necessary, proper or advisable to
permit consummation of the transactions contemplated by this Agreement;
and (ii) take promptly, in the event that any permanent or preliminary
injunction or other order is entered or becomes reasonably foreseeable
to be entered in any proceeding that would make consummation of such
transactions in accordance with the terms of this Agreement unlawful or
that would prevent or delay consummation of the transactions
contemplated by this Agreement, any and all commercially reasonable
steps (including the appeal thereof or the posting of a bond, but not
including undertaking the sale or other disposition of, or the holding
separate of, any assets, categories of assets or businesses of Hercules,
the Company or Purchaser or the respective Subsidiaries of any of them
having an aggregate value in excess of 10% of the pro forma combined
assets of the Company and the Purchaser following the Closing) necessary
to vacate, modify or suspend such injunction or order so as to permit
such consummation on a schedule as close as possible to that
contemplated by this Agreement; provided that Sellers shall not be
required to take any action contemplated by clauses
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50
(i) and (ii) above with respect to or in connection with the Purchaser's
financing of its purchase of Stock under this Agreement, it being
understood that the taking of all such actions shall be the sole
responsibility of Purchaser.
(c) Hercules and Purchaser each shall, upon request by the other,
furnish the other with all information concerning themselves, their
Subsidiaries, directors, officers and stockholders and such other
matters as may be reasonably necessary or advisable in connection with
any statement, filing, notice or application made by or on behalf of
Sellers, the Company, Purchaser or any of their respective Subsidiaries
to any Governmental Entity in connection with the transactions
contemplated by this Agreement.
(d) Hercules and Purchaser each shall keep the other apprised of
the status of matters relating to completion of the transactions
contemplated hereby, including promptly furnishing the other with copies
of notices or other communications received by Hercules or Purchaser, as
the case may be, or any of their respective Subsidiaries, from any
Governmental Entity with respect to the transactions contemplated by
this Agreement. Hercules and Purchaser each shall give prompt notice to
the other of any change that is reasonably likely to prevent, materially
delay or materially impair the ability of Hercules or Purchaser to
consummate the transactions contemplated by this Agreement.
(e) Sellers, the Company and Purchaser shall use reasonable
efforts to obtain each consent or approval of each other Person whose
consent or approval is required in order to permit the maintenance by
the Company or Purchaser, as applicable, following the Closing of any
obligation, right or interest of the Company or Purchaser, as
applicable, under any Contract or any non-governmental permit,
franchise, concession or license to which the Company, Purchaser or any
of their respective Subsidiaries is a party or is subject.
7.5 Publicity. Unless otherwise required by law or in order to
continue doing business in the ordinary course, prior to the earlier of (x) the
Closing Date and (y) the second anniversary of the date of termination of this
Agreement, no news release or other public announcement pertaining to the
transactions contemplated by this Agreement shall be made by or on behalf of
either party hereto without the prior approval of the other party.
7.6 Indemnification; Directors' and Officers' Liability
Insurance. (a) On and after the Closing Date,
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51
until October 1, 2002, Purchaser shall, or shall cause the Company to,
indemnify and hold harmless, to the fullest extent permitted under
applicable law (and Purchaser shall, or shall cause the Company to,
advance expenses as incurred to the fullest extent permitted under
applicable law provided the Person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification), each
present and former director, officer and employee of the Company and its
Subsidiaries (including any predecessor companies) (collectively, the
"Indemnified Parties") against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages
or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Closing, including
the transactions contemplated by this Agreement.
(b) Purchaser shall ensure that the Company shall from and after
the Closing Date until October 1, 2002, have in place officers' and
directors' liability insurance providing insurance protection to the
Company's and its Subsidiaries' officers and directors substantially
similar (including as to scope, deductible and maximum liability) as the
insurance maintained by or for the Company as of June 5, 1996 ("D&O
Insurance"), so long as the annual premium therefor is not in excess of
$750,000 (the "Current Premium"); provided, however, if a future annual
premium exceeds the Current Premium, Purchaser shall cause the Company
to use its best efforts to obtain as much D&O Insurance as can be
obtained for the remainder of such period for a premium not in excess of
the Current Premium.
(c) If the Company or any of its successors or assigns (i) shall
consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) shall transfer all or substantially all
of its Properties and assets to any individual, corporation or other
entity, then and in each such case, proper provisions shall be made so
that the successors and assigns of the Company shall assume all of the
obligations set forth in this Section.
(d) The provisions of this Section are intended to be for the
benefit of, and shall be enforceable by, each of the Indemnified
Parties, their heirs and their representatives.
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52
7.7 Reasonable Best Efforts and Cooperation. Sellers, the Company
and Purchaser each shall use (and shall cause their Subsidiaries to use) its
reasonable best efforts to cause the conditions set forth in Article VIII hereof
to be satisfied and to consummate the transactions contemplated by this
Agreement (provided that, for the avoidance of doubt, it is understood and
agreed that neither Sellers nor the Company shall be required to exercise
reasonable best efforts with respect to the Bought-Deal Financing and shall have
no obligation to furnish any information (other than the Hercules Information)
to any Person for purposes of, or otherwise in connection with, the Bought-Deal
Financing). Without limiting the foregoing, Purchaser shall use its reasonable
best efforts to cause the Bought-Deal Financing to be consummated on a timely
basis.
7.8 Further Assurances. Each party shall cooperate with the
other, and execute and deliver, or use its best efforts to cause to be executed
and delivered, all such other instruments, including instruments of conveyance,
assignment and transfer, and to make all filings with and to obtain all
consents, approvals or authorizations of any Governmental Entity or any other
Person under any permit, license, agreement, indenture or other instruments, and
take all such other actions as such party may reasonably be requested to take by
the other party hereto from time to time, consistent with the terms of this
Agreement, in order to effectuate the provisions and purposes of this Agreement
and the transactions contemplated hereby.
7.9 Expenses. Whether or not the transactions contemplated hereby
are consummated, all fees and expenses incurred in connection with this
Agreement and the transactions contemplated hereby (other than those third-party
fees and expenses incurred by or on behalf of Hercules, the Company or any of
their respective Affiliates in connection with the Bought-Deal Financing, which
shall be payable, in any case, by Purchaser, but including, without limitation,
broker's and finder's fees and attorneys' fees and expenses) shall be paid by
the party incurring such expenses, provided, however, that, notwithstanding the
foregoing, it is understood and agreed that the Company will bear US$3 million
(less the amount of reasonable fees paid by the Company to its public relations
firm and to Sidley & Austin in connection with the transactions contemplated
hereby) of third party fees and expenses which may be allocated to it by
Hercules or certain of its Affiliates (on behalf of the Sellers) and that
Sellers will bear any and all such third party fees and expenses incurred by the
Sellers and allocated to the Company in excess of such amount.
7.10 Taxes. Purchaser shall be liable for and shall
pay all applicable sales, transfer, recording, deed, stamp and
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53
other similar taxes resulting from the consummation of the transactions
contemplated hereby.
7.11 Reporting Issuer Status and Listing. Purchaser undertakes to
remain a reporting issuer under the Securities Act (Ontario) and the Securities
Act (Quebec) not in default of any requirement of either such Act or the
regulations thereunder, and to maintain its status as a reporting company under
the Exchange Act and to maintain the listing of the Purchaser Common Shares
(including those to be issued pursuant hereto) on each of the NYSE and the TSE
for a period of no less than twenty four months immediately following the
Closing Date; provided, however, that no breach of this covenant shall be deemed
to have occurred unless (and then only to the extent that) any Holder shall, as
a result of Purchaser's non-compliance herewith, not be able or be materially
impaired in its ability to sell the Purchaser Common Shares conveyed to it
hereunder.
7.12 Execution of Indemnity Escrow Agreement. Hercules and
Purchaser agree to enter into the Indemnity Escrow Agreement prior to the
Closing with the Indemnity Escrow Agent.
ARTICLE VIII
CONDITIONS TO THE CLOSING
8.1 Conditions of Obligation of Each Party. The respective
obligations of Purchaser and Sellers hereunder are subject to the satisfaction
or waiver, at or prior to the Closing Date, of the following conditions:
(a) No Injunction. At the Closing Date, there shall be no (i)
injunction, restraining order or decree of any nature of any court or
Governmental Entity of competent jurisdiction in effect that restrains
or prohibits the purchase of the Stock hereunder or (ii) pending action,
suit or proceeding brought by any Governmental Entity which seeks to
restrain or prohibit the purchase of the Stock hereunder.
(b) Regulatory Authorizations. All consents, authorizations,
orders or approvals of each Governmental Entity listed in Part I of
Section 4.1(d)(i) of the Seller Disclosure Schedule, Part I of Section
5.1(d)(i) of the Company Disclosure Schedule and Part I of Section
6.1(d)(i) of the Purchaser Disclosure Schedule and the filings required
or permitted under the HSR Act, the Exon-Florio provisions of the United
States Defense Production Act and the Competition Act (Canada) shall
have been obtained and any applicable waiting periods in respect thereof
(including all applicable waiting periods specified under the HSR Act
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54
and other applicable anti-trust laws) shall have expired or
been terminated.
8.2 Additional Conditions to the Obligations of Purchaser. The
obligation of Purchaser to consummate the transactions contemplated by this
Agreement is subject to the satisfaction at or prior to the Closing Date of each
of the following additional conditions (any of which may be waived in writing by
Purchaser):
(a) Representations and Warranties. The representations and
warranties of Sellers and the Company contained in Articles IV and V of
this Agreement, respectively, shall be true and correct in all material
respects as of the Closing Date as though made at and as of the Closing
Date, except to the extent that any representation and warranty is made
as of a specified date other than the Closing Date, in which case such
representation and warranty shall be true and correct in all material
respects as of such date.
(b) Performance of Covenants. Sellers shall have performed in all
material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by them prior to or at the
Closing Date.
(c) Certificate. Purchaser shall have received a certificate of
Hercules, executed by a director of Hercules and dated the Closing Date,
on behalf of the Sellers, to the effect that the conditions specified in
paragraphs (a) and (b) above have been fulfilled (provided that
statements therein with respect to any Selling Stockholder may be based
solely on representations made by such Selling Stockholder in the
Custody Agreement and Power of Attorney to which such Selling
Stockholder is a party).
(d) Legal Opinion. Purchaser shall have received opinions of
Robert J. Ingato, general counsel of the Company, Maples and Calder,
general counsel to Hercules, and the legal department of Nomura
International plc, each dated the Closing Date and addressed to
Purchaser, in the forms set forth in Exhibits I-1, I-2 and I-3,
respectively.
8.3 Additional Conditions to the Obligations of Sellers. The
obligation of Sellers to consummate the transactions contemplated by this
Agreement is subject to the satisfaction at or prior to the Closing Date of each
of the
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55
following additional conditions (any of which may be waived in writing by
Hercules on behalf of the Sellers):
(a) Representations and Warranties. The representations and
warranties of Purchaser contained in Article VI of this Agreement shall
be true and correct in all material respects as of the Closing Date as
though made at and as of the Closing Date, except to the extent that any
representation and warranty is made as of a specified date other than
the Closing Date, in which case such representation and warranty shall
be true and correct in all material respects as of such date.
(b) Performance of Covenants. Purchaser shall have performed in
all material respects all obligations and agreements, and complied in
all material respects with all covenants and conditions, contained in
this Agreement to be performed or complied with by it prior to or at the
Closing Date.
(c) Certificate. Hercules shall have received a certificate of
Purchaser, executed by an executive officer of Purchaser and dated the
Closing Date, to the effect that the conditions specified in paragraphs
(a) and (b) above have been fulfilled.
(d) Listing. The Purchaser Common Shares to be issued by
Purchaser as consideration pursuant to Section 2.2 hereof shall have
been listed and posted for trading on each of the NYSE, TSE and ME.
(e) Human Resources Agreement. The payment in respect of vested
options of the Company contemplated by the Human Resources Agreement
shall have occurred simultaneously with the Closing.
(f) Legal Opinion. Hercules shall have received an opinion of
Jamie Johnson, counsel to Purchaser, dated the Closing Date and
addressed to the Sellers, in the form set forth in Exhibit J.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Closing
Date:
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56
(a) By mutual written consent of Hercules and Purchaser; or
(b) By either Hercules or Purchaser upon written notice to the
other party in the event that any Governmental Entity (including any
court of competent jurisdiction), the consent of which is necessary for
the consummation of the transactions contemplated hereby pursuant to
Section 8.1(b), shall have issued an order, decree or ruling or taken
any other official action enjoining or otherwise prohibiting the
transactions contemplated by this Agreement or denying approval of any
application or notice for approval to consummate such transactions, and
such order, decree, ruling or other action shall have become final and
non-appealable; provided that the right to terminate this Agreement
pursuant to this clause (b) shall not be available to any party that has
breached in any material respect its obligations under this Agreement in
any manner that has proximately contributed to the occurrence of such
injunction, prohibition or demand; or
(c) By either Hercules or the Purchaser upon written notice given
to the other party in the event that the Closing shall not have taken
place on or before February 27, 1998, provided that the failure of the
Closing to occur on or before such date is not the result of a wilful
breach of any covenant or agreement hereunder by the party seeking such
termination; or
(d) By Hercules upon written notice given to Purchaser at any
time later than December 8, 1997 and prior to Hercules having received
written notice from the Montreal Trust Company of Canada (in its
capacity as custodian under the Installment Receipt Agreement and as
depository under the Installment Receivable Loan Agreement, each as
defined in the Underwriting Agreement) that funds raised pursuant to the
Bought-Deal Financing have been deposited under the Escrow Arrangement;
provided that Hercules' right to terminate this Agreement pursuant to
this clause (d) shall terminate on (i) December 22, 1997 unless Hercules
shall have executed a letter substantially in the form attached hereto
as Exhibit M (the "Exclusivity Letter") with a term determined by
Hercules not to exceed eight weeks, or (ii) the date of termination of
the Exclusivity Letter after giving effect to any written extensions
thereof which have been mutually agreed by Hercules and Purchaser; or
(e) By Hercules or Purchaser upon written notice given to the
other party at any time in the event that:
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57
(x) Underwriters underwriting more than 8% of the securities
being offered in the Bought-Deal Financing have given
notice of termination of their obligations under the
Underwriting Agreement pursuant to Section 12(1)(b) of the
Underwriting Agreement; and
(y) there shall have occurred (i) any change (actual,
anticipated, contemplated or threatened, financial or
otherwise) in the business, affairs, operations, assets,
liabilities (contingent or otherwise) or capital of
Purchaser or any of its Subsidiaries or the Company or any
of its Subsidiaries, that would be material to Purchaser,
its Subsidiaries, the Company and its Subsidiaries,
considered as a whole, or (ii) any change in any material
fact in the Preliminary Prospectuses, Prospectuses,
Registration Statement or Supplementary Material (each as
defined in the Underwriting Agreement), or the existence
of any new material fact, which change or new material
fact has had or would reasonably be expected to have a
significant adverse effect on the market price or value of
the Purchaser Common Shares; provided that Purchaser may
not exercise the right of termination under this Section
9.1(e) if the basis for such termination is (1) any breach
or default by Purchaser of any of its representations,
warranties or agreements under any of this Agreement or
any of the Financing Documents or (2) the failure of the
financial institutions to enter into the Instalment
Receivables Loan Agreement and to advance funds as
contemplated by the commitment letter; or
(f) By Hercules or Purchaser upon written notice given to the
other party in the event that:
(x) Underwriters underwriting more than 8% of the securities
being offered in the Bought-Deal Financing have given
notice of termination of their obligations under the
Underwriting Agreement pursuant to Section 12(2) of the
Underwriting Agreement; and
(y) there shall occur or come into effect any occurrence or
any catastrophe of national or international consequence
or any action, governmental law or regulation, inquiry or
other occurrence of any nature whatsoever which
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seriously adversely affects or will seriously adversely
affect the Canadian or United States financial markets or
the business of the Purchaser, its Subsidiaries and the
Company and its Subsidiaries, considered as a whole.
9.2 Effect of Termination. In the event of the termination of
this Agreement as provided above, this Agreement (other than this Section) shall
become void and of no further force and effect and there shall be no duties,
liabilities or obligations of any kind or nature whatsoever on the part of
either party hereto to the other party based either upon this Agreement or the
transactions contemplated hereby; provided, however, that (i) nothing in this
Section 9.2 shall relieve any party from liability in respect of any wilful
breach of this Agreement by it or wilful failure by it to perform its
obligations hereunder, and (ii) the obligations of the parties referred to in
the last sentences of Section 7.3(a) and 7.3(b) and in Sections 7.5 and 7.9
shall continue to apply following any such termination of this Agreement. No
termination of this Agreement shall affect the rights and obligations of the
parties under the Confidentiality Agreement and the Purchaser Confidentiality
Agreement.
ARTICLE X
GENERAL PROVISIONS
10.1 Survival and Indemnification.
(a) Survival. The following representations and warranties shall
survive the Closing for the periods specified:
(i) the representations and warranties of Sellers
contained in Article IV and the AF Representation (the "Article
IV Surviving Representations") shall survive until the first
anniversary of the date of this Agreement; provided, however,
that, the representation and warranty contained in the first two
sentences of Section 4.1(e)(i) shall survive indefinitely;
(ii) the representations and warranties of the Company
(subject to the last paragraph of Article 5) contained in
Sections 5.1(g)(ii), 5.1(i), 5.1(k) and 5.1(p) (the "Hercules
Surviving Representations" and together with the Article IV
Surviving Representations the "Sellers' Surviving
Representations") shall survive until the first anniversary of
the date of this Agreement; provided, however, that, the
representations
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59
and warranties of the Company contained in Section 5.1(k) solely
insofar as they relate to the Auburn Facility (the "AF
Representation") shall survive only until the six-month
anniversary of the date of this Agreement; and
(iii) the representations and warranties of Purchaser
contained in Sections 6.1(a)(i), 6.1(c), 6.1(d)(i), 6.1(d)(ii),
6.1(g), 6.1(i), 6.1(j), 6.1(l), 6.1(m) and 6.1(o) (together the
"Purchaser Surviving Representations") shall survive until the
first anniversary of the date of this Agreement; provided,
however, that, the representation and warranty contained in the
first sentence of Section 6.1(l) shall survive indefinitely.
The agreements of the parties contained in Sections 7.6, 7.9,
7.10 and 7.11 and this Article X shall survive the Closing until the
expiration of the term of the undertaking set forth in such covenant, if
any, and otherwise until the first anniversary of the date of this
Agreement. The indemnification obligations in respect of the agreement
of Hercules and the Company contained in Section 7.1(a)(ix) (the
"Hercules Surviving Covenant") shall survive until the first anniversary
of the date of this Agreement. All other representations, warranties,
covenants and agreements of the parties hereunder (including those
representations and warranties contained in the certificates provided
under Sections 8.2(c) and 8.3(c)), shall terminate and be of no further
force or effect immediately after the Closing. No party shall have any
liability or obligation of any nature with respect to any
representation, warranty, covenant or agreement (including those
representations and warranties contained in the certificates provided
under Sections 8.2(c) and 8.3(c)) after the termination thereof.
(b) Indemnification by Sellers. (i) Subject to the other
provisions of this Section 10.1, from and after the Closing Date:
(A) Hercules and each of the Selling Stockholders listed on
Exhibit A to the Indemnity Escrow Agreement (together with
Hercules, individually a "Holder" and collectively the
"Holders") shall jointly and severally indemnify and hold
harmless Purchaser, Purchaser's Affiliates, each of their
respective directors, officers, employees and agents, and
each of the heirs, executors, successors and assigns of
any of the foregoing (each a "Purchaser Indemnified
Person" and
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collectively the "Purchaser Indemnified Persons") from and
against any and all damages, claims, losses, expenses,
costs, obligations and liabilities, including, without
limiting the generality of the foregoing, liabilities for
all reasonable attorneys' fees and expenses (collectively,
"Losses and Expenses") suffered or incurred by any such
Purchaser Indemnified Persons arising from, relating to or
otherwise in respect of, any breach of any representation
or warranty of the Company contained in the Hercules
Surviving Representations; provided that, for purposes of
the AF Representation, the representations and warranties
(or any disclosures noted with respect thereto in the
Company Reports) shall be deemed to be read without any
"Knowledge" qualification contained therein; and provided,
further, that the procedures for making claims under this
Section 10.1(b)(i)(A) in respect of any breach of the AF
Representation shall be governed by the AF Claim
Procedure; and
(B) each Seller (including, for the avoidance of doubt,
Hercules) shall severally indemnify and hold harmless the
Purchaser Indemnified Persons from and against any and all
Losses and Expenses suffered or incurred by any such
Purchaser Indemnified Persons arising from, relating to or
otherwise in respect of, any breach of any representation
and warranty given by such Seller contained in the Article
IV Surviving Representations.
provided that the obligations of the Holders under clauses (A) and (B)
above and sub-paragraph (ii) below shall be satisfied solely out of and
to the extent of the Indemnity Escrow and in accordance with the
procedures contained in the Indemnity Escrow Agreement.
(ii) Notwithstanding the limitations of Section 10.1(d),
from and after the Closing Date, the Holders shall indemnify and hold
harmless the Purchaser Indemnified Persons from and against any and all
Losses and Expenses suffered or incurred by any such Purchaser
Indemnified Persons arising from, relating to or otherwise in respect
of, any breach of the agreements contained in the Hercules Surviving
Covenant or in Section 7.9.
<PAGE>
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61
(iii) Notwithstanding anything to the contrary contained
herein, no Holder shall have any liability under this Agreement with
respect to the CAL Claim.
(c) Indemnification by Purchaser. Subject to the other provisions
of this Section 10.1, from and after the Closing Date: (i) Purchaser
shall indemnify and hold harmless Sellers, their respective Affiliates,
and each of their respective directors, officers, employees and agents,
and each of the heirs, executors, successors and assigns of any of the
foregoing (each a "Seller Indemnified Person" and collectively the
"Seller Indemnified Persons" and, together with the Purchaser
Indemnified Persons, collectively the "Indemnified Persons" and
individually an "Indemnified Person") from and against any and all
Losses and Expenses suffered or incurred by any such Seller Indemnified
Persons arising from, relating to or otherwise in respect of, any breach
of any representation and warranty of Purchaser contained in the
Purchaser Surviving Representations; and (ii) Purchaser shall indemnify
and hold harmless the Seller Indemnified Persons from and against any
and all Losses and Expenses suffered or incurred by any such Seller
Indemnified Persons arising from, relating to or otherwise in respect of
claims arising out of (x) the Bought-Deal Financing or the Exchange
Offer other than Losses and Expenses arising out of (A) claims from
third parties (other than Purchaser or any of its Affiliates) which are
based solely on material misstatements in any SEC filing made by the
Company prior to the date of this Agreement or (B) with respect to the
Hercules Information or (y) any breach of the agreements contained in
Sections 7.6, 7.9, 7.10 and 7.11.
(d) Limitations on Indemnification. Neither Sellers nor Purchaser
shall have any obligation to indemnify any Purchaser Indemnified Person
pursuant to Section 10.1(b)(i) or any Seller Indemnified Person pursuant
to Section 10.1(c)(i), respectively, unless and until the aggregate
amount of Losses and Expenses (net of insurance proceeds recoverable by
such Indemnified Person) incurred by Purchaser Indemnified Persons or
Seller Indemnified Persons, respectively, exceeds US$50,000,000 (the
"Deductible"), in which case Sellers or Purchaser, as applicable, shall,
subject to the two immediately succeeding sentences, be liable only for
Losses and Expenses in excess of such Deductible. Subject to the last
sentence of this Section 10.1(d), the maximum aggregate liability of
Sellers on the one hand and Purchaser on the other hand under Sections
10.1(b)(i) and 10.1(c)(i), as applicable, is US$500,000,000, and neither
Sellers nor Purchaser shall have any obligation or liability pursuant to
such clauses in excess of such
<PAGE>
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62
amount). Only those Losses and Expenses indemnifiable under Sections
10.1(b)(i) or 10.1(c)(i) that are equal to or in excess of US$500,000
(net of relevant insurance proceeds recoverable by such Indemnified
Person) per claim (notwithstanding that multiple claims may arise from a
breach of a single representation, warranty or covenant) shall be
indemnifiable under this Section 10.1 or otherwise count towards
satisfaction of the Deductible. Any Losses and Expenses for which any
Holder is obligated to indemnify any Purchaser Indemnified Person shall
be satisfied solely out of and to the extent of the Indemnity Escrow and
in accordance with the procedures contained in the Indemnity Escrow
Agreement.
(e) Materiality Qualification. For purposes of this Section 10.1,
Losses and Expenses arising out of, or resulting from, breaches of (i)
any Hercules Surviving Representations or (ii) the Purchaser Surviving
Representations set forth in Sections 6.1(g) and 6.1(i) shall, in each
case, be determined as if references in the relevant representation or
warranty to a "Company Material Adverse Effect" or a "Purchaser Material
Adverse Effect", as the case may be, were to an adverse effect
representing an amount in excess of US$500,000, and as if references in
the relevant representation or warranty to the word "material" were to
an amount in excess of US$500,000; provided that, for the avoidance of
doubt, all such representations and warranties shall continue to be
qualified by reference to any items (other than materiality) included in
any corresponding section of the relevant Disclosure Schedule.
(f) Claims. (i) All indemnification claims under this Agreement
by Purchaser Indemnified Persons against the Holders shall be governed
by the terms and procedures contained in Article III of the Indemnity
Escrow Agreement.
(ii) If a claim by a third party is made against an
Indemnified Person hereunder, and if such Indemnified Person intends to
seek indemnity with respect thereto under this Section 10.1, such
Indemnified Person shall promptly notify the indemnifying Person in
writing of such claims setting forth such claims in reasonable detail;
provided that failure of such Indemnified Person to give prompt notice
as provided herein shall not relieve the indemnifying Person of any of
its obligations hereunder, except to the extent that the indemnifying
Person is materially prejudiced by such failure. The indemnifying Person
shall have 30 days after receipt of such notice to assume and undertake,
through counsel of its own choosing, the settlement or defense thereof,
and the Indemnified Person shall cooperate
<PAGE>
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63
with it in connection therewith; provided, however, that the Indemnified
Person may participate in such settlement or defense through counsel
chosen by such Indemnified Person; provided that the fees and expenses
of such separate counsel shall be borne by such Indemnified Person
unless there exists a conflict between the Indemnified Person and
indemnifying Person as to their respective legal defenses (other than
one that is of a monetary nature), in which case the Indemnified Person
shall be entitled to retain separate counsel, the reasonable fees and
expenses of which shall be reimbursed by the indemnifying Person. If the
indemnifying Person shall assume the defense of a claim, it shall not
settle or compromise such claim without the prior written consent of the
Indemnified Person (which consent shall not be unreasonably withheld)
unless (A) the indemnifying Person agrees in writing that the
Indemnified Person is entitled to indemnification in respect of such
claim pursuant to this Section 10.1, (B) such settlement or compromise
includes as an unconditional term thereof the giving by the claimant of
a release of the Indemnified Person from all liability with respect to
such claim, (C) such settlement or compromise does not admit criminal
liability or culpability or impugn the reputation of the Indemnified
Person in any respect and (D) such settlement or compromise does not
involve the imposition of equitable remedies or the imposition of any
obligations on such Indemnified Person other than financial obligations
for which such Indemnified Person will be indemnified hereunder. If the
indemnifying Person does not notify the Indemnified Person within 30
days after the receipt of the Indemnified Person's notice of a claim of
indemnity hereunder that it elects to undertake the defense thereof, the
Indemnified Person shall have the right to defend the claim at the cost
and expense of the indemnifying Person, but shall not settle or
compromise the claim without the consent of the indemnifying Person
(which consent will not be unreasonably withheld) unless the Indemnified
Person agrees in writing that it is not entitled to any indemnities
pursuant to this Section 10.1.
(g) Termination of Indemnification. The obligations to indemnify
and hold harmless an Indemnified Person pursuant to Section 10.1(b) or
10.1(c), as the case may be, shall terminate when the applicable
representation, warranty or covenant terminates pursuant to Section
10.1(a); provided, however, that such obligation to indemnify and hold
harmless shall not terminate with respect to any item as to which the
Indemnified Person shall have, after the Closing Date but before the
expiration of the applicable survival period, previously made a claim by
delivering a written notice (stating in reasonable detail the basis of
<PAGE>
<PAGE>
64
such claim, the representation, warranty or covenant alleged to have
been breached and the relevant facts and circumstances surrounding such
claim) to the indemnifying Person.
(h) Exclusive Remedy. After the Closing Date, the indemnification
provided pursuant to this Section 10.1, if any, shall be the sole and
exclusive remedy of any party hereto for any Losses and Expenses arising
out of or relating to any breach of any representation, warranty or
covenant contained in this Agreement; provided, however, that the
limitations of this Section 10.1(h) shall not apply to any claim based
upon actual fraud or wilful misconduct. In addition, for the avoidance
of doubt, Losses and Expenses with respect to the CAL Claim shall not be
so limited, and shall be governed by the CAL Claim Indemnification
Agreement (including the limitations set forth therein).
(i) Insurance. Each Indemnified Person shall be obligated in
connection with any claim for indemnification under this Section 10.1 to
use all commercially reasonable efforts to obtain any insurance proceeds
available to such Indemnified Person with regard to the applicable
claims. The amount which the indemnifying Person is or may be required
to pay to any Indemnified Person pursuant to this Section 10.1 shall be
reduced (retroactively, if necessary) by any insurance proceeds or other
amounts actually recovered by or on behalf of such Indemnified Person in
reduction of the related Losses and Expenses. If an Indemnified Person
shall have received any payment pursuant to this Section 10.1 from an
indemnifying Person in respect of Losses and Expenses of such
Indemnified Person and shall subsequently receive insurance proceeds or
other amounts in respect of such Losses and Expenses, then such
Indemnified Person shall promptly repay to the indemnifying Person a sum
equal to the amount of such insurance proceeds or other amounts actually
received by or on behalf of such Indemnified Person.
(j) Mitigation. In addition to the requirements of Section
10.1(i), each Indemnified Person shall be obligated in connection with
any claim for indemnification under this Section 10.1 to use all
commercially reasonable efforts to mitigate Losses and Expenses upon and
after becoming aware of any event which could reasonably be expected to
give rise to such Losses and Expenses.
(k) Subrogation. An indemnifying Person shall be subrogated to
any right of action which the Indemnified
<PAGE>
<PAGE>
65
Person may have against any other Person with respect to any matter
giving rise to a claim for indemnification hereunder.
10.2 Notices. All notices and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed given if
delivered Personally, transmitted by facsimile (and telephonically confirmed),
mailed by registered or certified mail with postage prepaid and return receipt
requested, or sent by commercial overnight courier, courier fees prepaid (if
available; otherwise, by the next best class of service available), to the
parties at the following addresses:
(a) if to Purchaser, to it at:
BCE Place, 181 Bay Street
Suite 3500, P.O. Box 827
Toronto, Ontario
Canada M5J 2TS
Attn: President
Telecopy: (416) 777-6206
Confirmation: (416) 777-6100
with a copy to:
BCE Place, 181 Bay Street
Suite 3500, P.O. Box 827
Toronto, Ontario
Canada M5J 2TS
Attn: General Counsel
Telecopy: (416) 594-2525
Confirmation: (416) 777-6158
(b) if to Sellers, to Hercules at:
c/o Maples and Calder
Ugland House, PO Box 309, George Town
Grand Cayman, Cayman Islands, BW1
Attn: Rebecca Steller
Telecopy: (345) 949-8088
Confirmation: (345) 949-8066
with a copy to:
Dorsey & Whitney
250 Park Avenue
New York, New York 10010-1709
Attn: Owen Marx
Telecopy: (212) 953-7201
Confirmation: (212) 415-9310
<PAGE>
<PAGE>
66
and with a copy to:
Nomura International plc
Principal Finance
Nomura House, 1 St. Martins-le-Grand
London EC1A 4NP
Attn: Guy Hands
Telecopy: (171) 521-3565
Confirmation: (171) 521-2224
(c) if to the Company, to it at:
44 Whippany Road
Morristown, NJ 07962-1983
Attn: Robert J. Ingato, General Counsel
Telecopy: (201) 397-3220
Confirmation: (201) 397-3191
or to such other Person or address as either party shall specify by notice in
writing to the other party in accordance with this Section 10.2. All such
notices or other communications shall be deemed to have been received on the
date of the Personal delivery or on the third Business Day after the mailing or
dispatch thereof; provided that notice of change of address shall be effective
only upon receipt.
