-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MepKWTEhPup98856dF31q0VJmAI2mMKHJ4atQCEXcxIfkRYzPKyH4dCvngYPOzd0 vaCzu+rKV/1DDAUX7a/yww== 0000950117-98-000673.txt : 19980401 0000950117-98-000673.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950117-98-000673 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CAPITAL CORP /DE/ CENTRAL INDEX KEY: 0000897708 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 223211453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11237 FILM NUMBER: 98580147 BUSINESS ADDRESS: STREET 1: 44 WHIPPANY ROAD CITY: MORRISTOWN STATE: NJ ZIP: 07962-1983 BUSINESS PHONE: 2013973000 MAIL ADDRESS: STREET 1: 44 WHIPPANY RD CITY: MORRISTOWN STATE: NJ ZIP: 07962-1983 10-K405 1 AT&T CAPITAL CORP. 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From to Commission File Number 1-11237 AT&T CAPITAL CORPORATION A DELAWARE I.R.S. EMPLOYER IDENTIFICATION CORPORATION No. 22-3211453 44 Whippany Road, Morristown, New Jersey 07962-1983 Telephone Number 973-397-3000 ------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES...x... NO....... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [X] No voting stock of this registrant is held by any non-affiliates of the registrant. As of February 28, 1998, 90,337,379 shares of this registrant's Common Stock, par value $.01 per share, were issued and outstanding to Newcourt Holdings USA, Inc. DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS PART I
Item Description Page 1. Description of Business 3 2. Properties 19 3. Legal Proceedings 19 4. Submission of Matters to a Vote of Security-Holders 19 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 20 6. Selected Financial Data 20 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 8. Financial Statements and Supplementary Data 48 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 95 PART III 10. Directors and Executive Officers of the Registrant 96 11. Executive Compensation 97 12. Security Ownership of Certain Beneficial Owners and Management 105 13. Certain Relationships and Related Transactions 106 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 107 2 PART I ITEM 1. DESCRIPTION OF BUSINESS RESTRUCTURING, INITIAL PUBLIC OFFERING AND MERGERS AT&T Capital Corporation ("AT&T Capital" or the "Company") was incorporated on December 21, 1992, as AT&T Leasing, Inc., and was renamed AT&T Capital Corporation on March 31, 1993. The Company was the successor entity to certain businesses of AT&T Capital Holdings, Inc. (formerly known as AT&T Capital Corporation) ("Old Capital"), a wholly owned subsidiary of AT&T Corp. ("AT&T"), and its subsidiaries, including AT&T Credit Holdings, Inc. (formerly known as AT&T Credit Corporation) ("Old Credit"), a wholly owned subsidiary of Old Capital that commenced operations in 1985. In a restructuring that occurred on March 31, 1993 (the "Restructuring"), Old Capital and Old Credit transferred substantially all their assets, except for certain assets consisting principally of equity interests in project finance transactions and leveraged leases of commercial aircraft, in exchange for shares of the Company's common stock and the assumption by the Company of certain related liabilities. In connection with the Restructuring, AT&T issued direct, full and unconditional guarantees of all existing indebtedness outstanding as of March 31, 1993 for borrowed money incurred, assumed or guaranteed by Old Capital entitled to the benefit of a Support Agreement between AT&T and Old Capital, including the debt of Old Capital assumed by the Company in the Restructuring. Debt issued by the Company subsequent to March 31, 1993, however, is not guaranteed or supported by AT&T (see Note 7 to the Consolidated Financial Statements). An initial public stock offering combined with a management stock offering totaling approximately 14% of the Company's stock occurred on August 4, 1993 ("IPO"). As a result of the IPO, approximately 86% of the outstanding common stock of the Company was owned indirectly by AT&T (through Old Capital and Old Credit). On September 20, 1995, AT&T announced a plan to pursue the public or private sale of its remaining 86% interest in the Company. On such date, AT&T also announced a plan to separate into three publicly-held stand-alone global businesses: AT&T, Lucent Technologies Inc. ("Lucent") and NCR Corporation ("NCR") (herein collectively, the "Former Affiliates"). On June 5, 1996, AT&T Capital entered into an Agreement and Plan of Merger (the "1996 Merger Agreement") with AT&T, Hercules Holdings (Cayman) Limited ("Hercules (Cayman)") and Antigua Acquisition Corporation ("Antigua"), a wholly-owned subsidiary of Hercules (Cayman). Hercules (Cayman) is an indirect wholly-owned subsidiary of The Grand Leasing Company Limited (UK) ("Grand Leasing"). As a result of the merger which occurred on October 1, 1996 (the "1996 Merger"), AT&T Capital's then shareowners received $45 in cash for each outstanding share of the Company's common stock, and Hercules (Cayman) and certain members of management (the "Management Investors") became the sole owners of the Company's common stock. 3 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 1996 Merger Agreement (the "1996 Merger Consideration") was approximately $2.2 billion. The 1996 Merger Consideration was funded through (i) a loan to the Company 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, which resulted in an after-tax gain of $79 million (see Note 6 to the Consolidated Financial Statements), and (ii) equity contributions to the Company represented by (a) capital contributions of $871 million from Hercules (Cayman), (b) exchange by the Management Investors of their existing shares totaling $29 million for newly issued shares and (c) the settlement of approximately $5 million of recourse loans previously made to senior executives. Also, in connection with the 1996 Merger, the Company, through a consolidated subsidiary, issued to the public $200 million of company-obligated preferred securities (see Note 8 to the Consolidated Financial Statements), the proceeds of which were used to pay down short-term debt. On January 12, 1998, Newcourt Credit Group Inc., an Ontario corporation ("Newcourt"), consummated the purchase (the "Newcourt Acquisition") of all of the outstanding shares of common stock of AT&T Capital, pursuant to a Stock Purchase Agreement dated as of November 17, 1997 among the Company, Newcourt, Hercules (Cayman), the former direct owner of 97.4% of the Company's common stock, and the Management Stockholders, as defined below. In connection with the Newcourt Acquisition, all of the outstanding shares of common stock of the Company were transferred to Newcourt Holdings USA, Inc., a newly-formed Delaware corporation which is a wholly-owned subsidiary of Newcourt. As a result of the Newcourt Acquisition, all of the outstanding shares of common stock of the Company are owned indirectly by Newcourt. The resulting combination of Newcourt and the Company (the "Merged Company") has created 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 corporate headquarters in Toronto, Canada, the Merged Company has approximately $22.3 billion (C$31.2 billion) of owned and managed assets at December 31, 1997. In addition, the Merged Company remains well capitalized with equity of $2.7 billion (C$3.9 billion) resulting in a leverage ratio (defined as total debt to total equity plus Preferred Securities) of 3.2 times at December 31, 1997. The aggregate purchase price under such Stock Purchase Agreement paid by Newcourt to the stockholders of AT&T Capital was approximately $1.6 billion comprised of approximately $1.0 billion in cash and the remainder comprising approximately 17.6 million of Newcourt common shares. Such shares were issued entirely to Hercules (Cayman) and generally may not be transferred for periods ranging from 6 to 18 months following the date of the Newcourt Acquisition. The cash portion of the purchase price paid by Newcourt was raised through the issuance by Newcourt of 38.5 million shares of Newcourt common stock at approximately $32.50 per share to employees of Newcourt and certain of the Management Stockholders (as defined below) and the public in Canada and the United States. The ownership of the Preferred Securities, which were issued by Capita Preferred Trust, a business trust originated by the Company in October, 1996, was not affected by the Newcourt Acquisition and the related 4 transactions. However, the Newcourt Guarantee (as defined below) ranks senior to the Trust Guarantee issued by the Company in connection with the Preferred Securities offering. (see Note 8 to the Consolidated Financial Statements). Prior to the Newcourt Acquisition, all of the outstanding shares of common stock of the Company were owned either (i) indirectly, through ownership of 100% of the common shares of Hercules (Cayman), by Grand Leasing, which in turn is beneficially owned through warrants to acquire 100% of the common shares of Grand Leasing by Nomura International plc ("Nomura"), a wholly-owned indirect subsidiary of The Nomura Securities Co., Ltd., and (ii) directly, at that time, by 21 members and one former member of the senior management of the Company (the "Management Stockholders"), with the Management Stockholders owning directly approximately 2.6% of the outstanding shares of common stock of the Company (or approximately 4.7% on a fully-diluted basis) and Grand Leasing owning indirectly approximately 97.4% of the outstanding shares of common stock of the Company (or approximately 93.6% on a fully diluted basis). The Company's employees and outside directors owned approximately 1.7% of the Company's common stock on a fully diluted basis. On February 9, 1998, the Company and Newcourt entered into a support agreement (the "Newcourt Support Agreement"). The Newcourt Support Agreement requires Newcourt to own a majority of the outstanding shares of common stock of the Company, to cause the Company and its subsidiaries to have a consolidated tangible net worth of at least $1.00 and to provide funds to the Company (upon the request of the Company) sufficient to enable the Company to make timely payments of principal and interest payments on its debt for borrowed money (if the Company is unable to do so). On February 20, 1998, the Company entered into a guarantee of certain outstanding indebtedness and liquidity facilities of Newcourt and Newcourt Credit Group USA Inc. (the "Newcourt Guarantee") (see Note 7 to the Consolidated Financial Statements). RELATIONSHIPS WITH THE FORMER AFFILIATES As discussed above, in September 1995, AT&T announced plans to separate itself into three publicly traded companies and to dispose of its approximately 86% equity interest in the Company to the general public or another company (the "AT&T Restructuring"). Pursuant to the AT&T Restructuring, the Company consummated the 1996 Merger which resulted in, among other things, the disposition by AT&T of its remaining equity interest in the Company. In the first quarter of 1996, AT&T's telecommunications manufacturing and marketing businesses were transferred to Lucent. On April 10, 1996 AT&T made a public offering of approximately 17.6% of Lucent's shares. On September 30, 1996, AT&T spun off its entire remaining interest in Lucent to AT&T's shareholders. Lucent's businesses involve the manufacture and distribution of public telecommunications systems, business communications systems, micro-electronic components, and consumer telecommunications products. On December 31, 1996, AT&T distributed to its shareholders all of its interest in NCR. NCR's businesses involve the manufacture and distribution of information technology equipment, including automated teller machines and point-of-sale terminal equipment. In the second quarter of 1993, the Company entered into the following agreements with AT&T: an Operating Agreement (as subsequently amended, the 5 "AT&T Operating Agreement"), an Intercompany Agreement (the "AT&T Intercompany Agreement"), and a License Agreement (as subsequently amended, the "AT&T License Agreement"). In the second quarter of 1996, the Company entered into separate operating agreements with each of Lucent and NCR (the "Lucent Operating Agreement" and "NCR Operating Agreement", respectively, and, collectively with the AT&T Operating Agreement, the "Operating Agreements") (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 Lucent and NCR). Also, in the second quarter of 1996, the Company entered into letter agreements with Lucent and NCR regarding the applicability to Lucent and NCR of specified provisions of the AT&T License Agreement (collectively, with the AT&T License Agreement, the "License Agreements") and the AT&T Intercompany Agreement (collectively, with the AT&T Intercompany Agreement, the "Intercompany Agreements"). (See Note 15 for further discussion of AT&T/Lucent/NCR). The Former Affiliates are not required to renew the terms of their respective Operating Agreements, License Agreements and Intercompany Agreements beyond the expiration of the current terms on August 4, 2000. In connection with the execution and delivery of the Stock Purchase Agreement, Lucent, pursuant to the terms of the Lucent Operating Agreement, consented to the change of control contemplated by the sale of the outstanding shares of common stock of the Company to Newcourt pursuant to the Stock Purchase Agreement. In addition, the Company and Newcourt agreed to negotiate with Lucent to amend the terms of the Lucent Operating Agreement. On March 9, 1998, Newcourt signed a new five-year agreement with Lucent (the "1998 Lucent Agreement") which expands the global financing program established to serve Lucent's business systems customers. The term of the 1998 Lucent Agreement is from October 1, 1997 through September 30, 2002. The 1998 Lucent Agreement replaces the Lucent Operating Agreement and the letter agreements between the Company and Lucent, the initial terms of which were scheduled to expire on August 4, 2000. In addition to the extended term of the 1998 Lucent Agreement, other changes from the previous Lucent Operating Agreement include Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, a change in the methodology in calculating the amount required to be paid to Lucent (based upon specific financial, service and performance levels tied to compensation) which is expected to result in an increase in such amount, and a single point of contact for customers. The 1998 Lucent Agreement also includes certain early termination provisions and a buy-out option that could have a material impact on the Company's future operations, if exercised. Lucent is not required to renew the term of the 1998 Lucent Agreement beyond the current term. In the event of either (a) an early termination or buy-out or (b) a non-renewal of the 1998 Lucent Agreement by Lucent, Newcourt will have an extended wind-down period with cost recovery. The impact of the 1998 Lucent Agreement on the Company's future net income is at this time unknown. While there is a possibility that the Company's future net income from Lucent transactions may increase as a result of an anticipated increase in financing volume arising from Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, there also is a possibility that the Company's future net income from Lucent transactions may decrease as a result of the increased amounts due to Lucent under the 1998 Lucent Agreement. 6 Pursuant to the AT&T 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 AT&T License Agreement provides that AT&T may require (as a result of AT&T's disposition of the Company in 1996, upon two years 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 Agreements (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 given any notice requiring discontinuance of use. Although the Company intends to seek to maintain and improve its existing relationships with Lucent, NCR and AT&T, no assurance can be given that the Operating Agreements or the 1998 Lucent Agreement, will be extended beyond their respective termination dates or, if extended, that the terms and conditions thereof will not be modified in a manner adverse to the Company. Failure to renew the Operating Agreement and the 1998 Lucent Agreement, on terms not adverse to the Company could have a material adverse effect on the Company. Moreover, in certain circumstances the Operating Agreements and the 1998 Lucent Agreement may be terminated prior to their respective expiration dates. In 1997, approximately 36% and 315% of the Company's total revenues and net income, respectively, were attributable, directly or indirectly, to the Former Affiliates. The relative high percentage of net income is a function of higher volumes, securitization gains and capital lease revenue associated with the Former Affiliates businesses. In addition, the Company's net loss on sales of businesses also reduced the net income of businesses other than the Former Affiliates. DESCRIPTION OF THE BUSINESS AT&T Capital is a full-service, diversified equipment leasing and finance company that operates in the United States, Europe, Canada, the Asia/Pacific Region, Mexico and South America. The Company is one of the largest equipment leasing and finance companies in the United States based on the aggregate value of equipment leased or financed. The Company, through its various subsidiaries, leases and finances equipment manufactured and distributed by numerous vendors, including the Former Affiliates. In addition, the Company provides equipment leasing and financing and related services directly to end-user customers. The Company's customers include large global companies, small and mid-size businesses and federal, state and local governments and their agencies. AT&T Capital leases and finances a wide variety of equipment including telecommunications equipment (such as private branch exchanges, telephone systems and voice processing units), information technology (such as personal computers, retail point-of-sale systems, and automated teller machines), general office, manufacturing and medical equipment ("General Equipment"), and transportation equipment (primarily vehicles), and also finances real estate (including real estate related loans in the Company's Small Business Administration ("SBA") lending and franchise finance businesses). The Company is the largest lessor of telecommunications 7 equipment in the United States based on the aggregate value of equipment leased or financed. At December 31, 1997, AT&T Capital's portfolio assets (investment in finance receivables, capital leases and operating leases) were comprised of, or collateralized by, General Equipment (aggregating 33% of such portfolio assets), information technology equipment (22%), telecommunications equipment (22%), loans secured by real estate (12%) and transportation equipment (11%). The Company leases and finances such equipment through a variety of financing and related products and services, including capital leases, operating leases, other collateralized working capital loans for equipment dealers and distributors, SBA lending, asset based loans and equipment management and remarketing services. In addition, the Company offers its customers certain equipment rental and administration services. AT&T Capital's portfolio assets are diversified among a large customer base, as well as numerous industries and geographic regions. The Company has one of the largest customer bases in the commercial equipment leasing and finance market, aggregating approximately 500,000 customers in its owned and managed portfolios. At December 31, 1997, on an owned and securitized basis, the Company's 100 largest customers (including AT&T and Lucent) accounted for approximately 18% of the Company's owned and securitized portfolio assets, and no customer (with the exception of AT&T and Lucent, in the aggregate) accounted for more than 1% of such portfolio assets. Although the Company operates principally in the United States, the Company began operations in the United Kingdom in 1991 and Canada in 1992, acquired a business in Hong Kong in 1994 and opened offices in Mexico and Australia in 1994. The Company continues to expand globally in response to the needs of its vendor clients. For a discussion regarding the Company's total assets, revenues and net income attributable to leasing and financing relating to clients other than the Former Affiliates (the "Other Clients"), see the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations. For a discussion regarding the Company's foreign operations, see Note 17 to the Consolidated Financial Statements. Marketing and Business Activities 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, 1997.
Financing Total Volume Assets ----------------------------- ($ in millions) Vendor Finance $2,272 40% $3,011 34% Direct Customer Finance 1,882 33 3,609 41 International Finance 1,513 27 2,156 25 ----- -- ----- -- Total $5,667 100% $8,776 100% ====== ==== ====== ====
8 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 private label financing programs for vendors. The Former Affiliates have collectively been the largest vendor clients of the Company. Historically, the Company 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, 1997, the Company generated approximately $0.9 billion of financing volume from Lucent and NCR related vendor finance activities. Of this financing volume, 79% was related to Lucent and 21% was related to NCR. To facilitate the financing of sales of the Former Affiliates' equipment, the Company has connected its data and telecommunications systems with those of the Former Affiliates' sales and marketing offices and maintains personnel and equipment at the Former Affiliates' sales and marketing sites. The Company uses these linkages, personnel and equipment in conjunction with its competitive strengths (e.g., credit scoring capabilities) and its personnel and equipment based at its own sites to provide high volume processing capabilities that enable the Company to serve large numbers of customers on an efficient and timely basis. In addition, these linkages permit the Former Affiliates to invoice the Company electronically for certain types of telecommunications and information technology equipment and permit the Company to pay invoices electronically. In serving other vendor clients, the Company 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). AT&T Capital's management believes its ability to identify creditworthy accounts represents a strategic competitive resource to vendors seeking to increase sales without increasing their personnel costs. In addition, the Company's high volume processing capabilities, relationship-based transaction skills and residual value assessment, equipment management and marketing expertise provide vendors with competitive pricing and enhanced customer account control after sales close. During the year ended December 31, 1997, the Company generated $1.4 billion of financing volume from its other vendor clients. Direct Customer Finance 9 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 (the Company is currently pursuing the sale of its U.S. consumer automotive business, see Note 5 to the Consolidated Financial Statements). 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 include procurement, integration, deployment, tracking and remarketing of equipment. Technology assets is a fast 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 a multi-vendor environment. 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. Specialized Commercial Finance AT&T Capital has leveraged on 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 SBA loans, asset-base 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 $9.5 billion government guaranteed loan program for fiscal year ended September 30, 1997. 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 Small Business Lending Corporation, has currently been designated as a preferred lender by the SBA administration in 58 of the SBA's 68 districts. For the year-ended December 31, 1997, AT&T Capital provided approximately $0.4 billion of SBA-guaranteed loans. 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. 10 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 financing structuring, pricing, credit analysis, asset management and engineering. 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 Mexico and South 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. 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 Canada acquired the operating assets and lease portfolio of Municipal Leasing Corporation, a Canadian operation which had approximately $160 million in assets at the time of the acquisition. Municipal Leasing Corporation serves the office equipment and automotive leasing needs of 26,000 customers in Ontario. 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 Capital's manufacturer and distributor vendor clients. Asia/Pacific - AT&T Capital's Asia Pacific operations are focused on vendor programs and other specialty asset finance businesses. Mexico and South America - Global manufacturers like Lucent and NCR have targeted the growth opportunities in Mexico and South America, which resulted in AT&T Capital establishing a strong presence in these regions. 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. The Merged Company 11 The Merged Company will offer its financing services to clients through three primary business units: Newcourt Financial, Newcourt Capital, and Newcourt Services. Newcourt Financial, the Merged Company's commercial finance business, will provide asset-based financing for a variety of equipment to vendors and customers. Newcourt Capital, the Merged Company's corporate finance business, will provide structured corporate finance to a growing list of international clients, including major corporations, governments and agencies. Finally, Newcourt Services, the Merged Company's control and support services, will be responsible for the underwriting, funding, administration and risk management needs of Newcourt Financial and Newcourt Capital. Newcourt Financial offers its lending services through select strategic relationships with equipment manufacturers, dealers and distributors and certain professional associations. Newcourt Financial's strategy focuses on the creation, maintenance and enhancement of vendor programs ensuring its position as the premier provider of global asset based financial products. Newcourt Financial focuses on the following sectors: Transportation and Industrial Finance, Technology Finance, Telecommunications Finance, Business Finance, Specialty Finance, Technology Services, International/Joint Ventures, and Operations. Newcourt Capital is the corporate finance business which provides asset based financing for high value assets and related advisory services to equipment manufacturers, corporate clients, governments and public sector agencies. Newcourt Capital focuses on the following sectors: Aerospace Finance, Rail Finance, Public Sector Finance, Project Finance, Structured Finance, Telecommunication and Media Finance, Business Finance, and Underwriting and Syndication. Newcourt Services is the service business unit responsible for providing cost effective control and support services to Newcourt Financial and Newcourt Capital. Newcourt Services consists of the following corporate functions: Treasury, Credit and Risk Management, Financial Reporting and Administration, Human Resources, Communications & Marketing, Tax Planning and Compliance, Systems Development, and Quality Assurance. Income Tax Considerations As a result of the 1996 Merger, the Company is no longer a member of AT&T's consolidated group for Federal income tax purposes. The Company ceased being a member of such consolidated group for Federal income tax purposes the "Tax Deconsolidation") upon the consummation of the 1996 Merger (see Notes 1 and 13 to the Consolidated Financial Statements). When the Company was a part of the AT&T consolidated federal income tax group, the payment of Federal income taxes associated with sales of products manufactured by the Former Affiliates was deferred (the amount of such taxes so deferred being herein called "Gross Profit Tax Deferral"), generally as the products were depreciated or until sold outside the group. Pursuant to the Gross Profit Tax Deferral Interest Free Loan Agreement between the Company and AT&T, AT&T had agreed to extend and had extended interest-free loans to the Company from time to time in an amount equal to the then outstanding amount of Gross Profit Tax Deferral. Such loans, the outstanding balance of which totaled $247.4 million as of September 30, 1996, were repaid by the Company immediately prior to Tax Deconsolidation as required by the agreement. The Company no longer receives such loans, which had constituted a competitive advantage to the Company in financing AT&T products. 12 Pursuant to the Federal Tax Sharing and the State Tax Sharing Agreements between the Company and AT&T, the AT&T consolidated Federal income tax liability was generally allocated among the members of the AT&T consolidated group that reported taxable income. Members of the AT&T consolidated group that reported tax losses were compensated by AT&T (through cash payments made on a quarterly basis) for their losses to the extent those losses were used to reduce the AT&T consolidated Federal income tax liability. Similar principles and cash payments also applied to certain state and local income tax liabilities. Upon Tax Deconsolidation, the Company is no longer entitled to receive quarterly cash payments from AT&T as compensation for the use of any tax losses. The tax losses, instead, are available to the Company to reduce future taxable income. Thus, the Company may derive a benefit in the future from tax losses, but only to the extent the Company has taxable income in later years. In 1997 and 1996, on a stand-alone basis, the Company had taxable income. (See Note 13 of the Consolidated Financial Statements.) It is anticipated that Newcourt Holdings USA, Inc. will merge into Newcourt Credit Group USA Inc. (a wholly-owned subsidiary of Newcourt), with Newcourt Credit Group USA Inc. being the surviving entity. Effective thereafter, the surviving entity, including the Company, will file a consolidated tax return for Federal income tax purposes. In addition, 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 would be available in the future as credits against the Company's regular tax liability. Credit Quality The following table shows the components of the Company's allowance for credit losses related to (i) lease financing (capital leases and rentals receivable on operating leases) from United States operations, (ii) finance receivables from United States operations and (iii) lease financing and finance receivables from foreign operations; collectively "finance assets". In addition, other key credit quality indicators, by loan type, are also provided. The breakdown of the allowance for credit losses at each year-end reflects management's estimate of credit losses and may not be indicative of actual future charge-offs by loan classification. 13
(Dollars in Thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------- Balance at beginning of year: - - Lease Financing-U.S. $ 82,123 $144,666 $113,735 $95,196 $86,086 - - Finance Receivables-U.S. 50,850 52,607 46,637 56,974 36,139 - - Foreign 36,013 25,947 16,056 7,649 1,736 - --------------------------------------------------------------------------------- Total 168,986 223,220 176,428 159,819 123,961 - --------------------------------------------------------------------------------- Additions Charged to Operations: - - Lease Financing-U.S. 62,228 69,931 66,505 62,447 91,605 - - Finance Receivables-U.S. 32,433 27,916 15,167 13,488 28,604 - - Foreign 19,639 15,758 4,542 4,953 3,469 - --------------------------------------------------------------------------------- Total 114,300 113,605 86,214 80,888 123,678 - --------------------------------------------------------------------------------- Charge-offs: - Lease Financing-U.S. 48,392 83,885 48,834 47,585 61,233 - Finance Receivables-U.S. 5,693 14,582 10,446 22,908 14,135 - Foreign 13,050 7,278 5,595 3,024 284 - --------------------------------------------------------------------------------- Subtotal 67,135 105,745 64,875 73,517 75,652 Recoveries: - - Lease Financing-U.S. 21,171 15,507 13,944 14,666 15,505 - - Finance Receivables-U.S. 887 1,495 1,403 1,561 1,118 - - Foreign 2,362 2,431 2,758 1,745 - - --------------------------------------------------------------------------------- Subtotal 24,420 19,433 18,105 17,972 16,623 - --------------------------------------------------------------------------------- Net Charge-offs: - - Lease Financing-U.S. 27,221 68,378 34,890 32,919 45,728 - - Finance Receivables-U.S. 4,806 13,087 9,043 21,347 13,017 - - Foreign 10,688 4,847 2,837 1,279 284 - --------------------------------------------------------------------------------- Total 42,715 86,312 46,770 55,545 59,029 - --------------------------------------------------------------------------------- Transfers and Other (a): - - Lease Financing-U.S. (50,993) (64,096) (684) (10,989) (36,767) - - Finance Receivables-U.S. (6,908) (16,586) (154) (2,478) 5,248 - - Foreign (4,118) (845) 8,186 4,733 2,728 - --------------------------------------------------------------------------------- Total (62,019) (81,527) 7,348 (8,734) (28,791) - --------------------------------------------------------------------------------- Balance at end of year: - - Lease Financing-U.S. 66,137 82,123 144,666 113,735 95,196 - - Finance Receivables-U.S. 71,569 50,850 52,607 46,637 56,974 - - Foreign 40,846 36,013 25,947 16,056 7,649 - --------------------------------------------------------------------------------- Total $178,552 $168,986 $223,220 $176,428 $159,819 =================================================================================
14
(Dollars in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Percentage of loan types to total finance assets: - - Lease Financing-U.S. 37.1% 41.3% 62.2% 67.9% 70.6% - - Finance Receivables-U.S. 36.5% 33.2% 20.8% 21.5% 23.1% - - Foreign 26.4% 25.5% 17.0% 10.6% 6.3% ================================================================================ Ratio of Net Charge-offs during the year to average finance assets outstanding during the year: - Lease Financing-U.S. 1.09% 1.49% 0.73% 0.78% 1.27% - Finance Receivables-U.S. 0.23% 0.70% 0.58% 1.69% 1.13% - Foreign 0.69% 0.32% 0.24% 0.22% 0.15% ================================================================================ Nonaccrual assets $168,723 $135,085 $118,484 $120,494 $160,574 ================================================================================
(a) Primarily includes transfers out of allowance for credit losses related to receivables securitized, transfers in of reserves related to businesses acquired and reclassifications. The lower ratios of net charge-offs to average Lease Financings - U.S. and Finance Receivables U.S. in 1997 compared to 1996, is primarily a result of a much lower level of net charge-offs in 1997. The reduction in the allowance and percentage of Lease Financing - U.S. assets is consistent with continued securitization activity, including primarily Lease Financing - U.S. assets. The increase in nonaccrual assets over 1996 is primarily due to a $27.4 million project finance transaction that was suspended from earnings in early 1997. The ratio of net charge-offs to average Lease Financing - U.S. assets increased in 1996 compared with 1995, while the allowance for credit losses decreased over the same period. These changes were due to the significant reduction in the Lease Financing portfolios due to the significant increase in securitizations in 1996. In addition, assets securitized generally include only those transactions not more than 60 days past due; therefore, the owned portfolio reflects a higher proportion of delinquent receivables which results in a higher charge-off ratio. Furthermore, the securitizations generally comprise receivables from the Company's small-ticket lease portfolios which carry a higher allowance for credit losses/portfolio asset ratio compared to the overall ratio. As a result, the Company's overall allowance for credit losses/portfolio assets ratio decreases when such small-ticket receivables are sold. The allowance for credit losses decreased primarily to the reclassification of certain amounts to securitization recourse reserves. The ratio of net charge-offs to average Finance Receivables increased while the allowance for credit losses decreased in 1996 compared to 1995, due to a large financing written-off in 1996 which was substantially reserved for in 1995. The ratio of net charge-offs to average Finance Receivables increased in 1994 compared with 1993, while the allowance for credit losses decreased in 1994 compared with 1993 due to reserves established for specific assets 15 (particularly in the media portfolio) that were subsequently charged off in 1994. As a result, in 1994 there were fewer assets that required specific reserves. For a further discussion regarding credit quality and the Company's portfolio credit performance indicators, see the Credit Quality section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Accounts are placed in nonaccrual status at 90 days past due or sooner if identified as a problem account. Revenue which would have been recorded in 1997 on nonaccrual U.S. and Foreign assets had these assets been earning at the original contractual rate amounted to approximately $18.4 million and $1.6 million, respectively. Revenue actually recognized in 1997 on U.S. and Foreign assets in nonaccrual status at December 31, 1997 amounted to approximately $5.8 million and $1.3 million, respectively. Lease terms that are modified in the normal course of business, for which additional consideration is received or insignificant concessions are made, are accounted for as changes in a provision for a lease in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases". Pursuant to SFAS No. 114, "Accounting by Creditor for Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures", the amount of impaired loans (requiring an individual allowance greater than $0.2 million) at December 31, 1997 is $101.1 million (see Note 3 to the Consolidated Financial Statements). Residual Value Realization The establishment and realization of residual values on leases are also important elements of the Company's business. The Company's residual management capabilities include its equipment remarketing skills, its in-house equipment refurbishment facilities, its proactive management of its portfolio of residuals and its knowledge of developing technologies, products and obsolescence trends. These competencies are used in setting residual values upon the acquisition and leasing of the equipment based on the estimated value of the equipment at the end of the lease term and the ability to influence lessee activities and choices over the life of the lease. These estimates are determined by the Company from, among other things, on-going studies prepared by the Company, professional appraisals, historical experience and industry data, market information on sales of used equipment, the ability to upgrade and enhance equipment value over lease term, end-of-lease customer behavior plus projections of new product introductions and obsolescence trends. The Company strategically manages its owned and securitized portfolios to ensure a broad diversification of residual risk by equipment type and lease expiration. The Company's risk management department, in conjunction with equipment experts in the Company's business units, regularly reviews residual values, and if they have declined, adjustments are made that result in an immediate charge to income for capital leases (and residuals where the associated receivables have been securitized) and adjustments to depreciation expense for operating leases over the shorter of the useful life of the asset or the remaining term of the lease. On an aggregate basis, the Company has historically realized proceeds from the sale or re-leasing of equipment during the lease term and at lease termination in excess of the Company's recorded residual values. However, there can be no assurance that such results will be realized in future years. The Company 16 recognizes in total revenues, amounts in excess of recorded residuals over the re-lease term, or upon the sale or other disposition of leased equipment. The Company actively manages its residuals by working with lessees and vendors during the lease term to upgrade and enhance their leased equipment and/or encourage lessees to extend their leases, as appropriate, and by monitoring the various equipment industries, particularly the information technology industries, for obsolescence trends and remarketing opportunities. The Company utilizes its equipment management (including equipment remarketing), engineering and other technical expertise to help manage its residual positions. The following table shows projected residual expirations, as an approximate percentage of aggregate recorded residuals as of December 31, 1997, by equipment type for the Company's owned and securitized portfolios, for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and thereafter:
Year of Termination ------------------------------------------------------------- 1998 1999 2000 2001 2002+ Total ------------------------------------------------------------- Telecommunications 4% 5% 7% 6% 8% 30% Information Technology 6% 7% 9% 2% 1% 25% Transportation 4% 9% 9% 2% 5% 29% General Equipment 3% 3% 3% 3% 4% 16% ------------------------------------------------------------- Total 17% 24% 28% 13% 18% 100%
Competition and Related Matters The equipment leasing and finance industry is highly competitive. Participants in the industry compete through price (including the ability to control costs), risk management, innovation and customer service. Principal cost factors include the cost of funds, the cost of selling to or obtaining new end-user customers and vendors, and the cost of managing portfolios (including, for example, billing, collection, credit risk management, and residual management). Adequate risk management is required to achieve satisfactory returns on investment and to provide appropriate pricing of financing products. The Company believes that innovation is necessary to compete in the industry, involving specialization in certain types of equipment, financial structuring for larger transactions, utilization of alternative channels of distribution and optimization of tax treatment between owner and user. In addition, end-users of equipment generally desire transactions to be simple, flexible and meet the customer needs. In its leasing and financing operations and programs, the Company competes with captive or related leasing companies (such as General Electric Capital Corporation and IBM Credit Corporation), independent leasing companies (such as Comdisco, Inc.), certain banks engaged in leasing, lease brokers and investment banking firms that arrange for the financing of leased equipment, and manufacturers and vendors who lease their own products to customers. In addition, the Company competes with all banking and other financial institutions, manufacturers, vendors and others who extend or arrange credit for the acquisition of equipment, and in a sense, with end-users' available cash resources to purchase equipment that the Company may otherwise finance. Many of the competitors of the Company are large companies that have substantial capital, technological and marketing resources; some of these competitors are significantly larger than the Company and have access to debt at a lower cost than the Company. 17 There continue to be substantial changes in the equipment leasing and finance industry, including the sale or cessation of operations of competitors of the Company and an apparent trend toward consolidation. While these developments may on balance be favorable for the Company's prospects, they are indicative of the strong competitive pressures on all participants in the industry, including the Company. The Company's penetration rate for Lucent's sales of telecommunications equipment in the United States (i.e., the percentage of the dollar volume of such sales that the Company finances) was approximately 35% for the year ended December 31, 1997. The Company does not expect material increases in this penetration rate, and there can be no assurance that the existing rate will be maintained. The Company's penetration rate for NCR's sales of data processing and related products, including data warehousing computers, retail point-of-sale computers, and automated teller machines was approximately 18% for the year ended December 31, 1997. Additionally, the Company has an insignificant penetration rate with respect to international sales of Lucent's network systems products (large telecommunications switches, cable products, cellular telephone equipment and microwave dishes and equipment), which sales the Company has been financing for a relatively short period of time. Because the markets for financing these products are highly competitive and substantially different from the markets for financing telecommunications equipment in the United States, there can be no assurance that the penetration rates in these product areas will increase. In addition to competition within the leasing and financing industry, competition experienced in the Former Affiliates' industries may adversely affect the Company because of the significance to the Company of its business with customers of the Former Affiliates. Those industries are highly competitive and subject to rapid changes in technology and customer needs. Many of the Former Affiliates' competitors are large companies that have substantial capital, technology and marketing resources. In addition, the Regional Bell Operating Companies (the "RBOCs"), which have historically been prohibited from manufacturing telecommunications equipment will be permitted to manufacture such equipment and compete with Lucent, subject to satisfying certain conditions, pursuant to telecommunications legislation recently enacted by Congress. It is possible that one or more of the RBOCs may decide to manufacture telecommunications equipment or form alliances with other manufacturers. Either of such developments could result in increased competition for Lucent, reduce the RBOCs' purchases of equipment from Lucent, and consequently, adversely impact the Company's financing volumes. While the Company is not able to fully predict whether Lucent's and NCR's separation from AT&T and the cessation of their use of the "AT&T" brand name will affect their equipment sales, any resulting change in the level of equipment sales by Lucent and NCR would likely have a corresponding impact on the Company's future financing volumes associated with such sales. Employees AT&T Capital had approximately 2,800 employees as of February 28, 1998, each of whom is referred to within the Company as a "member". Titles are not used internally. In general, members function using a team approach, with business generally conducted on a collaborative rather than 18 hierarchical basis. Management believes that its members are skilled and highly motivated and that the Company's ability to achieve its objectives depends upon their efforts and competencies. None of the Company's members are represented by a union. The Company believes that its relations with its members are good. ITEM 2. PROPERTIES The Company's properties consist primarily of administrative offices, warehouses for the storage and refurbishment of equipment and a number of geographically dispersed sales offices. The Company has its headquarters in Morristown, New Jersey, with its principal domestic offices and warehouses located in Morristown and Parsippany, New Jersey; Framingham, Massachusetts; Bloomfield Hills, Michigan; Towson, Maryland; and Dallas, Texas. The Company's principal international offices are in London, England; Toronto, Canada; Hong Kong; Sydney, Australia; Mexico City, Mexico; Brussels, Belgium; Frankfurt, Germany; Milan, Italy; and Paris, France. All these offices and warehouses are leased (some being subleased from the Former Affiliates), except for one building (of approximately 9,000 square feet) in Framingham, Massachusetts, owned by a subsidiary of the Company. This building is designed as office space and storage and is completely sublet to a nonaffiliated company. The Company considers its present locations suitable and adequate to carry on its current business. As a result of the Newcourt Acquisition, a Real Estate task force has been put in place to review all of the Merged Company's leases. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any pending litigation nor is the Company aware of any threatened litigation which in the opinion of the Company's management will have a material adverse impact on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information Until October 1, 1996, the principal market on which the common stock of the Company was traded was the New York Stock Exchange ("NYSE"). Since October 1, 1996, there has been no established public trading market for the Company's common stock. The Company is currently an indirect wholly-owned subsidiary of Newcourt Credit Group Inc.
Quarter Ended Quarterly Stock Prices Dividends declared per share High Low March 31, 1996 $44.000 $38.125 $0.11 June 30, 1996 $44.000 $36.625 $0.11 September 30, 1996 $44.875 $43.750 $0.11 December 31, 1996* $44.875 $44.875 $(c)
*As discussed above, there is no longer an established public trading market for the Company's common stock which is no longer traded on the NYSE. The fourth quarter "high" and "low" price is as of October 1, 1996, the last day of trading. (b) Holders As of February 28, 1998, there was one holder of record of the Company's common stock. (c) Dividends It is anticipated that the Company will no longer pay quarterly dividends in the short-term. ITEM 6. SELECTED FINANCIAL DATA The Results of Operations Data for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, as well as the Balance Sheet Data and Other Data at December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the Consolidated Financial Statements of the Company at such dates and for such periods, which have been audited by Coopers & Lybrand L.L.P., independent accountants except for 1997, which have been audited by Arthur Andersen LLP (see Item 9). 20 The selected financial data as presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto.