10.3 Interpretation. The table of contents and headings herein
are for convenience of reference only, do not constitute part of this Agreement
and shall not be deemed to limit or otherwise affect any of the provisions
hereof. Where a reference in this Agreement is made to a Section or Exhibit,
such reference shall be to a Section of or Exhibit to this Agreement unless
otherwise indicated. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Purchaser acknowledges and agrees that this Agreement has
been extensively negotiated at arm's length between sophisticated parties and
there shall be no presumption that any ambiguity or inconsistency contained in
this Agreement will be interpreted against the party principally responsible for
the drafting of such provision.
10.4 Amendment and Modification; Waiver. (a) This Agreement and
the exhibits and Disclosure Schedules hereto may not be amended except by an
instrument or instruments in writing signed and delivered on behalf of each of
the parties hereto.
(b) At any time prior to the Closing Date, any party hereto which
is entitled to the benefits hereof may (a) extend the time for the performance
of any of the obligations or other
<PAGE>
<PAGE>
67
acts of the other party, (b) waive any inaccuracy in the representations and
warranties of the other party contained herein or in any schedule hereto or in
any document delivered pursuant hereto, and (c) waive compliance with any of the
agreements of the other party or conditions contained herein. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed and delivered on behalf of such party.
10.5 Entire Agreement. This Agreement (including the Disclosure
Schedules and the documents included as exhibits hereto), the Confidentiality
Agreement, the Purchaser Confidentiality Agreement and the CAL Claim
Indemnification Agreement constitute the entire agreement and supersede all
other prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter hereof. EACH PARTY HERETO AGREES
THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT,
NEITHER SELLERS NOR PURCHASER MAKE ANY OTHER REPRESENTATIONS OR WARRANTIES, AND
EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR
ANY OF ITS AFFILIATES OR ANY OF THEIR RESPECTIVE REPRESENTATIVES WITH RESPECT TO
THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S
REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY
ONE OR MORE OF THE FOREGOING.
10.6 Third Party Beneficiaries. Except as expressly provided in
Sections 7.6(d), nothing in this Agreement, express or implied, is intended to
confer upon any Person other than the parties hereto (including each of the
Selling Stockholders) and their respective successors and permitted assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.7 Assignment; Binding Effect. This Agreement shall not be
assigned by either party hereto without the prior written consent of the other
party. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
10.8 Governing Law and Venue; Waiver of Jury Trial. (A) THIS
AGREEMENT, OTHER THAN ANY MATTERS RELATING TO SECTION 10.1 HEREOF, SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW
OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW
PRINCIPLES THEREOF. The parties hereby irrevocably submit to the
jurisdiction of the courts of the State of New York and the Federal
courts of the United States of America located in the State of New York
solely in respect of the
<PAGE>
<PAGE>
68
interpretation and enforcement of the provisions of this Agreement
(other than any matters relating to Section 10.1 hereof) and of the
documents referred to in this Agreement, and in respect of the
transactions contemplated hereby, and hereby waive, and agree not to
assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be
brought or is not maintainable in said courts or that the venue thereof
may not be appropriate or that this Agreement (other than any matters
relating to Section 10.1 hereof) or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree
that all claims with respect to such action or proceeding shall be heard
and determined in such a New York State or Federal court. The parties
hereby consent to and grant any such court jurisdiction over the Person
of such parties and over the subject matter of such dispute and agree
that mailing of process or other papers in connection with any such
action or proceeding in the manner provided in Section 10.2 or in such
other manner as may be permitted by law, shall be valid and sufficient
service thereof.
(B) MATTERS RELATING TO SECTION 10.1 OF THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF ENGLAND. The parties hereby irrevocably submit
to the jurisdiction of the courts of England solely in respect of any
matters relating to the provisions of Section 10.1, and hereby waive,
and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof, that it is not subject
thereto or that such action, suit or proceeding may not be brought or is
not maintainable in said courts or that the venue thereof may not be
appropriate or that Section 10.1 may not be enforced in or by such
courts, and the parties hereto irrevocably agree that all claims with
respect to such action or proceeding shall be heard and determined in
such an English court. The parties hereby consent to and grant any such
court jurisdiction over the Person of such parties and over the subject
matter of such dispute and agree that mailing of process or other papers
in connection with any such action or proceeding in the manner provided
in Section 10.2 or in such other manner as may be permitted by law,
shall be valid and sufficient service thereof.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH
MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY
IN
<PAGE>
<PAGE>
69
RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF OR
RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.8.
10.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
10.10 Severability. Subject to the proviso to the immediately
succeeding sentence, the provisions of this Agreement shall be deemed several
and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof. If any provision of
this Agreement, or the application thereof to any person or any circumstance, is
invalid or unenforceable, (a) a suitable and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (b) the remainder of this Agreement and the application of such provision to
other persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application thereof, in any
other jurisdiction; provided, however, that the invalidity or unenforceability
of such provision, in the reasonable determination of Hercules or Purchaser,
does not materially impair the rights of Sellers or Purchaser, respectively,
under this Agreement.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed on their behalf by their respective officers hereunto duly
authorized all as of the date first written above.
HERCULES HOLDINGS (CAYMAN)
LIMITED
By:_________________________________
Name:
Title:
THE SELLING STOCKHOLDERS
LISTED ON EXHIBIT A
By: HERCULES HOLDINGS
(CAYMAN) LIMITED (as
Custodian and Attorney-
In-Fact for the Selling
Stockholders)
By:____________________________
Name:
Title:
AT&T CAPITAL CORPORATION
By:_________________________________
Name:
Title:
NEWCOURT CREDIT GROUP INC.
By:_________________________________
Name:
Title:
<PAGE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to the securities has been filed with the
Securities and Exchange Commission. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Preliminary Prospectus SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1997
November , 1997
[LOGO]
CDN.$161,000,000
UP TO 3,500,000 FULLY PAID SUBSCRIPTION RIGHTS,
EACH REPRESENTING THE RIGHT TO RECEIVE ONE COMMON SHARE OF
NEWCOURT CREDIT GROUP INC.
Up to 3,500,000 fully paid Canadian dollar subscription rights (the "Fully Paid
Subscription Rights") offered hereby will be sold by Newcourt Credit Group Inc.
("Newcourt" or the "Corporation") at a price of Cdn.$46 per Fully Paid
Subscription Right. The proceeds of the sale of Fully Paid Subscription Rights
will be held by Montreal Trust Company of Canada, as depository, and invested in
short-term obligations of or guaranteed by the Government of Canada (and other
approved investments) pending the acquisition by Newcourt of all of the issued
and outstanding shares of AT&T Capital Corporation (the "Acquisition"). See
"Acquisition of AT&T Capital Corporation". Each Fully Paid Subscription Right
entitles the holder thereof to acquire, upon closing of the Acquisition (the
"Acquisition Closing"), and without payment of additional consideration, one
Common Share (a "Common Share") of the Corporation. Immediately following the
Acquisition Closing, Common Shares will be issued to holders of record of the
Fully Paid Subscription Rights as at the Acquisition Closing, and certificates
representing such Common Shares will be delivered to such holders as soon as
practicable following the Acquisition Closing. In the event the Acquisition
Closing does not occur on or before February 27, 1998 (the "Termination Date"),
holders of the Fully Paid Subscription Rights will receive the subscription
price therefor plus interest equal to the pro rata share of interest actually
earned on such amount between the closing of this offering ("Closing") and the
Termination Date, net of applicable withholding taxes. See "Details of the
Offering".
Concurrently with the offering of the Fully Paid Subscription Rights in the
United States, the Corporation is offering subscription rights evidenced by
instalment receipt certificates in Canada (the "Instalment Receipt Subscription
Rights and, together with the Fully Paid Subscription Rights, the "Subscription
Rights"). The aggregate number of Subscription Rights to be offered in Canada
and the United States will be 35,000,000. THE INSTALMENT RECEIPT SUBSCRIPTION
RIGHTS WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES. The offering price for
the Fully Paid Subscription Rights offered hereby has been determined by
negotiation between the Corporation and the Underwriters. See "Details of
Offering".
The outstanding Common Shares of the Corporation are listed on The Toronto Stock
Exchange, the Montreal Exchange and the New York Stock Exchange under the symbol
"NCT". On November 14, 1997, the closing sale price of the Common Shares on The
Toronto Stock Exchange and on the New York Stock Exchange was $51.30 and
U.S.$36.31, respectively. See "Price Range and Trading Volume For Common
Shares".
THIS OFFERING IS MADE BY A CANADIAN ISSUER THAT IS PERMITTED, UNDER A
MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE UNITED STATES, TO PREPARE
THIS PROSPECTUS IN ACCORDANCE WITH THE DISCLOSURE REQUIREMENTS OF CANADA.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT SUCH REQUIREMENTS ARE DIFFERENT FROM
THOSE OF THE UNITED STATES. THE FINANCIAL STATEMENTS OF THE CORPORATION INCLUDED
OR INCORPORATED HEREIN HAVE BEEN PREPARED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES, AND ARE SUBJECT TO CANADIAN AUDITING AND AUDITOR
INDEPENDENCE STANDARDS, AND THUS MAY NOT BE COMPARABLE TO FINANCIAL STATEMENTS
OF UNITED STATES COMPANIES.
PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THE ACQUISITION OF THE SECURITIES
DESCRIBED HEREIN MAY HAVE TAX CONSEQUENCES BOTH IN THE UNITED STATES AND IN
CANADA. SUCH CONSEQUENCES FOR INVESTORS WHO ARE RESIDENT IN, OR CITIZENS OF, THE
UNITED STATES MAY NOT BE DESCRIBED FULLY HEREIN. SEE "U.S. FEDERAL INCOME TAX
CONSEQUENCES" AND "CANADIAN FEDERAL INCOME TAX CONSIDERATIONS" FOR A GENERAL
DISCUSSION OF CERTAIN UNITED STATES AND CANADIAN TAX CONSEQUENCES, RESPECTIVELY.
THE ENFORCEMENT BY INVESTORS OF CIVIL LIABILITIES UNDER THE FEDERAL SECURITIES
LAWS MAY BE AFFECTED ADVERSELY BY THE FACT THAT THE CORPORATION IS INCORPORATED
OR ORGANIZED UNDER THE LAWS OF CANADA, THAT SOME OR ALL OF ITS OFFICERS AND
DIRECTORS MAY BE RESIDENTS OF CANADA, THAT SOME OR ALL OF THE UNDERWRITERS OR
EXPERTS NAMED IN THE REGISTRATION STATEMENT MAY BE RESIDENTS OF CANADA AND THAT
ALL OR A SUBSTANTIAL PORTION OF THE ASSETS OF THE CORPORATION MAY BE LOCATED
OUTSIDE OF THE UNITED STATES.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Net Proceeds
Price to Public Underwriters' Fee (1) to the Corporation
--------------- --------------------- ------------------
<S> <C> <C> <C>
Per Fully Paid Subscription Right................ Cdn.$46 Cdn.$1.84 Cdn.$44.16
Per Instalment Receipt Subscription Right ....... Cdn.$47.10 Cdn.$1.88 Cdn.$44.12
Total Offering (3)(4)............................ Cdn.$ Cdn.$ Cdn.$
</TABLE>
- ----------
(1) Before deducting expenses of the offering, estimated at Cdn.$10 million,
which together with the Underwriters' fee, are payable by the
Corporation. No fee will be paid by the Corporation to the Underwriters
in respect of approximately 2.1 million Subscription Rights purchased by
certain members of management of the Corporation and AT&T Capital. See
"Plan of Distribution".
(2) The Instalment Receipt Subscription Rights will not be offered or sold
in the United States.
(3) The Corporation has also granted to the Underwriters an option to
acquire up to an aggregate of 3,500,000 additional Subscription Rights
at the issue price per Fully Paid Subscription right or Instalment
Receipt Subscription Right, as applicable, to cover over-allotments, if
any, and for market stabilization purposes (the "Over-Allotment
Option"). Such option expires on Closing. See "Plan of Distribution".
(4) As the Underwriter may sell Subscription Rights to the public in the
form of either Fully Paid Subscription Rights or Instalment Receipt
Subscription Rights, the total price to the public, the total
Underwriters' fee and the total net proceeds to the Corporation will not
be determinable until immediately prior to the filing of the final
prospectus. See "Plan of Distribution."
The Fully Paid Subscription Rights offered hereby are offered by the
Underwriters as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. The right is
reserved to close the subscription books at any time without notice. It is
expected that Closing will take place on or about December 3, 1997, or such
later date as the Corporation and the Underwriters may agree, but in any event
not later than January 3, 1998. Certificates representing Fully Paid
Subscription Rights will be available for delivery at the Closing.
CIBC WOOD GUNDY SECURITIES INC. GOLDMAN SACHS CANADA
MERRILL LYNCH CANADA INC. SCOTIAMCLEOD INC.
MIDLAND WALWYN CAPITAL INC. NESBITT BURNS INC.
RBC DOMINION SECURITIES INC. TD SECURITIES INC.
- 2 -
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DOCUMENTS INCORPORATED BY REFERENCE ....................................... 4
EXCHANGE RATE DATA ........................................................ 5
PROSPECTUS SUMMARY ........................................................ 6
THE OFFERING .............................................................. 6
NEWCOURT CREDIT GROUP INC ................................................. 7
AT&T CAPITAL CORPORATION .................................................. 8
ACQUISITION OF AT&T CAPITAL CORPORATION ................................... 8
SELECTED SUMMARY FINANCIAL INFORMATION .................................... 9
NEWCOURT CREDIT GROUP INC ................................................. 10
SUMMARY DESCRIPTION OF THE BUSINESS OF NEWCOURT ........................... 10
ACQUISITION OF AT&T CAPITAL CORPORATION ................................... 11
AT&T CAPITAL CORPORATION .................................................. 12
RECENT DEVELOPMENTS ....................................................... 19
DETAILS OF THE OFFERING ................................................... 19
U.S. FEDERAL INCOME TAX CONSEQUENCES ...................................... 23
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS ................................ 25
DIVIDENDS ................................................................. 25
DESCRIPTION OF SHARE CAPITAL .............................................. 25
USE OF PROCEEDS ........................................................... 26
PLAN OF DISTRIBUTION ...................................................... 26
PRICE RANGE AND TRADING VOLUME FOR COMMON SHARES .......................... 27
ELIGIBILITY FOR INVESTMENT ................................................ 27
LEGAL MATTERS ............................................................. 28
AUDITORS, TRANSFER AGENT AND REGISTRAR .................................... 28
PURCHASERS' STATUTORY RIGHTS .............................................. 28
NEWCOURT CREDIT GROUP INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS .................. F-1
COMPILATION REPORT ....................................................... F-2
COMMENTS FOR UNITED STATES READERS ON CANADA
AND UNITED STATES REPORTING DIFFERENCES ................................ F-2
NEWCOURT CREDIT GROUP INC ................................................ F-9
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS ................... F-12
AT&T CAPITAL CORPORATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS ............................. F-21
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SUBSCRIPTION RIGHTS OR
THE COMMON SHARES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into and form an integral
part of this prospectus:
(a) the Renewal Annual Information Form of the Corporation dated May 2, 1997;
- 3 -
<PAGE>
<PAGE>
(b) the audited comparative consolidated financial statements of the
Corporation and the auditors' report contained in the Corporation's
Annual Report to shareholders thereon for the fiscal year ended December
31, 1996;
(c) the unaudited comparative interim consolidated financial statements of
the Corporation for the three months ended March 31, 1997, the six
months ended June 30, 1997 and the nine months ended September 30, 1997;
(d) the Management Information Circular of the Corporation dated February 6,
1997, except the sections entitled "Compensation Committee", "Report on
Executive Compensation", "Corporate Governance" and "Share Performance
Graph"; and
(e) the material change report of the Corporation dated August 7, 1997
describing the proposed acquisition by the Corporation of all of the
issued and outstanding shares of Commcorp Financial Services Inc.
In addition to the foregoing, the pro forma consolidated financial
statements of the Corporation contained in the Corporation's prospectus dated
August 15, 1997 and comprising the unaudited pro forma consolidated balance
sheet and the unaudited pro forma consolidated statements of income and retained
earnings as at and for the year ended December 31, 1996, and the related notes
and assumptions thereto, are deemed incorporated herein by reference. See "Pro
Forma Consolidated Financial Statements".
Any documents of the type referred to above and any material change
reports (excluding confidential reports) filed by the Corporation pursuant to
the requirements of applicable securities legislation after the date of this
prospectus and prior to the termination of this distribution shall be deemed to
be incorporated by reference into this prospectus.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN OR CONTAINED HEREIN SHALL BE DEEMED TO BE
MODIFIED OR SUPERSEDED, FOR PURPOSES OF THIS PROSPECTUS, TO THE EXTENT THAT A
STATEMENT CONTAINED HEREIN OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH
ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR
SUPERSEDES SUCH PRIOR STATEMENT. ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL
NOT CONSTITUTE A PART OF THIS PROSPECTUS, EXCEPT AS SO MODIFIED OR SUPERSEDED.
- 4 -
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<PAGE>
Information set forth herein with respect to AT&T Capital Corporation and its
subsidiaries has been derived from publicly available information, including the
audited consolidated financial statements and unaudited interim consolidated
financial statements of AT&T Capital Corporation filed by AT&T Capital
Corporation with the United States Securities and Exchange Commission in
accordance with applicable U.S. law and from documents provided by, and
discussions with, management of AT&T Capital Corporation. The Stock Purchase
Agreement (as hereinafter defined) provides that the Vendors (as hereinafter
defined) shall have no liability to the Corporation for the information
regarding AT&T Capital Corporation contained in this prospectus and the Vendors
are indemnified by the Corporation for any damage or loss arising in connection
with any third party claims against the Vendors under this prospectus. Newcourt
has no reason, based on its initial investigations and its review of other
available information, to question the material accuracy of this description or
to believe that there are material omissions therefrom. However, the Corporation
is not at this time in a position to undertake any further assurances or assume
any further responsibility with respect to the description of AT&T Capital
Corporation in this prospectus. In addition, although the Underwriters, as a
result of their investigation, have no knowledge that would indicate that the
description of AT&T Capital Corporation in this prospectus is untrue or
incomplete in any material respect, the Underwriters are not in a position to
assume any further responsibility with respect to the description.
EXCHANGE RATE DATA
All dollar amounts set forth in this prospectus, including the offering
price of the Subscription Rights, are stated in Canadian dollars, except where
otherwise indicated. The following table sets forth for each period indicated
the period-end exchange rates, the average exchange rates and the high and low
exchange rates for U.S. dollars. These rates are the noon-buying rates in New
York City for cable transfers in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York. On November 14, 1997, the noon
buying rate was U.S.$1.00 = Cdn.$1.4082.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
----------------- ---------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Period-end......................... 1.3868 1.3622 1.3706 1.3640
Average............................ 1.3763 1.3678 1.3636 1.3726
High................................ 1.3873 1.3745 1.3865 1.4267
Low................................. 1.3663 1.3607 1.3287 1.3275
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
This summary is qualified by, and should be read in conjunction with,
the detailed information appearing elsewhere in this short form prospectus.
THE OFFERING
<TABLE>
<S> <C>
OFFERING: 35,000,000 Subscription Rights consisting of Fully Paid
Subscription Rights in the United States and Canada and
Instalment Receipt Subscription Rights in Canada, each
Subscription Right representing the right to acquire
one Common Share of the Corporation.
AMOUNT OF OFFERING: $1,000,610,000
PRICE: $47.10 per Instalment Receipt Subscription Right, of
which $29.00 is payable on Closing and $18.10 is
payable on or before December 3, 1998. $46 per Fully
Paid Subscription Right
USE OF PROCEEDS: The net proceeds of the offering, after deducting fees
payable to the Underwriters and the estimated expenses
of the offering, will be approximately $_________ . The
net proceeds of the offering will be used to finance
the cash portion of the purchase price for all of the
issued and outstanding shares of AT&T Capital
Corporation, with the remainder to be used for working
capital and general corporate purposes. See
"Acquisition of AT&T Capital Corporation" and "Use of
Proceeds". The proceeds from the sale of the
Subscription Rights will be delivered to Montreal Trust
Company of Canada as depository for the Corporation and
held by it pending the Acquisition Closing, which is
expected to occur on or after January 30, 1998. See
"Details of the Offering".
SUBSCRIPTION RIGHTS: Each Subscription Right entitles the holder thereof to
acquire, upon the Acquisition Closing, one Common Share
without further action on the part of the holder.
Beneficial ownership of the Instalment Receipt
Subscription Rights (and, prior to the payment of the
final instalments, the Common Shares to be acquired
pursuant to such Instalment Receipt Subscription
Rights) will be represented by Instalment Receipts. On
the Acquisition Closing: (i) in the case of Fully Paid
Subscription Rights, Common Shares will be issued to
holders of record as at the Acquisition Closing, and
certificates representing such Common Shares will be
delivered to such holders as soon as practicable
thereafter; and (ii) in the case of Instalment Receipt
Subscription Rights, Common Shares will be acquired by
holders of Instalment Receipt Subscription Rights
pursuant to such Instalment Receipt Subscription
Rights, the final instalment of the purchase price of
such shares will become payable by such holders on
December 3, 1998 and the Instalment Receipts will
thereafter represent beneficial ownership of such
Common Shares. In the event the Acquisition Closing
does not occur on or before the Termination Date,
holders of Subscription Rights will receive (i) in the
case of Fully Paid Subscription Rights, an amount equal
to the subscription price therefor, and (ii) in the
case of Instalment Receipt Subscription Rights, an
amount equal to the first instalment thereon, plus, in
either case, interest equal to the interest actually
earned on the investment of such amount between Closing
and the Termination Date, net of any applicable
withholding taxes. HOLDERS OF SUBSCRIPTION RIGHTS ARE
NOT SHAREHOLDERS OF THE CORPORATION. See "Details of
the Offering".
INSTALMENT PAYMENT The Subscription Rights offered hereunder will be
ARRANGEMENTS: issued and sold by the Corporation to the Underwriters.
The Common Shares to be acquired pursuant to the
Instalment Receipt Subscription Rights on the
Acquisition Closing are being sold by the Underwriters
on an instalment basis. Beneficial ownership of the
Instalment Receipt Subscription Rights (and, prior to
payment of the final
</TABLE>
6
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<PAGE>
<TABLE>
<S> <C>
instalment, the Common Shares to be acquired pursuant
to such Instalment Receipt Subscription Rights) will be
represented by Instalment Receipts. The Financial
Institutions have agreed to provide non-recourse
financing to the Underwriters to fund a portion of the
Underwriters' cost of the Instalment Receipt
Subscription Rights, such financing to be secured by
way of cash collateral pending the Acquisition Closing,
a pledge of the Instalment Receipt Subscription Rights
and the underlying Common Shares when issued on the
Acquisition Closing and an assignment by way of
security of the final instalments payable by holders of
Instalment Receipts.
The first instalment of $29.00 per Instalment Receipt
Subscription Right is payable on the Closing and, if
the Acquisition Closing occurs on or before the
Termination Date, the final instalment of $18.10 per
Common Share is payable on or before December 3, 1998
(not later than 4:00 p.m. local time at the place of
payment) by the registered holder of the Instalment
Receipts. As soon as practicable after payment in full
of the final instalment, the registered holder of an
Instalment Receipt will receive a certificate
representing the underlying Common Shares, which Common
Shares will no longer be subject to the pledge in
favour of the Financial Institutions. IF A REGISTERED
HOLDER OF AN INSTALMENT RECEIPT DOES NOT PAY THE FINAL
INSTALMENT IN FULL ON OR BEFORE THE DUE DATE, THE
COMMON SHARES REPRESENTED BY SUCH INSTALMENT RECEIPT
MAY, AT THE FINANCIAL INSTITUTIONS' OPTION, UPON
COMPLIANCE WITH APPLICABLE LAW, BE ACQUIRED BY THE
FINANCIAL INSTITUTIONS IN FULL SATISFACTION OF THE
REGISTERED HOLDER'S OBLIGATIONS TO PAY THE FINAL
INSTALMENT SECURED BY THE PLEDGE. THE INSTALMENT
RECEIPT AGREEMENT WILL PROVIDE THAT, UNLESS THE
FINANCIAL INSTITUTIONS SHALL HAVE ACQUIRED THE COMMON
SHARES IN FULL SATISFACTION OF THE OBLIGATIONS OF A
REGISTERED HOLDER, THE FOREGOING SHALL NOT LIMIT ANY
OTHER REMEDIES AVAILABLE TO THE FINANCIAL INSTITUTIONS
AGAINST THE REGISTERED HOLDER OF AN INSTALMENT RECEIPT
IN THE EVENT THE PROCEEDS OF ANY SALE OF COMMON SHARES
ARE INSUFFICIENT TO COVER THE AMOUNT OF THE FINAL
INSTALMENT AND THE COSTS OF SALE AND, ACCORDINGLY, THE
REGISTERED HOLDER SHALL IN SUCH CIRCUMSTANCES REMAIN
LIABLE TO THE FINANCIAL INSTITUTIONS FOR ANY SUCH
DEFICIENCY. See "Details of the Offering - Instalment
Receipts".
RIGHTS OF INSTALMENT Following the Acquisition Closing and the acquisition
RECEIPT HOLDERS: of the Common Shares pursuant to the Instalment Receipt
Subscription Rights, registered holders of Instalment
Receipts will be entitled, in the manner set forth in
the Instalment Receipt Agreement described herein,
unless they have defaulted on their obligations under
the Instalment Receipt Agreement, to fully participate
in all normal course dividends and other distributions
paid on the Common Shares, to exercise the votes
attached to the Common Shares represented by such
Instalment Receipts and to receive periodic reports and
other materials as if they were registered holders of
the Common Shares. See "Details of the Offering -
Instalment Receipts - Rights and Privileges".
</TABLE>
NEWCOURT CREDIT GROUP INC.
Newcourt is an independent non-bank financial services company which
originates, sells and manages asset-based financings. The Corporation originates
the financing of a broad range of equipment and capital assets by way of secured
loans, conditional sales contracts and financial leases. The Corporation's loan
origination activities focus on the commercial finance and corporate finance
segments of the asset based lending market.
On August 29, 1997 Newcourt acquired all of the issued and outstanding
common shares of Commcorp Financial Services Inc. ("Commcorp"), a Canadian
asset-finance and associated management service company, for approximately $366
million. On September 5, 1997, Newcourt acquired the Business Technology Finance
division of Lloyds Bowmaker Limited (a United Kingdom- based asset finance
company) for $493 million. In October 1997, Newcourt acquired the micro-balance
origination and processing business of Lease Finance Group of Chicago, Illinois.
- 7 -
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<PAGE>
For the year ended December 31, 1996, Newcourt generated total asset
finance income of $171.6 million resulting in net income of $50.7 million. For
the nine months ended September 30, 1997 Newcourt reported total asset finance
income of $192.2 million and net income of $33.1 million (reflecting the one
time pre-tax restructuring charge of $48 million related to the acquisition of
Commcorp). As at September 30, 1997, Newcourt had over $9.9 billion in owned and
managed finance assets.
AT&T CAPITAL CORPORATION
AT&T Capital is one of the world's leading commercial finance companies
with a diversified portfolio of approximately U.S.$13 billion as at December 31,
1996 in owned and managed assets covering a broad spectrum of equipment. Through
its international network of 23 countries, AT&T Capital offers its customers a
large variety of financing products and services including operating leases,
finance leases and loan products. AT&T Capital provides its financial products
and services to its worldwide customers through three principal marketing
channels: vendor finance, direct customer finance and international.
For the year ended December 31, 1996, AT&T Capital's revenues totalled
more than U.S.$1.9 billion resulting in net income for the year of approximately
U.S.$168.5 million. For the nine months ended September 30, 1997, AT&T Capital's
total revenues were U.S.$1.3 billion resulting in net income for the nine months
ended September 30, 1997 of U.S.$35.8 million. Net income for the nine months
ended September 30, 1997 was U.S.$35.8 million, a decrease of U.S.$79.5 million
from the comparable period in 1996. Net income was lower due to the decreased
level of capital lease revenue as a result of the completion in 1996 of a
U.S.$3.1 billion securitization, higher relative interest expense associated
with increased leverage relating to the additional debt incurred to finance the
1996 acquisition of AT&T Capital by Hercules Holdings (Cayman) Limited and
distribution on certain preferred securities. See "AT&T Capital Corporation -
AT&T Capital's Recent Financial Performance".
ACQUISITION OF AT&T CAPITAL CORPORATION
On November 17, 1997, Newcourt entered into a stock purchase agreement
pursuant to which it agreed, subject to the satisfaction of certain closing
conditions, to acquire all of the issued and outstanding Common Shares of AT&T
Capital. The aggregate purchase price to be paid by Newcourt is approximately
U.S.$1.61 billion (Cdn.$2.3 billion), of which U.S.$1.06 billion (Cdn.$1.5
billion) will be paid in cash (financed by the proceeds of this offering) and
the remaining $U.S.550 million (Cdn.$776 million) will be satisfied by the
issuance of approximately 17.6 million Common Shares of Newcourt to the
shareholders of AT&T Capital. Hercules Holdings (Cayman) Limited (a subsidiary
of Hercules Holding U.K. Limited, which is a company structured and financed by
Nomura International plc) owns 97.4% of the outstanding shares of AT&T Capital,
with the remainder of the shares owned by members of management of AT&T Capital.
Newcourt expects that the Acquisition will close on or after January 30, 1998.
The completion of the Acquisition and the resulting combination of
Newcourt and AT&T Capital will create one of the largest providers of vendor
finance in the world, and one of the world's largest non-bank commercial asset
finance companies with owned and managed finance assets aggregating more than
$25.0 billion. While the combined business entity offers the potential for
significant revenue growth and substantial cost savings, the Acquisition also
creates significant challenges and risks to Newcourt, including the management
of the integration of two businesses, the continued dependence on external
sources of funding (and the related sensitivity to credit ratings) and the
dependence of AT&T Capital on its former affiliates for a substantial portion of
its business volume.
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<PAGE>
SELECTED SUMMARY FINANCIAL INFORMATION
The following selected financial information has been derived from the
consolidated financial statements of the Corporation for the five years ended
December 31, 1996 prepared in accordance with Canadian generally accepted
accounting principles and the interim consolidated statements for the nine
months ended September 30, 1997. The information below should be read in
conjunction with the consolidated financial statements and accompanying notes of
the Corporation and unaudited interim consolidated financial statements of the
Corporation for the nine months ended September 30, 1997, incorporated herein by
reference.
SELECTED SUMMARY FINANCIAL INFORMATION
(in thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPT. 30 YEAR ENDED DECEMBER 31,
-------------- -----------------------------------------
1997(6) 1996 1995 1994 1993(3) 1992
----------- -----------------------------------------
(UNAUDITED)
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Securitization and syndication fees 109,206 106,514 52,110 34,338 24,135 7,775
Income from affiliated companies and
management fees 27,859 12,689 10,364 8,690 7,411 5,853
Net finance income 55,156 52,386 29,686 15,930 12,619 13,039
--------- -------- ------ ------ ------ ------
Total asset finance income 192,221 171,589 92,160 58,958 44,165 26,667
Operating income 27,317(7) 64,150 36,438 24,610 21,940 12,087
Net income 33,135 50,681 29,405 18,737 14,268 9,654
Earnings per Common and
Special Share(1)(4)(5) $0.50 0.96 0.76 0.60 0.67 0.49
Fully diluted earnings per
Common and Special Share(2)(5) $0.50 0.96 0.76 0.60 0.67 0.49
</TABLE>
<TABLE>
<CAPTION>
AS AT SEPT. 30 AS AT DECEMBER 31,
-------------- ------------------------------------------------
1997 1996 1995 1994 1993(3) 1992
-------- ------------------------------------------------
(UNAUDITED)
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets 4,151,125 2,164,494 1,158,215 733,970 547,423 729,220
Debt 2,575,436 1,543,144 879,039 540,381 440,809 609,129
Shareholders' equity(4)(5) 1,300,520 515,934 245,194 160,964 28,011 46,818
</TABLE>
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Notes:
(1) Based on the weighted average number of Common Shares and Special
Shares outstanding during the period.
(2) Based on the weighted average number of Common Shares and Special
Shares outstanding during the period after giving effect to the
exercise of outstanding stock options.
(3) The 1993 figures include a $3.4 million gain ($1.9 million after
provision for income taxes or $0.18 per share), attributable to the
securitization of pre- 1993 commercial finance assets.
(4) On November 30, 1995, 1,611,000 Special Shares were converted into
1,611,000 Common Shares. On December 27, 1995, 1,411,675 Special
Shares were converted into 1,411,675 Common shares. On July 2, 1996,
the remaining 199,325 Special Shares were converted into 199,325
Common Shares. On December 11, 1995, the Corporation redeemed and
cancelled all issued and outstanding Preference Shares.