For the years ended December 31, (Dollars in thousands) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Results of Operations Data: Total revenues $1,814,139 $1,952,190 $1,577,035 $1,384,079 $1,359,589 Interest expense 451,470 458,039 411,040 271,812 236,335 Operating and administrative expenses 545,728 564,489 473,663 427,187 381,515 Provision for credit losses 114,301 113,605 86,214 80,888 123,678 Income before income taxes, cumulative effect on prior years of accounting change and impact of tax rate change 32,036 278,602 208,239 173,614 138,040 Income before cumulative effect on prior years of accounting change and impact of tax rate change 21,007 168,539 127,555 100,336 83,911 Cumulative effect on prior years of accounting change (1) - - - - (2,914) Impact of 1993 tax rate change (1) - - - - (12,401) Net income (1) $21,007 168,539 127,555 100,336 68,596 Dividends paid (2) - $ 15,490 $ 19,231 $ 17,338 $ 4,216 Return on average equity 2.9% 15.9% 12.1% 10.5% 8.5% Return on average assets 0.3% 1.8% 1.5% 1.4% 1.1% Return on average equity before tax charges (3) 2.9% 15.9% 12.1% 10.5% 10.3% Return on average assets before tax charges (3) 0.3% 1.8% 1.5% 1.4% 1.4% - -------------------------------------------------------------------------------- Balance Sheet Data, at December 31: Total assets $8,775,895 $8,092,512 $9,541,259 $8,021,923 $6,409,726 Total debt(4) 7,117,994 6,464,924 6,928,409 5,556,458 4,262,405 Total liabilities 7,832,116 7,185,205 8,425,134 7,013,705 5,485,283 Preferred Securities(5) 200,000 200,000 - - - Total shareowners' equity $ 743,779 $ 707,307 $1,116,125 $1,008,218 $ 924,443
21
At or for the years ended December 31, (Dollars in thousands) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Other Data: Net portfolio assets of the Company $7,225,327 $7,187,451 $9,105,403 $7,484,798 $6,076,805 Allowance for credit losses 178,552 168,986 223,220 176,428 159,819 Total owned and managed assets 13,912,146 12,883,484 11,755,761 10,681,449 9,205,389 Volume of equipment financed (6) $5,666,718 $5,245,000 $4,567,000 $4,251,000 $3,467,000 Ratio of earnings to fixed charges (7) 1.07x 1.60x 1.50x 1.62x 1.57x Ratio of total debt to shareowners' equity plus Preferred Securities(5) 7.54x 7.13x 6.22x 5.51x 4.61x Ratio of allowance for credit losses to net charge-offs 4.34x 1.96x 4.77x 3.18x 2.71x Ratio of net charge-offs to portfolio assets 0.56% 1.17% 0.50% 0.73% 0.95% Ratio of allowance for credit losses to portfolio assets 2.41% 2.30% 2.39% 2.30% 2.56%
22 (1) Net income for 1993 was adversely impacted by the federal tax rate increase to 35% ($12.4 million) and a cumulative effect on prior years of accounting change ($2.9 million). Net income without these charges for 1993 would have been $83.9 million. (2) As a result of the 1996 Merger and the Newcourt Acquisition, it is anticipated that the Company will no longer pay dividends in the short-term. (3) The Company defines return on average equity before tax charges and return on average assets before tax charges, as income before cumulative effect on prior years of accounting change and impact of tax rate change as a percentage of average equity and average assets, respectively. (4) Does not include certain interest free loans from AT&T to the Company under certain tax agreements, in aggregate outstanding principal amounts of $0, $0, $248.9 million, $214.1 million and $188.6 million, at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (5) The Company, through a consolidated subsidiary, issued to the public eight million shares of Company-obligated preferred securities (the "Preferred Securities") (see Note 8 to the Consolidated Financial Statements). (6) Total principal amount of loans and total cost of equipment associated with finance and lease transactions recorded by the Company and the change in outstanding inventory financing and asset based loans. (7) Earnings before income taxes and cumulative effect on prior years of accounting change plus the sum of interest on indebtedness and the portion of rentals representative of the interest factor (the "fixed charges") divided by the fixed charges. Fixed charges do not include distributions on Preferred Securities. In connection with the 1996 Merger, the portion of the Company's indebtedness to AT&T which did not bear interest, the GPTD loan, was repaid (see Notes 1 and 13 to the Consolidated Financial Statements). 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS When included in this Annual Report on Form 10-K, the words, "will", "should", "expects", "intends", "anticipates", "estimates" and similar expressions, among others, identify forward looking statements for purposes of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). Such statements, which include statements contained in this Item 7, inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. Such risks and uncertainties include, among others, those described below under "Risk Factors", many of which are beyond the control of AT&T Capital Corporation ("AT&T Capital" or the "Company"). These forward looking statements are made only as of the date of this Annual Report on Form 10-K. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. 1998 SALE OF THE COMPANY AND RELATED TRANSACTIONS On January 12, 1998, Newcourt Credit Group Inc., an Ontario corporation ("Newcourt"), consummated the purchase (the "Newcourt Acquisition") of all of the outstanding shares of common stock of AT&T Capital, pursuant to a Stock Purchase Agreement dated as of November 17, 1997 among the Company, Newcourt, Hercules Holdings (Cayman) Limited ("Hercules (Cayman)") (the former direct owner of 97.4% of the Company's common stock), and, at the time, by 21 members and one former member of the senior management of the Company. In connection with the Newcourt Acquisition, all of the outstanding shares of common stock of the Company were transferred to Newcourt Holdings USA, Inc., a newly-formed Delaware corporation which is a wholly-owned subsidiary of Newcourt. As a result of the Newcourt Acquisition, all of the outstanding shares of common stock of the Company are owned indirectly by Newcourt. The resulting combination of Newcourt and the Company (the "Merged Company") has created 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 corporate headquarters in Toronto, Canada, the Merged Company has approximately $22.3 billion (C$31.2 billion) of owned and managed assets at December 31, 1997. In addition, the Merged Company remains well capitalized with equity of $2.7 billion (C$3.9 billion) resulting in a leverage ratio (defined as total debt to total equity plus preferred securities) of 3.2 times at December 31, 1997. The aggregate purchase price under such Stock Purchase Agreement paid by Newcourt to the stockholders of AT&T Capital was approximately $1.6 billion comprised of approximately $1.0 billion in cash and the remainder comprising approximately 17.6 million of Newcourt common shares. Such shares were issued entirely to Hercules (Cayman) and generally may not be transferred for periods ranging from 6 to 18 months following the date of the Newcourt Acquisition. The cash portion of the purchase price paid by Newcourt was raised through the issuance by Newcourt of 38.5 million shares 24 of Newcourt common stock at approximately $32.50 per share to employees of Newcourt and the public in Canada and the United States. On February 9, 1998, the Company and Newcourt entered into a support agreement (the "Newcourt Support Agreement"). The Newcourt Support Agreement requires Newcourt to own a majority of the outstanding shares of common stock of the Company, to cause the Company and its subsidiaries to have a consolidated tangible net worth of at least $1.00 and to provide funds to the Company (upon the request of the Company) sufficient to enable the Company to make timely payments of principal and interest payments on its debt for borrowed money (if the Company is unable to do so). On February 20, 1998, the Company entered into a guarantee of certain outstanding indebtedness and liquidity facilities of Newcourt. See "Liquidity and Capital Resources" for further discussion. THE 1996 MERGER AND RELATED TRANSACTIONS On October 1, 1996, the Company was acquired by an investor group financed by Nomura International plc which included certain members of management (the "Investor Group") in a transaction that valued the Company's equity at approximately $2.2 billion (the "1996 Merger"). The purchase price was funded through (i) a loan to the Company 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, which resulted in an after-tax gain of $79 million (see Note 6), and (ii) equity contributions to the Company represented by (a) capital contributions of $871 million from Hercules (Cayman), (b) exchange by the Management Investors of their existing shares totaling $29 million for newly issued shares and (c) the settlement of approximately $5 million of recourse loans previously made to senior executives. Also, in connection with the 1996 Merger, the Company, through a consolidated subsidiary, issued to the public $200 million of Company-obligated preferred securities (the "Preferred Securities") (see Note 8), the proceeds of which were used to pay down short-term debt. The 1996 Securitization represented approximately one-third of total assets and the related gain contributed approximately $79 million, or 48% of the Company's net income in 1996. The mix of assets sold was split approximately equally between (a) AT&T, Lucent Technologies Inc., and NCR Corporation (herein collectively the "Former Affiliates") and (b) clients other than the Former Affiliates ("Other Clients"). As a result of the 1996 Securitization, 1997 capital lease revenue decreased. In addition, the Company experienced a decreased level of securitization revenue, offset in part by increased servicing revenues. The Company's post-1996 Merger recapitalization structure also resulted in higher leverage and, consequently, higher relative interest expense in 1997. FINANCIAL OVERVIEW Financing volume, portfolio assets and net portfolio revenue Financing volumes, one of the most important financial indicators of a leasing company, are generally measured by the amount of the loan, or cost of the equipment financed, at the inception of the loan or lease agreement. The financing is then recorded on the balance sheet as an investment in finance receivables, capital leases or operating leases (together known as 25 "Portfolio Assets"). The lease classification is based upon certain criteria under the Statement of Financial Accounting Standards ("SFAS") No. 13 "Accounting For Leases". For loans and other similar products ("finance receivables"), finance revenue is recognized over the life of the contract using the effective interest method. The amount of finance revenue earned during a period relative to the average balance of finance receivables outstanding during the period is known as the finance receivable yield. For leases classified as capital leases, unearned income is initially recorded as 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. Unearned income is amortized to capital lease revenue over the life of the lease contract using the effective interest method. The amount of capital lease revenue earned during a period relative to the average balance of capital leases outstanding during the period is known as the capital lease yield. Estimated unguaranteed residual values, which are included as part of the investment in capital leases, are established upon lease inception based upon the estimated fair 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. The Company regularly monitors its estimates of residual values associated with its owned and securitized portfolios and believes that, in general its residual values are conservatively stated. The Company has developed extensive expertise in the area of asset management which contributes to its ability to maximize the proceeds received upon the disposition of the residuals. Rental revenue on operating leases is recognized on a straight-line basis over the related lease term. Rental revenue also includes renewal revenue which is revenue the Company earns when a customer continues to lease equipment after its original lease term. During the term of the related lease, depreciation is generally calculated using the straight-line method based on the estimated salvage value of the equipment at the end of the lease term. A key financial measure of operating lease profitability is the associated margin (which equals the rental revenue less the associated depreciation expense ("operating lease margin") divided by the rental revenue ("operating lease margin percent")). Net portfolio revenue is the total of finance revenue, capital lease revenue, and rental revenue on operating leases ("portfolio revenue") less depreciation on operating leases. Net portfolio revenue is negatively affected by the suspension of revenue recognition when a loan or a lease becomes contractually delinquent for 90 days or more (or earlier if deemed necessary). Revenue recognition is resumed when the receivable becomes contractually current and management believes there is no longer any significant probability of loss. Costs & expenses The Company incurs three significant types of costs associated with portfolio revenue: (1)interest expense, (2)operating and administrative ("O&A") costs and (3)credit provisions. 26 Interest expense Interest expense includes the amortization of costs associated with raising funds primarily used for financings and lease equipment purchases. In connection with the 1996 Merger, the Company's senior medium and long-term debt and commercial paper ratings were downgraded. The Company's senior medium- and long-term debt and commercial paper were rated as follows:
Prior to the 1996 Subsequent to the Merger 1996 Merger - ----------------------------------------------------------------------------------------------- medium and commercial medium and commercial Rating Agency long-term paper long-term paper debt debt - ----------------------------------------------------------------------------------------------- Standard & Poors ("S&P") A A-1 BBB A-2 Duff & Phelps Credit Rating Co. ("Duff & Phelps") A D-1 BBB D-2 Fitch Investor Services ("Fitch") BBB F-1 BBB F-2 Moody's Investors Services ("Moody's") A-3 P-1 Baa3 P-3
In response to the announcement of the Newcourt Acquisition, "S&P", Fitch, and Moody's affirmed the Company's ratings. Duff & Phelps has upgraded the Company's medium and long-term debt and commercial paper to A- and D-1, respectively. As interest rates change, the pricing of new financing volume is generally adjusted to reflect the Company's higher or lower cost of debt. However, the pricing in connection with certain small-ticket financing volume tends to lag and may not be commensurate with the change in the Company's cost of debt. See "Asset and Liability Management - Match Funding". The Company generates a substantial portion of its funds to support the Company's operations from customer receipts, but is also highly dependent upon external financing, including commercial paper and medium and long-term debt, foreign bank lines of credit, and public and/or private asset-backed security interests (or securitizations) (see "Securitizations" for further discussion). O&A costs O&A includes the costs associated with processing new financing volume such as salaries, benefits, occupancy and other day-to-day expenses, account maintenance (including billing and collecting) and costs incurred during end of lease activity. As with the Company's other expenses, the ability to minimize such costs plays an integral part of the competitive pricing of the Company's financial products. O&A expenses are generally measured as a percentage of total period-end owned and managed assets. The Company has a strategic objective to achieve improvements in this ratio, by (i)increasing operating efficiencies and productivity, (ii)increasing utilization of its operating infrastructure (primarily related to acquired businesses, international growth, and start-up activities), and (iii)investing in technology and other operational improvements. 27 Credit provisions The active management of credit losses is an important element of the Company's business. The Company seeks to minimize its credit risk through diversification of its portfolio assets by customer, industry segment, geographic location and maturity. The Company's financing activities have been spread across a wide range of equipment types (e.g., telecommunications, general office, manufacturing and medical equipment, information technology and transportation) and a large number of customers located throughout the United States and, to a lesser extent, abroad. The Company maintains an allowance for credit losses (which is adjusted through the provision for credit losses reflected in the income statement) at a level management believes is adequate to cover estimated losses in the portfolio based on a review of historical loss experience, a detailed analysis of delinquencies and problem portfolio assets, and an assessment of probable losses in the portfolio as a whole given its diversification. Generally, the relative provisions recorded on medium and large-ticket transactions are lower than small-ticket assets. Management also takes into consideration the potential impact of existing and anticipated economic conditions in determining the adequacy of allowance levels. Non-portfolio revenue Non-portfolio revenue consists of: (i)revenue from securitizations (which represents the gain realized from selling lease and loan receivables through securitization vehicles) and the sale of Small Business Administration ("SBA") loans; (ii) revenue from sales of equipment, primarily buy/sell activity related to computer equipment; and (iii)other revenue which consists mainly of sales of leased and off-lease equipment, portfolio servicing fees and other fee related revenue. Non-portfolio revenue as a percent of total revenues is expected to increase due to the Company's higher securitization activity. Securitizations Under a securitization, the Company sells receivables primarily associated with capital lease transactions. The receivables and the associated net unearned income stream are removed from the Company's balance sheet for accounting purposes, although for tax purposes the treatment is unchanged. In conjunction with a securitization, the Company records a gain on the sale which generally equals the difference between the proceeds received and the allocated historical basis of the net assets sold, net of the fair value of any retained interests. 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. The Company's anticipated ongoing securitizations could have significant impact on the Company's financial position and results of operations depending upon their timing and magnitude. In addition, assets, revenues and income derived from the Other Clients businesses as well as foreign businesses will change depending upon the mix of assets securitized. With respect to the Company's balance sheet, the impacts from securitization include, but are not limited to: (i)net investment in finance receivables and capital leases will decrease (including residual values, allowance for credit losses and initial direct costs); (ii)upon the sale of substantially all of the lease receivables associated with a lease, the related residual value is frozen at its present value at the time of securitization and reclassified to other assets and deferred charges; (iii)proceeds generated from securitizations will generally be used to 28 reduce debt and manage leverage; and (iv)portfolio quality measures such as delinquency, non-accrual assets, and net charge-offs/portfolio assets will likely increase since only receivables not more than 60 days past due are included in securitizations. In addition to the gain, the impacts to the Company's income statement include, but are not limited to: (i)lower asset levels will result in lower finance revenue and capital lease revenue; (ii)capital lease revenue will no longer be recognized on residuals associated with the securitization where such residuals are frozen at the time of securitization; (iii)with lower carrying values of frozen residuals, income (losses) generated from renewals and sales of assets at end of lease will be higher (lower) than if the assets were not securitized; (iv)yields and margins on owned assets are likely to be lower due to the fact the securitizations will typically include small-ticket products which generally have higher yields and margins; (v)lower debt levels will generally result in reduced interest expense; and (vi)fees will be earned on servicing the portfolios. Cash flows Cash required for funding new financing volume represents the Company's most significant capital need. As the Company continues to grow, cash from customer collections will generally fall short of the Company's cash financing needs. To supplement this shortfall, as discussed above, the Company utilizes a securitization program (funds generated from this activity are captured in the investing activity category) and accesses commercial paper and medium and long-term debt markets (such funds are captured under financing activities). RESULTS OF OPERATIONS
Net Income For the Years ended December 31, 1997 1996 1995 --------------------------------------------------- (dollars in millions) Net Income $21.0 $168.5 $127.6
1997 net income was lower due to the decreased level of capital lease and securitization revenues as a result of the 1996 Securitization. Restructuring charges, net losses on sales of businesses, relative higher interest due to the Company's post 1996 Merger capital structure and distributions on Preferred Securities also decreased net income. Somewhat offsetting these factors were increases in other revenues, operating lease margin, lower interest expense associated with carrying less assets and lower charge-offs. 1996 net income increased 32.1% from 1995. This increase was generated principally through increased securitization and loan sales revenue, net portfolio revenues resulting from a higher level of average net portfolio assets and increased computer trading sales. Somewhat impeding the earnings growth was increased O&A expenses caused primarily by one-time 1996 Merger related costs. A higher provision for credit losses also somewhat offset the increased revenues. 29 Key financial operating statistics The following table sets forth certain key financial operating statistics of the Company's operations:
For the years ended December 31, 1997 1996 1995 -------------------------------------------------- (dollars in millions) Finance revenue $229.9 $204.2 $174.5 Capital lease revenue 361.1 598.2 586.1 Operating lease margin 280.0 241.4 206.5 -------------------------------------------------- Net portfolio revenue 871.0 1,043.8 967.1 less: interest expense 451.5 458.0 411.0 -------------------------------------------------- Net interest margin (a) 419.5 585.8 556.1 Average net portfolio assets $7,465.0 $8,910.1 $8,308.1 Net interest margin percentage (a) 5.62% 6.57% 6.69% -------------------------------------------------- Finance receivables- average yield 10.19% 10.35% 10.68% Capital leases-average yield 9.83% 10.50% 10.29% Operating lease margin percentage 33.57% 34.64% 36.80% Total portfolio yield 11.67% 11.72% 11.64% -------------------------------------------------- Debt/equity plus Preferred Securities 7.54x 7.13x 6.22x
a) Net interest margin is comprised of net portfolio revenue (finance revenue, capital lease revenue and operating lease margin) less interest expense. Net interest margin percentage equals the net interest margin divided by the respective average net portfolio assets. Finance revenue 1997 finance revenue increased $25.7 million or 12.6%, compared to 1996. A 14.4% increase in average net finance receivables to $2.3 billion accounted for $29.3 million of the increase, while the decrease in the average yield offset this increase by $3.6 million. The growth in the portfolio was primarily due to increases in the large-ticket structured and specialty finance, and SBA loan portfolios and growth in certain international residential mortgage portfolios. The reduction in yield was experienced by many of the Company's businesses and relates to increased competitive pressures and the mix of the assets recently securitized (see "Capital lease revenue" below for a discussion of the impact of securitizations on yields). 1996 finance revenue increased 17.0% from 1995. The 20.7% increase in average net finance receivables to $2.0 billion generated approximately $36.2 million of additional revenue and was driven by increases in the large-ticket structured and specialty finance and certain small-ticket portfolios offset by $0.1 billion of finance receivables securitized. A decline in the overall average yield reduced revenue by $6.5 million. The decrease in yield is consistent with the relative proportion of floating rate loans in the portfolio and the slightly lower average cost of debt (see "Interest expense" discussion below). 30 Capital lease revenue 1997 capital lease revenue decreased $237.1 million or 39.6% compared to 1996. A 35.5% decrease in the average net capital lease portfolio to $3.7 billion was responsible for approximately $212.6 million of the decrease. The decrease in the average portfolio was principally due to the 1996 Securitization which involved primarily capital leases. The reduction in the overall yield on capital leases by 67 basis points contributed to the remaining decrease in revenue. The reduction in yields reflects the effects of securitizing higher yielding assets and competitive pressures. The Company's securitizations have included small-ticket transactions which generally have higher yields and margins as compared to larger ticket transactions. Therefore, as securitizations occur, the proportion of these higher yielding transactions in the Company's owned portfolio is reduced 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. 1996 capital lease revenue increased $12.1 million, or 2.1% from 1995. The 21 basis point improvement in the average yield contributed $11.6 million to the increased revenue while the .09% increase in the average net capital lease portfolio to $5.7 billion contributed the remaining $0.5 million. The improved yield was primarily due to increased levels of higher yielding assets in certain small-ticket, automotive and mid-range and mainframe computer portfolios. However, certain non-U.S. businesses experienced decreased yields in 1996. The growth in the average net capital lease portfolio, which was experienced primarily in the small-ticket leasing portfolios and international businesses, was almost entirely offset by the 1996 Securitization. Operating lease margin 1997 rental revenue on operating leases of $834.0 million increased $137.0 million, or 19.7%, compared to 1996. Depreciation expense on operating leases of $554.1 million increased $98.5 million, or 21.6%, from 1996. The revenue increase was generated by the Company's enterprise server, telecommunications and international portfolios. The 107 basis point decline in operating lease margin percentage to 33.57% resulted from a lower proportion of renewal revenue, coupled with a slightly lower utilization rate of testing and diagnostic equipment. 1996 rental revenue on operating leases of $697.0 million increased 24.3% and depreciation expense on operating leases of $455.6 million increased 28.5%. The increased rental revenue was primarily generated by growth in the Company's small-ticket leasing, automotive and computer related portfolios and international businesses. The decreased operating lease margin percent relates primarily to increased depreciation on certain computer-related assets and certain small-ticket portfolios. Net interest margin 1997's net interest margin of $419.5 million was 5.62% of average net portfolio assets compared with $585.8 million, or 6.57% in 1996. The $166.3 million decrease in net interest margin was due to lower capital lease revenue, higher relative interest expense associated with the Company's post-1996 Merger capitalization structure, offset by lower interest expense associated with carrying a lower level of portfolio 31 assets. Average net portfolio assets for 1997 of $7,465.0 million were $1,445.1 million, or 16.2%, lower than 1996 causing a decrease in portfolio revenue of approximately $125.5 million. A slight decrease in the overall portfolio yield to 11.67% from 11.72%, reduced revenue by approximately $47.4 million. The Company's post-1996 Merger recapitalization includes higher debt relative to assets. The interest expense associated with carrying such higher relative debt reduced the 1997 margin by approximately $84.0 million. The lower level of debt associated with a smaller asset base partially offset this decrease by $81.3 million. The decrease in 1996's net interest margin percentage from 6.69% in 1995 was due to the large amount of higher yielding assets securitized and the increase in the debt to equity plus Preferred Securities ratio. A 22 basis point decrease in the average cost of debt and an increased average yield of the Company's total net portfolio assets somewhat offset this decrease. The debt to equity plus Preferred Securities ratio increased to 7.13 from 6.22 primarily as a result of the Company's recapitalization associated with the 1996 Merger (see discussion of interest expense below). The total portfolio yield increased to 11.72% from 11.64% primarily due to yield increases in capital leases (see "Capital lease revenue - 1996 discussion"). In addition, the 15.3% increase in average debt exceeded the increase of 7.2% in average portfolio assets. Non-portfolio revenue The following table summarizes the components of non-portfolio revenue which includes revenue from securitizations and loan sales, equipment sales, and other net revenue. In addition, equipment sales margin (equipment sales less cost of equipment sales) and the equipment sales margin percentage (equipment sales margin divided by equipment sales) are presented.