(5) Effective April 14, 1997, the Corporation subdivided on a two-for-one
basis all of its issued and outstanding Common Shares and all of its
Common Shares reserved for issuance. The Selected Summary Financial
Information set out in the above table has been adjusted to reflect
the stock split.
(6) These unaudited interim statements reflect the acquisition on August
29, 1997 of all of the issued and outstanding common shares of
Commcorp and the acquisition on September 5, 1997 of the business
technology finance division of Lloyds Bowmaker Limited. See "Recent
Developments".
(7) Operating income before restructuring charge and taxes was $75.3
million for the nine months ended September 30, 1997, Newcourt
incurred a one time pre-tax restructuring charge of $48.0 million in
respect of severances, office relocations and system conversions
relating to the integration of Commcorp's operations with Newcourt's
existing businesses. See "Recent Developments".
- 9 -
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<PAGE>
NEWCOURT CREDIT GROUP INC.
Newcourt Credit Group Inc./Groupe-Credit Newcourt Inc. ("Newcourt" or
the "Corporation") was incorporated in 1984 under the laws of Ontario. The
Corporation's head office and principal place of business is located at Suite
3500, BCE Place, 181 Bay Street, P.O. Box 827, Toronto, Ontario, M5J 2T3.
SUMMARY DESCRIPTION OF THE BUSINESS OF NEWCOURT
Newcourt is an independent, non-bank financial services company which
originates, sells and manages asset-based financings. The Corporation originates
the financing of a broad range of equipment and capital assets by way of secured
loans, conditional sales contracts and financial leases. Newcourt distinguishes
itself from traditional lenders such as banks, trust and finance companies in
that it:
sells and manages, rather than owns, the majority of the finance
assets which it originates, thereby reducing the Corporation's capital
requirements and credit exposure;
produces the majority of its income through gains from, and fees
related to, the sale of loans, thereby reducing the Corporation's
dependence on net finance income;
funds its activities through commitments from institutional investors
rather than by accepting deposits from the public; and
offers select, asset-based financing services rather than providing
full-service lending.
The Corporation has organized its business activities and operations
around three core functions: (i) loan origination; (ii) loan funding; and (iii)
loan management.
The Corporation's loan origination activities focus on the commercial
finance and corporate finance segments of the asset-based lending market. In the
commercial finance market, Newcourt offers its lending services through select
strategic relationships with equipment manufacturers, dealers and distributors
("vendors") and certain professional bodies and associations. The Corporation
has more than 235 vendor finance programs with selected equipment manufacturers
which are the primary source of the Corporation's loan origination business in
the commercial finance market. In the commercial finance market, Newcourt
provides its lending services through six distinct business units:
HEALTH CARE (FORMERLY HEALTHGROUP FINANCIAL) - provides both direct
and vendor financing in Canada and the United States for health care
equipment used by medical and dental practitioners, clinics and
hospitals;
INFORMATION TECHNOLOGY - provides vendor financing in Canada, the
United States and Europe for information technology and communication
equipment users;
TRANSPORTATION AND CONSTRUCTION - provides vendor and inventory
financing in Canada and the United States for transportation and
construction equipment users;
INVENTORY FINANCE - provides inventory or "floorplan" financing for
equipment manufacturers, dealers and distributors in Canada, the
United States and Australia;
CONSUMER AND PREMIUM FINANCE - provides point-of-sale term financing
to owner-operated enterprises and consumers in Canada and the United
States and financing of commercial property/casualty and workers'
compensation insurance premiums throughout the United States; and
ASSET MANAGEMENT - provides fair market value leases in Canada and the
United States in the high technology industry.
In the corporate finance market, the Corporation's specialized
investment banking unit provides advisory and funding services to major
Canadian, U.S. and international corporations, public sector institutions and
governments. Newcourt's principal structured finance activities in the corporate
finance market include providing corporate and government structured debt
financing, providing financial services to the regional airline industry,
arranging cross-border lease financing, acquiring and managing asset-based
finance portfolios and financing international equipment acquisitions.
To finance its originated loans, Newcourt arranges interim funding from
a number of public and private sources, including bank lines, commercial paper
and medium term note programs and other short term debt financing instruments.
Term funding is arranged for the Corporation's originated commercial finance
assets through securitization vehicles while corporate finance transactions are
generally syndicated to institutional investors.
Newcourt's Portfolio Services Unit, which operates out of two main
service centres in Toronto and Indianapolis, provides the administrative staff
and systems needed to service and support the Corporation's portfolio of over
$9.9 billion in owned and managed finance assets.
- 10 -
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<PAGE>
Newcourt has 42 worldwide offices, including 17 Canadian offices, 21
offices in the United States, 2 offices in the United Kingdom, an office in
Australia and a foreign affiliate office in Barbados.
NEWCOURT'S RECENT FINANCIAL PERFORMANCE
Newcourt reported operating income (before the restructuring charge of
$48 million relating to the acquisition of Commcorp) of $75.3 million for the
nine months ended September 30, 1997 representing an 80% increase over the $41.9
million in operating income reported for the same period in 1996.
During the third quarter, Newcourt completed three acquisitions which
strengthened its presence in the commercial vendor finance market and increased
owned and managed assets by more than $2.5 billion. The acquisition of Commcorp
Financial Services Inc. increased Newcourt's origination capability in the
Canadian small-balance market. The acquisition of the Business Technology
Finance division of UK-based Lloyds Bowmaker Limited also increased Newcourt's
small-balance origination strength and established a European-based loan
management platform for the Corporation. In October, 1997, Newcourt acquired the
micro-balance origination and processing business of Lease Finance Group of
Chicago, Illinois.
Newcourt originated new asset-based financings of $6.01 billion during
the first nine months of 1997, compared with $4.43 billion for the same period
the previous year. Approximately 58% of this amount ($3.51 billion) was
generated from the Corporation's activities in the commercial finance market,
while the remaining 42% ($2.50 billion) was sourced in the corporate finance
market. The U.S. and Canadian markets each accounted for 48% of the total
origination volume with the remaining 4% attributed to various international
markets.
Total asset finance income for the nine months ended September 30, 1997
rose 67% to $192.2 million from $115.1 million during the same period last year.
Fee-based income accounted for $137.1 million (71%) of total asset finance
income of the Corporation for the period as compared with $79.5 million (69%)
for the same period in 1996.
ACQUISITION OF AT&T CAPITAL CORPORATION
On November 17, 1997, the Corporation agreed, subject to the
satisfaction of certain closing conditions, to acquire all of the issued and
outstanding common shares of AT&T Capital Corporation ("AT&T Capital"). AT&T
Capital, a company incorporated under the laws of Delaware, is one of the
world's largest diversified equipment leasing and commercial finance companies.
Hercules Holdings (Cayman) Limited ("Hercules") (a subsidiary of Hercules
Holdings U.K. Limited, which is a company structured and financed by Nomura
International plc), owns 97.4% of the outstanding shares of AT&T Capital, with
the remainder of the shares owned by members of management of AT&T Capital.
Pursuant to the stock purchase agreement entered into by Newcourt, AT&T
Capital and Hercules and certain members of management of AT&T Capital
(collectively, the "Vendors") dated November 17, 1997 (the "Stock Purchase
Agreement"), the aggregate purchase price to be paid by Newcourt on the
Acquisition Closing is approximately U.S.$1.61 billion (Cdn.$2.2 billion), of
which approximately U.S.$1.06 billion (Cdn.$1.5 billion) will be paid in cash
and the remaining U.S.$550 million (Cdn.$776 million) will be satisfied by the
issuance of approximately 17.6 million Common Shares of Newcourt. The Vendors
have agreed, subject to certain exceptions, that such Newcourt Common Shares
shall not be sold, transferred or otherwise disposed of by the Vendors for a
period of six months following the Acquisition Closing, and thereafter may be
sold, transferred or disposed of, as to one-third of such shares, six months
after the Acquisition Closing, as to a further one-third of such shares twelve
months after the Acquisition Closing and the remaining one-third of such shares
eighteen months after the Acquisition Closing. The cash portion of the purchase
price will be derived from the proceeds of this offering. See "Use of Proceeds".
CLOSING
The Acquisition Closing is subject to the satisfaction of certain
closing conditions specified in the Stock Purchase Agreement, including receipt
of material regulatory approvals. The Stock Purchase Agreement is also subject
to termination (and the Acquisition will not be completed) if the Underwriters
terminate their obligations under the Underwriting Agreement in the event of (i)
a material adverse change in the business, affairs, operations, assets,
liabilities or capital of Newcourt or (ii) any occurrence or any catastrophe of
national or international consequence which seriously adversely affects or will
seriously adversely affect the Canadian or United States financial markets or
the business of the Corporation and its subsidiaries considered as a whole.
Although the Corporation expects to complete the Acquisition on these terms,
there can be no assurance that it will do so, or that the Acquisition Closing
will occur on or after January 30, 1998, as currently contemplated by the Stock
Purchase Agreement. If the Acquisition does not close by the Termination Date,
the Subscription Rights will be automatically cancelled and purchasers of
Subscription Rights will receive an amount equal to their initial investment in
the Subscription Rights, plus interest, pursuant to the Subscription Rights
Agreement. See "Details of the Offering".
Upon completion of the Acquisition of AT&T Capital, Newcourt anticipates
certain restructuring costs will be incurred. See the notes to the "Unaudited
Pro Forma Consolidated Financial Statements" of Newcourt included in this
prospectus.
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<PAGE>
AT&T CAPITAL CORPORATION
OVERVIEW
AT&T Capital is one of the world's leading commercial finance companies.
AT&T Capital has a diversified portfolio of approximately U.S.$13 billion as at
December 31, 1996 in owned and managed assets representing over 500,000
customers and covering a broad spectrum of equipment. Through its international
network, AT&T Capital offers its customers a large variety of financing products
and services including operating leases, finance leases and loan products. AT&T
Capital provides its financing services in 23 countries and, in addition to its
offices in the United States, has principal offices in Brussels, Frankfurt,
London, Mexico City, Milan, Paris, Sydney, Hong Kong and Toronto. As at December
31, 1996, AT&T Capital had more than 3,000 employees.
AT&T Capital was founded in 1985 as a captive finance subsidiary of AT&T
Corp. ("AT&T") to facilitate the sale of products to customers of AT&T business
units engaged in the manufacturing and sale of telecommunications, computer and
related equipment. AT&T Capital built its business around an operational
infrastructure that benefited from AT&T's controls and management disciplines
and combined it with the expertise of senior management recruited from within
the equipment leasing industry. As AT&T Capital's business capacity grew, it
expanded beyond financing AT&T equipment and entered related financial services
markets.
On October 1, 1996, in connection with a restructuring of AT&T's
operations, the Vendors acquired ownership of AT&T Capital (the "Merger").
BUSINESS OF AT&T CAPITAL
AT&T Capital provides its financial products and services to its
worldwide customers and clients through three principal marketing channels:
Vendor Finance, Direct Customer Finance and International Finance.
The table below shows approximate financing volumes and assets as a
percent of AT&T Capital's total financing volumes and owned assets, attributable
to each of its origination channels for the year ended December 31, 1996.
<TABLE>
<CAPTION>
FINANCING VOLUME TOTAL ASSETS
---------------- ------------
(in $U.S. millions) $ % $ %
- - - -
<S> <C> <C> <C> <C>
Vendor Finance...................... 2,412 46 2,590 32
Direct Customer Finance............. 1,584 24 3,560 44
International Finance............... 1,249 30 1,942 24
----- -- ----- --
$5,245 100 $8,092 100
====== === ====== ===
</TABLE>
VENDOR FINANCE
AT&T Capital has established vendor finance programs with producers of
telecommunications, information technology and industrial equipment. In
addition, the Vendor Finance unit also offers inventory financing for equipment
distributors and dealers and private label financing programs for vendors.
AT&T, Lucent Technologies Inc. ("Lucent") and NCR Corporation ("NCR")
(AT&T, Lucent and NCR are collectively referred to as the "Former Affiliates")
have collectively been the largest vendor clients of AT&T Capital. Historically,
AT&T Capital has financed (for the customers of the Former Affiliates) a large
volume of the Former Affiliates' telecommunications and information technology
sales. During the fiscal year ended December 31, 1996, AT&T Capital generated
U.S.$1.1 billion of financing volume from Lucent and NCR related vendor finance
activities. Of this financing volume, 76% was related to Lucent and 24% was
related to NCR.
In serving other vendor clients, AT&T Capital strategically focuses on
the telecommunications, information technology, medical, manufacturing,
materials handling, image processing and office equipment sectors. AT&T
Capital's vendor finance products include a variety of customized financing
products, sales aid services (including the training of vendor personnel and
point-of-sale support), private label programs (in which AT&T Capital provides
financing to the vendor's customers under the vendor's name), customer
operations support and interfaces, alternate channel programs (distribution
channels not involving the vendor's direct sales force), and support for
value-added retailers or distributors (retailers or distributors that modify
products and re-sell them).
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<PAGE>
DIRECT CUSTOMER FINANCE
AT&T Capital directly markets financial products and services to
specific market segments, including small business, structured and technology
equipment finance, short-term instrument and data equipment rentals and consumer
automobile leasing. Direct Customer Finance activities consist of Technology
Finance and Services, Specialized Commercial Finance and Capital Markets.
Technology Finance and Services. AT&T Capital's equipment management
services have included procurement, integration, deployment, tracking and
remarketing of equipment.
Technology assets are the fastest growing segment of the capital
equipment arena. Having identified this opportunity early on, AT&T Capital is
now one of the largest providers of financing and specialized asset management
services to corporate users of information technology assets. AT&T Capital
develops innovative financing solutions for acquiring, operating and disposing
of high technology assets and capital equipment. It specializes in structuring
flexible solutions for complex transactions to support customers in multi-vendor
environments.
To serve the short-term needs of sophisticated computer users who
operate in periods of peak demand, AT&T Capital also offers rentals of a full
range of high performance computers and test equipment. AT&T Capital serviced
such high profile events as the 1996 Republican and Democratic national
conventions and the 1996 Olympic Games in Atlanta. These services are flexible
and responsive with turnaround time measured in hours to anywhere in the United
States, and AT&T Capital has recently expanded its service area with offices in
Canada and Mexico.
Specialized Commercial Finance. AT&T Capital has leveraged its large
customer base, sophisticated transaction structuring skills, and high volume
transaction processing capabilities to provide specialized financial services
directly to target segments in the commercial finance market. AT&T Capital
targets small and medium-size companies in the United States with products
including small business administration ("SBA") loans, asset-based loans,
franchise financing, and other financing products (such as pre-approved credit
lines). AT&T Capital is the second largest lender in the United States
government's SBA program - a U.S.$7.8 billion government guaranteed loan
program. The SBA program was established to provide financing to small
businesses for equipment, land and buildings and inventory. AT&T Capital's SBA
licensed subsidiary, AT&T Capital Small Business Lending Corporation, has been
designated as a preferred lender by the SBA administration in 60 of the SBA's 68
districts. For the year ended December 31, 1996, AT&T Capital provided more than
U.S.$250 million of SBA-guaranteed loans.
Early in 1997, AT&T Capital announced a 50/50 joint venture with
American Express to offer equipment financing opportunities to small businesses,
beginning with American Express' 1.6 million small business customers. The joint
venture was created, in part, to facilitate access to credit for small
businesses. Through a new company, American Express CapitaFinance L.L.C., small
businesses are able to arrange prompt financing for a wide assortment of
equipment with financing periods generally ranging from one to five years.
Following the purchase of equipment, small businesses simply call a toll-free
telephone number to easily arrange financing. The program combines technology
and marketing in an innovative approach bringing speed and convenience to small
businesses for smaller finance transactions. The new venture combines the
financing expertise and credit skills of AT&T Capital with the marketing
experience of American Express.
Capital Markets - Through its capital markets business, AT&T Capital
serves the structured financing requirements of large companies worldwide. This
form of financing makes maximum use of AT&T Capital's structuring and risk
management skills and allows it to customize transactions to meet customer
needs.
AT&T Capital's experience in technology and financial service markets
brings it many opportunities to enter into business relationships with large,
growth-oriented companies that require big-ticket project and equipment finance.
On these corporate and structured finance transactions, AT&T Capital will
generally provide a total financing solution to the client, which results in
AT&T Capital agreeing to finance a significant portion of the investment and
syndicate the balance to a third party.
AT&T Capital has focused its capital markets initiatives in select
sectors, including transportation, manufacturing, industrial,
telecommunications, media and real estate. To deal effectively with the
complexity of many capital markets projects, AT&T Capital assembles teams that
include specialists in financial structuring, pricing, credit analysis, asset
management and engineering.
During 1996, AT&T Capital financed telecommunications networks in
Indonesia, Canada and the United States, as well as numerous radio properties,
several industrial facilities and select transportation equipment. A new office
opened in Hong Kong is intended to provide a base for developing project finance
ventures in the Asia/Pacific region.
INTERNATIONAL FINANCE
Although AT&T Capital operates principally in the United States, it has
expanded globally in order to respond to the needs of its vendor clients. AT&T
Capital's international business is managed through four geographic regions:
Canada, Europe, Asia Pacific and Latin America. International expansion has
resulted from a combination of acquisitions, start up operations and joint
ventures. While AT&T Capital's start up operations and joint ventures were
primarily focused on supporting global vendor relationships (directly through
vendor channels and indirectly through local distributors), some of its
acquisitions have included specialized commercial and consumer finance
origination capabilities. These acquisitions provided AT&T Capital with an
international infrastructure and growth opportunities.
AT&T Capital began operations in the United Kingdom in 1991, in Canada
in 1992, acquired a business in Hong Kong in 1994 and opened offices in Mexico
and Australia in 1994.
- 13 -
<PAGE>
<PAGE>
Canada - AT&T Capital Canada is one of the largest general equipment
lessors in Canada, providing financing of telecommunications, computing, office
and industrial equipment and consumer automobile leasing throughout Canada. In
the third quarter of 1996, AT&T Capital acquired the operating assets and lease
portfolio of Municipal Leasing Corporation, a Canadian operation which had
approximately U.S.$160 million in assets at the time of the acquisition.
Municipal leasing serves the office equipment and automotive leasing needs of
26,000 customers in Ontario. AT&T Capital Canada provides ongoing financing
support for Lucent as well as other Canadian equipment vendors and distributors,
including Danka Canada, Sony of Canada Broadcast and Professional Group and
Xerox Canada for non Xerox equipment financing.
Europe - In January 1995, AT&T Capital established a European network
for its financial services through the acquisition of the vendor leasing and
finance companies of Banco Central Hispano and certain of its affiliates located
in the United Kingdom, Germany, France, Italy, Belgium, and The Netherlands.
AT&T Capital's expansion to Europe has coincided with the entry into such
markets by AT&T Capitals manufacturer and distributor vendor clients. As a
result, AT&T Capital is able to support a number of vendor clients requiring
cross border financing needs, including such vendors as ATL (ultrasound
equipment), Coherent (laser medical technology), and Perkin-Elmer (analytical
instruments). AT&T's Capital European operations support more than 15
multinational vendors in 13 countries and provide a platform for Lucent small
ticket equipment financing needs, residual based operating lease and rental
programs.
Asia Pacific - AT&T Capital's Asia Pacific operations are focused on
vendor programs and other specialty asset finance business. In June 1995, AT&T
Capital acquired an Australian equipment finance company with approximately
U.S.$40 million in assets.
Latin America - Global manufacturers like Lucent and NCR have targeted
the growth opportunities in Latin America, which resulted in AT&T Capital
establishing a strong presence in the region. In 1995, AT&T Capital entered into
a joint venture with Banco Frances, a leading Argentine commercial bank to
operate an equipment leasing operation in Argentina. In Mexico, AT&T Capital has
established vendor relationships with such technology companies as Sun
Microsystems and Sony Professional Products.
RELATIONSHIP WITH THE FORMER AFFILIATES
A significant portion of AT&T Capital's total assets and revenues and a
substantial majority of its net income are attributable to financing provided by
AT&T Capital to customers of the Former Affiliates with respect to Former
Affiliates' products and, to a lesser extent, transactions with the Former
Affiliates as end-users, primarily with respect to the lease of information
technology and other equipment to them as end-users and the administration and
management of certain leased assets on behalf of AT&T.
In 1993, AT&T Capital entered into a series of agreements with AT&T to
formalize the relationship between the two companies, including the following
three significant agreements, each dated as of June 25, 1993: (i) the AT&T
Operating Agreement, (ii) the Intercompany Agreement, and (iii) the License
Agreement. AT&T Capital has executed agreements comparable to the AT&T Operating
Agreement with each of Lucent and NCR. In addition, AT&T Capital has entered
into supplementary agreements with Lucent and NCR pursuant to which Lucent and
NCR have agreed that various provisions of the Intercompany Agreement and the
License Agreement shall apply to them.
The Operating Agreements provide, among other things, that (i) AT&T
Capital serves as the "preferred provider" of financing services and has certain
related and other rights and privileges in connection with the financing of
AT&T, Lucent and NCR equipment to customers and distributors of the Former
Affiliates and (ii) subject to limited exceptions, the Former Affiliates shall
not compete or maintain an ownership interest in any business that competes with
AT&T Capital and its subsidiaries.
In connection with its financing business for Lucent, AT&T Capital
provides an additional incentive, in the form of a sales assistance fee, for
Lucent to assist AT&T Capital in the financing of products manufactured or
marketed by Lucent. The sales assistance fee is based on designated percentages
of the aggregate sales prices and other charges ("volumes") of Lucent products
financed by AT&T Capital. In January 1997, AT&T Capital and Lucent agreed to a
modified formula for calculating the sales assistance fee (as well as extension
of the transactions that qualify for a sales assistance fee to those originated
in indirect marketing channels and international transactions) for the remaining
years of the term of Lucent's Operating Agreement (retroactive to 1996). The
revised formula doubles the aggregate annual sales assistance fees from the
amounts that would have been paid if the prior formula had been maintained.
The Intercompany Agreement provides, among other things, that AT&T
Capital will administer for a fee various portfolios of financing and leasing
assets, including certain portfolios which prior to AT&T Capital's initial
public offering had been owned by AT&T Capital. In addition, AT&T Capital
provides certain of the same services for Lucent and NCR.
Pursuant to the License Agreement, AT&T has licensed certain trade names
and service marks, including the "AT&T" trade name, to AT&T Capital for use in
the leasing and financing business of AT&T Capital and certain of its
subsidiaries and, in the case of the "AT&T" trade name, to use as part of the
corporate names of AT&T Capital and certain subsidiaries.
The initial term of each of the Operating Agreements, the Intercompany
Agreement, the License Agreement and the Agreement Supplements is scheduled to
end on August 4, 2000. In addition, AT&T has the right under the License
Agreement, after two years' prior notice, to require AT&T Capital to discontinue
use of the "AT&T" trade name as part of AT&T Capital's corporate or "doing
business" name. As of the date hereof, AT&T has not provided any such notice.
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<PAGE>
AT&T CAPITAL'S RECENT FINANCIAL PERFORMANCE
For the nine month period ended September 30, 1997, AT&T Capital
reported revenues of U.S.$1.3 billion and net income of U.S.$35.8 million. See
"Unaudited Interim Consolidated Statements of AT&T Capital Corporation".
Portfolio revenue (which includes revenue from finance receivables and capital
leases, and rentals of operating leases) in the first nine months of 1997
accounted for U.S.$1,041.7 million (or 80.1% of total revenues), compared to
U.S.$1,147.1 million (or 83.7% of total revenues) for the comparable 1996
period. The decrease in portfolio revenue reflects AT&T Capital's increased
securitizations which produced gains from the sale of assets and higher service
fees. The securitization of U.S.$3.1 billion of assets in the fourth quarter of
1996 (which resulted in a U.S$149.3 million pre-tax gain), higher leverage and
the distributions on preferred securities resulting from AT&T Capital's
recapitalization in connection with its merger in the fourth quarter of 1996
with Hercules (the "Merger"), combined to reduce net income for the period.
Somewhat offsetting these factors were increases in revenue from securitizations
and loan sales, operating lease margin (rental revenue less depreciation) and
other revenue.
AT&T Capital's significant securitization during the fourth quarter of
1996, together with its post-Merger recapitalization, has resulted in 1997
quarterly income results which are significantly less than the comparable 1996
periods. Net interest margin declined during the period due to the effects of
securitizing higher yielding assets, the run-off of relatively higher yielding
leases and higher relative interest expense due to increased leverage associated
with AT&T Capital's post-merger capital structure. AT&T Capital's
securitizations have generally included small-ticket products having higher
yields and margins as compared to larger ticket products. As securitizations
occur, the proportion of these higher yielding products in AT&T Capital's owned
portfolio is reduced, thereby causing a decrease in yields. Higher yields are
not necessarily associated with higher profitability, since these assets
commonly carry higher credit provisions and servicing costs.
Operating and administrative expenses have increased in 1997 due
primarily to severance payments, certain systems investments and costs
associated with managing a higher level of assets. As a percentage of owned and
managed assets, annualized operating and administrative expenses for the nine
months ended September 30, 1997 were 3.96% improved from 4.03% for the
comparable 1996 period. The Company's objective is to reduce this ratio to 3.5%
or lower.
AT&T CAPITAL FUNDING ARRANGEMENTS
AT&T Capital finances its asset finance business, in addition to its
capital resources, through a U.S.$3.0 billion commercial paper program (of which
U.S.$1.9 billion was outstanding at September 30, 1997) and through medium and
long term debt program (of which U.S.$4.9 billion was outstanding at September
30, 1997). The commercial paper program is supported by a back up credit
facility from a syndicate of lending institutions in the amount of U.S.$2.0
billion. The medium and long term debt program was established under AT&T
Capital's registration statement filed with the United States Securities and
Exchange Commission (the "SEC") qualifying the issuance of up to U.S.$4.0
billion of debt securities.
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<PAGE>
DEBT COVENANTS
Included in AT&T Capital's MTN indenture are debt covenants, the most
significant of which place some limitations on AT&T Capital's ability to merge
or consolidate into other corporations or sell all or substantially all of its
assets. In addition, the MTN debt covenants limit the issuance of secured debt,
subject to numerous exceptions.
PREFERRED SECURITIES
In 1996, Capita Preferred Trust, a newly formed trust sponsored by AT&T
Capital, issued U.S.$200 million of perpetual Trust Originated Preferred
Securities ("TOPrS"). Holders of the TOPrS are entitled to receive cash
distributions at an annual percentage rate of 9.06%, which are guaranteed by
AT&T Capital. The original issue price of each security was U.S.$25 per share.
Distributions on the TOPrS are payable quarterly in arrears on each March 31,
June 30, September 30, and December 31.
Under U.S. GAAP, the TOPrS are called "Company-obligated preferred
securities of subsidiary", since the securities are issued by a consolidated
entity of AT&T Capital. AT&T Capital reports the securities in the mezzanine
section (between Total Liabilities and Shareowners' Equity) of its balance
sheet. Distributions associated with the TOPrS are stated as "Distribution on
Company-obligated preferred securities of subsidiary" on the income statement,
and are tax deductible and paid out of pre-tax earnings. See "Audited
Consolidated Financial Statements of AT&T Capital Corporation".
REVOLVING CREDIT FACILITIES
As at September 30, 1997, AT&T Capital has a U.S.$2.0 billion revolving
credit facility to serve as a back-stop to its commercial paper program of which
U.S.$1.2 billion is in the form of a 364-day term and U.S.$0.8 billion is in the
form of a 5-year term. AT&T Capital also maintains foreign bank lines which
principally support the daily funding needs of its overseas businesses.
SECURITIZATION PROGRAMS
In 1996, AT&T Capital established a new funding strategy related to an
increased use of securitization. As part of this initiative, AT&T Capital
expects to securitize approximately one-third of its annual loan originations,
which would be consistent with its ongoing diversified financing strategy to
manage leverage. In addition, securitization represents an economically
attractive means of diversifying AT&T Capital's funding sources.
AT&T Capital's asset profile supports its securitization objectives.
Approximately 60% of its portfolio is small-ticket assets, with an average
transaction size of approximately U.S.$10,000, thereby providing diversification
of risk and liquidity. AT&T Capital has more than 11 years of experience in
originating and servicing these assets, which gives it an extensive historical
database as to loss experience, prepayment history and asset origination,
utilizing prudent underwriting standards.
In October 1996, AT&T Capital completed its first public securitization
through its issue of U.S.$3.1 billion of small-ticket equipment lease-backed
securities through the Capita Equipment Receivables Trust 1996-1. The
transaction, which established AT&T Capital's presence as a significant issuer
of highly diversified small-ticket equipment lease-backed securities, was
greater than the public market's then U.S.$2 billion outstanding balance in
equipment lease-backed securities. The U.S.$3.1 billion securitization completed
in 1996 resulted in a U.S.$149.3 million one-time pre-tax gain for AT&T Capital.
ASSET/LIABILITY MANAGEMENT
AT&T Capital has established a comprehensive funding and investment
policy while managing interest risk and maintaining adequate liquidity. AT&T
Capital's approach to the management of interest rate and currency risks
includes a matched funding discipline, continual evaluation of assets, review of
liability and capital structure, assessment of funding options and the
monitoring of pricing guidelines. Specifically AT&T Capital:
(i) matches the duration and maturity structure of its liabilities to
that of its portfolio assets;
(ii) actively manages interest rate risk (the risk of earnings
volatility attributable to changes in interest rates) in an
effort to protect the margins on existing transactions; and
(iii) uses derivatives to match-fund its portfolio and thereby manage
interest rate and currency risk.
AT&T Capital generates a substantial portion of its funds to support its
operations from lease and rental receipts, but also uses external financing,
including the public issuance of commercial paper, medium and long-term debt,
asset-backed financing (or securitizations) and bank lines of credit. AT&T
Capital's funding program includes maintaining a broad distribution of financing
sources and expanding the base to minimize undue concentration.
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<PAGE>
FINANCIAL STATEMENTS RELATING TO THE ACQUISITION
AT&T Capital's audited consolidated financial statements for the three
years ended December 31, 1996, together with the related notes thereto, and AT&T
Capital's unaudited comparative interim consolidated financial statements for
the nine months ended September 30, 1997, are included in this prospectus. See
"Consolidated Financial Statements of AT&T Capital Corporation" and "Unaudited
Interim Consolidated Financial Statements of AT&T Capital Corporation".
Also included in this prospectus are pro forma financial statements of
Newcourt, together with relevant notes, assumptions and adjustments, as at and
for Newcourt's financial year ended December 31, 1996, which reflect the
completion on August 29, 1997 of the acquisition of Commcorp by the Corporation
(see "Recent Developments"), the completion of the offering of Subscription
Rights contemplated by this prospectus and the completion of the Acquisition of
AT&T Capital by the Corporation. See "Unaudited Pro Forma Consolidated Financial
Statements".
ACQUISITION MERITS AND IMPLICATIONS
POTENTIAL BENEFITS
Size - The combination of Newcourt and AT&T Capital creates one of the
largest providers of vendor finance in the world, and one of the largest
independent non-bank commercial asset finance companies based on assets owned
and managed. Upon completion of the Acquisition, Newcourt's international
origination and servicing capabilities will span 24 countries around the globe.
The Acquisition provides a platform to allow both Newcourt and AT&T Capital to
better serve their respective manufacturing clients in Canada, the United
States, and the United Kingdom and creates new opportunities for serving
Newcourt's clients in Asia Pacific, Europe and Latin America.
Complementary Skills - The businesses are complementary in many
respects. AT&T Capital has a proven record of quality asset management with
top-tier processing skills and systems, a broad range of clients, a solid credit
underwriting performance and a consistent operating history. Newcourt has
demonstrated its ability to originate asset finance business through innovative
financing techniques, focused client service and complementary product
offerings. Both companies have a conservative risk management culture.
Synergies - The two companies also complement each other by providing
cost savings opportunities due to geographic and business segment synergies.
Significant cost savings are anticipated due primarily to the consolidation of
facilities, systems, and functions in Canada, the United States and in the
United Kingdom. AT&T Capital has recently embarked upon implementation of a cost
reduction program. Newcourt's reputation as a low cost provider of asset finance
services should help to ensure the ongoing success of AT&T Capital's cost
reduction program.
Access to International Capital Markets - The combined entity combines
the innovative financing capabilities of Newcourt and its strong funding
relationships with Canadian life insurance companies and banks with AT&T
Capital's public securitization history in the United States and greater access
to foreign markets due to the synergies described above.
IMPLICATIONS OF THE ACQUISITION
While the business combination offers the potential for significant
revenue enhancements and cost savings, the Acquisition presents a number of
challenges and risks to Newcourt upon the completion of the Acquisition and the
integration of the two entities, including:
Financial Performance - AT&T Capital's 1997 year-to-date net income
declined significantly from 1996 results, reflecting reduced portfolio income
arising from AT&T Capital's U.S.$3.1 billion securitization in 1996 and higher
interest costs incurred due to increased leverage and lower credit ratings
following the 1996 recapitalization.
Newcourt's origination skills and sales culture are expected to improve
volume growth. In addition, AT&T Capital is targeting to reduce its ratio of
operating expenses to owned and managed assets from approximately 4.0% for the
nine months ended September 30, 1997 to 3.5% or lower over the next few years.
These reductions are expected to result from extensive cost savings programs and
economies of scale in processing operations, administration and centralized
services.
Reliance on Major Customers - AT&T Capital's most significant vendor
program is with Lucent. For the year ended December 31, 1996, Lucent generated
over U.S.$800 million of asset origination volume for AT&T Capital. The
agreements between AT&T Capital and Lucent expire on August 4, 2000. While
Lucent has consented to the change of control of AT&T Capital upon completion of
the Acquisition, there can be no assurance that the term of the principal
agreements will be extended beyond August 4, 2000. AT&T Capital has agreed with
Lucent to develop, by December 31, 1997, a new proposal relating to the
extension of the principal agreements beyond the year 2000 and to the expansion
of AT&T Capital's financing services to Lucent.
Integration of Businesses - Both AT&T Capital and Newcourt have
completed a number of acquisitions during the past five years. Integration of
the two businesses will require a significant amount of management's time.
Managing the integration of the businesses from a systems, employee and cultural
perspective will be difficult and time consuming.
Residual Assets - AT&T Capital has traditionally retained a larger
proportion of residual assets than Newcourt due to the larger volume of
operating and capital leases generated by AT&T Capital.
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<PAGE>
The anticipated residual or salvage value of the underlying leased
equipment assets may be less than the fair market value of the equipment while
under the lease or off lease, or the market value may exceed the expected
residual, or salvage value. The combined entity will place less reliance on
residual asset financing. Although AT&T Capital has historically received
proceeds exceeding the aggregate book value of its residual values, there can be
no assurance that such performance can continue.
Dependence on External Sources of Funding - AT&T Capital's commercial
finance business requires substantial amounts of cash to support its operations.
These cash requirements increase as the volume of AT&T Capital's owned and
managed assets and its servicing portfolio grow.
AT&T Capital's primary cash requirements include: (i) lease and loan
originations, (ii) interest and principal payments on AT&T Capital's outstanding
indebtedness, (iii) ongoing administrative and operating expenses, (iv) tax
payments, and (v) dividend payments on the TOPrS preferred securities. AT&T
Capital's primary sources of liquidity are expected to be (a) cash generated
from operations, (b) the issuance of commercial paper and medium and long-term
notes in public markets, (c) public and private securitizations of its lease and
loan receivables, and (d) foreign bank lines of credit. There can be no
assurance that any financing sources will be available to AT&T Capital or the
combined entity following completion of the Acquisition at any given time or as
to the terms on which such sources may be available. The combined entity's
ability to obtain funds and the cost of such funds could be affected by its
credit rating and restrictions contained in existing or future debt instruments
and by other events beyond its control, such as interest rates, general economic
conditions and the perception of its business, results of operations, leverage,
financial condition and business prospects.
Sensitivity to Ratings on Debt - As a result of the consummation of the
Merger in 1996 and related transactions, three major rating organizations
downgraded their respective ratings on AT&T Capital's short-term and (where
applicable) long-term senior unsecured debt. As a result of such downgradings,
AT&T Capital's costs of borrowing increased in 1997. No assurance can be given
that any or all of such rating organizations will not at any future time or from
time to time establish different ratings on the combined entity's short-term or
long-term debt. To the extent that any of such rating organizations assign a
lower rating than the existing ratings of AT&T Capital and Newcourt, such
downgrading would increase interest expense for the combined entity, limit its
access to its traditional funding sources and reduce its competitiveness,
particularly if any such assigned rating is not investment grade. In addition,
certain ratings downgrades could result in the termination of one or more of the
License Agreements with AT&T, Lucent and NCR. Any such downgrade could have a
material adverse effect on the combined entity's results of operations and
financial condition.
Securitization Program - AT&T Capital's securitization transactions,
structured as both private conduit programs and the sale of publicly offered
securities, are an important part of AT&T Capital's financing to manage its
leverage ratio and to transfer credit risk. Any delay in the securitization of
finance receivables would cause leverage to fluctuate and postpone the
recognition of the gain on such finance receivables, which could cause AT&T
Capital's net income to fluctuate from period to period.
Potential Conflicts Between Newcourt and AT&T Capital's Vendor
Relationships - Given the number of vendor programs established by both AT&T
Capital and Newcourt, there can be no assurance that conflicts between Newcourt
and AT&T Capital's vendor relationships will not occur. It is possible that the
loss of a large vendor relationship could result in a material loss of revenue
or earnings to the combined company.
International Events and Currency Exchange Rates - Newcourt intends to
pursue growth opportunities in international markets and to follow its vendor
relationships into new and emerging markets. AT&T Capital has pursued this
strategy and has made significant investments into these foreign markets to
establish a presence and to accompany its vendors. To date, AT&T Capital's
international operations have not been profitable.
A significant change in the value of the Canadian dollar against the
currency of one or more countries where substantial revenues or earnings are
recognized may materially adversely affect financial performance of the combined
company. These risks will be managed in a number of ways including foreign
currency contracts, derivative instruments and utilizing local capital markets
to fund the international operations.
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RECENT DEVELOPMENTS
On March 11, 1997, pursuant to a prospectus dated February 28, 1997, the
Corporation issued and sold 2,475,000 Common Shares in its capital at a price of
$51.00 per share (prior to giving effect to the subdivision of Newcourt's Common
Shares as described below) for net proceeds of $121,176,000.
Effective April 14, 1997, the Corporation subdivided all of its issued
and outstanding and all of its reserved and unissued Common Shares on a two for
one basis.
On April 29, 1997, the Corporation's Common Shares were listed and
posted for trading on the New York Stock Exchange. Concurrent with such listing,
the Corporation's Common Shares were also registered with the United States
Securities and Exchange Commission pursuant to section 12(b) of the Securities
Exchange Act of 1934.
On August 26, 1997, pursuant to a prospectus dated August 15, 1997, the
Corporation issued and sold 7,260,000 Common Shares in its capital at a price of
$38.50 per share for net proceeds of $268,729,600.
On August 26, 1997, the Corporation filed a replacement prospectus
supplement dated August 26, 1997 to the Corporation's short form shelf
prospectus dated October 17, 1996 increasing the aggregate principal amount of
1996 series medium term notes issuable thereunder from $350,000,000 to
$500,000,000.
On August 29, 1997, the Corporation acquired all of the issued and
outstanding shares of Commcorp Financial Services Inc. ("Commcorp"), a Canadian
asset-finance and associated management service company. The Corporation
acquired four finance units of Commcorp for approximately $366,000,000, of which
$89,000,000 was paid in cash and the remaining $277,000,000 was satisfied by the
issuance of 8.2 million Common Shares. As part of the acquisition, Newcourt
acquired established Commcorp offices in 11 Canadian cities and 510 employees.
Newcourt's pro forma financial statements as at and for the year ended December
31, 1996, which are included in this prospectus in respect of the proposed
Acquisition, reflect the acquisition of Commcorp by the Corporation.
See "Newcourt Credit Group Inc. - Unaudited Pro Forma Consolidated Financial
Statements".
On September 5, 1997, the Corporation acquired the business technology
finance division of Lloyds Bowmaker Limited, an asset finance company based in
the United Kingdom, for an aggregate purchase price of $493,000,000. As part of
the acquisition, Newcourt acquired $422,000,000 of asset finance contracts and
lease portfolios and 160 employees.
On September 24, 1997, the Corporation issued and sold 1,700,000 Common
Shares at a price of $50.10 per share on a private placement basis to a Canadian
chartered bank. Net proceeds to the Corporation were $85,170,000.
On November 13, 1997, the Corporation filed a short form shelf
prospectus dated November 12, 1997 establishing the Corporation's 1997 series
medium term note program in the aggregate principal amount of $500,000,000.
DETAILS OF THE OFFERING
The offering consists of 35,000,000 Subscription Rights, each
representing the right to acquire one Common Share of the Corporation. The
Corporation will issue and sell Subscription Rights to the Underwriters at a
price of $46 per Subscription Right. The Underwriters will sell Fully Paid
Subscription Rights to the public in both Canada and the United States at a
price of $46 per Fully Paid Subscription Right and will sell Instalment Receipt
Subscription Rights to the public at a price of $47.10 per Instalment Receipt
Subscription Right. The Instalment Receipt Subscription Rights are being sold by
the Underwriters on an instalment basis. The Financial Institutions have agreed
to provide non-recourse financing to the Underwriters to fund that portion of
the Underwriters' cost of the Instalment Receipt Subscription Rights not funded
by the first instalment paid by the holders acquiring Instalment Receipt
Subscription Rights under this offering. Such financing will be secured by cash
collateral pending the Acquisition Closing, a pledge of the Instalment Receipt
Subscription Rights and the underlying Common Shares when issued on the
Acquisition Closing, and an assignment by way of security of the final
instalment payable by holders of Instalment Receipt Subscription Rights.
SUBSCRIPTION RIGHTS
The following is a summary of the material attributes and
characteristics of the Subscription Rights and of the rights and obligations of
registered holders thereof. This summary does not purport to be complete and
reference is made to the subscription rights agreement to be dated as of the
date of Closing (the "Subscription Rights Agreement") among the Corporation,
CIBC Wood Gundy Securities Inc. on behalf of the Underwriters, and Montreal
Trust Company of Canada as depository (the "Depository").
The Subscription Rights Agreement will be available for inspection in
draft form prior to Closing and, subsequent to Closing in definitive form until
the completion of distribution, at the principal stock and bond transfer offices
of the Depository in Toronto. For the purposes of this description of the
material attributes and characteristics of the Subscription Rights, a "holder"
means a person who is shown on a register of holders of Subscription Rights.
Subscription Rights will be issued at the Closing pursuant to the
Subscription Rights Agreement. Pursuant to the Subscription Rights Agreement,
the proceeds from the sale of the Subscription Rights (the "Deposited Funds")
will be delivered on behalf of the Corporation to and held by the Depository and
invested in short-term obligations of or guaranteed by the Government of Canada
(and other approved investments) pending the Acquisition Closing, and prior to
the Acquisition Closing will be subject to security interests in favour of the
holders of the Subscription Rights, the Underwriters and the Financial
Institutions. Subscriptions and payment for the Fully Paid Subscription Rights
will be evidenced by transferable Fully Paid Subscription Right certificates in
fully registered form
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and subscriptions and payment of the first instalment of the purchase price for
Instalment Receipt Subscription Rights will be evidenced by transferable
Instalment Receipt certificates in fully registered form. Each Subscription
Right constitutes an agreement whereby the holder will acquire one Common Share
upon the Acquisition Closing. If the Acquisition Closing occurs on or before
February 27, 1998 (the "Termination Date"): (i) in the case of Fully Paid
Subscription Rights, Common Shares will be issued to holders of record of such
Fully Paid Subscription Rights as at the Acquisition Closing, and certificates
representing such Common Shares will be delivered to such holders as soon as
practicable thereafter; and (ii) in the case of Instalment Receipt Subscription
Rights, Common Shares will be acquired by holders of Instalment Receipt
Subscription Rights pursuant to the Instalment Receipt Subscription Rights
without further action on the part of such holders, the final instalment of the
purchase price of such Common Shares will become payable on December 3, 1998 by
the holders of the Instalment Receipt Subscription Rights and the Instalment
Receipts will thereafter represent beneficial ownership of such Common Shares.
In the event the Acquisition Closing does not occur on or before the
Termination Date, the Subscription Rights will automatically terminate and
holders of Subscription Rights will receive (i) in the case of Fully Paid
Subscription Rights, an amount equal to the subscription price therefor, and
(ii) in the case of Instalment Receipt Subscription Rights, an amount equal to
the first instalment thereon, plus, in either case, interest equal to a pro rata
share of the interest actually earned on such amount between Closing and the
Termination Date, net of any applicable withholding taxes. The balance of the
issue price of the Instalment Receipt Subscription Rights, plus interest at the
rate payable by the Underwriters to the Financial Institutions, will be payable
by the Corporation to the Underwriters under the terms of the Subscription
Rights Agreement and will be paid by the Corporation, on behalf of the
Underwriters, to the Financial Institutions in repayment in full of the loan by
the Financial Institutions referred to above. Upon such repayment and payment,
the Instalment Receipt Subscription Rights and the related Instalment Receipts
shall be cancelled and shall be of no further force or effect.
On the Acquisition Closing, the security interests in the Deposited
Funds will be released against a joint notice from the Corporation and CIBC Wood
Gundy Securities Inc., on behalf of the Underwriters, to the Depository,
confirming that the conditions of the acquisition of the Common Shares pursuant
to the Subscription Rights and the finalization of all matters relating to the
Acquisition Closing have been fulfilled to their satisfaction. The transfer
register with respect to the Subscription Rights shall be closed at the close of
business on the date of the Acquisition Closing. The Corporation shall, as soon
as practicable, issue a press release setting out the date of the Acquisition
Closing and the date on which the Subscription Rights transfer register will be
closed.
The Subscription Rights Agreement will provide for adjustments to the
number of Common Shares that a holder of a Subscription Right is entitled to
acquire pursuant to the Subscription Rights in certain circumstances while the
Subscription Rights remain outstanding pending the Acquisition Closing,
including any subdivision, consolidation or reclassification of the Common
Shares.
No fraction of a Common Share shall be issued upon the exercise of the
Subscription Rights. In lieu of such fraction of a share, the holder will
receive a cash payment which will be equal to the market price of such
fractional right.
HOLDERS OF SUBSCRIPTION RIGHTS ARE NOT SHAREHOLDERS OF THE CORPORATION.
HOLDERS OF FULLY PAID SUBSCRIPTION RIGHTS WILL BE ENTITLED ONLY TO ACQUIRE
COMMON SHARES (AND CERTIFICATES THEREFOR) UPON COMPLETION OF THE ACQUISITION
CLOSING, AND HOLDERS OF INSTALMENT RECEIPT SUBSCRIPTION RIGHTS WILL BE ENTITLED
ONLY TO RECEIVE INSTALMENT RECEIPT CERTIFICATES REPRESENTING THE INSTALMENT
RECEIPT SUBSCRIPTION RIGHTS (AND THE COMMON SHARES TO BE ACQUIRED PURSUANT TO
SUCH INSTALMENT RECEIPT SUBSCRIPTION RIGHTS) OR TO REPAYMENT FROM THE
CORPORATION OF THE SUBSCRIPTION PRICE PAID IN RESPECT OF A FULLY PAID
SUBSCRIPTION RIGHT AND THE AMOUNT OF THE FIRST INSTALMENT IN RESPECT OF AN
INSTALMENT RECEIPT SUBSCRIPTION RIGHT, AND, IN EITHER CASE, INTEREST EQUAL TO A
PRO RATA SHARE OF ALL INTEREST ACCRUED THEREON (NET OF ANY APPLICABLE
WITHHOLDING TAX), AS SET OUT IN THE SUBSCRIPTION RIGHTS AGREEMENT.
Regulatory relief is being sought for and on behalf of the Corporation
in certain Provinces of Canada to permit the distribution of Common Shares to
holders of Subscription Rights upon the automatic exercise of the Subscription
Rights to acquire Common Shares on the Acquisition Closing.
Certificates in fully registered form will be issued on Closing to
purchasers of Fully Paid Subscription Rights and will be transferable at the
principal offices of Montreal Trust Company of Canada in Toronto, Montreal and
Vancouver.
The first instalment of $29.00 per Instalment Receipt Subscription Right
is payable on Closing and, if the Acquisition Closing occurs prior to the
Termination Date, the final instalment of $18.10 per Common Share will be
payable on or before December 3, 1998. The final instalment payment must be
received in full by the Custodian no later than 4:00 p.m. (local time at the
place of payment) on the due date.
INSTALMENT RECEIPTS
THE INSTALMENT RECEIPTS WILL BE OFFERED IN CANADA AND WILL NOT BE
OFFERED OR SOLD IN THE UNITED STATES.
The following is a summary of the material attributes and
characteristics of the instalment receipts representing beneficial ownership of
the Instalment Receipt Subscription Rights (and the Common Shares which will be
acquired pursuant to the Instalment Receipt Subscription Rights on the
Acquisition Closing) (the "Instalment Receipts") and of the rights and
obligations of registered holders thereof. This summary does not purport to be
complete and reference is made to the Instalment Receipt Agreement relating to
the Instalment Receipts to be dated as of the date of Closing (the "Instalment
Receipt Agreement") among the Corporation, CIBC Wood Gundy Securities Inc. on
behalf of the Underwriters, Canadian Imperial Bank of Commerce, as agent for the
Financial Institutions, Montreal Trust Company of Canada (the "Custodian") and
MTCC Security Agent Corporation (the "Security Agent"),
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which will hold the Instalment Receipt Subscription Rights and Common Shares
pledged to the Financial Institutions as security for the final instalment
payable pursuant to the Instalment Receipts.
The Instalment Receipt Agreement will be available for inspection in
draft form prior to Closing and, subsequent to Closing in definitive form until
the completion of distribution, at the principal stock and bond transfer offices
of the Custodian in Toronto. For the purposes of this description of the
material attributes and characteristics of the Instalment Receipts, a "holder"
means a person who is shown on the register of holders of Instalment Receipts
maintained under the Instalment Receipt Agreement. INSTALMENT RECEIPTS WILL NOT
BE SOLD IN THE UNITED STATES OR TO U.S. PERSONS.
Holders of Instalment Receipts will be bound by the terms of the
Instalment Receipt Agreement. The Instalment Receipt Agreement will provide that
legal title to the Instalment Receipt Subscription Rights (and legal title to
the Common Shares acquired upon the exercise of the Instalment Receipt
Subscription Rights) will be held by the Custodian until the final instalment
payment has been fully paid to the Custodian on or before the due date. The
Instalment Receipt Subscription Rights, and the Common Shares acquired pursuant
to the Instalment Receipt Subscription Rights upon the Acquisition Closing, will
be issued by the Corporation and pledged to the Financial Institutions as
security for the non-recourse financing provided to the Underwriters by the
Financial Institutions and will be held in the possession of the Security Agent
subject to the terms of the Instalment Receipt Agreement. By acquiring and
holding an Instalment Receipt, the holder thereof acknowledges that the
Instalment Receipt Subscription Rights and the underlying Common Shares will be
held as continuing security for the non-recourse financing provided to the
Underwriters by the Financial Institutions and that such security will remain in
effect and be binding and effective notwithstanding any transfer of or other
dealings with the Instalment Receipt and the rights evidenced or arising
thereby.
An Instalment Receipt will, among other things, evidence that the first
instalment has been paid in respect of the number of Instalment Receipt
Subscription Rights (and on the Acquisition Closing, the number of Common Shares
acquired pursuant to the Instalment Receipt Subscription Rights) specified
thereon and the right of the holder thereof, subject to compliance with the
provisions of the Instalment Receipt Agreement, to become the registered holder
of such Common Shares upon payment in full of the final instalment in respect of
such Common Shares.
The Instalment Receipt Agreement will require the Custodian to mail to
the holders of Instalment Receipts thereunder, as determined on a date being not
more than 14 days before the date of mailing, notice of the applicable due date
for the final instalment and the amount of such instalment. Such notice will be
required to be mailed not less than 30 days prior to the applicable due date and
the Custodian shall also publish particulars of the notice in major English and
French language newspapers in Canada not later than November 15, 1998. Payment
of the final instalment is required in full when due whether or not a holder
receives a notice of the due date from the Custodian. Subject to compliance with
the provisions of the Instalment Receipt Agreement, as soon as practicable after
timely payment of the final instalment and presentation and surrender of the
certificate evidencing the Instalment Receipt, the Common Shares represented
thereby will be registered in the name of, and a certificate evidencing such
Common Shares will be forwarded to, the holder of the Instalment Receipt without
additional charge.
If the Acquisition Closing has occurred on or before the Termination
Date, a holder of an Instalment Receipt will be entitled to make payment, in
accordance with the provisions of the Instalment Receipt Agreement, of the final
instalment at any time prior to the due date with respect to any Common Shares
represented thereby and to thereupon become the registered holder of such Common
Shares.
RIGHTS AND PRIVILEGES
Under the Instalment Receipt Agreement, after completion of the
Acquisition Closing, holders of Instalment Receipts will have the same rights
and privileges and be subject to the same limitations as registered holders of
Common Shares of the Corporation, except for certain rights and privileges,
described below, which are limited under the Instalment Receipt Agreement in
order to protect the value of the collateral secured by the pledge to the
Financial Institutions of the Instalment Receipt Subscription Rights and Common
Shares represented by the Instalment Receipts or except where the exercise of
such rights and privileges would not be practicable. In particular, after
completion of the Acquisition Closing a holder of Instalment Receipts will be
entitled, in the manner set forth in the Instalment Receipt Agreement, unless
such holder has defaulted on its obligations thereunder, to participate fully in
all dividends and other distributions on the Common Shares represented by such
Instalment Receipts, to exercise the votes attached to the Common Shares
represented by such Instalment Receipts and to receive all information
circulars, proxy material, financial statements and other material sent to
holders of Common Shares of the Corporation in like manner as if the holder were
the registered holder of the Common Shares.
In particular, the Instalment Receipt Agreement will contain the
following provisions with respect to the rights of holders of Instalment
Receipts after the Acquisition Closing:
(a) dividends on Common Shares represented by Instalment Receipts
that are payable in cash will be remitted, net of any applicable
withholding taxes, to persons who, on the applicable record date
in respect of such dividend, are holders of the Instalment
Receipts;
(b) dividends on Common Shares represented by Instalment Receipts
that are paid in additional Common Shares ("Stock Dividends")
will be registered in the name of the Custodian and will be held
by the Security Agent as security for the performance of the
obligations of the holders of the Instalment Receipts to pay the
final instalment and upon payment of the final instalment shall
be distributed to the holders according to their entitlement;
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(c) if the Corporation issues or distributes (including on
liquidation, dissolution or winding-up of the Corporation) to
all, or substantially all, of the holders of Common Shares any:
(i) securities; (ii) options, rights or warrants to purchase any
securities; (iii) securities convertible into or exchangeable for
securities, property or other assets; (iv) evidences of
indebtedness; or (v) other property or assets, whether of the
Corporation or of any other person (excluding cash dividends,
Stock Dividends and securities, cash or other property issued or
delivered pursuant to a Reorganization as defined in paragraph
(d)) (collectively, the "Distributed Property"), the Custodian
will, as promptly as commercially reasonable, sell the
Distributed Property issued or distributed in respect of Common
Shares represented by Instalment Receipts. The net proceeds from
such sale will firstly be applied pro rata in reduction of the
unpaid balance of the final instalment payable on the Common
Shares by all holders. Any balance remaining will be remitted by
the Custodian, net of any applicable withholding taxes, to the
holders according to their entitlement; and
(d) upon any subdivision, consolidation, reclassification or other
change of the Common Shares or any reorganization, amalgamation,
arrangement, merger, transfer or sale of all, or substantially
all, of the assets or other similar transaction affecting the
Corporation (a "Reorganization"), the appropriate kind and number
of shares or other securities or property resulting from such
Reorganization shall be substituted for the Common Shares
represented by an Instalment Receipt, and will be registered in
the name of the Custodian and held by the Security Agent as
security for the performance of the obligations of the holder.
TRANSFER OF INSTALMENT RECEIPTS
Instalment Receipts will be transferable at the principal offices of
Montreal Trust Company of Canada in Toronto, Montreal and Vancouver. Upon
registration of the transfer of an Instalment Receipt, the transferee will
acquire the transferor's rights, subject to the pledge in favour of the
Financial Institutions and become subject to the obligations of a holder of
Instalment Receipts under the Instalment Receipt Agreement, including the
assumption by the transferee of the obligation to pay the final instalment if
the Acquisition Closing occurs prior to the Termination Date. The person
requesting registration of the transfer of an Instalment Receipt is deemed to
warrant such person's authority to do so as or on behalf of the transferee. Upon
registration of such transfer, the transferor will cease to have any further
rights or obligations thereunder (other than certain obligations specified in
the Instalment Receipt Agreement including any amounts owing to the Financial
Institutions in respect of withholding taxes on distributions). No transfer of
an Instalment Receipt tendered for registration after the due date for the final
instalment will be accepted for registration (except where an intermediary holds
Instalment Receipts on behalf of non-registered holders and such non-registered
holder has failed to pay the final instalment when due, or with the express
consent of the Financial Institutions).
LIABILITY OF INSTALMENT RECEIPT HOLDERS
Pursuant to the Instalment Receipt Agreement, the Instalment Receipt
Subscription Rights and the underlying Common Shares will be pledged to the
Financial Institutions to secure payment of the non-recourse financing provided
by the Financial Institutions to fund a portion of the Underwriters' cost of the
Instalment Receipt Subscription Rights. If payment of the final instalment is
not duly received in full by the Custodian from a holder of Instalment Receipts
when due, the Instalment Receipt Agreement will provide that any Common Shares
(and any securities or property substituted therefor or in addition thereto)
then remaining pledged under the Instalment Receipt Agreement may, at the option
of the Financial Institutions, subject to complying with applicable law, be
acquired by the Financial Institutions in full satisfaction of the obligations
secured thereby. The Instalment Receipt Agreement will further provide that the
Financial Institutions may direct the Custodian to sell the Common Shares (and
any securities or property substituted therefor or in addition thereto) in
respect of which payment of the final instalment was not duly received, in
accordance with the requirements of applicable law and of the Instalment Receipt
Agreement, and remit to the holder of the Instalment Receipt the holder's pro
rata portion of the proceeds of such sale after deducting therefrom the amount
of the remaining unpaid instalment, the amount of any applicable withholding
taxes and the holder's pro rata portion of the costs of such sale. THE
INSTALMENT RECEIPT AGREEMENT WILL PROVIDE THAT, UNLESS THE FINANCIAL
INSTITUTIONS SHALL HAVE ACQUIRED THE COMMON SHARES (AND ANY SECURITIES OR
PROPERTY SUBSTITUTED THEREFOR OR IN ADDITION THERETO) IN FULL SATISFACTION OF
THE OBLIGATIONS OF A HOLDER, THE FOREGOING SHALL NOT LIMIT ANY OTHER REMEDIES
AVAILABLE TO THE FINANCIAL INSTITUTIONS AGAINST THE HOLDER OF AN INSTALMENT
RECEIPT IN THE EVENT THE PROCEEDS OF ANY SALE OF COMMON SHARES ARE INSUFFICIENT
TO COVER THE AMOUNT OF THE FINAL INSTALMENT AND THE COSTS OF SALE AND,
ACCORDINGLY, THE HOLDER SHALL IN SUCH CIRCUMSTANCES REMAIN LIABLE TO THE
FINANCIAL INSTITUTIONS FOR ANY SUCH DEFICIENCY.
GENERAL
The Custodian may require holders of Instalment Receipts from time to
time to furnish such information and documents as may be necessary or
appropriate to comply with any fiscal or other laws or regulations relating to
the Common Shares or to rights and obligations represented by Instalment
Receipts. The Custodian and the Security Agent shall not be responsible for any
taxes, duties, or other governmental charges or expenses which are or may become
payable in respect of the Instalment Receipts, or the Instalment Receipt
Subscription Rights or the Common Shares represented by the Instalment Receipts,
as the case may be. In this regard, the Custodian and the Security Agent shall
be entitled to deduct or withhold from any payment or other distribution
required or contemplated by the Instalment Receipt Agreement the appropriate
amount of money or property, or to require holders of Instalment Receipts to
make any required payments, and to withhold delivery of certificates
representing the Common Shares from defaulting holders of Instalment Receipts
until satisfactory provision for payment is made in respect of any non-resident
Canadian withholding and other taxes.
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The Corporation will be liable for charges and expenses of the Custodian
and the Security Agent except for any taxes, duties or other governmental
charges or expenses which may be payable by holders of Instalment Receipts as
described above.
Apart from the changes which do not materially prejudice the holders of
Instalment Receipts as a group (which may be made by the Custodian without the
consent of such holders), the Instalment Receipt Agreement may not be amended
without the affirmative vote of the holders of Instalment Receipts entitled to
not less than two-thirds of the Common Shares represented by Instalment Receipts
which are represented and voted at a meeting duly called for the purpose. The
procedure for such meetings will be substantially similar to that governing
meetings of holders of Common Shares.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal U.S. federal income tax
consequences that may be relevant with respect to the acquisition, ownership and
disposition of the Common Shares to a holder thereof. This summary does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to a decision to purchase the Common Shares. In particular, this
summary deals only with U.S. Holders (as defined below) that are initial
purchasers of the Common Shares and that will hold the Common Shares as capital
assets, and does not address the tax treatment of special classes of U.S.
Holders, such as dealers or traders in securities or currencies, banks,
insurance companies, tax-exempt entities, persons that will hold the Common
Shares as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for U.S. federal income tax purposes, persons that own (or are
deemed to own for U.S. tax purposes) 10% or more (by voting power or value) of
the shares of the Corporation and holders whose "functional currency" is not the
U.S. dollar.
As used herein, the term "U.S. Holder" means a holder of the Common
Shares who is a citizen of or resident in the United States, a corporation or
partnership created or organized in or under the laws of the United States or
any state thereof (including the District of Columbia), an estate the income of
which is subject to U.S. federal income taxation regardless of its source or a
trust (i) the administration over which a U.S. court can exercise primary
supervision and (ii) all of the substantial decisions of which one or more U.S.
fiduciaries have the authority to control. Notwithstanding the preceding
sentence, to the extent provided in U.S. Treasury Regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons also will be
a U.S. Holder.
This summary is based on the tax laws of the United States as in effect
on the date of this Prospectus (including the Internal Revenue Code of 1986, as
amended (the "Code")), judicial decisions, administrative pronouncements, and
existing and proposed U.S. Treasury Regulations available as of the date hereof,
changes to any of which after the date of this Prospectus could apply on a
retroactive basis and affect the tax consequences described herein.
Prospective purchasers should consult their own tax advisors as to the
tax consequences of the acquisition, ownership and disposition of the Common
Shares in light of their particular circumstances, including in particular, the
effect of any foreign, and U.S. state and local tax laws.
Treatment of Subscription Rights
The characterization of the Fully Paid Subscription Rights for U.S.
federal income tax purposes before the Acquisition Closing (the "Closing Date")
is not entirely clear. Before the Closing Date, the Fully Paid Subscription
Rights may be viewed as representing a right to receive Common Shares that are
delivered on or before the Closing Date. Under this view, a U.S. Holder would be
treated as having acquired an interest in the Common Shares on the Closing Date
at a cost equal to the purchase price paid by the U.S. Holder for the Fully Paid
Subscription Rights. If the Common Shares are not delivered by the Termination
Date, any interest payable to U.S. Holders with respect to the return of the
amount paid for the Fully Paid Subscription Rights would be taxable as ordinary
interest income on the Termination Date or when received by the U.S. Holder,
depending on the U.S. Holder's method of tax accounting.
Alternatively, during the period prior to the Closing Date, the Fully
Paid Subscription Rights may be viewed as representing an interest in the
escrowed funds consisting of the amounts paid for the Fully Paid Subscription
Rights. Under this view, a U.S. Holder's share of the interest earnings on such
escrowed funds would be taxable as ordinary interest income at the time it is
received by the escrow agent or accrued, depending on the U.S. Holder's method
of tax accounting, regardless of whether these earnings were distributed to the
U.S. Holder. On the Closing Date, a U.S. Holder would be deemed to have acquired
the Common Shares at a cost equal to the price paid for the Fully Paid
Subscription Rights plus such U.S. Holder's share of interest earnings on the
escrowed funds.
Dividends on Common Shares
Subject to the discussion below under the caption "Potential Passive
Foreign Investment Company Status," the gross amount of any distribution of cash
(including the amount of any Canadian taxes withheld therefrom) paid to a U.S.