1997 1996 1995 ------------------------------------------- (dollars in millions) Revenue from securitizations and loan sales $ 82.7 $164.9 $ 16.4 ------------------------------------------- Equipment sales 49.3 90.6 48.7 Cost of equipment sales (44.8) (78.5) (43.4) ------------------------------------------- Equipment sales margin $ 4.5 $ 12.1 $ 5.3 ------------------------------------------- Equipment sales margin percentage 9.3% 13.3% 11.0% ------------------------------------------- ------------------------------------------- Other revenue, net $257.1 $197.2 $190.3 ------------------------------------------- ------------------------------------------- Total non-portfolio revenue $389.1 $452.7 $255.4 -------------------------------------------
Revenue from securitizations and loan sales 1997 revenue from securitizations and loan sales, including SBA loans, decreased $82.2 million from 1996. Securitization revenue decreased $92.2 million offset by $10.0 million in higher loan sales revenue. 1996 securitization revenue was unusually high as a result of the 1996 Securitization. The ten-fold increase in 1996 revenue from securitizations and loan sales over 1995 was due primarily to the $3.1 billion 1996 Securitization 32 as well as other securitizations aggregating $0.3 billion of lease and loan receivables. This compares to a $75 million securitization in 1995. Revenue from equipment sales 1997 revenue from sales of equipment decreased 45.5% from 1996. Similarly, cost of equipment sales decreased 43.0% from 1996. The drop in both equipment sales revenue and margin highlights the unusually strong results attained in 1996. During 1996, equipment sales and margin were bolstered by strong demand for enterprise servers and emerging technology equipment. Volume and profitability from equipment sales tend to follow customer behavior and generally are difficult to predict. 1996 revenue from sales of equipment almost doubled 1995 results. Similarly, cost of equipment sales increased 80.9%, equipment sales margin of $12.1 million, or 13.3% of revenue from sales of equipment increased from $5.3 million, or 11.0%. The revenue and margin improvements were primarily due to the 1996 factors described in the previous paragraph. Other revenue Other revenue consists mainly of sales of leased and off-leased equipment, portfolio servicing fees and other fee related revenue. Other revenue for 1997 increased $59.9 million or 30.4% from the prior year. Reflecting a higher managed asset base, service revenue contributed $23.0 million to the increase more than doubling to $43.3 million from $20.3 million in 1996. Fee income grew by $6.7 million, from $20.5 million in 1996, largely the result of providing software development services. Other revenue was up $18.7 million due to the disposition of certain warrant and equity instruments. The Company receives such instruments in conjunction with the structuring of certain of its complex large-ticket transactions. 1996 other revenue increased 3.6% from 1995. While gains on sale of leased and off-leased equipment remained flat, the increase in other revenue was driven by fee related revenue and other portfolio related revenue. Business by Channel The Company intends to continue its strategy of expanding its Other Clients businesses, while at the same time enhancing its relationships with the Former Affiliates. Because the growth in revenues generated by the Company's Other Clients businesses can be expected to lag behind the incurrence of expenses necessary to expand and operate such businesses, the Company anticipates that the percentage of its total net income (loss) and revenues attributable to Other Clients businesses may vary from year to year depending upon the stage of development of these Other Clients businesses.
Other Clients Business: 1997 1996 1995 - ------------------------------------------------------------------------------ Assets 74.0% 72.3% 65.2% Revenues 63.8% 62.9% 59.0% Net income (loss) (214.9)% 32.2% 23.9%
The 1997 Other Clients businesses net loss is due to lower volumes, lower securitization gains and capital lease revenue relative to the Former Affiliates. In addition, the Company's net loss on the sales of businesses also reduced the Other Client's net income results. The percentages of 33 total assets, revenues and net income/(loss) relative to the Other Clients businesses will vary depending upon the mix of assets securitized. The 1996 increase in Other Clients businesses assets was generated across most of the Company's businesses with partially offsetting declines in certain small-ticket portfolios (as a result of increased securitizations in 1996) and automobile portfolios. The 1996 increase in Other Clients businesses revenues was generated across all Company businesses. Had the 1996 Merger and 1996 Securitization not occurred, the Company estimates that the Other Clients businesses would have contributed approximately 34% of net income. This estimate assumes the exclusion of the 1996 Securitization gain and one-time 1996 Merger related costs, add back of revenues associated with assets sold, and adjustment to interest expense for certain other significant 1996 Merger and 1996 Securitization related events. Expenses Interest expense
For the years ended December 31, 1997 1996 1995 --------------------------------------------- (dollars in millions) Interest expense $451.5 $458.0 $411.0 Average borrowings outstanding $6,961.7 $7,174.8 $6,225.1 Average cost of debt 6.49% 6.38% 6.60%
1997 interest expense decreased $6.6 million, or 1.4%, compared to 1996. As discussed in the net interest margin section, the $81.3 million reduction in interest expense resulting from carrying a lower level of assets was more than offset by the $84.0 million impact of carrying relatively higher debt. The Company issued medium and long-term debt in 1997 at an average rate of 6.28%, compared to debt maturing having a slightly lower average rate of 6.23%. Average borrowings for 1997 decreased 3.0% from 1996 primarily due to lower debt requirements associated with a smaller asset base. 1996 interest expense increased 11.4%, or $47.0 million. Average borrowings outstanding of $7.2 billion increased 15.3%, or $.9 billion primarily due to growth in average portfolio assets and an increased debt to equity plus Preferred Securities ratio. Higher average borrowings contributed $52.3 million to the increase and was partially offset by $5.3 million due to a decline in the average cost of debt. The decrease in the cost of debt to 6.38% from 6.60% resulted from the issuance of medium and long-term debt at a lower cost than the maturing debt and a shift in the mix toward commercial paper during the second half of the year due to the recapitalization of the Company. During 1996, the Company issued approximately $2.0 billion of medium and long-term debt at an average rate of 5.93%, and repaid $2.1 billion of medium and long-term with an average rate of 6.91%. In October 1996, the Company repaid approximately $1.6 billion of commercial paper with proceeds from the 1996 Securitization and Preferred Offering, net of amounts used to purchase the Company's common stock. Consequently, the lower overall borrowings outstanding should reduce the Company's interest expense. However, the Company's cost of debt in the future will be negatively impacted by the loss of interest free loans from AT&T. On October 25, 1996 the Company, through a subsidiary, issued to the public eight million Company-obligated preferred securities for $25 per 34 share. Holders of the securities are entitled to receive cash distributions at an annual rate of 9.06%, which is guaranteed by the Company. During 1997 and 1996, $18.1 million and $3.3 million, respectively, of distributions were paid to the Preferred Securities holders. Operating and Administrative (O&A) Expenses
For the years ended December 31, 1997 1996 1995 ----------------------------------------- (dollars in millions) O&A expenses (a) $545.7 $ 564.5 $ 473.7 Total period-end owned and managed assets $13,912.1 $12,883.5 $11,755.8 O&A/period-end total owned and managed assets 3.92% 4.38% 4.03%
(a) Excludes Restructuring charges of $35.1 million. O&A expenses for 1997 decreased 3.3% from 1996. Total owned and managed assets at December 31, 1997 grew 8.0% from the end of 1996 primarily as a result of an increase in owned assets of $0.7 billion. As a percent of owned and managed assets, 1997 O&A expenses of 3.92% improved from 4.38% for 1996. The decrease in the ratio can be attributed to management's continuing effort to improve efficiency and increased financing volume utilizing the Company's infrastructure coupled with not incurring the $52.4 million of 1996 Merger-related costs experienced in 1996. 1996 O&A expenses increased 19.2% from 1995. This increase was due primarily to $52.4 million of one-time 1996 Merger related costs which include the accelerated payout and additional amounts due under the Company's Share Performance Incentive Plan, payments made to certain officers of the Company to waive certain of their rights under the Company's Leadership Severance Plan, certain other termination and other payments and 1996 Merger-related transaction costs. In addition, O&A was impacted by the increased costs associated with managing a higher level of owned and managed assets. O&A as a percentage of total period-end owned and managed assets of 4.38% increased from 4.03%. However, the percentage was 3.97% excluding the above mentioned one-time merger related costs. Provision for credit losses See "Credit Quality" below for a discussion of the provision for credit losses. Provision for income taxes
For the years ended December 31, 1997 1996 1995 ------------------------------------------- (dollars in millions) Provision for income taxes $11.0 $110.1 $80.7 Effective income tax rate 34.4% 39.5% 38.7%
The decrease in the 1997 effective rates resulted from higher relative tax-exempt income, a lower overall provision for state taxes, somewhat offset by higher foreign taxes. In addition the absence of certain non- 35 deductible one-time merger related costs, as experienced in 1996, contributed to the decrease. The increase in the 1996 overall effective tax rate was due primarily to certain one-time 1996 Merger related costs which were not deductible for tax purposes. CREDIT QUALITY The following table reflects the Company's key portfolio credit performance indicators. Portfolio assets include the investment in finance receivables, capital leases and operating leases.
At or for the years ended December 31, 1997 1996 1995 ----------------------------------------- (dollars in millions) Portfolio assets (gross of allowance) $7,403.9 $7,356.4 $9,328.6 Provision for credit losses $114.3 $113.6 $86.2 Allowance for credit losses $178.6 $169.0 $223.2 Allowance for credit losses/portfolio assets 2.41% 2.30% 2.39% Allowance for credit losses/non- accrual assets 1.06x 1.25x 1.88x Non-accrual assets $168.7 $135.1 $118.5 Non-accrual assets/portfolio assets 2.28% 1.84% 1.27% Net charge-offs/portfolio assets 0.56% 1.17% 0.50% Delinquency(a)-owned assets 3.08% 2.56% 1.46% Delinquency(a)-owned and securitized 2.62% 2.18% 1.61%
a) Delinquencies of two months or greater. The Company's Securitizations include generally better performing assets, those transactions that are not more than 60 days past due. Therefore, the owned portfolio reflects a higher proportion of delinquent receivables requiring higher allowance requirements. The increase in non-accrual assets to portfolio assets at the end of 1997 compared to 1996 is primarily due to a $27.4 million project finance transaction suspended from income recognition in February, 1997. The increase in the delinquencies since December 31, 1996 of both owned and owned and securitized assets, is primarily due to the project finance transaction discussed above. The decreases in 1996 key credit statistics from 1995 resulted primarily from the significant increase in securitizations in 1996. The decrease in the allowance for credit losses was also due primarily to the reclassification of certain amounts to securitization recourse reserves. Net charge-offs/portfolios assets was also impacted by the write-off of a large financing of approximately $11 million. In addition, the increases in the dollar amount of delinquencies and non-accrual assets resulted from a $36.5 million loan placed on non-accrual status. FINANCIAL CONDITION Sale of Businesses During the fourth quarter of 1997, the Company sold its fleet automotive and inventory financing business units totaling approximately 11% and 9% of the Company's assets and revenues, respectively, at and for 36 the nine months ended September 30, 1997. Additionally, the Company is currently pursuing the sale of its U.S. consumer automotive business. The carrying value of these assets have been reduced to fair value. The Company's net gains on the sales of the fleet automotive unit and inventory financing business unit, net of the loss recorded on the anticipated sale of the U.S. consumer automotive business, has been included in the income statement caption, Loss on sales of businesses, net. Net portfolio assets The following table reflects components of the Company's net portfolio assets.
1997 1996 --------------- ------------------- (dollars in millions) Net investment in finance receivables (a) $ 2,343.6 $2,135.3 Net investment in capital leases (a) 3,288.1 3,648.7 Net investment in operating leases (b) 1,593.6 1,403.5 --------------- ------------------- Net portfolio assets (net of allowance) 7,225.3 7,187.5 Managed assets $5,136.3 $4,791.0 Net investment in total owned and managed assets $12,361.6 $11,978.5
a) Generally represents the sum of the (i) the gross receivable, (ii) the associated unearned income, (iii) the unguaranteed residual value (for capital leases only), less (iv) the allowance for credit losses. b) Generally represents the historical cost of the equipment less the associated accumulated depreciation. Net portfolio assets remained relatively flat at $7.2 billion. Operating leases increased $190.1 million, or 13.5%, primarily due to growth in the Company's enterprise server, international and telecommunications portfolios. The net investment in finance receivables increased $208.4 million, or 9.8%, due primarily to increases in the SBA loan, international residential mortgage and large-ticket structured and specialty finance portfolios. Somewhat offsetting such growth was the sale of the Company's inventory financing business. The 9.9% reduction in capital leases is due to a reduction in the automotive portfolio (the U.S. consumer automotive business is currently for sale and included in the balance sheet caption "Assets held for sale and inventory"). The Company's international assets (excluding cross border transactions) grew to 24.6% of total assets, up slightly from 24.0% at the end of 1996. The increase in the level of assets managed is attributable to an increase in SBA loans serviced offset in part by normal run-off. The total assets managed on behalf of AT&T, Lucent and NCR collectively, represented 29.4% and 31.1% of the total assets managed at December 31, 1997 and 1996, respectively. 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 $160 million in assets at time of the acquisition. Deferred charges and other assets increased by $137.7 million, or 19.8%, to $832.9 million. This increase was primarily driven by a net increase of $88.0 million in retained interest in securitized assets. 37 Debt Primarily to fund increased financing volume, total debt of $7.1 billion at December 31, 1997 increased by 10.1%, from $6.5 billion at December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Cash flows The table below includes key cash flows provided by and used for operating, investing and financing activities.
For the year ended December 31, 1997 1996 1995 ------------------------------------------------ (dollars in millions) Net Cash provided by Operating Activities: $ 563.2 $292.3 $ 680.1 Investing Activities: Principal collections from customers 3,965.9 3,998.2 3,855.6 customers Cash used for financings and lease equipment purchases(a) (6,583.9) (6,206.9) (5,782.0) Cash proceeds from securitizations and loan sales 1,500.4 3,390.4 291.5 Financing Activities: Net proceeds (repayments) from issuance of short-term notes (b) 1.3 (345.1) (207.0) Proceeds from the issuance of medium and long-term debt 3,517.3 2,011.7 2,905.9 Repayments of medium and long-term debt $(2,930.5) $(2,135.7) $(1,828.4) ------------------------------------------------
(a) Includes purchases of finance asset portfolios and businesses. (b) Short-term notes include primarily commercial paper. Borrowings Newcourt has advised the Company that Newcourt intends for the Company to operate as an indirect wholly-owned subsidiary of Newcourt which will continue to issue commercial paper and medium and long-term debt in the public markets. Additionally, Newcourt intends for the Company and Newcourt, on a consolidated basis to move to a consolidated debt to tangible equity ratio of approximately 5.5:1. In addition, as discussed previously, the Newcourt Support Agreement requires Newcourt to own a majority of the outstanding shares of common stock of the Company, to cause the Company and its subsidiaries to have a consolidated tangible net worth of at least $1.00 and to provide funds to the Company (upon the request of the Company) sufficient to enable the Company to make timely payments of principal and interest payments on its debt for borrowed money (if the Company is unable to do so). On February 20, 1998, the Company entered into an agreement whereby the Company guarantees certain indebtedness and liquidity facilities of Newcourt and Newcourt Credit Group USA Inc. (the "Newcourt Guarantee"). This debt is used by Newcourt for general operating purposes. As of February 28, 1998, the Company's guarantee of such debt was US$1.4 billion (C$2.0 billion). 38 Also, as a result of the Newcourt Acquisition, the Company is currently renegotiating its existing $2.0 billion back-up facility to support Newcourt's and the Company's existing commercial paper programs and for general corporate purposes. The Company is looking to increase its U.S. facility to $2.25 billion with $1.5 billion having a term of 364 days and $.75 billion having a term of 5 years (the "U.S. facility"). In addition, Newcourt is pursuing a Canadian facility of C$1.0 billion with a term of 364 days ("the Canadian facility"). It is expected that the U.S. facility will be guaranteed by Newcourt and Newcourt Credit Group USA Inc., a wholly-owned subsidiary of Newcourt and rank pari passu with the Canadian facility. The Canadian facility will be guaranteed by the Company and Newcourt Credit Group USA Inc. In August 1997, the Company's back-up credit facility of $2.0 billion was modified. This facility, negotiated with a consortium of 24 lending institutions, supports the commercial paper issued by the Company. At December 31, 1997 this facility was unused. Under the most restrictive provision of the Company's back-up facility, the Company is required to maintain an interest coverage ratio (the ratio of consolidated earnings before interest and taxes, as defined, to consolidated interest expense) of 1.25 times. The Company is in compliance with this and all other covenants of the facility. To meet local funding requirements, the Company's foreign operations have available lines of credit of approximately $341.6 million, of which approximately $95.2 million were available at December 31, 1997. These facilities are generally renewed annually. During January 1997, the SEC declared effective a Company debt registration statement of $4.0 billion. Subsequent to December 31, 1997, the Company completed the full utilization of such debt available under the registration statement. On March 20, 1998 the Company filed with the SEC a $5.0 billion debt registration statement on Form S-3. The Company anticipates this registration statement to be declared effective in the second quarter of 1998. The ownership of the Company's Trust Originated Preferred Securities of $200 million, that were issued by a subsidiary of AT&T Capital in October, 1996, was not affected by the Newcourt Acquisition and related transactions. However, the Newcourt Guarantee ranks senior to the Trust Guarantee issued by the Company in connection with the Preferred Securities offering. The Company considers its current financial resources, together with the borrowings referred to above and estimated future cash flows, to be adequate to fund the Company's planned future growth and operating requirements. 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 1996 Merger and the Newcourt Acquisition, the Company anticipates that it will no longer pay dividends in the short-term. ASSET AND LIABILITY MANAGEMENT The Company's asset and liability management process takes a coordinated approach to the management of interest rate and foreign currency risks. The Company's overall strategy is to match the duration 39 and average cash flows of its borrowings with the duration and average cash flows of its portfolio assets, as well as the currency denominations of its borrowings with those of its portfolio assets, in a manner intended to reduce the Company's interest rate and foreign currency exposure. The following discussion describes certain key elements of this process, including the Company's use of derivatives to mitigate risk. Match funding The Company generally matches the duration and maturity structure of its liabilities to that of its portfolio assets. The Company routinely projects the expected future cash flows related to its current portfolio assets. Based on these projections, the Company is able to match the maturity and duration of its debt with that of its assets. The cash flow projections incorporate assumptions about customer behavior such as prepayments, refinancings and charge-offs. The assumptions are based on historical experience with the Company's individual markets and customers and are continually monitored and updated as markets and customer behaviors change, to reflect current customer preferences, competitive market conditions, portfolio growth rates and portfolio mix. Interest rate risk and currency exchange risk The Company actively manages interest rate risk to protect the Company's margins on existing transactions. Interest rate risk is the risk of earnings volatility attributable to changes in interest rates. The Company routinely analyzes its portfolio assets and strives to match floating rate assets with floating rate debt and fixed rate assets with fixed rate debt. The Company generally achieves a matched position through issuances of commercial paper and medium and long-term debt, as well as through the use of interest rate swaps. The Company does not speculate on interest rates, but rather seeks to mitigate the possible impact of interest rate fluctuations encountered in the normal course of business. This is a continual process due to prepayments, refinancings, non-accrual leases and loans, as well as other portfolio dynamics, and therefore, interest rate risk can be significantly limited but never fully eliminated. Additionally, the Company enters into foreign exchange contracts and participates in the currency swap market to mitigate its exposure to assets and liabilities denominated in foreign currencies and to meet local funding requirements. Using derivatives to manage interest rate and currency risk The Company uses derivatives to match fund its portfolio and thereby manage interest rate and currency risk. Derivatives can be customized in terms of duration and interest rate basis (i.e., fixed or floating). Derivatives used by the Company are operationally efficient to arrange and maintain. Whether the Company issues medium and long-term debt on which it pays a fixed rate, or issues floating rate debt and utilizes interest rate swaps, on which it generally pays a fixed rate and receives a floating rate, the Company's interest rate risk position can be equally well managed. However, it is the interplay between liquidity, capital, portfolio characteristics, and economic and market conditions that will determine the final mix of medium and long-term debt, commercial paper and swaps (or other derivatives) used to manage interest rate risk (see Notes 2, 10 and 16 to the Consolidated Financial Statements). 40 The total notional amount of the Company's interest rate swaps was $2,287.0 million and $1,436.8 million at December 31, 1997 and 1996, respectively. The total notional amount of the Company's currency swaps was $240.1 million and $320.6 million at December 31, 1997 and 1996, respectively. The U.S. dollar equivalent of the Company's foreign currency forward exchange contracts was $1,511.5 million and $907.3 million at December 31, 1997 and 1996, respectively. Derivative credit risk The notional amount of derivative contracts does not represent direct credit exposure. Rather, credit exposure may be defined as the market value of the derivative contract and the ability of the counterparty to perform its payment obligation under the agreement. The majority of the Company's interest rate swaps require the Company to pay a fixed rate and receive a floating rate. Therefore, this risk is reduced in a declining interest rate environment as the Company is generally in a payable position and is increased in a rising interest rate environment as the Company is generally in a receivable position. The Company seeks to control the credit risk of its interest rate swap agreements through credit approvals, exposure limits and monitoring procedures. All swap agreements are with major money center banks and intermediaries rated investment grade by national rating agencies with the majority of the Company's counterparties being rated "AA" or better. The Company monitors its derivative positions using techniques including market value, sensitivity analysis and a value at risk model. The value at risk tests discussed below for exposure to interest rate and currency rate exposures are based on a variance/co-variance model using a three-month horizon and a 95% confidence level. The model assumes that financial returns are normally distributed. The value at risk model takes into account correlations and diversification across market factors, including currencies and interest rates. Estimates of volatility and correlations of market factors are drawn from the Reuters/JP Morgan RiskMetrics dataset as of January 27, 1998. Based on the Company's overall interest rate exposure at December 31, 1997, including derivatives and other interest rate sensitive instruments, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements, would not materially affect the consolidated financial position on a fair value basis, results of operations or cash flows of the Company. Based on the Company's overall currency rate exposure at December 31, 1997, including derivatives and other foreign currency sensitive instruments, a near-term change in currency rates, within a 95% confidence level based on historical currency rate movements, would not materially affect the consolidated financial position on a fair value basis, results of operations or cash flows of the Company. There were no past due amounts or reserves for credit losses at December 31, 1997, related to derivative transactions. The Company has never experienced a credit related charge-off associated with derivative transactions. RISK FACTORS Risks Related to Plans Involving Newcourt 41 Integration of Business Both the Company and Newcourt have completed a number of acquisitions during the past five years. Integration of these two businesses will require a significant amount of management's time. Diversion of management attention from the Company's existing business could have a material adverse impact on the revenues and operating results of the Company. Guarantee of Certain Newcourt Debt In connection with the Newcourt Acquisition, on February 20, 1998 the Company entered into an agreement pursuant to which the Company will guarantee (the "Company Guarantee") the payment of certain indebtedness and liquidity facilities issued, guaranteed or entered into by Newcourt (as amended, supplemented, restated or replaced, collectively, the "Newcourt Debt Securities") for the timely benefit of the holders of the Newcourt Debt Securities (collectively, the "Newcourt Noteholders"). A copy of the Company Guarantee is filed as Exhibit 10 to the Company's Current Report on Form 8-K dated February 20, 1998 filed on March 12, 1998. Because the Company Guarantee is anticipated to cover future indebtedness under various documents evidencing or relating to the Newcourt Debt Securities, as well as amendments, supplements, restatements or replacements of or to the Newcourt Debt Securities, the aggregate outstanding principal amount of the Newcourt Debt Securities to be covered by the Company Guarantee is expected to increase in the future. The Company's obligations under the Company Guarantee represent an irrevocable and unconditional guarantee of the due and punctual payment to the Newcourt Noteholders, on demand, whether at stated maturity or otherwise, of all debts, liabilities and obligations of Newcourt under the Newcourt Debt Securities, including present and future, direct and indirect, absolute and contingent and matured and unmatured debts, liabilities and obligations. The liability of the Company under the Company Guarantee is anticipated to be unlimited as to amount and to be absolute and unconditional irrespective of any conditions or circumstances that might otherwise constitute a defense available to the Company or Newcourt, including any defense based on the lack of validity or the unenforceability of the Newcourt Debt Securities or any defense or counterclaim available to Newcourt. Sensitivity to Ratings on Debt As a result of the consummation of the Newcourt Acquisition, each of the four statistical rating organizations that have been rating the Company's securities maintained or upgraded their respective ratings on the Company's short-term and (where applicable) long-term senior unsecured debt. 