Holder on the Common Shares generally will be subject to U.S. federal income
taxation as foreign source dividend income at the time of receipt, to the extent
paid out of current or accumulated earnings and profits, as determined under U.S
federal income taxation principles. Distributions on the Common Shares that
constitute dividend income will not be eligible for the dividends received
deduction generally allowed to corporations under the Code. To the extent that
the amount of any distribution on the Common Shares exceeds the Corporation's
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as tax-free return of capital to the extent
of the U.S. Holder's adjusted tax basis in the Common Shares and will be applied
against and reduce such basis. To the
- 23 -
<PAGE>
<PAGE>
extent that such distribution exceeds the U.S. Holder's adjusted basis in the
Common Shares, the distribution will be taxed as capital gain.
Any such dividend on the Common Shares paid in Canadian dollars will be
included in the gross income of a U.S. Holder in an amount equal to the U.S.
dollar value of the Canadian dollars. The amount of any distribution of property
other than cash will be the fair market value of such property on the date of
distribution.
Sale or Exchange of Common Shares
Subject to the discussion below under the caption "Potential Passive
Foreign Investment Company Status," gain or loss realized by a U.S. Holder on
the sale or exchange of Common Shares will be recognized for U.S. federal income
tax purposes as capital gain or loss in an amount equal to the difference
between the U.S. Holder's adjusted tax basis in the Common Shares and the amount
realized on such sale or exchange. In the case of a noncorporate U.S. Holder,
the maximum marginal U.S. federal income tax rate applicable to such gain will
be lower than the maximum marginal U.S. federal income tax rate applicable to
ordinary income if such U.S. Holder's holding period for such Common Shares
exceeds one year and will be further reduced if such Commons Shares were held
for more than 18 months.
Subject to certain limitations, including limitations on U.S. foreign
tax credits generally, a U.S. Holder may elect to deduct in computing its
taxable income, or credit against its U.S. federal income tax liability,
Canadian taxes withheld from dividend paid to the U.S. Holder. For purposes of
calculating the U.S. foreign tax credit, dividends paid by the Corporation
generally will constitute foreign source "passive income", or in the case of
certain U.S. Holders, "financial services income." The calculation of U.S.
foreign tax credits involves the application of rules that depend on a U.S.
Holder's particular circumstances. U.S. Holders of Common Shares should consult
their own tax advisors regarding the application of the U.S. foreign tax credit
rules to distributions made on the Common Shares.
Potential Passive Foreign Investment Company Status
A non-U.S. corporation will be classified as a "passive foreign
investment company" (a "PFIC") for U.S. federal income tax purposes in any
taxable year in which, after applying certain look-through rules, either (i) at
least 75% of its gross income is "passive income" or (ii) on average at least
50% of the gross value of its assets is attributable to assets that produce
"passive income" or are held for the production of passive income. Passive
income for this purpose generally includes dividends, interest, royalties, rents
and gains from commodities and securities transactions.
Based on its estimate of gross income and the average value of its gross
assets, the Corporation believes that it will not be classified as a PFIC for
its current taxable year. The Corporation's status in future years will depend
on its assets and activities in those years. The Corporation has no reason to
believe that its assets or activities will change in a manner that would cause
it to be classified as a PFIC. If the Corporation were a PFIC, a U.S. Holder of
the Common Shares generally would be subject to potentially punitive imputed
interest charges and other disadvantageous tax treatment with respect to any
gain from the sale or exchange of, and certain distributions with respect to,
the Common Shares. U.S. Holders should consult their own tax advisors regarding
the tax consequences which would arise if the Corporation were treated as a
PFIC.
Information Reporting and Backup Withholding Tax
U.S. information reporting requirements and backup withholding tax
generally will apply to certain payments to certain non-corporate holders of
Common Shares. Information reporting generally will apply to payments of
dividends on, and to proceeds from the sale or redemption of, Common Shares by a
payor within the United States to a holder of Common Shares (other than an
"exempt recipient," which includes corporations and certain other persons). A
payor within the United States will be required to withhold 31% of any payment
of proceeds from the sale or exchange of Common Shares within the United States
to a holder (other than an "exempt recipient") if such holder fails to furnish
its correct taxpayer identification number or otherwise fails to comply with
such backup withholding tax requirements.
Recently-issued Treasury Regulations would modify certain of the rules
discussed above generally with respect to payments on the Common Shares made
after December 31, 1998. In particular, a payor within the United States will be
required to withhold 31% of any payments of dividends on, or proceeds from the
sale of, Common Shares within the United States to a Non-U.S. Holder if such
holder fails to provide an appropriate certification. In the case of such
payments by a payor within the United States to a foreign partnership (other
than payments to a foreign partnership that qualifies as a "withholding foreign
partnership" within the meaning of such Treasury Regulations and payments to a
foreign partnership that are effectively connected with the conduct of a trade
or business in the United States), the partners of such partnership will be
required to provide the certification discussed above in order to establish an
exemption from backup withholding tax and information reporting requirements.
Moreover, a payor may rely on a certification provided by a Non-U.S. Holder only
if such payor does not have actual knowledge or a reason to know that any
information or certification stated in such certificate is unreliable.
- 24 -
<PAGE>
<PAGE>
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the principal Canadian
federal income tax considerations under the Income Tax Act (Canada) (the
"Canadian Tax Act"), to holders who, at all material times, are not resident in
Canada and do not carry on business in Canada for the purposes of the Act and
are residents of the United States and do not have a "permanent establishment"
or "fixed base" in Canada for the purposes of the Canada-United States Income
Tax Convention ("U.S. Residents").
If an amount in respect of a Subscription Right is repaid to U.S.
Residents with interest upon the termination of the Subscription Rights in the
circumstances referred to above, such interest will generally be subject to
Canadian withholding tax at the rate of 10%.
Dividends paid or credited or deemed under the Canadian Tax Act to be
paid or credited to a U.S. Resident will generally be subject to withholding tax
at the rate of 15%.
A U.S. Resident will not be subject to tax under the Canadian Tax Act in
respect of any capital gain on the disposition of Subscription Rights or Common
Shares provided that, at no time during the five years immediately preceding the
disposition of the Subscription Rights or Common Shares, 25% or more of the
issued shares of any class of the capital stock of the Corporation belonged to
the U.S. Residents to persons with whom the U.S. Resident does not deal at arm's
length, or the US Resident and persons with whom the US Resident does not deal
at arm's length.
The foregoing is not exhaustive of all Canadian federal income tax
consequences and does not take into account or anticipate any changes in law or
administrative or assessing practices in Canada. It is of a general nature only
and is not intended to be, and should not be construed to be, legal or tax
advice to any investor and no representation with respect to the tax
consequences to any investor is made. Potential investors are urged to consult
with their own tax advisors with respect to the tax consequences to them of
holding or disposing of Subscription Rights or Common Shares.
DIVIDENDS
The Corporation's Board of Directors has established a policy to pay
dividends on the Corporation's equity shares (Common Shares and Special Shares)
of between 10% and 20% of the Corporation's after-tax net income (after
providing for the payment of dividends on any of the Corporation's Preference
Shares). Any payment of dividends (including the amounts thereof) is at the
discretion of the Board of Directors and is dependant upon the Corporation's
results of operations, financial conditions and other factors that the Board of
Directors deems relevant.
Since completion of Newcourt's initial public offering of Common Shares
in February 1994, the Corporation has declared and paid a quarterly dividend
(after adjusting for the subdivision of Newcourt's Common Shares - See "Recent
Developments") of $0.025 per equity share (Common and Special Shares) in May,
August and November of 1994 and in February and August of 1995, a quarterly
dividend of $0.030 per equity share in November of 1995 and February, May and
August of 1996, a quarterly dividend of $0.035 per equity share in November,
1996 and February, May and August, 1997 and a quarterly dividend of $0.04 per
equity share in November 1997.
DESCRIPTION OF SHARE CAPITAL
The authorized capital of the Corporation consists of an unlimited
number of Common Shares, Special Shares and Class A Preference Shares.
COMMON SHARES
Each Common Share of the Corporation is entitled to one vote at meetings
of the shareholders of the Corporation and to receive dividends if, as and when
declared by the Board of Directors. Subject to the prior rights of holders of
Class A Preference Shares, holders of Common Shares will participate equally in
any distribution of the assets of the Corporation upon its liquidation,
dissolution or winding-up.
SPECIAL SHARES
The Special Shares carry exactly the same rights, privileges,
restrictions and conditions of the Common Shares, except that holders of the
Special Shares are not entitled to vote at any meeting of the shareholders of
the Corporation. The holders of such Special Shares are entitled to convert
their Special Shares into Common Shares on a share-for-share basis. There are no
Special Shares outstanding.
CLASS A PREFERENCE SHARES
The Class A Preference Shares are issuable in series. Holders of such
preference shares are not entitled to notice of, or to attend or to vote at, any
meeting of the shareholders of the Corporation, except as may be specifically
provided in the provisions attaching to any series. The Class A Preference
Shares rank senior to the Common Shares and Special Shares with respect to the
payment of dividends and distributions in the event of the liquidation,
dissolution or winding-up of the Corporation. The Board of Directors of the
Corporation is empowered to fix, before the issue thereof, the number of Class A
Preference Shares of each series
- 25 -
<PAGE>
<PAGE>
and the designation, rights, privileges, restrictions and conditions attaching
to the Class A Preference Shares of each series. There are no Class A Preference
Shares outstanding.
USE OF PROCEEDS
The estimated net proceeds to be received by the Corporation, after
deducting the estimated expenses of issue of $10 million and the Underwriters'
fees of $__________, will be $__________.
The Corporation will use $__________ of the net proceeds of the issue to
finance the cash portion of the purchase price for the Acquisition (see
"Acquisition of AT&T Capital Corporation") and the remainder will be used for
working capital and general corporate purposes. The Stock Purchase Agreement
relating to the Acquisition provides that it is subject to certain closing
conditions, including receipt of all regulatory approvals on terms satisfactory
to the Corporation. The net proceeds from the issue and sale of the Subscription
Rights will be held by Montreal Trust Company of Canada as depository pending
the Acquisition Closing. While the Corporation expects to complete the
Acquisition on the terms set out in the Stock Purchase Agreement, there can be
no assurance that it will do so.
PLAN OF DISTRIBUTION
Pursuant to an agreement (the "Underwriting Agreement") dated November
17, 1997 among the Corporation and CIBC Wood Gundy Securities Inc., Goldman
Sachs Canada, Merrill Lynch Canada Inc., ScotiaMcLeod Inc., Midland Walwyn
Capital Inc., Nesbitt Burns Inc., RBC Dominion Securities Inc., Midland Walwyn
Capital Inc. and TD Securities Inc., (collectively the "Underwriters"), the
Corporation has agreed to issue and sell and the Underwriters have severally
agreed to purchase on December 3, 1997 or such later date as the Underwriters
and the Corporation may agree but in any event not later than January 3, 1998,
all but not less than all the 35,000,000 Subscription Rights and to offer in the
United States up to 3,500,000 Fully Paid Subscription Rights offered hereby at a
price of Cdn.$46 per Fully Paid Subscription Right. The Underwriting Agreement
provides for the Corporation to pay the Underwriters a fee of Cdn.$1.84 per
Fully Paid Subscription Right sold pursuant to the offering, subject to
adjustment thereof in the event the Acquisition Closing does not occur by the
Termination Date. Certain members of management of Newcourt or its affiliates
and of AT&T Capital will purchase up to 2.1 million Subscription Rights of the
Subscription Rights offered by this Prospectus, for an aggregate purchase price
of up to Cdn.$100,000,000, for which no fee will be paid to the Underwriters.
The offering price for the Fully Paid Subscription Rights offered hereby has
been determined by negotiation between the Corporation and the Underwriters.
Concurrently with the offering of the Fully Paid Subscription Rights in
the United States, the Corporation is offering subscription rights evidenced by
the Instalment Receipt Subscription Rights. THE INSTALMENT RECEIPT SUBSCRIPTION
RIGHTS WILL NOT BE OFFERED OR SOLD IN THE UNITED STATES. See "Details of
Offering".
The Underwriting Agreement provides that the Underwriters may, at their
discretion, terminate their obligations thereunder upon the occurrence of
certain stated events. In the Underwriting Agreement, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the Subscription Rights offered and sold pursuant to the Underwriting
Agreement if any of the Subscription Rights being sold pursuant to the
Underwriting Agreement are purchased.
The Corporation has also granted to the Underwriters an Over-Allotment
Option to acquire at the issue price of the Subscription Rights, up to an
aggregate of 3,500,000 additional Subscription Rights. The Underwriters may
exercise such Over- Allotment Option in whole or in part at any time up to the
Closing of this offering to cover over-allotments, if any, or for market
stabilization purposes.
Pursuant to policy statements of the Ontario Securities Commission and
the Commission des valeurs mobilieres du Quebec, the Underwriters may not,
throughout the period of distribution under this Prospectus, bid for or purchase
the Subscription Rights. The foregoing restriction is subject to exceptions, on
the condition that the bid or purchase not be engaged in for the purpose of
creating actual or apparent active trading in, or raising the price of, the
Subscription Rights. Such exceptions include a bid or purchase permitted under
the by-laws and rules of The Toronto Stock Exchange and the Montreal Exchange
relating to market stabilization and passive market making activities and a bid
or purchase made for and on behalf of a customer where the order was not
solicited during the period of distribution, provided that the bid or purchase
was not engaged in for the purpose of creating actual or apparent active trading
in, or raising the price of the Subscription Rights. Pursuant to the
first-mentioned exception, in connection with this offering and subject to
applicable Canadian and United States law, the Underwriters may over-allot or
effect transactions which stabilize or maintain the market price of the
Subscription Rights at levels other than those which might otherwise prevail on
the open market. Such transactions, if commenced, may be discontinued at any
time.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Subscription Rights or Common Shares in accordance with Regulation M of the
Securities Exchange Act of 1934, as amended. Specifically, the Underwriters may
overallot the offering, creating a syndicate short position in the Common Shares
for their own account. The Underwriters may bid for and purchase Subscription
Rights or Common Shares in the open market to cover syndicate short positions.
In addition, the Underwriters may bid for and purchase Subscription Rights or
Common Shares in the open market to stabilize the price of the Subscription
Rights or Common Shares. These activities may stabilize or maintain the market
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<PAGE>
<PAGE>
price of the Subscription Rights or Common Shares above independent market
levels. The Underwriters are not required to engage in these activities, and may
end these activities at any time.
This offering is being made pursuant to the provisions of Rule 2710, the
Corporate Financing Rule of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"). As there is a bona fide independent
market for the Common Shares, this offering is being conducted in compliance
with Rule 2720(c)(3) of such Conduct Rules.
In the Underwriting Agreement, the Corporation has agreed to indemnify
the Underwriters in respect of certain liabilities, including liabilities under
the United States Securities Act of 1933, as amended.
PRICE RANGE AND TRADING VOLUME FOR COMMON SHARES
The Common Shares of the Corporation are listed and traded on The
Toronto Stock Exchange, the Montreal Exchange and the New York Stock Exchange.
The following table sets forth the high and low closing sale prices and the
approximate trading volumes for the Newcourt Common Shares on The Toronto Stock
Exchange for the periods indicated:
<TABLE>
<CAPTION>
PRICE RANGE
----------- APPROXIMATE
1995 HIGH LOW TRADING VOLUME
---- --- --------------
<S> <C> <C> <C>
First Quarter $16.50 $15.25 645,153
Second Quarter 18.50 16.00 1,114,034
Third Quarter 18.88 17.50 1,318,631
Fourth Quarter 21.00 16.50 3,639,406
1996
First Quarter $27.25 $21.00 4,341,977
Second Quarter 33.65 27.00 3,494,939
Third Quarter 38.50 31.75 3,758,222
Fourth Quarter 49.35 36.50 4,895,319
1997
First Quarter $56.40 $46.00 5,714,681
Second Quarter(1) 37.50 27.45 10,070,619
Third Quarter 54.75 35.75 14,767,610
October 55.40 36.00 4,064,575
November (to November 14) 53.00 49.75 2,451,530
</TABLE>
- ----------
Note: (1) Effective April 14, 1997, the outstanding Common Shares were
subdivided on a two-for-one basis.
On November 14, 1997, the closing price of the Common Shares on The
Toronto Stock Exchange was $51.30. The Corporation's Common Shares were listed
on the New York Stock Exchange on April 29, 1997 and the closing sale price of
the Common Shares on the New York Stock Exchange on November 14, 1997 was
U.S.$36.31.
ELIGIBILITY FOR INVESTMENT
In the opinion of Blake, Cassels & Graydon, counsel to the Corporation,
and Fasken Campbell Godfrey, counsel to the Underwriters, the Subscription
Rights and the Common Shares which may be acquired pursuant to such Subscription
Rights, if issued on the date hereof, would be qualified investments, as at such
date, under the Income Tax Act (Canada) (the "Tax Act") for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans (other than deferred profit sharing plans to which
contribution payments are made by Newcourt or a corporation with which Newcourt
does not deal at arm's length within the meaning of the Tax Act is an employer)
and, assuming that the Tax Act is amended as provided in Bill C-69 which was
introduced in the House of Commons but not passed during the Second Session,
would not be "foreign property" as defined in Part XI of the Tax Act. No opinion
is expressed as to whether the Subscription Rights or Common Shares will be
foreign property in the unlikely event that the proposed amendments are not
enacted.
- 27 -
<PAGE>
<PAGE>
LEGAL MATTERS
The matters referred to under "Eligibility for Investment" and certain
other legal matters relating to the Subscription Rights offered by this
prospectus will be passed upon by Blake, Cassels & Graydon, Toronto on behalf of
the Corporation and by Fasken Campbell Godfrey, Toronto on behalf of the
Underwriters. Certain matters relating to the Subscription Rights offered by
this prospectus (and the underlying Common Shares) will be passed upon by White
& Case, New York on behalf of the Corporation and Shearman & Sterling, Toronto
and New York, on behalf of the Underwriters. As of November 7, 1997, the
partners and associates of Blake, Cassels & Graydon as a group beneficially
owned, directly or indirectly, less than one per cent of the outstanding Common
Shares of the Corporation. As of November 7, 1997, the partners and associates
of Fasken Campbell Godfrey as a group beneficially owned, directly or
indirectly, less than one per cent of the outstanding Common Shares of the
Corporation.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Corporation are Ernst & Young, Chartered
Accountants, Ernst & Young Tower, 222 Bay Street, Toronto, Ontario, M5K 1J7.
The transfer agent and registrar for the Subscription Rights, the
Instalment Receipts and the Common Shares in Canada is Montreal Trust Company of
Canada at its principal transfer office in Toronto, Montreal and Vancouver and,
in the United States, the transfer agent and registrar for the Common Shares is
the New York office of a Canadian chartered bank.
PURCHASERS' STATUTORY RIGHTS
Securities legislation in several of the Provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase securities
within two business days after receipt or deemed receipt of a prospectus and any
amendment. In several of the Provinces, securities legislation further provides
a purchaser with remedies for rescission or, in some jurisdictions, damages
where the prospectus and any amendment contain a misrepresentation or are not
delivered to the purchaser, provided that such remedies are exercised by the
purchaser within the time limit prescribed by the securities legislation of the
purchaser's Province. The purchaser should refer to any applicable provisions of
the securities legislation of the purchaser's Province for the particulars of
these rights or consult with a legal advisor.
- 28 -
<PAGE>
<PAGE>
NEWCOURT CREDIT GROUP INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
<PAGE>
COMPILATION REPORT
To the Directors of Newcourt Credit Group Inc.
We have reviewed, as to compilation only, the accompanying unaudited pro forma
consolidated balance sheet of Newcourt Credit Group Inc. as at December 31, 1996
and the unaudited pro forma consolidated statement of income for the year then
ended. These unaudited pro forma consolidated financial statements have been
prepared solely for inclusion in this prospectus. In our opinion, these
unaudited pro forma consolidated financial statements have been properly
compiled to give effect to the proposed transactions and the assumptions
described in the notes thereto.
November 17, 1997
Ernst & Young
Chartered Accountants
Toronto, Canada
COMMENTS FOR UNITED STATES READERS ON CANADA
AND UNITED STATES REPORTING DIFFERENCES
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the pro
forma financial statements requires an examination or review substantially
greater in scope than the review we have conducted. Consequently, we are unable
to express any opinion in accordance with standards of reporting generally
accepted in the United States with respect to the compilation of the
accompanying unaudited pro forma financial information.
November 17, 1997
Ernst & Young
Chartered Accountants
Toronto, Canada
F-2
<PAGE>
<PAGE>
NEWCOURT CREDIT GROUP INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
AS AT As at As at
--------------- ---------------- -----------------
DEC. 31/96 Dec. 31/96 Dec. 31/96
Pro Forma
Newcourt/ AT&T Pro Forma Pro Forma
NEWCOURT Commcorp Capital Adjustments Reference Consolidated
---------------------------------------------------------------------------------------------------
[Note 2] [Note 3]
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in finance assets $964,539 $1,189,953 $2,855,841 $4,045,794
Investment in capital leases 5,683,088 5,683,088
Investment in operating leases 107,738 107,738 1,923,036 2,030,774
Assets held for securitization and
syndication 774,000 1,174,000 1,174,000
Investment in affiliated
companies 162,308 186,557 186,557
Accounts receivable 36,900 36,900 36,900
Fixed assets 40,859 55,136 55,136
Goodwill 54,279 268,451 176,306 $1,420,518 5 (a) 1,865,275
Other assets 23,871 71,918 917,747 989,665
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,164,494 $3,090,653 $11,556,018 $1,420,518 $16,067,189
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and accrued
liabilities $93,338 $152,578 $805,466 $958,044
Debt 1,543,144 1,825,406 9,450,719 11,276,125
Deferred income taxes 12,078 74,792 48,886 123,678
Payables to affiliates and former
affiliates 191,425 191,425
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,648,560 2,052,776 10,496,496 12,549,272
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 7,201 274,040 281,241
- -----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 415,160 929,902 1,236 2,204,764 5 (b) (c) 3,135,902
Paid in capital 686,813 (686,813) 5 (b) (c)
Recourse loans to senior
executives (21,508) 21,508 5 (b) (c)
Foreign currency translation (6,535) 6,535 5 (b) (c)
Retained earnings 100,774 100,774 125,476 (125,476) 5 (a) 100,774
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 515,934 1,030,676 785,482 1,420,518 3,236,676
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,164,494 $3,090,653 $11,556,018 $1,420,518 $16,067,189
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-3
<PAGE>
<PAGE>
NEWCOURT CREDIT GROUP INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(in thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED Year Ended Year Ended
---------------- ---------------- -----------------
DEC. 31/96 Dec. 31/96 Dec. 31/96
Pro Forma
Newcourt/ AT&T Pro Forma Pro Forma
NEWCOURT Commcorp Capital Adjustments Reference Consolidated
----------------------------------------------------------------------------------------------------
[Note 2] [Note 3]
<S> <C> <C> <C> <C> <C> <C>
FEE AND AFFILIATE INCOME
Securitization and syndication
fees $106,514 $123,781 $194,625 $318,406
Net income from affiliated
companies 8,549 8,549 8,549
Management fees 4,140 16,429 263,630 280,059
--------------- ---------------- ---------------- -------------
119,203 148,759 458,255 607,014
Net rental revenue from
operating leases 7,047 7,047 329,207 336,254
Net finance income 45,339 95,431 366,823 462,254
--------------- ---------------- ---------------- -------------
TOTAL ASSET FINANCE INCOME 171,589 251,237 1,154,285 1,405,522
Operating expenses 107,439 172,794 773,973 71,000 5 (d) 1,017,767
--------------- ---------------- ---------------- ---------------- -------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 64,150 78,443 380,312 (71,000) 387,755
Provision for income taxes 13,469 26,621 150,082 176,703
Minority interest 1,915 4,530 6,445
--------------- ---------------- ---------------- ---------------- -------------
NET INCOME FOR THE YEAR $50,681 $49,907 $225,700 $(71,000) $204,607
=============== ================ ================ ================ =============
Earnings per Common Share 6 ________
=============
</TABLE>
See accompanying notes
F-4
<PAGE>
<PAGE>
NEWCOURT CREDIT GROUP INC.
Notes to the Unaudited Pro Forma Consolidated Balance Sheet
and Unaudited Pro Forma Consolidated Statement of Income
as at and for the year ended December 31, 1996
(unaudited)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated balance sheet and unaudited pro
forma consolidated statement of income have been prepared using the
following information:
(a) Audited consolidated financial statements of Newcourt for the
fiscal year ended December 31, 1996, which are incorporated by
reference in this prospectus;
(b) Audited consolidated financial statements of Commcorp Financial
Services Inc. ("Commcorp") for the fiscal year ended October 31,
1996;
(c) Audited consolidated financial statements of AT&T Capital
Corporation ("AT&T Capital") for the fiscal year ended December
31, 1996, which are included in this prospectus; and
(d) Such other supplementary information as was considered necessary
to reflect the proposed transaction in these pro forma financial
statements.
The unaudited pro forma consolidated financial statements of Newcourt
should be read in conjunction with the consolidated financial
statements, including notes thereto, of Newcourt and AT&T Capital.
The unaudited pro forma consolidated financial statements are not
intended to reflect the results of operations or the financial position
that would have actually resulted had the transaction been effected on
the date indicated or the results which may be obtained in the future.
Certain of the financial statement items of AT&T Capital and Commcorp
have been reclassified to conform to the presentation format used by
Newcourt.
2. PRO FORMA NEWCOURT/COMMCORP
On August 29, 1997, Newcourt acquired all of the outstanding shares of
Commcorp in exchange for cash and Newcourt shares totalling $366 million
(the "Commcorp Acquisition"). The Commcorp Acquisition was accounted for
as a purchase and the results of operations of Commcorp have been
included in the results of Newcourt from the date of acquisition. For
the purposes of these unaudited pro forma consolidated financial
statements, the financial position and results of operations of Newcourt
and Commcorp ("Pro Forma Newcourt/Commcorp") have been combined to give
effect to the Commcorp Acquisition as if it had occurred on December 31,
1996 and January 1, 1996 in the case of the unaudited pro forma
consolidated balance sheet and the unaudited pro forma consolidated
statement of income respectively. Accordingly, the following adjustments
have been made to reflect the acquisition of Commcorp:
(a) Issuance of treasury shares by Newcourt in amount of $277 million
to satisfy a portion of the purchase price.
(b) Issuance of $254 million of common shares for cash of which $89
million was used to satisfy the remaining portion of the purchase
price.
(c) The difference between the proceeds of the share issue of $243
million (net of issue costs) and the cash portion of the purchase
price of $89 million was used to reduce outstanding debt.
(d) Amortization of goodwill over a twenty year period.
(e) Reduction of interest expense relating to the proceeds of the
common share offering exceeding the cash portion of the purchase
price.
(f) No adjustment has been made for restructuring costs to integrate
the operations of Commcorp with Newcourt. A restructuring charge
of $26.4 million (after tax) was charged to income by Newcourt in
the third quarter of 1997.
F-5
<PAGE>
<PAGE>
The pro forma consolidated statements of Newcourt contained in the
Corporation's prospectus dated August 15, 1997 and comprising the
unaudited pro forma consolidated balance sheet and the unaudited pro
forma consolidated statement of income as at and for the year ended
December 31, 1996, and the related notes and assumptions thereto, which
result in the Pro Forma Newcourt/Commcorp, have been incorporated by
reference herein.
3. AT&T CAPITAL CORPORATION
The consolidated financial statements of AT&T Capital as at and for the
year ended December 31, 1996, included elsewhere in the prospectus, were
prepared in accordance with accounting principles generally accepted in
the United States and are expressed in United States dollars. For the
purposes of these unaudited pro forma consolidated financial statements,
the following adjustments have been made to the consolidated balance
sheet and consolidated income statement of AT&T Capital to conform them
to Newcourt's basis of presentation.
(a) Differences between Accounting Principles Generally Accepted in
Canada and the United States [GAAP].
(i) As a result of the reorganization during 1996, certain of
the assets of AT&T Capital were revalued for tax but not
for accounting purposes. Under U.S. GAAP, such revaluation
results in additional deferred taxes which, in this case,
were offset by an increase in additional paid-in capital.
Under Canadian GAAP, such deferred taxes are not recorded.
Accordingly, both deferred taxes and additional paid-in
capital were reduced by U.S.$159.6 million for Canadian
GAAP purposes.
(ii) In prior years, AT&T Capital acquired certain companies
which, for U.S. GAAP purposes, were accounted for using
the pooling of interests method. Under Canadian GAAP, such
acquisitions would be accounted for using the purchase
method. At December 31, 1996 the remaining portion of
unamortized goodwill would have been U.S.$24.1 million.
For the year ended December 31, 1996, additional
amortization of goodwill of U.S.$ 3.1 million has been
recorded for Canadian GAAP purposes.
(iii) In prior years, AT&T Capital entered into several
leveraged leases. Under U.S. GAAP, AT&T Capital discloses
its investment in capital leases net of the related
non-recourse debt. For Canadian GAAP purposes, such lease
receivables and non-recourse debt are disclosed on a gross
basis unless a legal right of set-off exists. Accordingly,
for Canadian GAAP purposes, net investment in capital
leases and long-term debt has been increased by U.S.$222.5
million.
(iv) AT&T Capital has investments in several joint ventures
which, for U.S. GAAP purposes, have been accounted for
using the equity method. Under Canadian GAAP, such joint
ventures are accounted for using proportionate
consolidation. Accordingly, net investment in capital
leases and long-term debt have been increased by U.S.$63
million and U.S.$12 million respectively and net
investment in finance assets has been reduced by U.S.$51
million (to eliminate inter-company balances) as at
December 31, 1996 for Canadian GAAP purposes. The
adjustment to consolidated revenues and expenses of AT&T
Capital is not significant.
(v) As discussed in the consolidated financial statements of
AT&T Capital, AT&T Capital entered into a number of
securitization transactions during 1996 and in prior
years. Under U.S. GAAP, each of these transactions was
accounted for as a sale of receivables. Under Canadian
GAAP, however, certain of these transactions would be
accounted for as financings. Accordingly, net investment
in capital leases and long- term debt was increased by
U.S.$213.5 million and U.S.$198.0 million respectively and
other assets and deferred taxes was decreased by U.S.$22.3
million and U.S.$7.8 million respectively under Canadian
GAAP as at December 31, 1996. In addition, capital lease
revenue was increased by U.S.$51.9 million, revenue from
securitizations was decreased by U.S.$22.2 million,
interest expense was increased by U.S.$25.7 million and
other revenue was decreased by U.S.$3.9 million for
Canadian GAAP purposes.
The following tables summarizes the differences between what was
reported by AT&T Capital in its consolidated financial statements
under US GAAP and what has been reflected herein for Canadian
GAAP purposes as at and for the year ended December 31, 1996:
F-6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
[millions of U.S. dollars]
<S> <C>
Net income for the year ended December 31, 1996
as reported under U.S. GAAP $168.5
Impact of accounting for securitizations as financings
under Canadian GAAP
Net finance income (net of an adjustment to interest
expense of $25.7) 26.2
Securitization and syndication fees (22.2)
Other Revenue (3.9)
Amortization of goodwill related to acquisitions
accounted for as purchases under Canadian GAAP (3.1)
------
Net income for the year ended December 31, 1996
under Canadian GAAP $165.5
=======
Shareholders' equity as at December 31, 1996
as reported under U.S. GAAP $707.3
Elimination of merger related deferred tax asset (159.6)
Unamortized goodwill related to acquisitions accounted
for as purchases under Canadian GAAP 24.1
Net impact of securitizations reported as financings
under Canadian GAAP in prior periods 1.5
------
Shareholders' equity as at December 31, 1996
under Canadian GAAP $573.3
=======
</TABLE>
(b) Currency
The consolidated financial statements of AT&T Capital are
expressed in United States dollars. For the purposes of these
unaudited pro forma consolidated financial statements, the
consolidated balance sheet of AT&T Capital has been translated
into Canadian dollars using the December 31, 1996 exchange rate
of 1.3702 and the consolidated statement of income has been
translated into Canadian dollars using the weighted average
exchange rate for the year ended December 31, 1996 of 1.3636.
4. PRO FORMA ASSUMPTIONS
(a) The acquisition, pursuant to an agreement dated November 17,
1997, whereby Newcourt has agreed to purchase all of the issued
and outstanding Common Shares of AT&T Capital, subject to
satisfaction of certain closing conditions, for approximately
$2.2 billion payable as follows:
(i) $1.45 billion by means of cash payment at closing; and
(ii) $753 million by the issue of approximately 17.2 million
Newcourt Common Shares from treasury at closing.
(b) The acquisition of AT&T Capital has been accounted for using the
purchase method.
The difference between the purchase price and estimated fair
value of the net assets acquired has been allocated to goodwill.
The amount assigned to goodwill will be amortized to income over
twenty years.
(c) The issuance of approximately 35 million Common Shares pursuant
to this prospectus for net proceeds (after the underwriters' fees
and the expenses of issue) of $__________ billion.
F-7
<PAGE>
<PAGE>
5. PRO FORMA ADJUSTMENTS
The pro forma adjustments contained in these unaudited pro forma
consolidated financial statements are based on estimates and assumptions
by management of Newcourt based on available information. The
adjustments for the actual acquisition may differ as a result of changes
arising from evaluation of the fair value of AT&T Capital's net assets
by Newcourt after the effective date of acquisition. The following
adjustments have been made to reflect the proposed transactions:
(a) To reflect the purchase of all of the issued and outstanding
common shares of AT&T Capital.
(b) Issuance of treasury shares by Newcourt in amount of $753 million
to satisfy a portion of the purchase price.
(c) Issuance of $1.45 billion of Common Shares by means of this
prospectus which will be used to satisfy the remaining portion of
the purchase price.
(d) Amortization of goodwill over a twenty year period
(e) No adjustment has been made for restructuring costs to integrate
the operations of AT&T Capital with Newcourt which are
anticipated to be between $90 and $100 million, after tax.
These will be charged to income as incurred.
6. EARNINGS PER SHARE
Earnings per share reflects the issuance of approximately 52.2 million
Common Shares arising from the acquisition of AT&T Capital and the
issuance of Common Shares pursuant to this prospectus and the issuance
of 15 million Common Shares arising from the acquisition of Commcorp
combined with the average number of Common Shares outstanding
(subsequent to the subdivision of the Common Shares) during the period.
7. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES
The unaudited pro forma consolidated financial statements have been
prepared using the consolidated financial statements of Newcourt and
Commcorp prepared in accordance with Canadian GAAP and using the
consolidated financial statements of AT&T Capital, adjusted to conform
to Canadian GAAP. Had these unaudited pro forma consolidated financial
statements been prepared using the U.S. GAAP results of Newcourt,
Commcorp and AT&T Capital as described in the notes to each of the
respective financial statements, the following balances would have been
reflected in these unaudited pro forma consolidated financial
statements:
<TABLE>
<CAPTION>
U.S. CANADIAN
GAAP GAAP
---- ----
(millions of Canadian dollars)
<S> <C> <C>
Investment in finance assets $4,329 $4,046
Assets held for Securitization and Syndication 2,574 1,174
Debt 12,290 11,276
Securitization and Syndication fees 349 318
Management fees 285 280
Net finance income 427 462
Net income for the year 209 205
</TABLE>
F-8
<PAGE>
<PAGE>
NEWCOURT CREDIT GROUP INC.
SUPPLEMENT TO THE UNAUDITED
COMPARATIVE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
F-9
<PAGE>
<PAGE>
RECONCILIATION TO UNITED STATES ACCOUNTING PRINCIPLES
The unaudited interim consolidated financial statements of the Corporation for
the nine months ended September 30, 1997 (the "Interim Statements") were
prepared in accordance with accounting principles generally accepted in Canada
[GAAP]. As required by the regulations of the Securities and Exchange
Commission, the following summarizes the material differences between U.S. and
Canadian GAAP as they apply to the Interim Statements:
(a) For Canadian GAAP purposes, unrealized translation gains and
losses on long term monetary items are deferred and amortized
over the remaining terms of those items. For U.S. GAAP purposes,
such gains and losses are recorded in income immediately.
(b) For Canadian GAAP purposes, amounts paid to employees to retire
issued stock options without issuing common stock are recorded as
capital transactions. For U.S. GAAP purposes, such amounts paid
are recorded as compensation expense.
(c) For Canadian GAAP purposes, finance assets sold to securitization
vehicles are not consolidated for financial reporting. Under U.S.
GAAP, the Corporation is required to consolidate certain of these
securitization vehicles. In addition, U.S. GAAP requires the
Corporation to equity account for its interest in certain other
securitization vehicles. Accordingly, for U.S. GAAP purposes, the
Corporation has deferred gains recorded on the asset sales to
these vehicles, and, in the case of consolidated vehicles, has
recorded their assets and liabilities on its consolidated balance
sheet. The Corporation will recognize the deferred gains in
income as the related finance assets are collected.
(d) The restructuring charge was reduced for costs that would have
been accrued as an adjustment to the liabilities assumed through
the purchase under U.S. GAAP, rather than expensed as permitted
by Canadian GAAP.
THE FOLLOWING TABLES PRESENT THE AMOUNTS THAT WOULD HAVE BEEN REPORTED FOR U.S.
GAAP PURPOSES IN 1997 AND 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30, 1997 SEPT. 30, 1996
$ $
-------------- --------------
(thousands, except per share amounts)
<S> <C> <C>
Net income for the year - Canadian GAAP 33,135 33,110
Difference in accounting for foreign exchange
gains (losses) (net of income taxes recovery of
$164 [1996 - ($895)]) (202) 1,103
Difference in accounting for options retired (1,100) (163)
Difference in accounting for securitization
transactions (net of income tax of $268 [1996 -
$506]) 4,188 633
Difference in accounting for restructuring
charge (net of income tax recovery of $15,300
[1996 - Nil] 18,700 ---
- --------------------------------------------------------------------------------
Net income for the year - U.S. GAAP 54,721 34,683
=================================================================================
Primary and fully diluted earnings per share $ 0.81 $0.69
=================================================================================
</TABLE>
F-10
<PAGE>
<PAGE>
CHANGES IN BALANCE SHEET ITEMS, AS COMPUTED UNDER U.S. GAAP:
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
1997
$
--------------
(thousands)
<S> <C>
Increase in investment in finance assets 147,744
Increase in accrued liabilities 1,744
Increase in debt 1,421,430
Increase in subordinated debt 19,197
Decrease in other assets (3,861)
Increase in assets held for securitization and syndication 1,279,000
</TABLE>
CHANGES IN SHAREHOLDERS' EQUITY, AS COMPUTED UNDER U.S. GAAP:
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
1997
$
-------------
(thousands)
<S> <C>
Retained earnings, beginning of year 85,966
Net income for the year 54,721
Dividends paid on common shares (6,681)
-------------------------------------------------------------------
Retained earnings, end of year 134,006
Share Capital 1,174,392
- ----------------------------------------------------------------------
Total Shareholders' Equity 1,308,398
=====================================================================
</TABLE>
F-11
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
* The following Unaudited Interim Consolidated Financial Statements of AT&T
Capital Corporation, together with the notes thereto, have been obtained from
AT&T Capital Corporation's Form 10-Q for the nine months ended September 30,
1997 filed with the United States Securities and Exchange Commission under
applicable U.S. laws and regulations.
F-12
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30 AS AT DECEMBER 31
------------------ -----------------
(UNAUDITED)
1997 1996*
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 44,703 $ -
Net investment in finance receivables 2,353,302 2,135,250
Net investment in capital leases 3,633,915 3,648,731
Investment in operating leases,
net of accumulated depreciation of
$910,137 in 1997 and $777,905 in 1996 1,669,505 1,403,470
Deferred charges and other assets 837,957 788,935
Deferred income taxes 246,306 116,126
----------- ----------
TOTAL ASSETS $ 8,785,688 $ 8,092,512
=========== ===========
LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY:
LIABILITIES
Short-term notes, less unamortized
discounts of $20,649 in 1997 and
$3,112 in 1996 $ 2,209,121 $ 1,867,247
Income taxes and other payables 475,748 580,575
Payables to affiliates and Former Affiliates 41,637 139,706
Medium and long-term debt 5,109,607 4,597,677
----------- ---------
TOTAL LIABILITIES 7,836,113 7,185,205
----------- ----------
COMMITMENTS AND CONTINGENCIES
Preferred Securities:
Company-obligated preferred
securities 200,000 200,000
------- -------
Shareowners' Equity:
Common stock, one cent par value:
Authorized 150,000,000 shares,
issued and outstanding, 90,337,379
shares in 1997 and 90,198,571 shares in 1996 903 902
Additional paid-in-capital 636,942 633,676
Recourse loans to senior executives (16,259) (15,697)
Unrealized gain on marketable securities, net
of taxes 5,889 -
Foreign currency translation adjustments (3,737) (3,502)
Retained earnings 125,837 91,928
-------- --------
TOTAL SHAREOWNERS' EQUITY 749,575 707,307
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES
AND SHAREOWNERS' EQUITY $8,785,688 $ 8,092,512
========== ===========
</TABLE>
* Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
F-13
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
(UNAUDITED)
1997 1996*
---- -----
<S> <C> <C>
REVENUES:
Finance revenue $166,417 $ 149,357
Capital lease revenue 267,773 492,357
Rental revenue on operating leases (a) 607,576 505,380
Revenue from securitization and loan sales 42,447 13,855
Equipment sales 35,127 72,608
Other revenue, net 181,838 136,937
--------- ---------
TOTAL REVENUES 1,301,178 1,370,494
--------- ---------
EXPENSES:
Interest 327,071 350,359
Operating and administrative 402,930 375,172
Depreciation on operating leases 402,367 329,336
Cost of equipment sales 31,652 61,677
Provision for credit losses 67,193 71,454
--------- ---------
TOTAL EXPENSES 1,231,213 1,187,998
--------- ---------
Distributions on Preferred Securities 13,590 -
--------- ---------
Income before income taxes 56,375 182,496
--------- ---------
Provision for income taxes 20,577 67,206
--------- ---------
NET INCOME $ 35,798 $ 115,290
========= =========
</TABLE>
(a) Includes $21,481 and $22,821 for the three months ended September 30, 1997
and 1996, respectively, and $64,339 and $67,224 for the nine months ended
September 30, 1997 and 1996, respectively, from AT&T Corporation, Lucent
Technologies Inc. and NCR Corporation.
* Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
F-14
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
(UNAUDITED)
1997 1996*
---- -----
<S> <C> <C>
Common stock
Balance at beginning of year $ 902 $ 470
Stock issuances, net 1 1
-------- ----------
Balance, end of period 903 471
-------- ----------
Additional Paid-in capital
Balance at beginning of year 633,676 783,244
Stock issuances, net 4,202 2,919
Other (936) -
--------- ----------
Balance, end of period 636,942 786,163
-------- ----------
Recourse loans to senior executives
Balance at beginning of year (15,697) (20,512)
Loans made (4,679) (411)
Loans repaid 4,117 -
-------- ----------
Balance, end of period (16,259) (20,923)
--------- -----------
Unrealized gain on marketable securities
Balance at beginning of year - -
Unrealized gain 5,889 -
-------- ----------
Balance, end of period 5,889 -
-------- ----------
Foreign currency translation adjustments
Balance at beginning of year (3,502) (2,173)
Unrealized translation loss (235) (631)
--------- -----------
Balance, end of period (3,737) (2,804)
--------- -----------
Retained earnings
Balance at beginning of year 91,928 355,096
Net income 35,798 115,290
Dividends - (15,491)
Other (1,889) -
--------- ----------
Balance, end of period 125,837 454,895
-------- ----------
Total Shareowners' Equity $749,575 $1,217,802
======== ==========
</TABLE>
* Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
F-15
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
(UNAUDITED)
1997 1996*
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 35,798 $ 115,290
Non-cash items included in income:
Depreciation and amortization 440,039 387,183
Deferred taxes (123,443) (17,034)
Provision for credit losses 67,193 71,454
Revenue from securitizations and loan sales (42,447) (13,855)
(Increase) decrease as deferred charges
and other assets 15,860 (63,995)
(Decrease) in income taxes and other payables (109,937) (109,789)
(Decrease) increase in payables to
Affiliates and Former Affiliates (26,935) 1,782
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 256,128 371,036
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of finance asset portfolios -- (148,109)
Financings and lease equipment purchases (4,576,049) (4,170,561)
Principal collections from customers 2,516,046 2,999,188
Cash proceeds from securitizations and loan sales 959,806 248,720
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (1,100,197) (1,070,762)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Increase in short-term notes, net 341,875 790,842
Additions to medium and long-term debt 2,327,525 1,288,102
Repayments of medium and long-term debt (1,780,628) (1,101,718)
Decrease in payables to affiliates
and Former Affiliates -- (247,397)
Dividends paid -- (15,490)
----------- -----------
Net Cash Provided by Financing Activities 888,772 714,339
----------- -----------
Net increase in Cash and Cash Equivalents 44,703 14,613
Cash and Cash Equivalents at Beginning of Period -- 3,961
----------- -----------
Cash and Cash Equivalents at End of Period $ 44,703 $ 18,574
=========== ===========
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first nine months of 1996 and 1997, the Company entered into capital
lease obligations of $24,456 and $3,500, respectively, for equipment that was
subleased.
*Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
F-16
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by AT&T Capital Corporation and its subsidiaries ("AT&T Capital" or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations, financial position and cash flows for each period
shown. The results for interim periods are not necessarily indicative of
financial results for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and the current year's previously
issued Form 10-Qs.
2. RECENT PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. It allows companies to
choose either 1) a fair value method of valuing stock-based compensation plans
which will affect reported net income, or 2) to continue to follow the existing
accounting rules for stock option accounting but disclose what the impacts would
have been had the fair value method been adopted. The Company adopted the
disclosure alternative which requires annual disclosure of the pro forma net
income and earnings per share amounts assuming the fair value method was adopted
on January 1, 1995. As a result, the adoption of this standard did not have any
impact on the Company's consolidated financial statements.
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement requires that liabilities and
derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practical. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer. This statement was effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996 and its application is prospective. In December 1996,
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" was issued. Management does not expect the adoption of either
standard to have a material impact on the Company's consolidated financial
statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129, which is applicable to all entities,
requires disclosure of information about the liquidation preference of preferred
stock, redeemable stock, and certain other disclosures. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997
which for the Company will be 1997. Management does not expect that the adoption
of SFAS No. 129 to have any impact on the Company's consolidated financial
statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires total comprehensive income to be reported in a
financial statement. Comprehensive income is defined as the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for
financial statements for periods beginning after December 15, 1997 which for the
Company will be 1998. Comparative information for earlier years will be
restated.
In June 1997, the FASB Issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes a new model for
segment reporting. The Statement requires reporting of financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. It also
requires reporting of certain information about products and services,
geographic areas of operation, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997 which for
the Company will be 1998. Comparative information for earlier years will be
restated.
F-17
<PAGE>
<PAGE>
3. DERIVATIVE DISCLOSURE
For a discussion regarding the Company's derivatives and related accounting
policies, see Notes 2, 11 and 15 to the Consolidated Financial Statements
included in the Company's 1996 Annual Report filed on Form 10- K. In addition,
the following information is provided pursuant to the SEC's Financial Reporting
Release No. 48 issued in 1997, the purpose of which is to enhance disclosures
regarding derivatives and other financial instruments.
Foreign Currency Forward Exchange Contracts
The Company enters into foreign currency forward exchange contracts to
manage foreign exchange risk (primarily British pounds and Canadian dollars). In
the event of an early termination, sale or extinguishment of such a contract
that is determined to be a hedge, the gain or loss shall continue to be deferred
over the remaining term of the contract. The exchange of the principal amount
under the foreign currency forward exchange contracts is reflected in the
statement of cash flows in the "short-term notes, net" amount since the
underlying amount is generally commercial paper.
Interest Rate Swaps and Currency Swaps
Interest rate swaps and the interest component of the currency swaps
generally include the exchange of interest payments without the exchange of
underlying principal amounts. The difference between the two interest payments
is recorded as an adjustment to interest expense and is reflected in the
statement of cash flows in the "net income" amount. The exchange of the
principal amount under the currency swap is reflected in the statement of cash
flows in the "short-term notes, net" amount since the underlying amount is
generally commercial paper.
4. SUBSIDIARY DEBENTURES
The table below shows summarized consolidated financial information for AT&T
Capital Leasing Services, Inc. and AT&T Capital Services Corporation, both
wholly owned subsidiaries of the Company. The Company has guaranteed, on a
subordinated basis, payment on debentures issued by these subsidiaries.
<TABLE>
<CAPTION>
AT&T CAPITAL LEASING SERVICES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
Total revenues $98,042 $176,342
Interest expense 32,428 59,653
Operating and administrative expense 62,235 61,848
Provision for credit losses 31,179 32,393
Income (loss) before taxes (29,926) 20,719
Net (loss) income (18,118) 12,477
</TABLE>
F-18
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ --------
(unaudited)
<S> <C> <C>
Total assets $829,478 $628,945
Total debt 729,082 507,180
Total liabilities 782,540 597,203
Total shareowner's equity 46,938 31,742
</TABLE>
<TABLE>
<CAPTION>
AT&T CAPITAL SERVICES CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
Total revenues $ 86,512 $ 81,188
Interest expense 5,089 3,656
Operating and administrative expenses 34,881 32,620
Provision for credit losses 1,139 -
Income before taxes 4,983 9,601
Net income 2,930 5,723
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ --------
(unaudited)
<S> <C> <C>
Total assets $149,399 $161,232
Total debt 112,193 116,545
Total liabilities 135,186 145,565
Total shareowner's equity 14,213 15,667
</TABLE>
5. SALE OF EQUITY SECURITIES
In October 1997, the Company recognized a pre-tax gain of $12.4 million
on the disposition of certain equity securities. On September 30, 1997, these
securities were classified as available for sale in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115") and, therefore, the related unrecognized after tax gain of $5.9
million was included in shareowners' equity. The Company receives equity
securities (e.g., warrants and common stock) in connection with the structuring
of some of its complex capital markets transactions. As of September 30, 1997,
no other such equity security was required to be marked to market pursuant to
SFAS No. 115.
6. SUBSEQUENT EVENTS
On November 4, 1997 the Company announced that it had plans to exit
certain businesses which represent approximately 11% and 9% of the Company's
assets and revenues, respectively, at and for the first nine months of 1997. On
November 6, the Company entered into a definitive agreement for the sale of one
of these businesses, its inventory financing business unit, which represented 2%
and less than 1/2% of the Company's assets and revenues, respectively, at and
for the first nine months of 1997. Management does not expect to recognize a
loss on the sale of these businesses.
On November 4, 1997, the Company confirmed that it was engaged in
discussions about a possible business combination with Newcourt Credit Group, a
major asset finance company headquartered in Toronto, Canada ("Newcourt"). On
November 4, 1997, Newcourt also confirmed discussions with the Company regarding
a "possible business combination to be financed by equity issued by Newcourt
pursuant to a prospectus and a share exchange with [the Company's]
shareholders". No definitive agreement regarding any such transaction has been
signed at the time of this filing.
F-19
<PAGE>
<PAGE>
Due to such possible business combination, the Company currently is not
issuing medium and long-term debt in the public market. Therefore, subsequent to
September 30, 1997, the Company issued notes of $500 million in aggregate
principal amount to an affiliate to fund interim cash flow requirements.
Because of such possible business combination, one of the Company's
rating agencies, Moody's Investors Service, has placed the Company's rating "On
Review with Direction Uncertain".
F-20
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
* The following Audited Consolidated Financial Statements of AT&T Capital
Corporation, together with the notes thereto, have been obtained from
AT&T Capital Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the United States Securities and Exchange
Commission under applicable U.S. laws and regulations.
F-21
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareowners of AT&T Capital Corporation
We have audited the consolidated balance sheets of AT&T Capital Corporation and
Subsidiaries at December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareowners' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
applicable in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AT&T Capital
Corporation and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles applicable in the United States.
COOPERS & LYBRAND L.L.P.
1301 Avenue of Americas
New York, New York
March 6, 1997
F-22
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
AS AT DECEMBER 31
--------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 3,961
Net investments in finance receivables 2,135,250 1,800,636
Net investment in capital leases 3,648,731 6,187,131
Net investments in operating leases,
net of accumulated depreciation of
$872,024 in 1996 and $777,905 in 1995 1,403,470 1,117,636
Deferred charges and other assets 788,935 431,895
Deferred income taxes 116,126 --
Net assets of discontinued operations
----------- -----------
TOTAL ASSETS $8,092,512 $9,541,259
========== ==========
LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY:
Short-term notes, less unamortized
discounts of $5,720 in 1996 and
$3,112 in 1995 $ 1,867,247 $ 2,212,351
Income taxes and other payables 580,575 581,000
Deferred Income taxes -- 555,296
Payables to Affiliates and Former Affiliates 139,706 360,429
Medium and long-term debt 4,597,677 4,716,058
----------- -----------
TOTAL LIABILITIES 7,185,205 8,425,134
----------- -----------
COMMITMENTS AND CONTINGENCIES
Preferred Securities:
Company-obligated preferred
securities of subsidiary 200,000 --
----------- -----------
Shareowners' Equity:
Common stock, one cent par value:
Authorized 150,000,000 shares,
issued and outstanding, 90,337,379
shares in 1996 and 90,198,571 shares in 1995 902 470
Additional paid-in-capital 633,676 783,244
Recourse loans to senior executives (15,697) (20,512)
Unrealized gain on marketable securities
Foreign currency translation adjustments (3,502) (2,173)
Retained earnings 91,928 355,096
----------- -----------
TOTAL SHAREOWNERS' EQUITY 707,307 1,116,125
----------- -----------
TOTAL LIABILITIES, PREFERRED SECURITIES
AND SHAREOWNERS' EQUITY $8,092,512 $9,541,259
========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-23
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1996 1995* 1994*
---- ----- ----
<S> <C> <C> <C>
REVENUES:
Finance revenue $ 204,204 $ 174,523 $120,800
Capital lease revenue 598,203 586,141 477,875
Rental revenue on operating leases (a) 697,020 560,964 475,375
Revenue from securitization and loan sales 164,899 16,374 16,311
Equipment sales 90,631 48,724 126,567
Other revenue, net 197,233 190,309 167,151
--------- --------- --------
TOTAL REVENUES 1,952,190 1,577,035 1,384,079
--------- --------- ---------
EXPENSES:
Interest 458,039 411,040 271,812
Operating and administrative 564,489 473,663 427,187
Depreciation on operating leases 455,595 354,509 313,583
Cost of equipment sales 78,538 43,370 116,995
Provision for credit losses 113,605 86,214 80,888
--------- --------- ---------
TOTAL EXPENSES 1,670,266 1,368,796 1,210,465
--------- --------- ---------
Distribution on Company - obligated
preferred securities of subsidiary 3,322 - -
Income before income taxes 278,602 208,239 173,614
Provision for income taxes 110,063 80,684 73,278
--------- --------- --------
NET INCOME $ 168,539 $ 127,555 $ 100,336
========== ========= =========
</TABLE>
(a) Includes $21,187 for the three months ended June 30, 1996 and $44,403
for the six months ended June 30, 1996, respectively, from AT&T Capital
Parent, ("AT&T") herein, "AT&T/Lucent/NCR" of the "Former Affiliates".
* Certain amounts have been reclassified to conform to the 1996 presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-24
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common stock
Balance at beginning of year $ 470 $ 470 $ 469
Repurchase and retirement of shares
in connection with the Merger (471) - -
Stock issuances:
New shares issued as a result of
the Merger 902 - -
Pension and benefit plans 1 - 1
-------- ---------- ----------
Balance at end of year 902 470 470
-------- ---------- ----------
Additional Paid-in capital
Balance at beginning of year 783,244 782,785 780,591
Repurchase and retirement of shares
in connection with the Merger (1,660,174) - -
Stock issuances:
New shares issued as a result of
the Merger 821,583 - -
Pension and benefit plans 1,695 459 2,194
Tax impacts of the Merger:
Capital contribution from Former
Affiliates for lost tax depreciation 279,876 - -
Reduction of deferred tax liabilities
as a result of Section 338(h)10
election 232,929 - -
Establishment of goodwill-deferred tax
asset as a result of Section 338(h)10
election 161,999 - -
Establishment of current tax receivable
relating to tax benefit generated by
Hercules buyout of employee stock
options 16,011 - -
Other (3,487) - -
--------- ---------- ----------
Balance at end of year 633,676 783,244 782,785
-------- ---------- ----------
Recourse loans to senior executives
Balance at beginning of year (20,512) (19,651) (17,788)
Loans made (1,381) (2,613) (2,760)
Loans repaid 6,196 1,752 897
-------- ---------- ----------
Balance at end of year (15,697) (20,512) (19,651)
--------- ----------- -----------
Foreign currency translation adjustments
Balance at beginning of year (2,173) (2,158) (2,603)
Unrealized translation (loss) gain (1,329) (15) 445
--------- ----------- ----------
Balance at end of year (3,502) (2,173) (2,158)
--------- ----------- -----------
Retained earnings
Balance at beginning of year 355,096 246,772 163,774
Repurchase and retirement of shares
in connection with the Merger (416,217) - -
Net income 168,539 127,555 100,336
Cash dividends paid (15,490) (19,231) (17,338)
--------- ----------- -----------
Balance at end of year 91,928 355,096 246,772
-------- ---------- ----------
Total Shareowners' Equity $707,307 $1,116,125 $1,008,218
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-25
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995* 1994*
---- ----- -----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 168,539 $ 127,555 $ 100,336
Non-cash items included in income:
Depreciation and amortization 509,957 412,044 353,954
Deferred taxes (269,972) (2,772) 106,384
Provision for credit losses 113,605 86,214 80,888
Revenue from securitizations and loan sales (164,899) (16,374) (16,311)
(Increase) decrease as deferred charges
and other assets (11,274) 26,596 (130,927)
(Decrease) increase in income taxes
and other payables (35,131) 50,362 3,068
Decrease (increase) in payables to Affiliates
and Former Affiliates (18,481) (3,509) (10,257)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 292,344 680,116 487,135
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired (148,109) (294,472) (234,375)
Purchase of finance asset portfolios (7,339) (19,769) (217,939)
Financings and lease equipment purchases (6,051,483) (5,467,773) (5,031,041)
Principal collections from customers, net of
amounts included in income 3,998,239 3,855,592 3,553,620
Cash proceeds from securitizations and loan sales 3,390,396 291,476 306,406
Increase in payables to affiliates 25,451 -- --
----------- ----------- -----------
NET CASH PROVIDED (USED) FOR INVESTING ACTIVITIES 1,207,155 (1,634,946) (1,623,329)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
(Decrease) increase in short-term notes, net (345,104) (207,045) 523,370
Additions to medium and long-term debt 2,011,705 2,905,920 2,142,993
Repayments of medium and long-term debt (2,135,693) (1,828,426) (1,448,470)
(Decrease) increase in payables to affiliates
and Former Affiliates (247,400) 53,109 (9,897)
Dividends paid (15,490) (19,231) (17,338)
Issuance of Company-obligated preferred securities 200,000 -- --
Proceeds from interim bridge-loan to fund merger 1,255,286 -- --
Repayment of interim bridge loan to fund merger (1,255,286) -- --
Repurchase of Company Common Stock (2,076,863) -- --
Capital contributions from affiliates and
Former Affiliates 1,101,459 -- --
Other merger related items 3,926 -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,503,460) 904,327 1,190,658
----------- ----------- -----------
Net (Decrease) Increase in Cash
and Cash Equivalents (3,961) (50,503) 54,464
Cash and Cash Equivalents at Beginning of Period 3,961 54,464 --
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ -- $ 3,961 $ 54,464
=========== =========== ===========
</TABLE>
Interest paid, including discount on commercial paper, was $443.4 million,
$365.5 million and $254.0 million during 1996, 1995 and 1994, respectively.
Net income taxes paid were $373.5 million, $27.8 million and $55.7 million
during 1996, 1995 and 1994, respectively.
F-26
<PAGE>
<PAGE>
NON CASH INVESTING AND FINANCING ACTIVITIES:
In conjunction with the Merger, additional paid-in capital increased due to
the elimination of deferred tax liabilities of $232.9 million as a result of the
Section 338(h)(10) election under the Internal Revenue Code, as amended, and
similar elections in certain state and local jurisdictions and the establishment
of a deferred tax asset of $162.0 million associated with the step-up in basis
to fair value for tax purposes which was not done for book purposes ("push-down
accounting") due to the Company's significant level of public debt outstanding.
See Notes 1 and 12. Also, certain management members of the Company exchanged
their existing shares of Company common stock for new shares totalling $29
million. See Note 1.
In 1996, 1995 and 1994, the Company entered into capital lease obligations
of $35.6 million, $105.2 million and $41.4 million, respectively, for equipment
that was subleased. In 1996 and 1995, the Company assumed debt in conjunction
with acquisitions of $3.4 million and $473.0 million, respectively.
* Certain amounts have been reclassified to conform to the 1996 presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-27
<PAGE>
<PAGE>
AT&T CAPITAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
1. THE COMPANY AND BACKGROUND
Description of the Company
AT&T Capital Corporation ("AT&T Capital" or the "Company") is a full
service, diversified equipment leasing and finance company that operates
predominantly in the United States; however, it also has operations in Europe,
Canada, the Asia/Pacific Region, Mexico and South America. The Company operates
primarily in one business segment - equipment leasing and financing. This
segment represents more than 90% of consolidated revenues, net income and total
assets. The Company leases and finances equipment manufactured and distributed
by AT&T ("AT&T"), Lucent Technologies Inc. ("Lucent") and NCR Corporation
("NCR") (herein, "AT&T/Lucent/NCR" or the "Former Affiliates") and numerous
other companies. The Company also provides inventory financing for equipment
dealers and distributors, Small Business Administration ("SBA") lending, and
equipment management and remarketing services. In addition, the Company offers
its customers high-technology equipment rental and certain other equipment
administration services.
At December 31, 1996, AT&T Capital's portfolio assets were comprised of
general equipment (consists of general office, manufacturing and medical
equipment) aggregating 27%, transportation equipment of 23%, information
technology equipment of 22%, telecommunications equipment totalling 18%, and
real estate of 10%.
AT&T Capital's portfolio assets are diversified among a large customer base,
as well as numerous industries and geographic regions. The Company's customers
are diversified across many industries including manufacturing, services,
communications and retail, as well as many small and mid-size business customers
and federal, state and local governments and their agencies. At December 31,
1996, on an owned basis, the Company's 98 largest customers (after AT&T and
Lucent) accounted for approximately 24% of the Company's net portfolio assets,
and no customer (with the exception of AT&T and Lucent) accounted for more than
1% of such net portfolio assets.
Other than AT&T/Lucent/NCR, as of December 31, 1996, management is not aware
of any significant concentration of business transacted with a particular
customer, supplier or lender that could severely impact the Company's
operations. Also, the Company does not have a concentration regarding the types
of financing products or available sources of debt, labour or services, or
licenses or other rights that could severely impact its operations.
Sale of the Company and Related Transactions
On September 20, 1995, AT&T announced a plan to pursue the public or private
sale of its remaining 86% interest in AT&T Capital. On such date, AT&T also
announced a plan to separate (the "Separation") into three publicly-held
stand-alone global businesses (AT&T, Lucent and NCR). In connection with the
Separation, AT&T sold approximately 17.6% of its equity interest in Lucent in an
initial public offering on April 10, 1996 and spun-off its entire remaining
equity interest in Lucent to AT&T shareowners on September 30, 1996. On December
31, 1996 AT&T spun off its 100% interest in NCR to AT&T shareowners.
On June 5, 1996, AT&T Capital entered into an Agreement and Plan of Merger
("the Merger Agreement") with AT&T, Hercules and Antigua Acquisition Corporation
("Antigua"). Hercules is an indirect wholly-owned subsidiary of GRS Holding
Company, Ltd., which owns a U.K. rail leasing business.
On September 30, 1996 the Company, pursuant to a Gross Profit Tax Deferral
Interest Free Loan Agreement (the "GPTD Agreement") between the Company and
AT&T, made a payment of $247.4 million to AT&T for full repayment of such loans.
See Note 12 for additional discussion of GPTD and other tax implications of the
Merger.
F-28
<PAGE>
<PAGE>
On October 1, 1996, the Company completed a merger (the "Merger") pursuant
to which Antigua, a wholly-owned subsidiary of Hercules, was merged with and
into the Company. As a result of the Merger, AT&T Capital's shareowners received
$45 in cash for each outstanding share of the Company's common stock, and
Hercules and certain management team members (the "Management Investors") became
the sole owners of the Company's common stock. The aggregate purchase price for
the then outstanding shares of the Company's outstanding common stock and the
aggregate amount necessary to cash-out the Company's stock options in accordance
with the Merger Agreement (the "Merger Consideration") was approximately $2.2
billion. The Merger Consideration was comprised of (i) a loan from Goldman Sachs
Credit Partners L.P. in the amount of approximately $1.3 billion, which was to
mature on October 30, 1996 and was repaid by the Company from a portion of the
proceeds of a $3.1 billion offering of equipment receivable-backed securities by
affiliates of the Company on October 15, 1996 (see Note 6) and (ii) equity
contributions (collectively, the "Equity Contributions") represented by (a)
capital contributions of $871 million from Hercules, (b) exchange by the
Management Investors of approximately $29 million and (c) the settlement of
approximately $5 million of recourse loans to senior executives. Also, in
connection with the Merger, the Company, through a consolidated subsidiary,
issued to the public $200 million of company-obligated preferred securities (see
Note 9) and the proceeds of which were used to pay down short term debt.