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 Company's senior unsecured short-term or long-term debt. To the extent that any of such rating organizations assigns a lower rating than the existing ratings, such downgrading would result in relatively higher borrowing costs for the Company, reduce its access to its traditional funding sources and reduce its competitiveness, particularly if any such assigned rating is in a generic rating category that signifies that the relevant debt of the Company is less than investment grade. In addition, certain ratings downgrading could result in the termination of one or more of the License Agreements with AT&T and NCR (as defined below) 42 or the 1998 Lucent Agreement (as defined below). See "Changes in Relationships with the Former Affiliates - Operating and Certain Other Agreements with the Former Affiliates" below. Any such downgrading could have a material adverse effect on the Company. Liquidity and Debt Service The Company's business requires substantial amounts of cash to support its growth and operations. The Merged Company'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. Securitization Program The Company's securitization transactions, structured as both private conduit programs and the sale of publicly offered securities, are an important part of the Company'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, postpone the recognition of the gain on such finance receivables and cause the Company's net income to fluctuate from period to period. Continuity of Management The Merged Company's success depends to a significant extent upon the continued services of its management. There is no assurance that any of Newcourt's or the Company's existing officers and key employees will remain in their current positions for any period of time following the date hereof. The unavailability of the continued services of such persons could have a material adverse effect on the Company's business. Changes in Relationships with the Former Affiliates Reliance on Major Vendors A substantial portion of the Company's net income is attributable to the financing provided by the Company to customers of the Former Affiliates with respect to products manufactured or distributed by them (the "Former Affiliates Products") and, to a lesser extent, to 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 the Former Affiliates. The Company's commercial relationships with the Former Affiliates are currently governed by certain agreements. Although, while the proportion of the Company's total revenues from the Other Clients Businesses has grown over the last several years, a substantial portion of the Company's net income has been generated by the Company's relationship with the Former Affiliates. A significant decrease in the portion of the sales of the Former Affiliates Products that are financed by the Company, or in the absolute amount of the Former Affiliates Product sales (in either case, particularly with respect to Lucent), or in the amount of transactions effected by the Company with the Former Affiliates as end-user (particularly with respect to AT&T) would have a 43 material adverse effect on the Company's results of operations and financial conditions. Operating and Certain Other Agreements with the Former Affiliates. In the second quarter of 1993, the Company entered into the following agreements with AT&T: an Operating Agreement (as subsequently amended, the "AT&T Operating Agreement"), an Intercompany Agreement (the "AT&T Intercompany Agreement"), and a License Agreement (as subsequently amended, the "AT&T License Agreement"). In the second quarter of 1996, the Company entered into separate operating agreements with each of Lucent and NCR (the "Lucent Operating Agreement" and "NCR Operating Agreement", respectively, and, collectively with the AT&T Operating Agreement, the "Operating Agreements") (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 Lucent and NCR). Also, in the second quarter of 1996, the Company entered into letter agreements with Lucent and NCR regarding the applicability to Lucent and NCR of specified provisions of the AT&T License Agreement (collectively, with the AT&T License Agreement, the "License Agreements") and the AT&T Intercompany Agreement (collectively, with the AT&T Intercompany Agreement, the "Intercompany Agreements"). (See Note 15 for further discussion of the Former Affiliates). The Former Affiliates are not required to renew the terms of their respective Operating Agreements, License Agreements and Intercompany Agreements beyond the expiration of the current terms on August 4, 2000. On March 9, 1998, Newcourt signed a new five-year agreement with Lucent (the "1998 Lucent Agreement") which expands the global financing program established to serve Lucent's business systems customers. The term of the 1998 Lucent Agreement is from October 1, 1997 through September 30, 2002. The 1998 Lucent Agreement replaces the Lucent Operating Agreement and the letter agreements between the Company and Lucent, the initial terms of which were scheduled to expire on August 4, 2000. In addition to the extended term of the 1998 Lucent Agreement, other changes from the previous Lucent Operating Agreement include Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, a change in the methodology in calculating the amount required to be paid to Lucent (based upon specific financial, service and performance levels tied to compensation) which is expected to result in an increase in such amount, and a single point of contact for customers. The 1998 Lucent Agreement also includes certain early termination provisions and a buy-out option that could have a material impact on the Company's future operations, if exercised. Lucent is not required to renew the term of the 1998 Lucent Agreement beyond the current term. In the event of either (a) an early termination or buy-out or (b) a non-renewal of the 1998 Lucent Agreement by Lucent, Newcourt will have an extended wind-down period with cost recovery. The impact of the 1998 Lucent Agreement on the Company's future net income is at this time unknown. While there is a possibility that the Company's future net income from Lucent transactions may increase as a result of an anticipated increase in financing volume arising from Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, there also is a possibility that the Company's future net income from Lucent transactions may decrease as a result of the increased amounts due to Lucent under the 1998 Lucent Agreement. 44 Although the Company intends to seek to maintain and improve its existing relationships with Lucent, NCR and AT&T, no assurance can be given that the Operating Agreements or the 1998 Lucent Agreement, will be extended beyond their respective termination dates or, if extended, that the terms and conditions thereof will not be modified in a matter adverse to the Company. Failure to renew the Operating Agreements and the 1998 Lucent Agreement, on terms not adverse to the Company could have a material adverse effect on the Company. Moreover, in certain circumstances the Operating Agreements and the 1998 Lucent Agreement may be terminated prior to their respective expiration dates. Certain Increased Costs and Expenses As a result of the Newcourt Acquisition and the related integration plan for the Merged Company, AT&T Capital's net income will be adversely impacted over the next eighteen months. Such integration plan is expected to result in additional costs which include, but are not limited to, severance and other employee benefit costs, systems conversions, location closures and other restructuring costs. AT&T Capital is targeting to reduce its ratio of operating expenses to owned and managed assets 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. While it is anticipated that these savings will be recognized, any unanticipated event in the integration of the businesses by both Newcourt and AT&T Capital may require significant management time and cause a delay in recognition of the cost savings. Competition The equipment leasing and finance industry in which the Company operates is highly competitive and is undergoing a process of consolidation. As a result, certain of the Company's competitors' relative cost bases have been reduced. Participants in the industry compete through price (including the ability to control costs), risk management, innovation and customer services. Principal cost factors include the cost of funds, the cost of selling to or obtaining new end-user customers and vendors and the cost of managing portfolios. The Company's competitors include captive or related leasing companies (such as General Electric Capital Corporation and IBM Credit Corporation), independent leasing companies (such as Comdisco, Inc.), certain banks engaged in leasing, lease brokers and investment banking firms that arrange for the financing of leased equipment, and manufacturers and vendors which lease their own products to customers. In addition, the Company competes with all banking and other financial institutions, manufacturers, vendors and others who extend or arrange credit for the acquisition of equipment, and in a sense, with end-users' available cash resources to purchase equipment that the Company may otherwise finance. Many of the competitors of the Company are large companies that have substantial capital, technological and marketing resources; some of these competitors are significantly larger than the Company and have access to debt at a lower cost than the Company. In addition, the Company may not have, in the immediate future, access to sufficient U.S. Federal tax capacity to pursue efficiently U.S. tax based lease financing. Certain Other Risks 45 The Company is subject to certain other risks including the risk that its allowance for credit losses may not prove adequate to cover ultimate losses and that its estimated residual values will not be realized at the end of the lease terms. There can be no assurance that such allowance will prove adequate to cover losses in connection with the Company's investment in finance receivables, capital leases and operating leases or that such residual values (which have historically been a significant element of the net income of the Company) will be realized. Readiness for Year 2000 Prior to its acquisition by Newcourt, AT&T Capital had begun addressing the Year 2000 issue, also known as the "millineum bug". This included inventories of most systems as well as some conversion effort on major systems. The Merged Company is addressing the Year 2000 issue from a global perspective. In early 1998, the Merged Company established a global Year 2000 Program Office to provide oversight from both a business and technical perspective. The program will coordinate vendors, consultants and regional Year 2000 resources. The Merged Company, including AT&T Capital plans to convert its critical systems by the end of 1998 with conversion of remaining systems and compliance testing and certification to be completed in 1999. As part of the integration strategy, the Merged Company plans to aggressively consolidate onto a limited set of identified Year 2000 compliant systems in order to achieve operational efficiencies and to minimize the Year 2000 exposures and costs. Management does not anticipate that the total cost to the Company of these Year 2000 compliance activities will be material to its financial position or results of operations in any given year RECENT PRONOUNCEMENTS In July 1997, the Financial Accounting Standards Board (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. The Company will adopt this standard in its 1998 financial statements. 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 a company's 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. The Company will adopt this standard in its 1998 financial statements. Comparative information for earlier years will be restated. 46 In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits". SFAS No. 132 revises employer's disclosures about pension and other post retirement benefit plans but does not change the measurement or recognition of those plans. The Statement standardizes the disclosure requirements to the extent practicable, requires additional information changes in the benefit obligations and fair value of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company will adopt this standard in its 1998 financial statements. Comparative information for earlier years will be restated, if readily available. 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------- At December 31, 1997 1996* (Dollars in Thousands) - -------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents $ 8,317 $ - Assets held for sale and inventory 478,213 93,775 Net investment in finance receivables 2,343,604 2,135,250 Net investment in capital leases 3,288,141 3,648,731 Net investment in operating leases, net of accumulated depreciation of $772,437 in 1997 and $777,905 in 1996 1,593,582 1,403,470 Deferred charges and other assets 832,892 695,160 Deferred Income taxes 231,146 116,126 - -------------------------------------------------------------------------------- Total Assets 8,775,895 8,092,512 - -------------------------------------------------------------------------------- LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY: LIABILITIES: Short-term notes, less unamortized discounts of $14,357 in 1997 and $3,112 in 1996 1,868,585 1,867,247 Income taxes and other payables 714,122 720,281 Medium and long-term debt 5,249,409 4,597,677 Commitments and contingencies - -------------------------------------------------------------------------------- Total Liabilities 7,832,116 7,185,205 - -------------------------------------------------------------------------------- PREFERRED SECURITIES: Company-obligated preferred securities of subsidiary 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 in 1996 903 902 Additional paid-in capital 651,552 633,676 Recourse loans to senior executives (15,471) (15,697) Foreign currency translation adjustments (4,032) (3,502) Retained earnings 110,827 91,928 - -------------------------------------------------------------------------------- Total Shareowners' Equity 743,779 707,307 - -------------------------------------------------------------------------------- Total Liabilities, Preferred Securities and Shareowners' Equity $8,775,895 $8,092,512 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements. *Certain amounts have been reclassified to conform to the 1997 presentation. 48 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995 (Dollars in Thousands) - -------------------------------------------------------------------------------- REVENUES: Finance revenue $229,855 $204,204 $174,523 Capital lease revenue 361,124 598,203 586,141 Rental revenue on operating leases 834,027 697,020 560,964 Revenue from securitizations and loan sales 82,663 164,899 16,374 Equipment sales 49,349 90,631 48,724 Other revenue, net 257,121 197,233 190,309 - -------------------------------------------------------------------------------- Total Revenues 1,814,139 1,952,190 1,577,035 - -------------------------------------------------------------------------------- EXPENSES: Interest 451,470 458,039 411,040 Operating and administrative 545,728 564,489 473,663 Depreciation on operating leases 554,059 455,595 354,509 Cost of equipment sales 44,769 78,538 43,370 Provision for credit losses 114,301 113,605 86,214 Restructuring charges 35,093 - - Loss on sales of businesses,net 18,563 - - - -------------------------------------------------------------------------------- Total Expenses 1,763,983 1,670,266 1,368,796 - -------------------------------------------------------------------------------- Distributions on Company-obligated preferred securities of subsidiary 18,120 3,322 - - -------------------------------------------------------------------------------- Income before income taxes 32,036 278,602 208,239 Provision for income taxes 11,029 110,063 80,684 - -------------------------------------------------------------------------------- NET INCOME $ 21,007 $168,539 $127,555 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements. 49 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
- -------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 (Dollars in Thousands) - -------------------------------------------------------------------------------- Common stock Balance at beginning of year $ 902 $ 470 $ 470 Repurchase and retirement of shares in connection with the 1996 Merger - (471) - Stock issuances: New shares issued as a result of the 1996 Merger 1 902 - Pension and benefit plans - 1 - - -------------------------------------------------------------------------------- Balance at end of year 903 902 470 - -------------------------------------------------------------------------------- Additional paid-in capital Balance at beginning of year 633,676 783,244 782,785 Repurchase and retirement of shares in connection with the 1996 Merger - (1,660,174) - Stock issuances: New shares issued as a result of the 1996 Merger 4,203 821,583 - Pension and benefit plans - 1,695 459 Tax impacts of the 1996 Merger: Capital contribution from Former Affiliates for lost tax depreciation (6,711) 279,876 - Reduction of deferred tax liabilities due to the Section 338(h)10 election 17,160 232,929 - Establishment of goodwill-deferred tax asset due to the Section 338(h)10 election 4,591 161,999 - Establishment of current tax receivable due to tax benefit generated by Hercules (Cayman) buyout of employee stock options - 16,011 - Other (1,367) (3,487) - - -------------------------------------------------------------------------------- Balance at end of year 651,552 633,676 783,244 - -------------------------------------------------------------------------------- Recourse loans to senior executives Balance at beginning of year (15,697) (20,512) (19,651) Loans made (4,894) (1,381) (2,613) Loans repaid 5,120 6,196 1,752 - -------------------------------------------------------------------------------- Balance at end of year (15,471) (15,697) (20,512) - -------------------------------------------------------------------------------- Foreign currency translation adjustments Balance at beginning of year (3,502) (2,173) (2,158) Unrealized translation loss (530) (1,329) (15) - -------------------------------------------------------------------------------- Balance at end of year (4,032) (3,502) (2,173) - -------------------------------------------------------------------------------- Retained earnings Balance at beginning of year 91,928 355,096 246,772 Repurchase and retirement of shares in connection with the 1996 Merger - (416,217) - Net income 21,007 168,539 127,555 Cash dividends paid - (15,490) (19,231) Other (2,108) - - - -------------------------------------------------------------------------------- Balance at end of year 110,827 91,928 355,096 - -------------------------------------------------------------------------------- Total Shareowners' Equity $ 743,779 $ 707,307 $1,116,125 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements. 50 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996* 1995 (Dollars in Thousands) - -------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 21,007 $ 168,539 $ 127,555 Noncash items included in income: Depreciation and amortization 606,751 509,957 412,044 Deferred taxes (103,955) (269,972) (2,772) Provision for credit losses 114,301 113,605 86,214 Revenue from securitizations and loan sales (82,663) (164,899) (16,374) (Increase) decrease in deferred charges and other assets (33,611) (11,274) 26,596 Increase (decrease) in income taxes and other payables 43,173 (35,131) 50,362 Decrease in payables to Former Affiliates (1,757) (18,481) (3,509) - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 563,246 292,344 680,116 - -------------------------------------------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired - (148,109) (294,472) Purchase of finance asset portfolios (4,871) (7,339) (19,769) Financings and lease equipment purchases (6,579,002) (6,051,483) (5,467,773) Principal collections from customers, net of amounts included in income 3,965,877 3,998,239 3,855,592 Cash proceeds from securitizations and loan sales 1,500,367 3,390,396 291,476 (Decrease) increase in payables to affiliates (25,451) 25,451 - - -------------------------------------------------------------------------------- Net Cash (Used for) Provided by Investing Activities $(1,143,080) $1,207,155 $(1,634,946) - -------------------------------------------------------------------------------- (Continued on next page) 51 AT&T CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996* 1995 (Dollars in Thousands) - -------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (decrease) in short-term notes, net $ 1,338 $ (345,104) $ (207,045) Additions to medium and long-term debt 3,517,344 2,011,705 2,905,920 Repayments of medium and long-term debt (2,930,531) (2,135,693) (1,828,426) (Decrease) increase in payables to affiliates and Former Affiliates - (247,400) 53,109 Issuance of Company-obligated preferred securities - 200,000 - Proceeds from interim bridge-loan to fund 1996 Merger - 1,255,286 - Repayment of interim bridge-loan to fund 1996 Merger - (1,255,286) - Repurchase of Company common stock - (2,076,863) - Capital contributions from affiliates and Former Affiliates - 1,101,459 - Other 1996 Merger related items - 3,926 - Dividends paid - (15,490) (19,231) - -------------------------------------------------------------------------------- Net Cash Provided by (Used for) Financing Activities 588,151 (1,503,460) 904,327 - -------------------------------------------------------------------------------- Net Increase (decrease) in Cash and Cash Equivalents 8,317 (3,961) (50,503) Cash and Cash Equivalents at Beginning of Period - 3,961 54,464 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 8,317 $ - $ 3,961 - --------------------------------------------------------------------------------
Interest paid, including discounts on commercial paper, was $451.8 million, $443.4 million and $365.5 million during 1997, 1996 and 1995, respectively. Net income taxes paid were $160.8 million, $373.5 million and $27.8 million during 1997, 1996 and 1995, respectively. 52 Noncash Investing and Financing Activities: In conjunction with the 1996 Merger, additional paid-in capital increased in 1997 and 1996 due to the elimination of deferred tax liabilities of $17.2 million and $232.9 million, respectively, 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. In addition, additional paid-in capital was affected by the 1997 adjustment to and the 1996 establishment of a deferred tax asset of $4.6 million and $162.0 million, respectively, 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 13). In 1997 and 1996, certain management members of the Company exchanged their existing shares of Company common stock for new shares totaling $2.0 million and $29 million, respectively. (See Note 1). In addition certain management members were issued shares of Company common stock in 1997 totaling $2.2 million. Recourse loans issued associated with such shares totaled $3.7 million in 1997. In connection with the Company's $1.1 billion public securitization offering in December 1997, the Company recorded an asset of $100.9 million and a liability of $105.0 million associated with a note issued with a call provision (see Notes 6 and 7). In 1997, 1996 and 1995, the Company entered into capital lease obligations of $4.2 million, $35.6 million and $105.2 million, respectively, for equipment that was subleased. In 1996, the Company assumed debt in conjunction with acquisitions of $3.4 million. * Certain amounts have been reclassified to conform to the 1997 presentation. The accompanying notes are an integral part of these Consolidated Financial Statements. 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 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 operating income and total assets. The Company leases and finances equipment manufactured and distributed by AT&T Corp. ("AT&T"), Lucent Technologies Inc. ("Lucent") and NCR Corporation ("NCR") (herein, the "Former Affiliates") and numerous other companies. The Company also provides Small Business Administration ("SBA") lending and equipment management and remarketing services. In addition, the Company offers its customers high-technology equipment rental and certain equipment administration services. At December 31, 1997, AT&T Capital's portfolio assets (investment in finance receivables, capital leases and operating leases) were comprised of, or collateralized by, general equipment (consisting of general office, manufacturing and medical equipment) (aggregating 33% of such portfolio assets), information technology equipment (22%), telecommunications equipment (22%), loans secured by real estate (12%) and transportation equipment (11%). 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, 1997, on an owned and securitized basis, the Company's 100 largest customers (including AT&T and Lucent) accounted for approximately 18% of the Company's owned and securitized portfolio assets, and no customer (with the exception of AT&T and Lucent, in the aggregate) accounted for more than 1% of such portfolio assets. Other than AT&T and Lucent, as of December 31, 1997, management is not aware of any significant concentration of business transacted with a particular customer, supplier or lender that could have a material adverse impact on the Company's operations. Also, the Company does not have a concentration regarding the types of financing products or available sources of debt, labor or services, or licenses or other rights that could have a material adverse impact on its operations. 54 1996 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 "1996 Merger Agreement") with AT&T, Hercules Holdings (Cayman) Limited ("Hercules (Cayman)") and Antigua Acquisition Corporation ("Antigua"), a wholly-owned subsidiary of Hercules (Cayman). Hercules (Cayman) is an indirect wholly-owned subsidiary of The Grand Leasing Company Limited (UK) ("Grand Leasing"). 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 13 for additional discussion of the GPTD Agreement and other tax implications of the 1996 Merger. On October 1, 1996, the Company completed a merger (the "1996 Merger") pursuant to which Antigua was merged with and into the Company pursuant to the 1996 Merger Agreement. As a result of the 1996 Merger, AT&T Capital's shareowners received $45 in cash for each outstanding share of the Company's common stock, and Hercules (Cayman) 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 1996 Merger Agreement (the "1996 Merger Consideration") was approximately $2.2 billion. The 1996 Merger Consideration was funded through (i) a loan to the Company 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, which resulted in an after-tax gain of $79 million (see Note 6), and (ii) equity contributions to the Company represented by (a) capital contributions of $871 million from Hercules (Cayman), (b) exchange by the Management Investors of their existing shares totaling $29 million for newly issued shares and (c) the settlement of approximately $5 million of recourse loans previously made to senior executives. Also, in connection with the 1996 Merger, the Company, through a consolidated subsidiary, issued to the public $200 million of Company-obligated preferred securities (see Note 8), the proceeds of which were used to pay down short-term debt. 55 In connection with the 1996 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 14), an $11.0 million expense relating to the Company's 1996 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 payment by the Company to AT&T in connection with certain tax liabilities described further in Note 13. 