In connection with the Merger, the Company incurred a $47.6 million expense
relating to the accelerated payout of the Company's Share Performance Incentive
Plan ("SPIP") and other payments to certain officers of the Company (see Note
13), an $11.0 million expense relating to the Company's Merger related and other
transaction costs offset by a $6.2 million credit related to the reversal of tax
reserves no longer needed as a result of the AT&T tax indemnity payment
described further in Note 12.
On October 15, 1996 the Company securitized $3.1 billion of lease and loan
receivables. As previously noted a portion of the Securitization proceeds were
used to finance the Merger transaction. In connection with the Securitization
the Company recorded an after-tax gain of approximately $79 million. See Note 6
for a further discussion of securitizations.
On October 25, 1996 the Company, through a subsidiary, issued to the public
eight million shares of company- obligated preferred securities for $25 per
share. Holders of the securities will be entitled to receive cash distributions
at an annual rate of 9.06%, which is guaranteed by the Company. See Note 9 for
further discussion of the preferred offering.
Relationship of the Company with the Former Affiliates
In the second quarter of 1996, the Company executed an Operating Agreement
(pursuant to which, among other things, the Company serves as preferred provider
of financing services and has certain related and other rights and privileges in
connection with the financing of equipment to the customers of AT&T/Lucent/NCR)
with each of Lucent and NCR, and entered into letter agreements with Lucent and
NCR regarding the applicability to Lucent and NCR of specified provisions of a
License Agreement (the "License Agreement") and the Intercompany Agreement (Note
14) between the Company and AT&T (see Note 12). None of the Former Affiliates is
required to renew the term of its Operating Agreement beyond the expiration of
the current term on August 4, 2000.
Although the Company will seek to maintain and improve its existing
relationships with Lucent, NCR and AT&T and seek to extend each of the Operating
Agreements beyond August 4, 2000, no assurance can be given that the Operating
Agreements, License Agreements or Intercompany Agreements, will be extended
beyond such date or, if extended, that the terms and conditions thereof will not
be modified in a manner adverse to the Company. Failure to renew NCR's and
Lucent's Operating Agreements on terms not adverse to the Company could have a
material adverse effect on the Company (see the Risk Factors included in the
Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations).
Pursuant to the License Agreement, AT&T has licensed to the Company and
certain of its subsidiaries certain trade names and service marks, including but
not limited to the AT&T Capital Corporation, AT&T Credit Corporation, AT&T
Systems Leasing and AT&T Automotive Services names. The License Agreement
provides that AT&T may require (as a result of their disposition of the Company
and upon one year's notice and generally at AT&T's expense) the Company to
discontinue the use of the "AT&T" name as part of its corporate name. The
Company's subsidiaries may, notwithstanding such event, continue to use the
other AT&T licensed names (including NCR) and service marks pursuant to the
License Agreement (e.g., as part of such subsidiaries' corporate names and for
marketing purposes), subject to extensive restrictions on the use thereof in
connection with the issuance of securities and incurrence of indebtedness. As of
the date of these financial statements, AT&T has not made such request.
F-29
<PAGE>
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements reflect, and the future consolidated
financial statements of the Company will reflect, the historical cost of the
Company's assets and liabilities. Adjustments to the Company's consolidated
financial statements to reflect the fair value of the Company's assets and
liabilities as of the merger date ("push down" accounting) will not be reflected
due to the existence of substantial publicly traded debt of the Company.
Consolidation
The accompanying consolidated financial statements include all
majority-owned subsidiaries. The accounts of operations located outside of the
United States are included on the basis of their fiscal years, ended either
November 30, or December 31.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates. Significant areas in which estimates are used
include residual values, income taxes, securitization reserves, allowance for
credit losses and contingencies.
Revenue Recognition for Finance Receivables and Capital Leases
For loans and other financing contracts ("Finance Receivables"), revenue is
recognized over the life of the contract using the interest method.
For leases classified as Capital Leases, the difference between (i) the sum
of the minimum lease payments due and the estimated unguaranteed residual values
and (ii) the asset purchase price paid by the Company is initially recorded as
unearned income. The difference is subsequently amortized over the life of the
lease contract and recognized as revenue, using the interest method.
Accrual of income on portfolio assets is generally suspended when a loan or
a lease becomes contractually delinquent for 90 days or more (or earlier if
deemed necessary). Accrual is resumed when the receivable becomes contractually
current and management believes there is no longer any significant probability
of loss.
Investment in Operating Leases
Equipment under Operating Leases is generally depreciated over the estimated
useful life of the asset. During the term of the related lease, annual
depreciation is generally calculated on a straight-line basis on the estimated
residual values at the end of the respective lease terms. Rental revenue is
recognized on a straight-line basis over the related lease terms.
Estimated Unguaranteed Residual Values
Estimated unguaranteed residual values are established upon acquisition and
leasing of the equipment based upon the estimated value of the equipment at the
end of the lease term. They are determined on the basis of studies prepared by
the Company, professional appraisals, historical experience and industry data.
Although it is reasonably possible that a change in the unguaranteed residual
values could occur in the near term, the Company actively manages its residual
values by working with lessees and vendors during the lease term to encourage
lessees to extend their leases or upgrade and enhance their leased equipment.
Residual values are reviewed by the Company at least annually. Declines in
residual values for capital leases are recognized as an immediate charge to
income. Declines in residual values for operating leases are recognized as
adjustments to depreciation expense over the shorter of the useful life of the
asset or the remaining term of the lease.
F-30
<PAGE>
<PAGE>
Upon the sale or securitization of substantially all of the receivables
associated with a capital lease, the associated residual value is frozen at its
then current book value. Such residual value ceases to accrete to its estimated
value at the end of the lease term.
Allowance for Credit Losses
In connection with the financing of leases and other receivables, the
Company records an allowance for credit losses to provide for estimated losses
in the portfolio. The allowance for credit losses is estimated by management
considering delinquencies and problem assets, an assessment of overall risks and
evaluation of probable losses in the portfolio given its diversification, and a
review of historical loss experience. Although currently deemed adequate by
management, it is reasonably possible that a change in the estimate could occur
in the near term as a result of changes in the above mentioned factors. The
Company's reserve policy is based on an analysis of the aging of the Company's
portfolio, a review of all non-accrual receivables and leases, and prior
collection experience. An account is charged off when analysis indicates that
the account is uncollectible. Additionally, Company policy generally requires
the "at risk" portion (the amount of the receivable not covered by estimated
equipment or other collateral value) of accounts 180 days past due to be
reserved for or charged off.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Other Assets
The cost of property and equipment is depreciated on a straight-line basis
over their estimated useful lives, which generally range from three to
twenty-five years. Leasehold improvements are amortized over the lesser of the
term of the related lease or the estimated useful lives of the related assets on
a straight-line basis.
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets on the date of acquisition, and is amortized as a
charge against income on a straight line basis generally over three to twenty
year periods. Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value. The accompanying
consolidated balance sheet caption Deferred Charges and Other Assets includes
$104.6 million and $114.7 million of goodwill at December 31, 1996 and 1995,
respectively. The accompanying consolidated statements of income caption
Operating and Administrative Expenses includes $12.6 million, $13.2 million and
$10.7 million of goodwill for the years ended December 31, 1996, 1995 and 1994,
respectively. See Note 3, "Acquisitions" for discussion of the Company's recent
acquisition activities.
Securitization Recourse Reserves
The Company securitized certain portfolio assets as part of its funding
strategy. The securitization agreements provide for limited recourse to the
Company for certain uncollectible amounts. The Company recorded the present
value of such recourse obligations using a discount rate of 6.5%. These recourse
obligations would have been approximately $3.9 million higher had the Company
not discounted these recourse obligations.
Derivative Financial Instruments
The Company enters into derivative financial instruments, mainly interest
rate swaps and currency swaps, to hedge interest rate and foreign currency
exchange risk and to match fund assets and liabilities. Interest rate swaps
generally involve the exchange of interest payments without the exchange of
underlying notional principal amounts. Currency swaps generally involve both the
exchange of principal and interest payments in distinct currencies. The criteria
which must be satisfied for hedges are as follows: (1) the asset or liability to
be hedged exposes AT&T Capital, as a whole, to interest rate or currency
exchange risk, (2) the derivative acts to reduce the interest rate or currency
exchange risk by reducing the sensitivity to interest rate or currency exchange
movements, and (3) the derivative is designated and effective as a hedge.
F-31
<PAGE>
<PAGE>
For interest rate swaps, the Company records the net interest to be received
or paid as an adjustment to interest expense. In the event of an early
termination of a swap contract, the gain or loss on swap accounted for as a
hedge is amortized over the remaining life of the related transaction. The
Company does not enter into speculative swaps; however, if the underlying
transaction associated with a swap accounted for as a hedge is terminated early,
the swap is then considered speculative. The gain or loss on a speculative swap
is recognized immediately.
The Company enters into foreign exchange contracts as a hedge against assets
and liabilities denominated in foreign currencies. Gains and losses are
recognized on the contracts and offset foreign exchange gains or losses on the
related assets and liabilities.
Foreign Currency Translation
The financial statements of the Company's foreign operations are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation", the resulting translation
adjustments are recorded as a separate component of shareowners' equity. A
transaction gain or loss realized upon settlement of a foreign currency
transaction generally is included in determining net income for the period in
which the transaction is settled.
Impairment of Long-Lived Assets
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment has occurred when the estimate of
undiscounted future cash flows expected to be generated by the asset is less
than its carrying amount. If an impairment occurred, the measurement of the
impairment is based on the fair value of the asset. Since adoption, no
impairment losses have been recognized.
3. ACQUISITIONS
In the third quarter of 1996, the Company acquired the operating assets and
lease portfolio of Municipal Leasing Corporation. This Canadian operation has
been financing office equipment and automobiles for the past 15 years and had
approximately $160 million in assets at the time of the acquisition.
On January 4, 1995, the Company acquired the vendor leasing and finance
companies of Banco Central Hispano and certain of its affiliates ("CFH Leasing
International") located in the United Kingdom, Germany, France, Italy, Belgium
and the Netherlands. CFH Leasing International provides financial services to
equipment manufacturers and vendors and had approximately $540 million in assets
at the time of acquisition., In addition, on June 30, 1995, the Company acquired
two relatively small businesses, a United States mid-range computer asset
business with approximately $180 million in assets and an Australian equipment
finance company with approximately $40 million in assets. The above acquisitions
were accounted for under the purchase method and the total cash paid, net of
cash acquired, for all of the above was $294.5 million. The Company assumed
certain existing debt associated with these acquisitions. The results of
operations are included in the income statement of the Company from the
respective acquisition dates.
F-32
<PAGE>
<PAGE>
4. NET INVESTMENT IN FINANCE RECEIVABLES AND CAPITAL LEASES
Finance receivables and capital leases consisted of the following:
<TABLE>
<CAPTION>
FINANCE
RECEIVABLES CAPITAL LEASES
------------------------- --------------------------
At December 31, 1996 1995 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Receivables $ 2,294,054 $ 1,959,004 $ 4,056,152 $ 6,846,834
Estimated unguaranteed
residual values - - 380,325 734,140
Unearned income (105,289) (104,170) (680,670) (1,230,418)
Allowance for credit losses (53,515) (54,198) (107,076) (163,425)
- --------------------------------------------------------------------------------------
Net investment $ 2,135,250 $ 1,800,636 $ 3,648,731 $ 6,187,131
- --------------------------------------------------------------------------------------
</TABLE>
For a discussion regarding the Company's securitization activities, see
Notes 1 and 6.
The schedule of maturities at December 31, 1996 for the finance
receivables and capital leases is as follows:
<TABLE>
<CAPTION>
FINANCE CAPITAL
RECEIVABLES LEASES
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 611,030 $1,658,499
1998 313,448 1,096,906
1999 217,864 664,340
2000 207,054 329,225
2001 220,470 144,106
2002 and thereafter 724,188 163,076
- --------------------------------------------------------------------------------
TOTAL $2,294,054 $4,056,152
- --------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", and No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". These standards
require that impaired loans be measured based on the present value of expected
cash flows, discounted at the loan's effective interest rate or, the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent, as well as requiring certain related disclosures. The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements. The amount of impaired loans at December 31,
1996 and 1995 was not material.
F-33
<PAGE>
<PAGE>
5. NET INVESTMENT IN OPERATING LEASES
The following is a summary of equipment under operating leases at
December 31, 1996 and 1995, including equipment on lease to Former Affiliates
(see Notes 1 and 14):
<TABLE>
<CAPTION>
At December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 673,298 $ 628,857
1998 557,567 378,426
1999 550,242 456,575
2000 354,658 254,984
- --------------------------------------------------------------------------------
2,135,765 1,718,842
Less: Accumulated depreciation (777,905) (642,728)
Rental receivables, net 45,610 41,522
- --------------------------------------------------------------------------------
Net investment in operating leases $ 1,403,470 $ 1,117,636
- --------------------------------------------------------------------------------
</TABLE>
Minimum future rentals to be received on non-cancellable operating leases
as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 565,921
1998 335,728
1999 180,844
2000 66,367
2001 22,296
2002 and thereafter 3,330
- --------------------------------------------------------------------------------
TOTAL MINIMUM FUTURE RENTALS $1,174,486
- --------------------------------------------------------------------------------
</TABLE>
6. SECURITIZATIONS AND LOAN SALES
In 1996, the Company securitized approximately $3.4 billion of lease and
loan receivables and recorded a $149.3 million pre-tax gain. Total proceeds from
the 1996 securitizations was approximately $3.1 billion. The 1996 activity
includes the Securitization of $3.1 billion of lease and loan receivables (which
includes $0.3 billion of receivables previously sold and repurchased by the
Company). A portion of the Securitization proceeds were used to finance the
Merger transaction (see Note 1). For the years ended December 31, 1995 and 1994,
the Company securitized portions of its capital lease portfolio amounting to
$74.8 million and $259.1 million, with proceeds received of $86.8 million and
$287.6 million, respectively. The Company recorded pre-tax gains on
securitizations of $5.9 million and $14.8 million for 1995 and 1994,
respectively.
Included in other assets at December 31, 1996 and 1995, is approximately
$195.9 million and $61.5 million of retained interests in the securitized
receivables. These retained interests act as a credit enhancement for the
purchasers and are repaid to the Company over the life of the securitized
receivables. The securitization agreements provide for limited recourse to the
Company for any uncollectible amounts. The Company's maximum exposure under
these recourse provisions, in the unlikely event that all such receivables
became uncollectible, amounted to $104.9 million at December 31, 1996 and $254.8
million at December 31, 1995. A portion of the gains have been deferred to
record an estimate of the losses under recourse provisions for the lease
receivables securitized (see Note 2). Under the agreements, the Company services
these accounts for a fee on behalf of the purchasers.
At December 31, 1996 and 1995, $2,984.7 million and $559.0 million,
respectively, of receivables previously securitized remained outstanding.
On a periodic basis, the Company sells the guaranteed portion of SBA
loans in the secondary market. The gain on these sales is (1) decreased by an
adjustment to reduce the carrying value of the retained unguaranteed portion of
the loan to its fair value and (2) adjusted for any excess servicing fees to be
received. For the years ended December 31, 1996, 1995 and 1994 the Company sold
approximately $170.2 million, $146.7 million and $15.7 million, with proceeds
received of $184.9 million, $157.2 million, and $19.6 million, respectively. The
Company recorded pre-tax gains on SBA loan sales of $15.6 million, $10.5 million
and $1.5 million for 1996, 1995 and 1994, respectively.
F-34
<PAGE>
<PAGE>
7. OTHER REVENUE
Other revenue consisted of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995* 1994*
<S> <C> <C> <C>
Net gain on sale of leased and off-lease
equipment $ 86,639 $ 86,987 $ 76,453
Portfolio servicing fees 20,303 23,584 27,203
Other fee related revenue 51,449 44,105 38,871
Other portfolio related revenue 38,842 35,633 24,624
- --------------------------------------------------------------------------------------
TOTAL OTHER REVENUE $197,233 $190,309 $167,151
- --------------------------------------------------------------------------------------
</TABLE>
* Certain amounts have been reclassified to conform to the 1996 presentation.
8. DEBT
Commercial Paper
Commercial paper is generally issued at a discount with the majority
maturing within 90 days. As of December 31, 1996 the maturities of commercial
paper ranged up to 45 days. As of December 31, 1996 the maturities of commercial
paper ranged up to 45 days. As of December 31, 1995 the maturities of commercial
paper ranged up to four months. Interest rates ranged from 5.60% to 7.20% and
5.48% to 5.83% at December 31, 1996 and 1995, respectively. The discount
amortized on commercial paper, which reflects the cost of such debt, amounted to
$100.3 million, $94.0 million and $69.3 million in 1996, 1995 and 1994,
respectively.
In September 1996, the Company renegotiated its back-up credit facility
of $1.8 billion. This facility, negotiated with a consortium of 24 lending
institutions, supports the commercial paper issued by the Company. At December
31, 1996 this facility was unused. Under the most restrictive provision of the
Company's back-up facility, the Company is required to maintain a minimum
consolidated tangible net worth (based on a formula that includes a portion of
current net income) of $546.9 million at December 31, 1996. The Company is in
compliance with this and all other covenants of the agreement. To meet local
funding requirements, the Company's foreign operations have available lines of
credit of approximately $362.9 million, of which approximately $26.2 million was
available at December 31, 1996. These facilities are generally renewed annually.
Facility fees paid for the revolving and foreign credit arrangements were not
material in 1996 or 1995.
Data with respect to short-term notes (principally commercial paper) are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
End of year balance, net $1,867,247 $2,212,351 $2,176,877
Weighted average interest rate at
December 31, 6.1% 5.9% 5.8%
Highest month-end balance $3,021,459 $2,212,351 $2,176,877
Average month-end balance (a) $2,154,614 $1,921,298 $1,741,872
Weighted average interest rate (b) 5.7% 5.3% 4.3%
</TABLE>
- --------------------------------------------------------------------------------
(a) The average month-end balance was computed by dividing the total of
the outstanding month-end balances by the number of months.
(b) The weighted average interest rate during the year is calculated by
dividing the interest charged for the year by the average month-end
balance.
F-35
<PAGE>
<PAGE>
Medium and Long-term Debt
Medium and long-term debt outstanding at December 31, 1996 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
MATURITIES 1996 1995
<S> <C> <C> <C>
4.44% - 5.99% Medium-term notes 1996 - 2001 $1,331,900 $ 716,900
6.00%-6.99% Medium-term notes 1996 - 2000 1,621,525 1,466,025
7.00%-8.08% Medium-term notes 1996 - 2005 621,625 1,043,825
Floating rate Medium-term notes
Interest periodically reprices based on
various indices. As of December 31,
1996 and 1995, the average interest
rate ranged from 5.47%-5.65%
and 4.93%-5.74%, respectively. 1996 - 1997 682,000 1,129,500
Other long-term debt 1996 - 2002 340,627 359,808
- --------------------------------------------------------------------------------------
Total medium and long-term debt $4,597,677 $4,716,058
- --------------------------------------------------------------------------------------
</TABLE>
The Company's medium and long-term debt matures as follows:
<TABLE>
<S> <C>
1997 $2,418,753
1998 1,326,375
1999 611,346
2000 88,599
2001 34,773
2002 and thereafter 117,831
- --------------------------------------------------------------------------------
TOTAL $4,597,677
- --------------------------------------------------------------------------------
</TABLE>
To reduce exposure to interest rate movements, the Company enters into
interest rate swap agreements (see Note 15). The weighted average interest rate
on average total debt outstanding, including the effect of these swaps, was
6.38% and 6.60% for the years ended December 31, 1996 and 1995, respectively.
During the fourth quarter of 1996, the Company filed with the Securities
and Exchange Commission (the "SEC") a debt registration statement in the amount
of $4.0 billion. The SEC declared this registration statement effective on
January 3, 1997. As of February 28, 1997, the Company had issued $1.2 billion of
debt under this registration statement.
In connection with transactions preceding the initial public offering of
the Company's stock in 1993, AT&T issued a guarantee on all of the Company's
debt outstanding at that date. As of December 31, 1996 and 1995, $189,675 and
$319,200 of medium and long-term debt was guaranteed by AT&T, respectively.
9. COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY
In the fourth quarter of 1996, Capita Preferred Trust (the "Trust")
issued $200 million of Trust Originated Preferred Securities (the "Preferred
Securities") to the public (the "Offering"). The Trust invested the proceeds
received from the Offering and its issuance of common securities to the Company
in exchange for Partnership Preferred Securities of its affiliate, Capita
Preferred Funding L.P. (the "Partnership"). The Trust and the Partnership are
consolidated subsidiaries of the Company. The Partnership, in turn, used
proceeds from the issuance of the Partnership Preferred Securities and a Company
capital contribution to invest primarily in 20-year debentures of the Company
and two wholly-owned subsidiaries (the "Debentures"). Payments in respect to the
Debentures issued by the Company's subsidiaries have been guaranteed, on a
subordinated basis, by the Company.
Holders of the 8,000,000 shares of Preferred Securities will be entitled
to receive quarterly cash distributions at an annual rate of 9.06% and a
liquidation amount of $25 per share. Under the terms of the Offering, the
Company issued an irrevocable guarantee, to the extent the Trust has funds
available therefore, on the distributions, redemption and liquidation of the
Preferred Securities. Distribution will be made on the Preferred Securities to
the extent that the Trust had funds available, which is dependent on the payment
of distributions on the Partnership Preferred Securities by the Partnership to
its limited partner, the Trust. Distributions on the Partnership Preferred
Securities will be declared and paid only as determined in the sole discretion
of the Company in its capacity as the general partner of the Partnership. The
Partnership's ability to pay such distributions to the Trust is dependent on the
receipt of interest payments on the Debentures from the Company and its two
subsidiaries.
F-36
<PAGE>
<PAGE>
The table below shows summarized consolidated financial information of
the Company's two subsidiaries, AT&T Capital Leasing Services, Inc. and AT&T
Capital Services Corporation which have issued the Debentures. The summarized
financial information includes transactions with the Company that are eliminated
in consolidation.
<TABLE>
<CAPTION>
AT&T Capital Leasing Services, Inc.
At or for the years ended December 31, 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total revenues $ 244,560 $ 197,537 $ 158,973
Interest expense 69,490 62,420 35,741
Operating and administrative expenses 86,121 85,621 77,607
Provision for credit losses 51,862 39,996 33,942
Income before income taxes 34,509 7,234 9,134
Net income 20,733 4,241 5,465
Total assets 628,943 1,387,325
Total debt 507,180 1,061,640
Total liabilities 597,203 1,214,257
Total shareowner's equity 31,742 173,068
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AT&T Capital Services Corporation
At or for the years ended December 31, 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total revenues $ 111,572 $ 84,732 $ 70,134
Interest expense 5,157 4,046 2,864
Operating and administrative expenses 46,423 36,108 33,420
Provision for credit losses 650 107 -
Income before income taxes 10,260 7,724 1,837
Net income 6,098 4,385 954
Total assets 161,232 116,952
Total debt 116,545 72,635
Total liabilities 145,565 99,031
Total shareowner's equity 15,667 17,921
- ----------------------------------------------------------------------------------------
</TABLE>
The significant decrease in AT&T Capital Leasing Services, Inc. total assets
is due to significant securitization activity. See Note 6 for further discussion
of securitizations.
10. DIVIDENDS
On February 29, 1996, shareowners of record as of February 9, 1996, were
paid a fourth quarter 1995 dividend of $.11 per share. During 1996, the
Company's Board of Directors declared dividends each of $.11 per share to
shareowners of record as of May 10, 1996 and August 9, 1996 payable on May 31,
1996 and August 30, 1996, respectively. As a result of the Merger, the Company
anticipates that it will no longer pay dividends in the short term.
11. FAIR VALUE DISCLOSURES
Fair value is a subjective and imprecise measurement that is based on
assumptions and market data which require significant judgment and may only be
valid at a particular point in time. The use of different market assumptions or
valuation methodologies may have a material effect on the estimated fair value
amounts. Accordingly, management cannot provide assurance that the fair values
presented are indicative of the amounts that the Company could realize in a
current market exchange.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments at December 31, 1996 and 1995:
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value.
F-37
<PAGE>
<PAGE>
Net Investment in Finance Receivables
The fair value of the finance receivable portfolio is estimated by
discounting the expected future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Short-term Notes (Commercial Paper and Other Short-term Notes)
The carrying amount is a reasonable estimate of fair value for
commercial paper. Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate the fair value of other
short-term notes.
Gross Profit Tax Deferral Payable to AT&T
The fair value of the gross profit tax deferral was estimated by
discounting the expected future cash flows using the Company's current cost of
debt. Based on the announcement that AT&T intended to sell its interest in the
Company, this amount for 1995 had been calculated based on the assumption that
the amount would have been repaid by December 31, 1996. On September 30, 1996
the Company repaid the then outstanding balance of $247.4 million to AT&T for
full repayment of such loans (see Note 1).
Medium and Long-term Debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Interest Rate and Currency Swap Agreements
The fair value of interest rate and currency swaps is estimated by
discounting the expected future cash flows using an estimated rate at which the
Company could terminate the swaps in the market today.
Foreign Exchange Contracts
The fair value of foreign exchange contracts is estimated based on
current market quotes obtained from dealers for foreign exchange contracts with
the same remaining terms.
Credit Facilities
The fair values of the credit facilities are based on fees currently
paid for similar arrangements.
The following table summarizes the carrying and fair values of
on-balance sheet instruments (as determined using the methods described above):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ - $ - $ 3,961 $ 3,961
Net investment in finance
receivables (Note 4) 2,135,250 2,140,878 1,800,636 1,844,617
Liabilities:
Short-term notes (Note 8) 1,867,247 1,867,247 2,212,351 2,212,403
Gross profit tax deferral
payable to AT&T (Note 12) - - 248,902 237,845
Medium and long-term debt
(Note 8) 4,597,677 4,663,012 4,716,058 4,844,594
- ---------------------------------------------------------------------------------------
</TABLE>
Matching maturities of its portfolio assets and debt is a key component
of the financial strategy used by the Company to manage interest rate risk.
Based on unaudited calculations performed by the Company, the increased fair
value of the Company's debt (including the effects of interest rate and currency
swaps, as shown
F-38
<PAGE>
<PAGE>
below) has been offset by the increased fair value of the Company's portfolio
assets at December 31, 1996 and December 31, 1995, respectively. The fair value
of the Company's lease portfolio is not a required disclosure under SFAS No.
107, "Disclosure About Fair Value of Financial Instruments" and, therefore, only
the fair value of the finance receivable portfolio has been disclosed.
The following tables summarize the carrying and fair values of
off-balance sheet financial instruments (as determined using methods described
above):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
CARRYING AMOUNT FAIR VALUE
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements $ 258 $ (2,662) $ 14,247 $ (26,318)
Currency swap agreement 69 (1,255) 3,407 (14,870)
Foreign currency forward
exchange contracts 7,807 (21,405) (931) (25,654)
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------
CARRYING AMOUNT FAIR VALUE
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements $ 3,681 $(1,477) $ 2,234 $(53,359)
Currency swap agreements 278 (1,185) 7,066 (8,235)
Foreign currency forward
exchange contracts 13,104 (814) (3,036) (2,227)
- ---------------------------------------------------------------------------------------
</TABLE>
Hedging the net cash inflows from foreign denominated assets is a key
component of the financial strategy used by the Company to manage its exposure
to foreign currency fluctuations. Based on unaudited calculations performed by
the Company, the decreased fair value of the Company's forward exchange
contracts is generally offset by an increase in the fair value of the Company's
foreign denominated assets.
The Company has unused revolving credit facilities totalling $1.8
billion and approximately $26.2 million of unused foreign credit facilities. The
fair value of the credit facilities is based upon fees currently paid for
similar arrangements which are not material (see Note 8).
12. INCOME TAXES
As a result of the Merger, the Company is no longer included in the
consolidated federal and state returns of AT&T and will file a stand-alone
consolidated federal income tax return ("Tax Deconsolidation"). When the Company
was included in AT&T's returns, the Company's income tax expense would not have
differed materially from that reported had the Company filed tax returns on a
stand-alone basis.
In connection with the Merger, Hercules and AT&T made an election under
Section 338(h)(10) of the Internal Revenue Service Code (the "Section 338(h)(10)
election") and similar elections under state and local laws. Under these
elections the Merger was deemed to be an asset sale for tax purposes resulting
in the elimination of substantially all deferred tax liabilities as of the
Merger date. In addition, the Company stepped-up its assets and liabilities to
their fair value for tax purposes, which was not done for book purposes
("push-down accounting") due to the Company's significant level of public debt
outstanding. Such difference between books and taxes, generated a deferred tax
asset, the "Merger-related tax goodwill".
In connection with AT&T's sale of its 86% interest in the Company, AT&T
agreed to pay the Company approximately $280 million for lost tax depreciation
relating to the Section 338(h)(10) election. The Company offset such receivable
from AT&T with amounts owed to AT&T for income taxes due as of the Merger date.
The Company is also entitled to a tax deduction for the cash-out of the
Company's stock options by Hercules. The tax benefit of such payment reduced the
Company's current tax liability by approximately $16.0 million. At
F-39
<PAGE>
<PAGE>
December 31, 1996 and 1995 the Company had a current tax receivable of $6.9
million and current taxes payable of $30.6 million, respectively.
As part of the GPTD Agreement the Company has, in the past, received
interest free loans to the extent of the tax deferrals generated by transactions
between AT&T and the Company. On September 30, 1996 the Company, pursuant to the
GPTD Agreement, made a payment of $247.4 million to AT&T for full repayment of
such loans. The GPTD Agreement required the Company to repay such loans
immediately prior to the Company no longer being a member of AT&T's consolidated
group for federal income tax purposes., These interest free loans amounted to
$248.9 million at December 31, 1995. The average balance outstanding for such
loans was $248.9 million, $245.9 million and $213.2 million for the nine months
ended September 30, 1996 and the years ending December 31, 1995 and 1994,
respectively. Also on September 30, 1996, pursuant to the Merger Agreement, the
Company made a $35.0 million payment to AT&T in exchange for AT&T assuming all
tax liabilities associated with federal and combined state taxes for periods
prior to the consummation of the Merger.
In addition, following Tax Deconsolidation, it is possible that the
Company could be subject to the federal alternative minimum tax. A Company's
alternative minimum tax liability is computed by applying the alternative
minimum tax rate, which is lower than the regular tax rate, to a measure of
taxable income that is broader than that used in computing the regular tax.
Payments of any alternative minimum tax incurred by the Company after a Tax
Deconsolidation would be available in the future as credits against the
Company's regular tax liability.
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 289,942 $59,252 $(13,494)
State and local 68,409 13,415 (23,150)
Foreign 21,384 10,789 3,538
- -------------------------------------------------------------------------------------------
TOTAL CURRENT PORTION 379,735 83,456 (33,106)
- -------------------------------------------------------------------------------------------
Deferred
Federal (221,720) (5,460) 72,729
State and local (49,878) 205 33,655
Foreign 1,926 2,483 --
- -------------------------------------------------------------------------------------------
TOTAL DEFERRED PORTION (269,672) (2,772) 106,384
- -------------------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $110,063 $80,684 $73,278
- -------------------------------------------------------------------------------------------
</TABLE>
The Company recorded tax credits of $20,762, $10,850 and $3,446 in 1996,
1995 and 1994, respectively.
F-40
<PAGE>
<PAGE>
Deferred income tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred income tax liabilities:
Lease related differences $ (999) $(692,440)
Securitization-related (54,519) (2)
Pensions (1,176)
Other (5,347) (51,618)
- -------------------------------------------------------------------------------------------
GROSS DEFERRED INCOME TAX LIABILITIES (62,041) (744,060)
- -------------------------------------------------------------------------------------------
Gross deferred income tax assets:
Merger-related tax goodwill 159,604
Allowance for credit losses 5,644 124,186
Pensions -- 11,718
State and foreign net operating losses 7,205 17,926
Deferred Foreign Tax Credit 23,237 7,000
Other 4,476 32,982
- -------------------------------------------------------------------------------------------
GROSS DEFERRED INCOME TAX ASSETS 200,166 193,812
- -------------------------------------------------------------------------------------------
Valuation allowance (21,999) (5,048)
- -------------------------------------------------------------------------------------------
NET DEFERRED INCOME TAX ASSETS (LIABILITIES) $116,126 $(555,296)
- -------------------------------------------------------------------------------------------
</TABLE>
* Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
As a result of the step-up allowed under the Section 338(h)(10) election,
substantially all the deferred tax liabilities arising from lease related
differences were eliminated. In addition, the Merger-related tax goodwill
created a deferred tax asset.