1998 Sale of the Company and Related Transactions On January 12, 1998, Newcourt Credit Group Inc., an Ontario corporation ("Newcourt"), consummated the purchase (the "Newcourt Acquisition") of all of the outstanding shares of common stock of AT&T Capital, pursuant to a Stock Purchase Agreement dated as of November 17, 1997 among the Company, Newcourt, Hercules (Cayman), the former direct owner of 97.4% of the Company's common stock, and the Management Stockholders, as defined below. In connection with the Newcourt Acquisition, all of the outstanding shares of common stock of the Company were transferred to Newcourt Holdings USA, Inc., a newly-formed Delaware corporation which is a wholly-owned subsidiary of Newcourt. As a result of the Newcourt Acquisition, all of the outstanding shares of common stock of the Company are owned indirectly by Newcourt. The aggregate purchase price under such Stock Purchase Agreement paid by Newcourt to the stockholders of AT&T Capital was approximately $1.6 billion comprised of approximately $1.0 billion in cash and the remainder comprising approximately 17.6 million of Newcourt common shares. Such shares were issued entirely to Hercules (Cayman) and generally may not be transferred for periods ranging from 6 to 18 months following the date of the Newcourt Acquisition. The cash portion of the purchase price paid by Newcourt was raised through the issuance by Newcourt of 38.5 million shares of Newcourt common stock at approximately $32.50 per share to employees of Newcourt and the public in Canada and the United States. The ownership of the Preferred Securities, which were issued by Capita Preferred Trust, a business trust originated by the Company in August, 1996, was not affected by the Newcourt Acquisition and related transactions. However, the Newcourt Guarantee (as defined below) ranks senior to the Trust Guarantee issued by the Company in connection with the Preferred Securities offering (See Note 8). Prior to the Newcourt Acquisition, all of the outstanding shares of common stock of the Company were owned either (i) indirectly, through ownership of 100% of the common shares of Hercules (Cayman), by Grand Leasing, which in turn is beneficially owned through warrants to acquire 100% of the common shares of Grand Leasing by Nomura International plc ("Nomura"), a wholly-owned indirect subsidiary of The Nomura Securities Co., Ltd., and (ii) directly, by 21 members and one former member of the senior management of the Company (the "Management Stockholders"), with the Management Stockholders owning directly approximately 2.6% of the outstanding shares of common stock of the Company (or approximately 4.7% on a fully-diluted basis) and Grand Leasing owning indirectly approximately 97.4% of the outstanding shares of common stock of the Company (or approximately 93.6% on a fully diluted basis). The Company's employees and outside directors owned approximately 1.7% of the Company's common stock on a fully diluted basis. 56 On February 9, 1998, the Company and Newcourt entered into a support agreement (the "Newcourt Support Agreement"). The Newcourt Support Agreement requires Newcourt to own a majority of the outstanding shares of common stock of the Company, to cause the Company and its subsidiaries to have a consolidated tangible net worth of at least $1.00 and to provide funds to the Company (upon the request of the Company) sufficient to enable the Company to make timely payments of principal and interest payments on its debt for borrowed money (if the Company is unable to do so). On February 20, 1998, the Company entered into a guarantee of certain outstanding indebtedness and liquidity facilities of Newcourt and Newcourt Credit Group USA Inc. (the "Newcourt Guarantee"). (See Note 7). Relationship of the Company with the Former Affiliates In the second quarter of 1993, the Company entered into the following agreements with AT&T: an Operating Agreement (as subsequently amended, the "AT&T Operating Agreement"), an Intercompany Agreement (the "AT&T Intercompany Agreement"), and a License Agreement (as subsequently amended, the "AT&T License Agreement"). In the second quarter of 1996, the Company entered into separate operating agreements with each of Lucent and NCR (the "Lucent Operating Agreement" and "NCR Operating Agreement", respectively, and, collectively with the AT&T Operating Agreement, the "Operating Agreements") (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 Lucent and NCR). Also, in the second quarter of 1996, the Company entered into letter agreements with Lucent and NCR regarding the applicability to Lucent and NCR of specified provisions of the AT&T License Agreement (collectively, with the AT&T License Agreement, the "License Agreements") and the AT&T Intercompany Agreement (collectively, with the AT&T Intercompany Agreement, the "Intercompany Agreements"). (See Note 15 for further discussion of AT&T/Lucent/NCR). The Former Affiliates are not required to renew the terms of their respective Operating Agreements, License Agreements and Intercompany Agreements beyond the expiration of the current terms on August 4, 2000. In connection with the execution and delivery of the Stock Purchase Agreement, Lucent, pursuant to the terms of the Lucent Operating Agreement, consented to the change of control contemplated by the sale of the outstanding shares of common stock of the Company to Newcourt pursuant to the Stock Purchase Agreement. In addition, the Company and Newcourt agreed to negotiate with Lucent to amend the terms of the Lucent Operating Agreement. On March 9, 1998, Newcourt signed a new five-year agreement with Lucent (the "1998 Lucent Agreement") which expands the global financing program established to serve Lucent's business systems customers. The term of the 1998 Lucent Agreement is from October 1, 1997 through September 30, 2002. The 1998 Lucent Agreement replaces the Lucent Operating Agreement and the letter agreements between the Company and Lucent, the initial terms of which were scheduled to expire on August 4, 2000. In addition to the extended term of the 1998 Lucent Agreement, other changes from the previous Lucent Operating Agreement include Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, a change in the methodology in calculating the amount required to be paid to Lucent (based upon specific financial, service and performance levels tied to compensation) which is expected to result in an increase in such amount, 57 and a single point of contact for customers. The 1998 Lucent Agreement also includes certain early termination provisions and a buy-out option that could have a material impact on Newcourt's future operations, if exercised. Lucent is not required to renew the term of the 1998 Lucent Agreement beyond the current term. In the event of either (a) an early termination or buy-out or (b) a non- renewal of the 1998 Lucent Agreement by Lucent, Newcourt will have an extended wind down period with cost recovery. The impact of the 1998 Lucent Agreement on the Company's future net income is at this time unknown. While there is a possibility the Company's future net income from Lucent transactions may increase as a result of an anticipated increase in financing volume arising from Newcourt being the preferred provider of financing services for a greater portion of Lucent's equipment and related product sales, there also is a possibility the Company's future net income from Lucent transactions may decrease as a result of the increased amounts due to Lucent under the 1998 Lucent Agreement. Pursuant to the AT&T 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 AT&T License Agreement provides that AT&T may require (as a result of AT&T's disposition of the Company in 1996, upon two years 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 Agreements (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 given any notice requiring discontinuance of use. Although the Company intends to seek to maintain and improve its existing relationships with Lucent, NCR and AT&T, no assurance can be given that the Operating Agreements or the 1998 Lucent Agreement, will be extended beyond their respective termination dates or, if extended, that the terms and conditions thereof will not be modified in a manner adverse to the Company. Failure to renew the Operating Agreement and the 1998 Lucent Agreement, on terms not adverse to the Company could have a material adverse effect on the Company. Moreover, in certain circumstances the Operating Agreements and the 1998 Lucent Agreement may be terminated prior to their respective expiration dates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements 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 a result of the 1996 Merger ("push down" accounting) were not reflected therein due to the existence of substantial publicly traded debt of the Company. Consolidation 58 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, retained interests in securitized assets and related reserves, allowance for credit losses, valuation of assets held for sale, restructuring reserves 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 based 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 59 adjustments to depreciation expense over the shorter of the useful life of the asset or the remaining term of the lease. 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 and is recorded in Deferred charges and other assets on the accompanying balance sheet. 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 Securitization Related As part of its funding strategy, the Company sells generally non-prepayable capital lease and loan receivables in the public and private asset-backed securities markets. The securitization structures provide for limited recourse to the Company for certain uncollectible amounts. The Company continues to be responsible for the administration and collection of the receivables on behalf of the investors for which the Company receives servicing fees (see Note 11). Portions of the Company's securitization transactions during 1997, 1996 and 1995 qualified to be accounted for as sales for financial reporting pursuant to Statement of Financial Accounting Standards ("SFAS") No. 77 "Reporting by Transferors for Transfers of Receivables with Recourse" ("SFAS No. 77") and/or SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 77 applied in 1995 and 1996, while SFAS No. 125, applied in 1997 and thereafter. The Company derecognizes assets sold, records assets received or retained and records a gain or loss on the sale. The asset received is generally cash. Assets retained represent an interest in the cash flows of the receivables sold. Such retained interest may include cash collateral accounts, excess spread assets, securities backed by the transferred assets and residual interests in securitized trusts ("retained interests"). Securitization revenue (or gain on sale) generally equals the difference 60 between the historical basis in the net assets sold and the cash received plus the allocated historical cost of the retained interests. In accordance with SFAS No. 125, such historical cost allocations are made using the relative amounts of (a) the fair market value of the interests sold (amounts invested by third parties) and (b) the estimated fair market value of retained interests. Because there generally are not observable market prices for the retained interests in the Company's securitizations, the Company estimates the value of those interests using assumptions to discount expected cash flows to a present value. Key assumptions include estimated future prepayment, delinquency, default and loss rates on the securitized assets and estimated market discount rates. While these assumptions are based on the Company's historical experience, future experience could differ from these estimates due to changes in customer behavior, changes in economic conditions or other factors. The Company has used in its 1997 and 1996 securitizations an assumed constant prepayment rate (which includes terminations due to prepayments and defaults) based upon its historical experience of 6%. Expected losses are based upon the Company's historical loss experience. In addition, the Company uses a fair market discount rate, reflective of the risks associated with the underlying net cash flows, to determine the fair value of the retained interests. Such discount rates generally range from 10.00% to 10.50%. Interest is recorded on the retained interests on an accrual basis. Property, Plant and Equipment 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 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 $85.6 million and $104.6 million of goodwill at December 31, 1997 and 1996, respectively. The accompanying consolidated statements of income caption Operating and administrative expenses includes $11.8 million, $12.6 million and $13.2 million of goodwill amortization for the years ended December 31, 1997, 1996 and 1995, respectively. Assets Held for Sale The Company has certain assets held for sale. Such assets are recorded at the lower of cost or market. For further discussion see Note 5. Derivative Financial Instruments 61 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. For interest rate swaps and the interest component of the currency swaps, the Company records the net interest to be received or paid as an adjustment to interest expense. The net amount is reflected in the statement of cash flows in the net income amount. The exchange of the principal amount under the currency swaps is reflected in the statement of cash flows in the short-term notes, net amount since the underlying amount is generally commercial paper. 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 also enters into foreign currency forward exchange contracts to hedge foreign exchange risk. 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. Foreign Currency Translation The financial statements of the Company's foreign operations are translated into US dollars and 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 Loans Included in finance receivables are loans that the Company considers impaired. A loan is considered impaired when it is probable the Company will be unable to collect all amounts due according to the original contractual term of the loan agreement. Groups of smaller homogeneous loans, such as consumer loans and residential real estate loans, are specifically excluded from this definition. As a practical expedient, impairment is measured based on the loan's observable market price of the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded as an addition to the allowance for credit losses. See "Revenue Recognition for Finance Receivables and Capital 62 Leases" above for a further discussion of revenue recognition policies. (See Note 3). Impairment of Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the 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. During 1997, the Company recorded a $42.9 million impairment relating to certain assets held for sale (see Note 5). No impairment losses were recognized in 1996 and 1995. Recent Pronouncements In July 1997, the Financial Accounting Standards Board (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. The Company will adopt this standard in its 1998 financial statements. 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 a company's 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. The Company will adopt this standard in its 1998 financial statements. Comparative information for earlier years will be restated. In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits". SFAS No. 132 revises employer's disclosures about pension and other post retirement benefit plans but does not change the measurement or recognition of those plans. The statement standardizes the disclosure requirements to the extent practicable, requires additional information changes in the benefit obligations and fair value of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company will adopt this standard in its 1998 financial statements. Comparative information for earlier years will be restated, if readily available. 63 3. NET INVESTMENT IN FINANCE RECEIVABLES AND CAPITAL LEASES Finance receivables and capital leases consisted of the following:
Finance Receivables Capital Leases At December 31, 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Receivables $2,511,963 $2,294,054 $3,606,216 $4,056,152 Estimated unguaranteed residual values - - 432,838 380,325 Unearned income (93,028) (105,289) (656,436) (680,670) Allowance for credit losses (75,331) (53,515) (94,477) (107,076) - -------------------------------------------------------------------------------- Net investment $2,343,604 $2,135,250 $3,288,141 $3,648,731
For a discussion regarding the Company's securitization activities, see Note 6. The schedule of maturities at December 31, 1997 for finance receivables and capital leases is as follows:
Finance Capital Receivables Leases - -------------------------------------------------------------------------------- 1998 $ 582,769 $1,211,991 1999 335,734 992,877 2000 273,940 652,604 2001 259,511 374,183 2002 212,772 170,411 2003 and thereafter 847,237 204,150 - -------------------------------------------------------------------------------- Total $2,511,963 $3,606,216 - --------------------------------------------------------------------------------
As of December 31, 1997, the recorded investment in impaired loans which required an individual valuation allowance greater than $.2 million was $101.1 million with an aggregate valuation allowance for all such impaired loans of $22.3 million. If such loans had not been considered impaired, and thus earned income during 1997 (at their original contractual terms), finance revenue would have been approximately $9.3 million higher. The amount of impaired loans at December 31, 1996 and 1995 was not material. 64 4. NET INVESTMENT IN OPERATING LEASES The following is a summary of equipment under operating leases at December 31, 1997 and 1996, including equipment on lease to Former Affiliates (see Note 15):
At December 31, 1997 1996 - -------------------------------------------------------------------------------- Original equipment cost: Information technology $ 748,616 $ 673,298 Telecommunications 741,690 557,567 Transportation 242,630 550,242 General equipment and other 553,619 354,658 - -------------------------------------------------------------------------------- 2,286,555 2,135,765 Less: Accumulated depreciation (772,437) (777,905) Rental receivables, net 79,464 45,610 - -------------------------------------------------------------------------------- Net investment in operating leases $ 1,593,582 $ 1,403,470 - --------------------------------------------------------------------------------
Minimum future rentals to be received on noncancelable operating leases as of December 31, 1997, are as follows: 1998 $ 680,321 1999 399,545 2000 210,532 2001 69,603 2002 33,763 2003 and thereafter 6,490 - -------------------------------------------------------------------------------- Total minimum future rentals $1,400,254 - -------------------------------------------------------------------------------- 5. ASSETS HELD FOR SALE AND INVENTORY The Company is currently pursuing the sale of its US consumer automotive business. The carrying value of these assets was reduced to $419.8 million, their estimated fair value based on an estimated sale price, net of costs to sell. The adjustment of $42.9 million was recorded in the fourth quarter of 1997 and is included in the income statement caption Loss on sales of businesses, net. During 1997, 1996 and 1995, this business operation generated revenues of $137.0 million, $140.4 million and $123.4 million and net income (loss) of $(39.7) million, $8.6 million and $8.9 million, respectively. Also, assets held for sale at December 31, 1997 and 1996 include inventory of off-lease equipment and warehoused assets totaling $58.4 million and $93.8 million for 1997 and 1996, respectively. 65 6. SECURITIZATIONS AND LOAN SALES See Note 1 for a discussion regarding the Company's Securitization policies. At December 31, 1997 and 1996, on a historical cost basis, $2,936.5 million and $2,984.7 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. The following table summarizes securitization and loan sales activity and balances:
At or for the years ended December 31, 1997 1996 1995 (in millions, except as noted) - ---------------------------------------------------------------------------------- Assets securitized, net (in billions) $ 1.1 $ 3.1 $ 0.1 Proceeds from assets securitized (in billions) 1.3 3.1 0.1 Securitization revenue 57.1 149.3 5.9 Retained interests in assets securitized 283.9 195.9 61.5 Maximum exposure in retained interests 221.3 104.9 254.8 SBA loans sold, at par 219.7 170.2 146.7 Proceeds from SBA loan sales 240.5 184.9 157.2 SBA loan sales revenue $ 25.6 $ 15.6 $ 10.5
In addition, the Company recorded a collateralized borrowing in the amount of $105.0 million, which represents the proceeds received from investors for a portion of the 1997 securitization since the applicable criteria of SFAS No. 125 for sales treatment were not met (see Note 7). In 1995, the Company utilized a different securitization structure than in 1997 or 1996. In 1995, the Company provided recourse in an amount greater than the retained interest in the assets securitized. Therefore, the maximum exposure exceeded the retained interest. 66 7. DEBT Newcourt purchased the common stock of the Company on January 12, 1998. Newcourt has advised the Company that Newcourt intends for the Company to operate as an indirect wholly-owned subsidiary of Newcourt which will continue to issue commercial paper and medium and long-term debt in the public markets. In addition, the Newcourt Support Agreement with the Company supports all of the Company's debt. (See Note 1 for further discussion of Newcourt.) On February 20, 1998, the Company entered into an agreement whereby the Company guarantees certain indebtedness and liquidity facilities of Newcourt and Newcourt Credit Group USA Inc. This debt is used by Newcourt for general operating purposes. As of February 28, 1998, the Company's guarantee of such debt was US$1.4 billion (C$2.0 billion). Also, as a result of the Newcourt Acquisition, the Company is currently renegotiating its existing back-up facility to support Newcourt's and the Company's existing commercial paper programs and for general corporate purposes. The Company is looking to increase its US facility to $2.25 billion with $1.5 billion having a term of 364 days and $.75 billion having a term of 5 years (the "US facility"). In addition, Newcourt is pursuing a Canadian facility of C$1.0 billion with a term of 364 days (the "Canadian facility"). It is expected that the US facility will be guaranteed by Newcourt and Newcourt Credit Group USA Inc., a wholly-owned subsidiary of Newcourt and rank pari passu with the Canadian facility. The Canadian facility will be guaranteed by the Company and Newcourt Credit Group USA Inc. Commercial Paper Commercial paper is generally issued at a discount with the majority maturing within 90 days. As of December 31, 1997 the maturities of commercial paper ranged up to six months. As of December 31, 1996 the maturities of commercial paper ranged up to 45 days. Interest rates ranged from 5.90% to 7.20% and 5.60% to 7.20% at December 31, 1997 and 1996, respectively. The discount amortized on commercial paper, which reflects the cost of such debt, amounted to $106.3 million, $100.3 million and $94.0 million in 1997, 1996 and 1995, respectively. In August 1997, the Company's back-up credit facility of $2.0 billion was modified. This facility, negotiated with a consortium of 24 lending institutions, supports the commercial paper issued by the Company. (At December 31, 1997 this facility was unused.) Under the most restrictive provision of the Company's back-up facility, the Company is required to maintain an interest coverage ratio (the ratio of consolidated earnings before interest and taxes, as defined, to consolidated interest expense) of 1.25 times. The Company is in compliance with this and all other covenants of the facility. To meet local funding requirements, the Company's foreign operations have available lines of credit of approximately $341.6 million, of which approximately $95.2 million were available at December 31, 1997. These facilities are generally renewed annually. Facility fees paid for the revolving and foreign credit arrangements are not material. 67 Data with respect to short-term notes (principally commercial paper) are as follows:
1997 1996 1995 - -------------------------------------------------------------------------------- End of year balance, net $1,868,585 $1,867,247 $2,212,351 Weighted average interest rate at year-end 7.0% 6.1% 5.9% Highest month-end balance $2,479,688 $3,021,459 $2,212,351 Average month-end balance (a) $1,979,034 $2,154,614 $1,921,298 Weighted average interest rate (b) 6.1% 5.7% 5.3% - --------------------------------------------------------------------------------
(a) The average month-end balance was computed by dividing the total of the outstanding month-end balances by the number of months. (b) The weighted average interest rate during the year is calculated by dividing the interest charged for the year by the average month-end balance. Medium and Long-term Debt Medium and long-term debt outstanding at December 31, 1997 and 1996, consisted of the following:
Maturities 1997 1996 - -------------------------------------------------------------------------------- 4.67% - 5.99% Medium-term notes 1997 - 2001 $ 714,400 $1,331,900 6.00% - 6.93% Medium-term notes 1997 - 2002 3,350,600 1,621,525 7.03% - 8.08% Medium-term notes 1997 - 2005 294,050 621,625 Floating rate Medium-term notes Interest periodically reprices based on various indices. As of December 31, 1997 and 1996, the average interest rate ranged from 5.78%-6.22% and 5.47%-5.65%, respectively. 1997 - 2000 587,250 682,000 Other long-term debt- Interest ranging from 3.61%-12.03% and 4.75%-12.03%, respectively. 1997 - 2003 303,109 340,627 - -------------------------------------------------------------------------------- Total medium and long-term debt $5,249,409 $4,597,677 - --------------------------------------------------------------------------------
The Company's medium and long-term debt matures as follows: 1998 $2,676,236 1999 1,781,492 2000 281,445 2001 215,329 2002 143,693 2003 and thereafter 46,214 - -------------------------------------------------------------------------------- Total $5,144,409 - --------------------------------------------------------------------------------
68 Included in Other long-term debt are the $105.0 million relating to the proceeds received from an asset-backed security associated with the 1997 public securitization to which the Company has a call option (see Note 6). Since this is a noncash item, the debt maturity table (above) excludes such borrowing. To reduce exposure to interest rate movements, the Company enters into interest rate swap agreements (see Note 16). The weighted average interest rate on average total debt outstanding, including the effect of these swaps, was 6.49% and 6.38% for the years ended December 31, 1997 and 1996, respectively. During January 1997, the SEC declared effective a Company debt registration statement of $4.0 billion. Subsequent to December 31, 1997, the Company completed the full utilization of such debt available under the registration statement. On March 20, 1998 the Company filed with the SEC a $5.0 billion debt registration statement on Form S-3. The Company anticipates this registration statement to be declared effective in the second quarter of 1998. 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, 1997 and 1996, $106.8 million and $189.7 million, respectively, of medium and long-term debt was guaranteed by AT&T. 8. 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 preferred securities ("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 of the Debentures issued by the Company's subsidiaries have been guaranteed, on a subordinated basis, by the Company. Holders of the 8 million 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 therefor, on the distributions, redemption and liquidation of the Preferred Securities. Distribution will be made on the Preferred Securities to the extent that the Trust has 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 69 subsidiaries. As discussed in Note 1, the Newcourt Acquisition and related transactions did not effect ownership of the Preferred Securities. However, the Newcourt Guarantee ranks senior to the Trust Guarantee issued by the Company in connection with the Preferred Securities offering. The table below shows summarized consolidated financial information of the Company's two subsidiaries, AT&T Capital Leasing Services, Inc. and AT&T Capital Services Corporation which have issued the Debentures. The summarized financial information includes transactions with the Company that are eliminated in consolidation.