A valuation allowance has been recorded to offset certain deferred tax
assets due to the uncertainty of realizing the benefit of foreign tax credits
and foreign net operating loss carryforwards.
A valuation allowance has not been established for non-foreign deferred tax
assets. Management believes that based upon its consistent history of profitable
operations, coupled with its forecast of taxable income, which employs certain
tax-planning strategies, it is probable that non-foreign deferred tax assets of
approximately $135 million will be realized on future tax returns, primarily
through the generation of future taxable income. The ultimate realization of the
deferred tax assets will require aggregate taxable income of approximately $320
million to $350 million in future years.
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax effect 4.3 4.2 3.9
Tax exempt income (1.4) (1.6) (1.7)
Goodwill 0.3 0.5 1.2
Foreign Taxes 1.0 1.0 (0.1)
Other 0.3 0.4 3.9
- -------------------------------------------------------------------------------------------
EFFECTIVE TAX RATE 39.5% 38.7% 42.2%
- -------------------------------------------------------------------------------------------
</TABLE>
The Company has no available AMT credit carryforwards at December 31,
1996 to reduce future federal income taxes payable.
For the years ended December 31, 1996, 1995 and 1994, the consolidated
income (loss) before income taxes and cumulative effect of accounting change by
domestic and foreign source was $296,876 and $(18,274), $210,296 and $(2,057),
$177,662 and $(4,048), respectively.
F-41
<PAGE>
<PAGE>
13. PENSION AND BENEFIT PLANS
Pension
Effective January 1, 1994, all employees of the Company and its domestic
subsidiaries were covered by the AT&T Capital Retirement and Savings Plan
("RSP"), a qualified defined contribution plan.
Under a defined contribution plan, the amount of future pension benefits
is based solely on the amount contributed and the returns earned on those
amounts. The RSP has a profit sharing component (including a cash or deferred
arrangement) under Section 401(k) of the Internal Revenue Code and a money
purchase component. The Company's annual contribution under the profit sharing
component, which is discretionary above 5%, is expected to equal approximately
9% of employee pay (i.e., aggregate base salaries and annual incentives of
participants in the RSP). In addition, under the money purchase component, the
Company matches an amount equal to 662/3% of the first 6% of compensation that
each employee contributes to the RSP under Section 401(k). RSP participants can
select from a variety of funds within the RSP to invest their allotments. The
Company recorded $14,954, $14,367 and $13,525 of pension expense in 1996, 1995
and 1994, respectively, related to the RSP. In addition, in 1996, 1995 and 1994
the Company recorded pension expense of $2,649, $2,431 and $1,366, respectively
in connection with the RSP-related nonqualified defined contribution plans. The
Company also sponsors various international plans which are available to certain
employees of its international subsidiaries. The plans are similar to the RSP in
that they enable employees of the Company to contribute a percentage of their
salary to provide for post-retirement income. The Company recorded $1,736,
$1,412 and $1,034 of pension expense in 1996, 1995 and 1994, respectively
related to the various international plans.
At the date of the Merger, as a result of the change in control
provisions in the RSP, all participants became fully vested.
The Company sponsors three unfunded supplemental nonqualified defined
benefit retirement plans that provide certain employees with additional benefits
after retirement. Components of net periodic pension cost for the years ended
December 31, were:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost - benefits earned $ 595 $ 456
Interest cost on projected benefit obligation 608 450
Amortization 490 365
Settlement loss* 455 --
- -------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST AFTER SETTLEMENT LOSS $2,148 $1,271
- -------------------------------------------------------------------------------------------
</TABLE>
*In 1996, lump sums were paid to certain participants upon separation of their
service.
F-42
<PAGE>
<PAGE>
The funded status of the plans at December 31 was:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligations:
Vested benefit obligation $5,926 $1,495
Non-vested benefit obligation 1,104 5,471
Total 7,030 6,966
Additional benefits on estimated future salary level 1,306 1,434
Total projected benefit obligation 8,336 8,400
Plan assets at fair value -- --
Unfunded projected benefit obligation 8,336 8,400
Unrecognized prior service cost 4,413 4,845
Unrecognized net loss 1,413 945
Additional liability 4,773 4,458
Accrued pension liability recorded 7,283 7,068
- --------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, the projected benefit obligation was
determined using assumed weighted average discount rates of 7.50% and 7.0%
respectively, and assumed long-term rates of increase in future compensation
levels of 4.5% or 5.5% in both years, depending on the plan.
Share Performance Incentive Plan
Prior to the Merger, the Company's Share Performance Incentive Plan, as
amended ("SPIP") was designed to provide the opportunity for cash incentive
awards to key employees at the end of five three-year performance periods. The
first such period terminated on June 30, 1996, with each of the other
performance periods ending on the annual anniversary date through and including
June 30, 2000. These incentive awards were generally based on the performance of
the Company's stock price and dividend yield relative to the interest rate on
three-year treasury notes and the total return on the stock relative to a
specified peer group of financial services companies over three year performance
periods. The estimated compensation expense relating to the SPIP has been
charged against income over the respective performance periods. As a result of
the Merger, the SPIP provided an accelerated payout and additional amounts to
certain key employees resulting in a pre-tax charge of $36.2 million for year
ended December 31, 1996. The Company discontinued the SPIO effective October 1,
1996 (the Merger date).
Leveraged Stock Purchase Plan
Prior to the Merger, under the Company's Leveraged Stock Purchase Plan
("LSPP"), 2,000,000 shares of common stock and options to purchase common stock
were reserved for purchase or grant. The terms and provisions of the LSPP
required certain senior management employees to purchase an aggregate of 851,716
shares of common stock in conjunction with the Company's initial public offering
at the offering price of $21.50 per share ("offering price"). The eligible
employees had the option of borrowing from the Company, on a recourse basis,
88.5% to 97.7% of the purchase price of the shares. The recourse loans would
have matured on August 4, 2000, and had a stated interest rate of 6.0%
compounded on an annual basis. The purchased shares were pledged as collateral
for the recourse loans. Sale of these shares was restricted prior to August 4,
1996, and was contingent upon repayment of the loan and certain other
requirements. The recourse loans were shown on the balance sheet as a reduction
of equity.
In addition, under the LSPP, the same senior management employees were
granted premium priced stock options which provided participants with an
opportunity to purchase up to 1,095,040 shares of Company stock at an exercise
price equal to 125% of the offering price ($26.875 per share). The options were
exercisable during the period from August 4, 1996 through August 4, 2003. No
options were cancelled during 1996. Options cancelled during 1995 and 1994 were
102,852 and 54,895, respectively. Options exercised during 1996 prior to the
Merger were 53,352. Pursuant to the terms of the LSPP, no further purchases of
stock, Company loans or option grants were made under the LSPP subsequent to
December 31, 1993.
F-43
<PAGE>
<PAGE>
1993 Long Term Incentive Plan
Prior to the Merger, under the Company's 1993 Long Term Incentive Plan
("1993 LTIP") the Company granted various stock-based and other awards to
employees of the Company. The number of shares available for grant or purchase
under the 1993 LTIP were 3,500,000 (following approval by the Company's
shareowners of an additional 1,500,000 shares on April 19, 1996). Similar to the
LSPP, eligible employees purchasing stock under the 1993 LTIP had the option of
borrowing from the Company, on a recourse basis, 88.5% to 97.7% of the purchase
price of the shares. The recourse loans, which were due seven years from the
loan date, had stated interest rates ranging from 6.0% to 7.92% compounded on an
annual basis. The purchases shares were pledged as collateral for the recourse
loans. Sale of these shares was prohibited for a three-year period and was
contingent upon repayment of the loan and certain other requirements. The
recourse loans were shown on the balance sheet as a reduction of equity. Awards
under the 1993 LTIP were made to executives and employees of the Company at the
Company's discretion.
The following table summarizes the option activity relating to the 1993
LTIP through the Merger date:
<TABLE>
<CAPTION>
SHARES UNDER OPTION NUMBER PRICE PER SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1993 686,303 $21.50
Changes in 1994:
Options exercised (274) $21.50
Options cancelled (85,367) $21.50-26.15
Options granted 502,707 $21.81-30.63
- ---------------------------------------------------------------------------------------------
Options outstanding at December 31, 1994 1,103,369 $21.50-30.63
Changes in 1995:
Options exercised (16,978) $21.50-26.15
Options cancelled (79,605) $21.50-26.15
Options granted 345,036 $21.50-47.03
- ---------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 1,351,822 $21.50-47.03
Changes in 1996 prior to merger date:
Options exercised (70,195) $21.50-26.15
Options cancelled (42,937) $21.50-38.63
Options granted 5,206 $38.25-38.63
Options outstanding at October 1, 1996 1,243,896 $21.50-47.03
prior to Merger
- ---------------------------------------------------------------------------------------------
Options exercisable at December 31, 1996 -- --
Options exercisable at December 31, 1995 59,157 $21.50-26.56
- ---------------------------------------------------------------------------------------------
</TABLE>
Upon consummation of the October 1, 1996 Merger Agreement, all option
holders received from Hercules $45 in cash for each option. As a result no
compensation cost was incurred by the Company relating to the cashout of these
options.
As part of the same Merger Agreement, most of the senior management
employees who were participants in the LSPP and 1993 LTIP, were given the
opportunity to exchange all of the Company pre-Merger shares, purchased under
the above mentioned plans, for an equal value of the Company's post-Merger
shares, which was on the basis of 4.5 new shares for each of the Company's
pre-Merger shares. Management employees who effected the exchange had their LSPP
or 1993 LTIP recourse loans extended to the year 2006. The new recourse loans
have a stated interest rate of 7.13% compounded on an annual basis. The
exchanged shares are pledged as collateral for the recourse loans. Sale of the
underlying shares is restricted and is contingent upon repayment of the loan and
certain other requirements. The recourse loans are shown on the balance sheet as
a reduction of equity.
In addition, the Company had awarded restricted stock under the 1993 LTIP
to certain employees in consideration of services rendered. During 1996, 1995
and 1994, respectively, restricted stock awards of 7,796, 19,967 and 17,801
shares were made to employees under the LTIP.
As of December 31, 1996, 1995 and 1994 respectively, 0, 405,106 and
735,936 shares were available for issuance under the 1993 LTIP. The shares were
not subject to stock appreciation right features.
F-44
<PAGE>
<PAGE>
Employee Stock Purchase Plan
In April 1994, the Company's shareowners approved an employee stock
purchase plan effective August 1, 1994. The AT&T Capital 1994 Employee Stock
Purchase Plan ("ESPP") enabled employees to purchase shares of AT&T Capital
common stock at a discount. The price per share was 90% of the fair market value
of the common stock at the time of its purchase. No compensation expenses was
recorded in connection with the ESPP. The maximum aggregate number of shares of
common stock that could have been purchased under the ESPP was 500,000. During
1996, 1995 and 1994, 10,074, 27,965 and 13,484 shares were purchased by
employees at prices ranging from $38.88 to $41.63; $22.05 to $36.00 and $19.02
to $21.83 per share, respectively. As a result of the Merger agreement, the ESPP
was discontinued on June 5, 1996.
1996 Long Term Incentive Plan
Effective on the Merger date, the Company discontinued the LSPP and the
1993 LTIP. A new fixed option plan, the 1996 Long Term Incentive Plan (1996
LTIP) was adopted the same date. Under the 1996 LTIP, certain members of
management who effected an exchange of pre-Merger shares in the Company received
options to purchase new shares of the Company having exercise prices aggregating
$29.25 million. Additional options to purchase the Company's stock having
exercise prices aggregating $9.75 million will also be available for grant to
the same group.
In addition, options to purchase the Company's stock having exercise
prices aggregating $64 million will be available for grant to general members.
These grants will be made annually over a 5 year period. The Board of Directors
may also consider grants over time, commencing after 1997, of options to
purchase the Company's stock with exercise prices aggregating a further $13
million to junior management. Awards under the 1996 LTIP are made to members of
the Company at the Company's discretion.
All stock options granted under the 1996 LTIP shall be at a price no less
than fair market value on the date of the grant, expire after 10 years and vest
over a five year period.
In October, 1996, 5,062,200 options, with an aggregate value of
approximately $51 million were granted under the 1996 LTIP. A further 50,000
options, with an aggregate value of $0.5 million were granted to Board members.
The grants were made at an exercise price of $10 each, being equal to the fair
market value of the Company's common stock at the date of grant. Under the plan,
options having exercise prices aggregating $52 million were available for grant
to December 31, 1996.
Effective January 1, 1996 the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation". This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. It allows
companies to choose either 1) a fair value method of valuing stock-based
compensation plans which will affect reported net income, or 2) to continue to
follow the existing accounting rules for stock option accounting but disclose
what the impacts would have been had the new standard been adopted. The Company
adopted the disclosure alternative which requires disclosure of the pro forma
net income amount assuming the fair value method was adopted on January 1, 1995.
As a result, the adoption of this standard did not have any impact on the
Company's consolidated financial statements. If the Company had elected to
recognize compensation costs based on the fair value at the date of grant for
awards in 1996 and 1995, in accordance with the provisions of SFAS 123, on a pro
forma basis, the Company's net income would have been reduced by $1.3 million
and $0.6 million for 1996 and 1995.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in the future are anticipated.
The weighted average fair values at date of grant for pre-Merger options
granted during 1996 and 1995 were $6.71 and $7.03 per share, respectively. The
minimum value at date of grant for post-Merger options granted in 1996 was $2.61
per share.
For 1996, as a result of the Merger and the related accelerated vesting
of all prior option grants, the fair value was determined as being the
difference between the grant price and the final cash settlement price of $45
per share for all option grants made in 1996. For post-Merger option grants, the
minimum value was estimated using the following assumptions: (a) Risk free
interest rate of 6.2% and (b) expected life of 5 years.
For 1995, the fair value was estimated using the Black-Scholes
option-pricing model using the following assumptions: (a) Expected volatility
rate of 24.3%, (b) Risk free interest rate of 7.4%, (c) Expected dividend yield
of 0% and (d) Expected life of 3 years.
F-45
<PAGE>
<PAGE>
Severance plans
In 1995, the Company's Compensation Committee and Board of Directors
approved broad-based plans that provide for benefits to members upon certain
terminations of employment. Such benefits are calculated using annual base pay
and annual incentive awards as well as other factors. No accrual for these
benefits have been reflected in the consolidated financial statement because the
amount cannot be reasonably estimated.
14. RELATED-PARTY TRANSACTIONS
Nomura
On October 1, 1996 the Company entered into an Advisory Agreement with an
affiliated company, Nomura International plc (the indirect beneficial owner of
Hercules ("Nomura")). The agreement is for ten years and is subject to a
substantial change in the beneficial ownership of the Company. Under the
agreement Nomura will provide support services to the Company. As part of the
same agreement, the Company incurred a securitization fee of $24 million in
connection with its October 15, 1996 $3.1 billion securitization of lease and
loan receivables (see Note 6). Further, Nomura earned from the Company a $2.0
million fee in connection with its October 25, 1996 issuance to the public of
eight million company-obligated preferred securities of subsidiary. Nomura also
receives a quarterly retainer fee of $0.75 million for certain other services
provided to the Company. Such fees may increase after the first year, but not in
excess of 10% of the previous year's amount.
In connection with the above mentioned $3.1 billion securitization,
Nomura provided an amount equal to 3.5% of the Securitization proceeds as a
credit enhancement.
AT&T/Lucent/NCR
In 1996, rental expense under existing leases with AT&T and affiliates
for the nine months through the Merger date was $3.8 million. Such expenses for
the years ended 1995 and 1994 were $5.5 million and $4.1 million, respectively.
The Company purchases services from AT&T and affiliates, included data
processing, billing and collection, administration and other services. In 1996,
the Company's expenses for such services, for the nine months through the Merger
date were $13.1 million. For the years ended 1995 and 1994, such expenses
amounted to $20.0 million and $20.6 million, respectively.
At December 31, 1995 and 1994, the Company was the lessor to AT&T of
equipment comprising $176.4 million and $268.6 million of capital leases and
$220.5 million and $204.6 million of equipment under operating leases,
respectively. Revenues in 1996 related to these leases through the Merger date
were $67.2 million. For the year ended 1995 and 1994, such revenues were $105.8
million and $108.8 million, respectively.
The Company also had an interest bearing intercompany debt payable to
AT&T and affiliates of $18.3 million at December 31, 1995 and an interest
bearing intercompany note receivable from AT&T and affiliates of $40.1 million
at December 31, 1994. The net interest income and expense associated with
intercompany borrowing were not material in 1996, 1995 or 1994. Additionally,
the Company had interest free loans related to tax agreements from AT&T as more
fully discussed in Note 12.
The Company is also a party to Operating and License Agreements with
AT&T, pursuant to which AT&T provides the Company with the right to be the
preferred provider of leasing and financing services for AT&T products on a
basis consistent with past practice (Note 1). The Company and AT&T have also
entered into an Intercompany Agreement whereunder, among other things, the
Company manages and administers, for a fee, certain lease portfolios, including
the Lease Finance Assets of Old Capital and Old Credit which were not
transferred to the Company. In 1996, for the nine months through the Merger
date, the Company recognized service fee revenue of $4.8 million for such
services. In 1995 and 1994, fee revenue of $7.6 million and $8.6 million,
respectively, were earned for such services.
In the second quarter of 1996, the Company executed an Operating
Agreement with each of Lucent and NCR, and entered into letter agreements with
Lucent and NCR regarding the applicability to Lucent and NCR of specified
provisions of the License Agreement and the Intercompany Agreement between the
Company and AT&T.
The Company has paid a sales assistance fee ("SAF") to Lucent, which fee
is related to the volume of the Company's Lucent-related business. Under the
terms of its Operating Agreement with the Company, Lucent is prohibited from
accepting a SAF from any other provider of leasing services. In early 1996,
after a period of negotiations, the Company agreed to pay a substantial increase
in the SAF for 1995, both as an absolute amount and as a percentage of volumes
attributable to Lucent. After giving effect to the increase, the SAF paid by the
Company to Lucent for 1995 was approximately double the 1994 fee. The Company
and Lucent recently agreed
F-46
<PAGE>
<PAGE>
to a modified formula for calculating the SAF for the remaining years of the
term of Lucent's Operating Agreement (retroactive to 1996). The revised formula
is expected to result in aggregate annual SAF which is approximately double the
amounts that would have been paid if the pre-1995 formula had been maintained.
15. COMMITMENTS AND CONTINGENCIES
Derivative Financial Instruments
In the normal course of business, the Company is routinely party to
various derivative financial instruments. These financial instruments are used
by the Company to reduce interest rate and foreign currency exposure, as well as
to meet the financing needs of its customers.
At both December 31, 1996 and 1995, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
derivative contracts. There were no past due amounts, nor were there any
reserves for credit losses on derivatives as of December 31, 1996, 1995 and
1994. Generally, the Company does not require collateral or other security to
support financial instruments with credit risk. The Company has never
experienced a credit related charge-off associated with derivative transactions.
Information is provided below for each significant derivative product
type. The derivatives, with which the Company is involved, are primarily
interest rate swaps, currency swaps, and foreign currency forward exchange
contracts.
Interest Rate and Currency Swaps
The Company enters into interest rate and foreign currency swap
agreements with major money center banks and intermediaries located in major
financial centres to reduce interest rate exposure, to more closely match the
maturity of its debt portfolio to that of its asset portfolio and to reduce its
exposure to currency fluctuations. Interest rate swaps also allow the Company to
raise funds at floating rates and effectively swap them into fixed rates that
are lower than those available to the Company if fixed-rate borrowings were made
directly. Foreign currency swaps are primarily used to hedge Canadian dollars.
Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount. Generic swaps' notional amounts generally do not change for
the life of the contract. Amortizing and accreting swaps' notional amounts
generally change based upon a predetermined amortization or accretion schedule.
Currency swaps generally involve the exchange of both principal and interest
payments in distinct currencies.
The notional amounts shown below for interest rate swaps represent an
agreed upon amount on which calculation of amounts to be exchanged are based and
for currency swaps also represent the U.S. equivalent of an amount exchanged.
Notional amounts do not represent the Company's exposure. Rather, the Company's
exposure is limited to the current fair value of the contracts with a positive
fair value at the reporting date (see Note 11). A key assumption in the
information below is that rates remain constant at the reporting date levels. To
the extent that rates change, the variable interest rate information will
change.
F-47
<PAGE>
<PAGE>
Activity in interest rate and currency swaps which are all held for
purposes other than trading for 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
GENERIC AMORTIZING GENERIC PAY CURRENCY
NOTIONAL AMOUNTS PAY FIXED PAY FIXED FLOATING SWAPS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $1,571,800 $964,973 $175,000 $221,817 $2,933,590
Additions 124,339 373,435 240,000 151,631 889,405
Maturities/
amortization (350,000) (406,365) (175,000) (108,455) (1,039,820)
Terminations (225,000) (59,400) - - (284,400)
- -----------------------------------------------------------------------------------------
December 31, 1995 1,121,139 872,643 240,000 264,993 2,498,775
Additions 303,877 370,189 100,000 150,074 924,140
Maturities/
amortization (527,873) (143,364) (240,000) (94,418) (1,005,655)
Terminations (119,800) (540,033) - - (659,833)
- -----------------------------------------------------------------------------------------
December 31, 1996 $ 777,343 $ 559,435 $ 100,000 $ 320,649 $1,757,427
- -----------------------------------------------------------------------------------------
</TABLE>
F-48
<PAGE>
<PAGE>
The schedule of maturities at December 31, 1996 for interest rate and
currency swaps which are all held for purposes other than trading is as follows:
<TABLE>
<CAPTION>
GENERIC AMORTIZING GENERIC PAY CURRENCY
NOTIONAL AMOUNTS PAY FIXED PAY FIXED FLOATING SWAPS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total notional
amounts $ 777,343 $ 559,435 $ 100,000 $ 320,649 $1,757,427
Weighted average
a pay rate 6.79% 5.99% 5.46% 3.97% 5.95%
Weighted average
receive rate 5.73% 4.97% 5.45% 3.06% 4.99%
- -----------------------------------------------------------------------------------------
<CAPTION>
GENERIC AMORTIZING GENERIC PAY CURRENCY
PAY FIXED PAY FIXED FLOATING SWAPS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Maturities $341,354 $217,484 $100,000 $128,334 $787,172
Weighted average
pay rate 6.03% 6.02% 5.46% 4.89% 5.77%
Weighted average
receive rate 5.73% 4.84% 5.45% 3.80% 5.13%
1998 Maturities $230,818 $145,285 - $112,445 $488,548
Weighted average
pay rate 6.86% 5.74% - 4.12% 5.90%
Weighted average
receive rate 5.72% 4.83% - 3.13% 4.86%
1999 Maturities $201,680 $72,898 - $75,536 $350,114
Weighted average
pay rate 8.00% 5.74% - 2.04% 6.25%
Weighted average
receive rate 5.75% 4.74% - 1.54% 4.63%
2000 Maturities $3,491 $60,468 - $4,334 $68,293
Weighted average
pay rate 6.56% 5.95% - 6.57% 6.02%
Weighted average
receive rate 5.59% 5.28% - 5.75% 5.33%
2001 Maturities - $33,186 - - $33,186
Weighted average
pay rate - 5.92% - - 5.92%
Weighted average
receive rate - 5.75% - - 5.75%
2002-2017 Maturities - $30,114 - - $30,114
Weighted average
pay rate 7.75% 7.75%
Weighted average
receive rate - 5.75% - - 5.75%
- -----------------------------------------------------------------------------------------
</TABLE>
Foreign Currency Forward Exchange Contracts
The Company enters into foreign currency forward exchange contracts to
manage foreign exchange risk (primarily British pounds and Canadian dollars).
The U.S. dollar equivalent of such contracts was $907,283 and $658,808 at
December 31, 1996 and 1995, respectively. The Company enters into these
contracts to hedge the cash flows associated with foreign currency denominated
assets. The term of these contracts is rarely more than three years. The purpose
of the Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual dollar net cash inflows resulting from these
assets will be adversely affected by changes in exchange rates.
F-49
<PAGE>
<PAGE>
Certain regional office facilities and equipment of the Company are
leased with renewal options of one to five years. Rental expense (including
rental expense to the Former Affiliates of $4,508) for the years ended December
31, 1996, 1995 and 1994 was $21,247, $22,752 and $18,303, respectively. Rental
expense associated with sublease rentals on operating leases for 1996, 1995 and
1994, was $51, $165 and $115, respectively. Minimum annual rental commitments at
December 31, 1996, under these operating lease agreements are as follows:
<TABLE>
<S> <C>
1997 $21,095
1998 20,470
1999 18,779
2000 13,232
2001 9,677
2002 and thereafter 21,751
- --------------------------------------------------------------------------------
TOTAL $105,004
- --------------------------------------------------------------------------------
</TABLE>
The total of minimum rentals to be received in the future under
noncancelable subleases related to operating leases as of December 31, 1996, was
$11,802. The total of minimum rentals to be received in the future under
noncancelable subleases related to capital leases (recorded as debt) as of
December 31, 1996, was $117,850.
As part of its lending activities, the Company has entered into
noncancelable commitments to extend credit to some of its customers. As of
December 31, 1996, the Company had approximately $140,213 of such unused
commitments with a remaining term in excess of one year.
In the normal course of business, the Company is subject to certain
lawsuits and other claims. Such matters are subject to many uncertainties and
the outcomes are not predictable with assurance. Consequently, the ultimate
monetary liability or financial impact with respect to these matters at December
31, 1996 cannot be ascertained. While these matters could impact the operating
results, management believes that after final disposition, any monetary
liability or financial impact to the Company would not be material to the
consolidated financial statements.
16. FOREIGN OPERATIONS
The following data on other geographic areas pertain to operations that
are located outside the U.S. (primarily Europe, Canada, the Asia/Pacific Region
and Central/South America). Net income (loss) includes certain allocated
operating expenses and interest expense. Revenues between geographic areas are
not material. The increase in the net loss relating to foreign operations for
1996 resulted primarily from the allocation of one-time Merger related costs.
F-50
<PAGE>
<PAGE>
A summary of the Company's operations by geographic area is presented
below.
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Total Revenues:
United States $1,683,499 $1,370,672 $1,250,591
Foreign 268,691 206,363 133,488
- -------------------------------------------------------------------------------------
Total $1,952,190 $1,577,035 $1,384,079
- -------------------------------------------------------------------------------------
Net Income (Loss):
United States $180,433 $130,587 $104,558
Foreign (11,894) (3,032) (4,222)
- -------------------------------------------------------------------------------------
Total $168,539 $127,555 $100,336
- -------------------------------------------------------------------------------------
<CAPTION>
At December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets:
United States $6,150,074 $7,868,941 $7,148,737
Foreign 1,942,438 1,672,318 873,186
- -------------------------------------------------------------------------------------
Total $8,092,512 $9,541,259 $8,021,923
- -------------------------------------------------------------------------------------
</TABLE>
F-51
<PAGE>
<PAGE>
New Worlds New Rules
Newcourt
1997 First Quarter Report
To Shareholders
For the Three Months Ended March 31
NCT
<PAGE>
<PAGE>
FINANCIAL SUMMARY
Newcourt Credit Group
<TABLE>
<CAPTION>
(unaudited, in thousands of Canadian dollars, except for share data)
Three months ended
March 31 March 31
1997 1996
<S> <C> <C>
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
<S> <C> <C>
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
<S> <C> <C>
Asset Financings $ $
Originations during the period 1,368,777 1,024,996
As at
March 31 December 31
1997 1996
$ $
<S> <C> <C>
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
</TABLE>
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF
INCOME AND RETAINED EARNINGS
Newcourt Credit Group
<TABLE>
<CAPTION>
(unaudited, in thousands of Canadian dollars, except for per share data)
Three Months Ended
March 31 March 31
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
page six
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
Newcourt Credit Group
<TABLE>
<CAPTION>
(unaudited, in thousands of Canadian dollars)
March 31 December 31
1997 1996
$ $
<S> <C> <C>
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
</TABLE>
page seven
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Newcourt Credit Group
<TABLE>
<CAPTION>
(unaudited, in thousands of Canadian dollars)
Three Months Ended
March 31 March 31
1997 1996
$ $
<S> <C> <C>
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
</TABLE>
page eight
<PAGE>
<PAGE>
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
<TABLE>
<CAPTION>
COMMON SHARE PRICE
FOR THE QUARTER
Pre Post
Split
<S> <C> <C> <C>
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>
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
(Canadian Dollars per U.S. Dollar)
<S> <C> <C>
Average $1.36 $1.37
Quarter End $1.38 $1.36
</TABLE>
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
(Unaudited)
June 30, 1997
<PAGE>
<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>
<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>
<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>
<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>
<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>
<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>
<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>
<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
<S> <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>
<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>
<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>
<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>
<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>
<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>
<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
</TABLE>
<PAGE>
<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>
<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>
<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>
<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>
<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>
<S> <C>
$
1997 3,556
1998 6,449
1999 7,487
2000 7,593
2001 7,637
Thereafter 38,450
------
71,172
</TABLE>
<PAGE>
<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
(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.
</TABLE>
15. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
consolidated financial statements for any interim period within that year.
<PAGE>
<PAGE>
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]
<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
Interest Coverage
Sept. 30, 1997 December 31, 1996
($000's)
<S> <C> <C>
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
</TABLE>
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Sept. 30, 1997 December 31, 1996
($000's)
<S> <C> <C>
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
</TABLE>
Sincerely,
Borden D. Rosiak
Executive Vice President
and Chief Financial Officer
<PAGE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
NEWCOURT CREDIT GROUP INC.
(Unaudited)
September 30, 1997
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Newcourt Credit Group Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
[in thousands of Canadian dollars]
September 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
See accompanying notes
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C>
$ $
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
</TABLE>
See accompanying notes
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Newcourt Credit Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[in thousands of Canadian dollars]
Nine Months Ended
September 30, September 30,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
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
<PAGE>
<PAGE>
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>
<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>
<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>
<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>
<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
September 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
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
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
</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$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.
<PAGE>
<PAGE>
An analysis of the Company's allowance for credit losses and investment in
finance assets is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
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.
<PAGE>
<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 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.
<TABLE>
<CAPTION>
As at September 30, 1997, the Company had commitments or substantially
completed commitments to fund or support the funding of the following amounts:
<S> <C>
$
Commercial Finance 3,488,000
Corporate Finance 640,000
---------
4,128,000
</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
<TABLE>
<CAPTION>
Fixed assets consist of the following:
September 30, 1997 December 31, 1996
---------------------- -------------------------
Accumulated Accumulated
Cost depreciation Cost depreciation
<S> <C> <C> <C> <C>
$ $ $ $
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
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Other 416 125 1,914 123
132,361 16,988 52,527 11,668
------- ------
Net book value 115,373 40,859
</TABLE>
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:
<TABLE>
<CAPTION>
Commcorp BTF Total
<S> <C> <C> <C>
$ $ $
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
</TABLE>
Upon completion of these acquisitions, total goodwill amounted to $401,811
[December 31, 1996 - $60,288].
<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
The effect on net income after income taxes and earnings per common share of
this change is set out below:
<S> <C>
$
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
</TABLE>
<PAGE>
<PAGE>
9. DEBT
<TABLE>
<CAPTION>
Debt consists of the following:
September 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 143,655 143,186
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
</TABLE>
<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
As of September 30, 1997, scheduled repayments are as follows:
<S> <C>
$
1997 1,192,126
1998 221,002
1999 170,665
2000 198,344
2001 210,740
Thereafter 582,559
---------
2,575,436
</TABLE>
<PAGE>
<PAGE>
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 -
<TABLE>
<CAPTION>
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
<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 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
</TABLE>
<PAGE>
<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.
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.
<PAGE>
<PAGE>
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].
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
$ $
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
</TABLE>
14. LEASE COMMITMENTS
<TABLE>
<CAPTION>
Future minimum annual payments on a cash basis under leases for premises over
the next 5 years and thereafter are as follows:
<S> <C>
$
1997 4,762
1998 8,230
1999 8,812
2000 8,867
2001 8,874
Thereafter 46,051
------
85,596
</TABLE>
<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
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.
</TABLE>
16. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.