AT&T Capital Leasing Services, Inc. At or for the years ended December 31, 1997 1996 1995 --------- --------- --------- Total revenues $ 172,736 $244,560 $197,537 Interest expense 47,467 69,490 62,420 Operating and administrative expenses 93,914 86,121 85,621 Provision for credit losses 39,171 51,862 39,996 (Loss) income before income taxes (10,617) 34,509 7,234 Net (loss) income (a) (23,164) 20,733 4,241 Total assets 786,895 628,945 1,387,325 Total debt 675,420 507,180 1,061,640 Total liabilities 742,633 597,203 1,214,257 Total shareowner's equity $ 44,262 $ 31,742 $ 173,068 ---------- ---------- ---------- AT&T Capital Services Corporation At or for the years ended December 31, 1997 1996 1995 --------- --------- --------- Total revenues $ 113,655 $ 111,572 84,732 Interest expense 6,752 5,157 4,046 Operating and administrative expenses 49,049 46,423 36,108 Provision for credit losses 1,257 650 107 Income before income taxes 4,511 10,260 7,724 Net income 2,627 6,098 4,385 Total assets 147,182 161,232 116,952 Total debt 108,794 116,545 72,635 Total liabilities 133,800 145,565 99,031 Total shareowner's equity $ 13,382 $ 15,667 $ 17,921
(a) Net loss for 1997 has been increased by a $12.5 million tax provision. A $33.0 million tax provision was recorded for a deferred intercompany gain resulting from the transfer of assets to an affiliate, which is eliminated on an AT&T Capital consolidated basis. This was partially offset by a $20.5 million tax benefit on a $51.8 million tax loss, which includes equity investment revenues not taxable to AT&T Capital Leasing Services. The significant decrease in AT&T Capital Leasing Services, Inc. 1996 total assets compared to 1995, is due to significant securitization activity (see Note 6 for further discussion of securitizations). 9. 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 70 May 31, 1996 and August 30, 1996, respectively. As a result of the 1996 Merger and the Newcourt Acquisition, the Company anticipates that it will no longer pay dividends in the short-term. 10. 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, 1997 and 1996: Cash and Cash Equivalents The carrying amount is a reasonable estimate of fair value. Interest in Asset-Backed Security This asset is the result of a call option the Company has relating to a note issued by the CERTS 97-1 (see Note 6). The fair value of the interest in asset-backed security is equal to the related amount recorded as the collateralized borrowing (see Note 7) since that liability is a floating rate obligation. 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. 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. 71 Foreign Exchange Contracts The fair value of foreign exchange contracts is estimated based on current market quotes obtained from dealers for foreign exchange contracts with the same remaining terms. Credit Facilities The fair values of the credit facilities are based on fees currently paid for similar arrangements. The following table summarizes the carrying and fair values of on-balance sheet instruments (as determined using the methods described above):
December 31, 1997 December 31, 1996 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - -------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 8,317 $ 8,317 $ - $ - Interest in asset-backed security 100,924 105,000 - - Net investment in finance receivables (Note 3) 2,343,604 2,367,266 2,135,250 2,140,878 Liabilities: Short-term notes (Note 7) 1,868,585 1,868,585 1,867,247 1,867,247 Medium and long-term debt (Note 7) $5,249,409 $5,361,314 $4,597,677 $4,663,012 - ---------------------------------------------------------------------------
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 below) has been offset by the increased fair value of the Company's portfolio assets at December 31, 1997 and December 31, 1996, 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. 72 The following tables summarize the carrying and fair values of off-balance sheet financial instruments (as determined using methods described above):
- -------------------------------------------------------------------------------- December 31, 1997 - -------------------------------------------------------------------------------- Carrying Amount Fair Value Receivable Payable Receivable Payable - -------------------------------------------------------------------------------- Interest rate swap agreements $ 9,733 $(1,832) $11,268 $(15,753) Currency swap agreements 339 (532) 7,147 3,235 Foreign currency forward $ 27,241 $(16,106) $22,609 $ (2,959) exchange contracts - -------------------------------------------------------------------------------- December 31, 1996 - -------------------------------------------------------------------------------- Carrying Amount Fair Value Receivable Payable Receivable Payable - -------------------------------------------------------------------------------- Interest rate swap agreements $ 258 $ (2,662) $14,247 $(26,318) Currency swap agreements 69 (1,255) 3,407 (14,870) Foreign currency forward exchange contracts $ 7,807 $(21,405) $ (931) $(25,654) - --------------------------------------------------------------------------------
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 increased fair value of the Company's forward exchange contracts has been offset by a decrease in the fair value of the Company's foreign denominated assets at December 31, 1997. Likewise, at December 31, 1996, the decreased fair value of the Company's forward exchange contracts was offset by an increase in the fair value of the Company's foreign denominated assets. As of December 31, 1997, the Company has unused revolving credit facilities totaling $2.0 billion and approximately $95.2 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 7). 73 11. OTHER REVENUE Other revenue, net consisted of the following:
For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Net gain on sale of leased and off-lease equipment $ 88,636 $ 86,639 $ 86,987 Portfolio servicing fees 43,286 20,303 23,584 Other fee related revenue 60,545 51,449 44,105 Other portfolio related revenue 64,654 38,842 35,633 - -------------------------------------------------------------------------------- Total other revenue, net $257,121 $197,233 $190,309
The higher portfolio servicing fees in 1997 resulted from the Company's increased securitization activities since October 1996. Included in other portfolio related revenue is $18.7 million related to the gains recorded from the sale of certain equity securities. The Company obtains equity securities in conjunction with structuring certain complex capital market transactions. 12. RESTRUCTURING CHARGES In the fourth quarter of 1997, the Company's management approved a plan of restructuring (the "Plan"). The objective of the Plan, which is independent of the Newcourt Acquisition, is to enhance the overall efficiency and profitability of the Company by reducing operating and administrative costs in line with acceptable industry standards. In connection with the Plan, the Company recorded a pretax restructuring charge of $35.1 million. This charge includes $32.9 million relating to severance and benefit related costs for the elimination of approximately 200 employees, including administrative, communications, systems, operations, sales and marketing, finance, human resources, legal, facilities and other functions across all business and corporate support units. In addition to the severance and benefit related costs, $2.2 million of the restructuring charges are related to costs to close a facility. The Company anticipates that the Plan will be substantially completed by December 31, 1998. Management believes that the $35.1 million reserve is adequate to complete the Plan. It is reasonably possible that there may be additional restructuring reserves recorded in the future relating to the Newcourt Acquisition. 74 13. INCOME TAXES It is anticipated that Newcourt Holdings USA, Inc. will merge into Newcourt Credit Group USA Inc. (a wholly-owned subsidiary of Newcourt), with Newcourt Credit Group USA Inc. being the surviving entity. Effective thereafter, the surviving entity, including the Company, will file a consolidated tax return for Federal income tax purposes. Following the 1996 Merger, the Company was no longer included in the consolidated Federal and state returns of AT&T and filed a stand-alone consolidated Federal income tax return ("Tax Deconsolidation"). In connection with the 1996 Merger, Hercules (Cayman) 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 1996 Merger was deemed to be an asset sale for tax purposes resulting in the elimination of substantially all deferred tax liabilities as of the 1996 Merger date of $232.9 million. In 1997, the Company trued-up this amount which resulted in an increase to additional paid-in capital of $17.2 million. 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 of $162.0 million, the "1996 Merger-related tax goodwill". In 1997, the Company trued-up this amount which resulted in an increase in the 1996 Merger-related tax goodwill of $4.6 million. In connection with AT&T's 1996 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 1996 Merger date. This amount was trued-up in 1997 which resulted in a reduction to additional paid-in capital of $6.7 million. The Company was also entitled to a tax deduction for the cash-out of the Company's stock options by Hercules (Cayman). The tax benefit of such payment reduced the Company's 1996 current tax liability by approximately $16.0 million. At December 31, 1997 and 1996 the Company had a current tax receivable of $41.5 million and $6.9 million, respectively. As part of the GPTD Agreement the Company has, prior to the 1996 Merger, 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 and $245.9 million during the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Also on September 30, 1996, pursuant to the 1996 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 1996 Merger. 75 In addition, it is possible that the Company could be subject to the Federal alternative minimum tax. A company's alternative minimum tax ("AMT") 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 would be available in the future as credits against the Company's regular tax liability. The Company has no available AMT credit carryforwards at December 31, 1997 to reduce future Federal income taxes payable. The provision (benefit) for income taxes consisted of the following:
For the years ended December 31, 1997 1996* 1995* - -------------------------------------------------------------------------------- Current: Federal $ 94,283 $ 310,704 $70,102 State and local (a) 12,918 68,409 13,415 Foreign 12,218 21,384 10,789 - -------------------------------------------------------------------------------- Total current portion 119,419 400,497 94,306 - -------------------------------------------------------------------------------- Deferred: Federal (83,309) (221,208) (2,873) State and local (a) (14,326) (49,878) 205 Foreign (15,545) 1,926 2,483 - -------------------------------------------------------------------------------- Total deferred portion (113,180) (269,160) (185) Tax credits: Current (4,435) (20,762) (10,850) Deferred (b) 9,225 (512) (2,587) - -------------------------------------------------------------------------------- Total provision for income taxes $ 11,029 $ 110,063 $80,684 - --------------------------------------------------------------------------------
*Certain amounts have been reclassified to conform to the 1997 presentation. (a) Includes true-ups relating to tax returns filed for prior years. (b) The 1997 debit balance is the result of a reversal of a foreign deferred tax liability on which a US deferred tax credit had been recorded. 76 Deferred income tax assets consist of the following:
At December 31, 1997 1996 - -------------------------------------------------------------------------------- Gross deferred income tax liabilities: Lease related differences $ - $ (999) Securitization-related - (54,519) Pensions (2,122) (1,176) Other - (5,347) - -------------------------------------------------------------------------------- Gross deferred income tax liabilities (2,122) (62,041) - -------------------------------------------------------------------------------- Gross deferred income tax assets: 1996 Merger-related tax goodwill 153,587 159,604 Allowance for credit losses 17,173 5,644 State net operating losses 9,492 - Foreign net operating losses 1,064 7,205 Deferred foreign tax credit 14,305 23,237 Lease-related differences 25,952 - Securitization related 790 - Other 17,805 4,476 - -------------------------------------------------------------------------------- Gross deferred income tax assets 240,168 200,166 - -------------------------------------------------------------------------------- Valuation allowance (6,900) (21,999) - -------------------------------------------------------------------------------- Net deferred income tax assets $ 231,146 $ 116,126 - --------------------------------------------------------------------------------
77 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 $230 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 $640 million to $700 million in future years. A reconciliation between the Federal statutory tax rate and the Company's effective tax rate is shown below:
For the Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of Federal income tax effect 2.3 4.3 4.2 Tax exempt income (13.2) (1.4) (1.6) Goodwill - 0.3 0.5 Foreign taxes 9.7 1.0 1.0 Other * 0.6 0.3 (0.4) - -------------------------------------------------------------------------------- Effective tax rate 34.4% 39.5% 38.7% - --------------------------------------------------------------------------------
* Includes true-ups relating to tax returns filed for previous years for Federal, state and local, and foreign income taxes as well as Foreign tax credits. The Company has available state net operating loss carryforwards totaling approximately $289 million which will expire in the years 1999 through 2011. For the years ended December 31, 1997, 1996 and 1995, the consolidated income (loss) before income taxes and cumulative effect of accounting change by domestic and foreign source was $68,458 and $(36,422), $296,876 and $(18,274), $210,296 and $(2,057), respectively. 78 14. PENSION AND BENEFIT PLANS Pension 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 Retirement and Savings Plan ("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 66-2/3% 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 $16,417, $14,954 and $14,367 of pension expense in 1997, 1996 and 1995, respectively, related to the RSP. In addition, in 1997, 1996 and 1995 the Company recorded pension expense of $4,339, $2,649 and $2,431, respectively, in connection with RSP-related nonqualified plans. The Company also sponsors various international plans which are available to certain employees of its international subsidiaries. These plans are similar to the RSP, in that they enable employees of the Company to contribute a percentage of their salary to provide for retirement income. The Company recorded $2,053, $1,736 and $1,412 of pension expense in 1997, 1996 and 1995, respectively, related to the various international plans. The Company does not provide post-employment benefits to its employees. As of the date of the 1996 Merger, as a result of the change in control provisions in the RSP, all participants became fully vested. As of the date of the Newcourt Acquisition, as a result of the change in control provisions in the RSP, all participants became fully vested. The Company sponsors three unfunded supplemental retirement plans (two non-qualified plans and one qualified severance plan) that provide certain employees with additional benefits after retirement (the "Plans"). Components of net periodic pension cost for the years ended December 31, were:
1997 1996 - -------------------------------------------------------------------------------- Service cost - benefits earned $ 516 $ 595 Interest cost on projected benefit obligation 649 608 Amortization 564 490 Settlement loss* 2,410 455 - -------------------------------------------------------------------------------- Net periodic pension cost after settlement loss $4,139 $2,148 - --------------------------------------------------------------------------------
*Lump sums were paid to certain participants upon separation of their service. 79
The funded status of the Plans at December 31 was: 1997 1996 - ------------------------------------------------------------------------------- Accumulated benefit obligations: Vested benefit obligation $7,035 $5,926 Non-vested benefit obligation 1,553 1,104 Total 8,588 7,030 Additional benefits on estimated future salary level 828 1,306 Total projected benefit obligation 9,416 8,336 Plan assets at fair value - - Unfunded projected benefit obligation 9,416 8,336 Unrecognized prior service cost 3,981 4,413 Unrecognized net loss 834 1,413 Additional liability 4,051 4,773 Accrued pension liability recorded $8,652 $7,283 - --------------------------------------------------------------------------------
At December 31, 1997 and 1996, the projected benefit obligation was determined using assumed weighted average discount rates of 7.5% 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 1996 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 of such 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 1996 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 SPIP effective October 1, 1996 (the 1996 Merger date). 80 Leveraged Stock Purchase Plan Prior to the 1996 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 loans 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. 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. No options were canceled during 1996. Options canceled during 1995 were 102,852. Options exercised during 1996 prior to the 1996 Merger were 53,352. As of the 1996 Merger date, all remaining LSPP options (851,382) were cashed out by Hercules (Cayman) at the difference between the exercise price and $45 per share. Effective on the 1996 Merger date, the Company discontinued the LSPP. 1993 Long Term Incentive Plan Prior to the 1996 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 purchased 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. 81 The following table summarizes the option activity relating to the 1993 LTIP through the 1996 Merger date:
Shares Under Option Number Price Per Share - -------------------------------------------------------------------------------- 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 canceled (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 1996 Merger date: Options exercised (70,195) $21.50-$26.15 Options canceled (42,937) $21.50-$38.63 Options granted 5,206 $38.25-$38.63 - ------------------------------------------------------------------------------- Options outstanding at October 1, 1996 prior to 1996 Merger 1,243,896 $21.50-$47.03 - --------------------------------------------------------------------------- Options exercisable at December 31, 1997 - - Options exercisable at December 31, 1996 - - - ---------------------------------------------------------------------------
Upon consummation of the October 1, 1996 Merger Agreement, all option holders received from Hercules (Cayman) $45 in cash for each option. As a result no compensation cost was incurred by the Company relating to the cashout of these options. Effective on the 1996 Merger date, the Company discontinued the 1993 LTIP. In addition, the Company had awarded restricted stock under the 1993 LTIP to certain employees in consideration of services rendered. During 1996 and 1995, respectively, restricted stock awards of 7,796 and 19,967 shares were made to employees under the LTIP. As part of the 1996 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-1996 Merger shares, purchased under the above mentioned plans, for an equal value of the Company's post-1996 Merger shares, which was on the basis of 4.5 new shares for each of the Company's pre-1996 Merger shares. Management employees who effected the exchange had their LSPP or 1993 LTIP recourse loans extended to the year 2006. All of the outstanding shares of common stock of the Company were acquired in connection with the Newcourt Acquisition (see Note 1). The new recourse loans had a stated interest rate of 7.13%, compounded on an annual basis. The exchanged shares (resulting from the 1996 Merger) were pledged as collateral for the recourse loans. Sale of the underlying shares were restricted and was contingent upon repayment of the loan and certain other requirements. The recourse loans are shown on the balance sheet as a reduction of equity. 82 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 Corporation 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 expense 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 and 1995, 10,074 and 27,965 shares were purchased by employees at prices ranging from $38.88 to 41.63 and $22.05 to $36.00 per share, respectively. As a result of the 1996 Merger agreement, the ESPP was discontinued on June 5, 1996. 1996 Long Term Incentive Plan A new fixed option plan, the 1996 Long Term Incentive Plan (the "1996 LTIP"), was adopted on the date of the 1996 Merger. Under the 1996 LTIP, certain members of management who effected an exchange of pre-1996 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 also were available for grant to the same group. In addition, options to purchase the Company's stock having exercise prices aggregating $64 million were available for grant to general members. These grants were to be made annually over a 5 year period. The Board of Directors could also have considered 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 were made to members of the Company at the Company's discretion. All stock options granted under the 1996 LTIP were at a price no less than fair market value on the date of the grant, would have expired after 11 years and vested over a five year period. The following table summarizes the option activity relating to the 1996 LTIP:
Shares Under Option Number Price Per Share - -------------------------------------------------------------------------------- Options outstanding at December 31, 1995 - $ - Changes in 1996: Options granted 5,147,500 $10.00 Options canceled (42,100) $10.00 Options exercised - - - -------------------------------------------------------------------------------- Options outstanding at December 31, 1996 5,105,400 $10.00 Changes in 1997: Options granted 279,905 $16.00 - $16.48 Options canceled (1,531,590) $10.00 Options exercised - - - -------------------------------------------------------------------------------- Options outstanding at December 31, 1997 3,853,715 $10.00 - $16.48 Options exercisable at December 31, 1997 1,033,850 $10.00 - $16.48 Options exercisable at December 31, 1996 - -
83 Following the Newcourt acquisition, option holders received a cash payment, from Newcourt, for the value of the vested stock option gain (the difference between the exercise price of the options and the value of the underlying Company shares based on the Newcourt Acquisition price). Additionally, the option holders were given the right to receive (on a three year vesting schedule) shares of common stock of Newcourt equal to the value of the stock option gain relating to unvested options. 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 1997, 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 $1.1 million, $1.3 million and $0.6 million for 1997, 1996 and 1995, respectively. 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-1996 Merger options granted in 1996 and 1995 were $6.71 and $7.03 per share, respectively. The weighted average fair value at date of grant for options granted in 1997 was $6.48 per share. For 1997, the fair value was estimated using the Black-Scholes option valuation model using the following assumptions: (a) Expected volatility rate of 0% (assumed for a private company) (b) Risk free interest rate of 6.7%, (c) Expected dividend yield of 0% and (d) Expected life of 8 years. For 1996, as a result of the 1996 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-1996 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-valuation 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. Severance Plans The Company maintains 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 84 other factors. For the years ended December 31, 1997 and 1996, net income was reduced by $13.9 million and $6.6 million for termination payments. 15. RELATED-PARTY TRANSACTIONS Nomura On October 1, 1996 the Company entered into an Advisory Agreement with an affiliated company, Nomura (the indirect beneficial owner of Hercules (Cayman)). Under the agreement Nomura provided 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 public securitization of lease and loan receivables (see Note 6). Furthermore, Nomura earned from the Company a $2.0 million fee in connection with its issuance of Preferred Securities (see Note 8). Nomura also received a quarterly retainer fee of $0.75 million for certain other services provided to the Company. This fee amounted to $3.0 million for 1997 and $.75 million for 1996. In connection with the Newcourt Acquisition the Advisory Agreement terminated by its own terms. In connection with the above-mentioned $3.1 billion securitization, Nomura underwrote, on a principal basis, certain cash collateral account loans in an amount equal to 3.8% of the securitization proceeds as a credit enhancement. During 1997, Nomura sold substantially all of such credit enhancement to an independent third party and as of December 31, 1997 retained 0.3% of the securitization proceeds as a credit enhancement. Upon the termination of certain management members, Nomura purchased the members' outstanding shares plus any interest due on recourse loans owed by the member. During 1997, Nomura purchased 813,776 shares for a total of $8.4 million. Also, in the fourth quarter of 1997, the Company issued and repaid notes of $500 million in aggregate principal amount to Nomura. The Company paid Nomura $1.8 million of related interest. Former Affiliates In 1996, rental expense under existing leases with AT&T and affiliates for the nine months through the 1996 Merger date was $3.8 million. Such expense for the year ended 1995 was $5.5 million. During 1996 and 1995, the Company purchased services from AT&T and affiliates, including data processing, billing and collection, administration and other services. The Company's expenses for such services, for the nine months through the 1996 Merger date were $13.1 million. For the year ended 1995, expenses amounted to $20.0 million. 1996 lease revenues, in which the Company was the lessor to AT&T of equipment, through the 1996 Merger date were $67.2 million. For the year ended 1995, such revenues were $105.8 million. 85 The Company is also a party to the AT&T Operating Agreement and the AT&T License Agreement, pursuant to which AT&T provides the Company with the right to be the preferred provider of leasing and financing services for AT&T's products on a basis consistent with past practice (see Note 1). The Company and AT&T are party to the AT&T Intercompany Agreement whereunder, among other things, the Company manages and administers, for a fee, certain lease portfolios of subsidiaries of AT&T. In 1996, for the nine months through the 1996 Merger date, the Company recognized service fee revenue of $4.8 million for such services. In 1995, fee revenue of $7.6 million was earned for such services. The Company is currently renegotiating the servicing fees with AT&T (see Note 1). In the second quarter of 1996, the Company entered into separate operating agreements 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 (see Note 1). 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 the Lucent Operating Agreement, 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. In early 1997, the Company and Lucent agreed to include international volumes and certain third party volumes in the amount upon which the Company pays SAF, for the remaining term of Lucent's Operating Agreement (retroactive to 1996). The impact of this revision was not material to the Company's financial statements. On March 9, 1998, Newcourt signed the 1998 Lucent Agreement. (See Note 1.) 16. 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, 1997 and 1996, 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, 1997 and 1996. 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. 86 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 centers 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 may 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. The majority of foreign currency swaps are 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 calculations of amounts to be exchanged are based and for currency swaps also represent the US 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 10). 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. Activity in interest rate and currency swaps which are all held for purposes other than trading for 1997 and 1996, is summarized as follows:
Generic Amortizing Generic Pay Pay Pay Currency Notional Amounts Fixed Fixed/Floating Floating Swaps Total - -------------------------------------------------------------------------------- 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 Additions 27,250 264,606 1,334,000 69,089 1,694,945 Maturities/ amortization (366,375) (196,955) (100,000) (112,926) (776,256) Terminations - (112,350) - (36,684) (149,034) - -------------------------------------------------------------------------------- December 31, 1997 $ 438,218 $ 514,736* $1,334,000 $240,128 $2,527,082 - --------------------------------------------------------------------------------
*Included in these year end balances are floating rate swaps with notional amounts of $126,842, $25,545 and $30,004 for 1997, 1996 and 1995, respectively. 87 The schedule of maturities at December 31, 1997 for interest rate and currency swaps which are all held for purposes other than trading is as follows:
Generic Amortizing Generic Pay Pay Pay Currency Fixed Fixed/Floating Floating Swaps Total - -------------------------------------------------------------------------------- Total notional amounts $ 438,218 $ 514,736* $1,334,000 $ 240,128 $2,527,082 Weighted average pay rate 7.42% 5.87% 5.93% 6.25% 6.21% Weighted average receive rate 5.94% 5.94% 6.26% 5.81% 6.10% 1998 Maturities $ 205,818 $ 172,168 $ 710,000 $ 130,761 $1,218,747 Weighted average pay rate 6.99% 5.69% 5.95% 6.32% 6.13% Weighted average receive rate 5.93% 6.36% 6.21% 5.83% 6.15% 1999 Maturities $ 201,680 $ 99,470 $ 624,000 $ 71,722 $ 996,872 Weighted average pay rate 8.00% 5.58% 5.91% 6.46% 6.34% Weighted average receive rate 5.86% 5.98% 6.31% 5.82% 6.15% 2000 Maturities $ 30,720 $ 60,538 - $ 19,486 $ 110,744 Weighted average pay rate 6.53% 5.71% - 5.72% 5.94% Weighted average receive rate 6.54% 5.38% - 5.74% 5.76% 2001 Maturities - $ 45,049 - $ 18,159 $ 63,208 Weighted average pay rate - 5.64% - 5.47% 5.59% Weighted average receive rate - 5.48% - 5.72% 5.55% 2002 Maturities - $112,420 - - $ 112,420 Weighted average pay rate - 6.19% - - 6.19% Weighted average receive rate - 5.77% - - 5.77% 2003-2017 Maturities - $ 25,091 - - $ 25,091 Weighted average pay rate - 7.75% - - 7.75% Weighted average receive rate - 5.83% - - 5.83% - --------------------------------------------------------------------------------
*Included in this amount is $126,842 of floating rate swaps. The schedule of maturities for these swaps is $5,898, $6,242, $6,607, $3,095 and $105,000, in 1998, 1999, 2000, 2001 and 2002, respectively. 88 Foreign Currency Forward Exchange Contracts The Company enters into foreign currency forward exchange contracts to hedge foreign exchange risk (primarily Canadian dollars and British pounds). The US dollar equivalent of such contracts was $1.5 billion and $.9 billion at December 31, 1997 and 1996, 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. Other Commitments and Contingencies Certain regional office facilities and equipment of the Company are leased with renewal options of one to five years. Rental expense for the years ended December 31, 1997, 1996 and 1995 was $26,254, $21,247, and $22,752, respectively. Rental expense associated with sublease rentals on operating leases for 1997, 1996 and 1995, was $17, $51, and $165, respectively. Minimum annual rental commitments at December 31, 1997, under these operating lease agreements are as follows: 1998 $18,692 1999 16,058 2000 12,630 2001 8,379 2002 7,054 2003 and thereafter 30,543 - -------------------------------------------------------------------------------- Total $ 93,356 - --------------------------------------------------------------------------------
The total of minimum rentals to be received in the future under noncancelable subleases related to operating leases as of December 31, 1997, was $27,454. 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, 1997, was $68,325. 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, 1997, the Company had approximately $362,200 of such unused commitments with a remaining term in excess of one year. The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims, and other legal proceedings relating to the conduct of its business. In management's judgment, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial statements. 89 17. FOREIGN OPERATIONS The following data on other geographic areas pertain to operations that are located outside the US (primarily Europe, Canada, the Asia/ Pacific Region, Mexico and 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 resulted primarily from the allocation of restructuring costs in 1997 and the allocation of 1996 Merger related costs in 1996. A summary of the Company's operations by geographic area is presented below:
For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Total Revenues: United States $ 1,518,805 $ 1,683,499 $ 1,370,672 Foreign 295,334 268,691 206,363 - -------------------------------------------------------------------------------- Total $ 1,814,139 $ 1,952,190 $ 1,577,035 - -------------------------------------------------------------------------------- Net Income (Loss): United States $ 44,281 $ 180,433 $ 130,587 Foreign (23,274) (11,894) (3,032) - -------------------------------------------------------------------------------- Total $ 21,007 $ 168,539 $ 127,555 - -------------------------------------------------------------------------------- At December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Total Assets: United States $ 6,621,351 $ 6,150,074 $ 7,868,941 Foreign 2,154,544 1,942,438 1,672,318 - -------------------------------------------------------------------------------- Total $ 8,775,895 $ 8,092,512 $ 9,541,259 - --------------------------------------------------------------------------------
90 REPORT OF MANAGEMENT -------------------- Management is responsible for the preparation, integrity and objectivity of the financial statements and all other financial information included in this report. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The financial statements, which reflect the consolidated accounts of AT&T Capital Corporation and its Subsidiaries, and other financial information shown were prepared in conformity with generally accepted accounting principles. Estimates included in the financial statements were based on judgments of qualified personnel. To maintain its system of internal controls, management carefully selects key personnel and establishes the organizational structure to provide an appropriate division of responsibility. We believe it is essential to conduct business affairs in accordance with the highest ethical standards as set forth in the Company's Guide to Business Conduct. These guidelines and other informational programs are designed and used to ensure that policies, standards, and managerial authorities are understood throughout the organization. AT&T Capital's Business Controls Group, monitors compliance with the system of internal controls by means of an annual plan of internal audits. On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light of the results of constant management oversight, internal and independent audits, changes in the Company's business and other conditions. Management believes that the system of internal controls, taken as a whole, provides reasonable assurance that (1) financial records are adequate and can be relied upon to permit the preparation of financial statements in conformity with generally accepted accounting principles, and (2) access to assets occurs only in accordance with management's authorizations. During 1997, the Audit Committee of the Board of Directors met periodically with management, AT&T Capital's Business Controls Group and the independent auditors to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, the independent auditors met privately with the Audit Committee. Both the Business Controls Group and the independent auditors had access to the Audit Committee and its individual members at any time. As a result of the Newcourt Acquisition, the Board of Directors assumed the duties and responsibilities previously performed by the Audit Committee. 91 The 1997 financial statements have been audited by Arthur Andersen LLP, Independent Public Accountants and the 1996 and 1995 financial statements have been audited by Coopers & Lybrand L.L.P. Their audits were conducted in accordance with generally accepted auditing standards and their reports follow. Steven K. Hudson Chief Executive Officer Daniel A. Jauernig Group President and Chief Financial Officer 92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Shareowner of AT&T Capital Corporation: We have audited the accompanying consolidated balance sheet of AT&T Capital Corporation and Subsidiaries at December 31, 1997, and the related consolidated statements of income, changes in shareowners' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AT&T Capital Corporation and Subsidiaries at December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York March 11, 1998 (except with respect to the matter discussed in Note 7, as to which the date is March 20, 1998) 93 REPORT OF INDEPENDENT AUDITORS ------------------------------ To the Shareowners of AT&T Capital Corporation: We have audited the accompanying balance sheet of AT&T Capital Corporation and Subsidiaries at December 31, 1996 and the related consolidated statements of income, changes in shareowners' equity, and cash flows for each of the two 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. 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 the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles in the United States. COOPERS & LYBRAND L.L.P. 1301 Avenue of the Americas New York, New York March 6, 1997 94 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On March 4, 1998, the Company's Board of Directors dismissed Arthur Andersen LLP as the Company's independent public accountants and appointed Ernst & Young LLP to serve as the Company's independent public accountants for the year 1998. Arthur Andersen LLP will continue to serve as the Company's independent accountants for 1997. There have been no disagreements between the Company and Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s) would have caused Arthur Andersen LLP to make reference to the subject matter of such disagreements in connection with its auditors report. On February 12, 1997, the Audit Committee of the Company's Board of Directors (with the concurrence of the Board of Directors) dismissed Coopers & Lybrand L.L.P. as the Company's independent public accountants and appointed Arthur Andersen LLP to serve as the Company's independent public accountant for the year 1997. There were no disagreements with Coopers & Lybrand L.L.P. on any accounting or financial disclosure during the two fiscal years preceding February 12, 1997. 95 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS DAVID F. BANKS. Mr. Banks has been Chairman of the Board of the Company since January 1998. Prior to that he was Chief Executive Officer of the Company from May 1997 through December 1997. From 1995 to May 1997 he was Chief Executive Officer of Penna Holdings plc, a United Kingdom public company specializing in provision of human resources services. Prior to that he was Finance Director of General Atlantic Group Ltd., a privately held industrial holding company based in San Francisco, California, from 1991 to 1995. In addition, Mr. Banks is Chairman of the Board of Newcourt Credit Group Inc. and a director of Duty Free Shoppers, Argent plc and the K&J Coal Company. Age: 55. Date First Elected: October 1996. STEVEN K. HUDSON. Mr. Hudson has been the Company's Chief Executive Officer and a member of the Board of Directors since January 1998. Mr. Hudson is also Newcourt's Chief Executive Officer and was its founding principal. He established Newcourt in 1984 and since that time, has provided strategic direction to Newcourt. He is a member of the Board of Directors of AGRA Inc., the Royal Ontario Museum Foundation and the St. Joseph's Health Centre Foundation of Toronto. He is a member of the Executive Committee of the Canadian Finance and Leasing Association and Director of the Foundation for Leasing Education. Age: 39. Date First Elected: January 1998. THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD The business of the Company is managed under the direction of the Board of Directors. The Board of Directors has also established one Committee to devote attention to specific subjects and to assist it in the discharge of its responsibilities. The functions of this Committee and its current members are described below. The COMPENSATION COMMITTEE recommends to the Board the compensation arrangements for, and grants of awards and incentive payments to, certain of the Company's senior officers and management; considers matters related to management development and succession; administers certain of the Company's compensation plans; periodically reviews the competitive position of the Company's total compensation relative to the Company's peers and competitors; approves aggregate award of stock options or other equity awards to be granted to the Company's members; approves certain employment agreements involving the Company's members; and approves certain benefit plans of the Company and its subsidiaries. The members of the Compensation Committee are Messrs. Banks (Chairman) and Hudson. EXECUTIVE OFFICERS Executive officers of the Company serve at the discretion of the Board of Directors. No executive officer of the Company (other than Mr. Banks) has a written employment or noncompetition agreement with the Company (see page 102 for additional information regarding "Employment, Change in Control and Termination Arrangements"). The executive officers of the Company consist of the following ten officers: Messrs. David F. Banks, Steven K. Hudson, Paul Currie, Michael A. DeBernardi, Daniel A. Jauernig, David D. McKerroll, Bradley D. Nullmeyer, Borden D. Rosiak, David J. Sharpless and Glenn A. Votek. Information regarding Messrs. Banks and Hudson, Chairman of the Board and Chief Executive Officer of the Company, respectively, is set forth above under "Directors." 96 Paul Currie, 39, has served as Executive Vice President of the Company since January 1998. He has also served as an Executive Vice President of Newcourt since February 1998. From 1989 to 1997 he was a partner with Coopers & Lybrand in the Financial Advisory Services Group. Michael A. DeBernardi, 43, has served as Executive Vice President - Chief Credit Officer of the Company since January 1998. From 1985 to January 1998, Mr. DeBernardi was Vice President-Chief Credit Officer of the Company. He is also a director and Chairman of the Audit Committee of Oritani Savings Bank, SLA. Daniel A. Jauernig, 32, is a Group President and Chief Financial Officer of the Company. In addition, Mr. Jauernig is also President and Chief Financial Officer of Newcourt Services. From 1991 to January 1998 Mr. Jauernig was Treasurer of Newcourt. David D. McKerroll, 38, has served as a Group President of the Company since January 1998. In addition, Mr. McKerroll is also President of Newcourt Capital. Having joined Newcourt in 1987 Mr. McKerroll was one of Newcourt's founding partners. From 1996 to 1998, Mr. McKerroll served as an Executive Vice President of Newcourt and from 1990 to 1996 he served as Senior Vice President, Corporate Division of Newcourt. Bradley D. Nullmeyer, 38, has served as a Group President of the Company since January 1998. In addition, Mr. Nullmeyer is also President of Newcourt Financial. Having joined Newcourt in 1986, Mr. Nullmeyer was one of Newcourt's founding partners. From 1996 to 1998, Mr. Nullmeyer served as an Executive Vice President of Newcourt and from 1990 to 1996 he served as Senior Vice President and Chief Operating Officer of Newcourt. Borden D. Rosiak, 51, has served as an Executive Vice President of the Company since January 1998. From 1994 to 1998 Mr. Rosiak was Executive Vice President and Chief Financial Officer of Newcourt. Prior to joining Newcourt, Mr. Rosiak served as Chief Financial Officer of Confederation Life Insurance Company from 1992 to 1994; in August 1994 Confederation Life Insurance Company was placed into insolvency. David J. Sharpless, 47, has served as Executive Vice President - International of the Company since January 1998. Mr. Sharpless is also Deputy Chairman of Newcourt and oversees the activities of Newcourt's international unit. Mr. Sharpless also serves as Chairman of the Board of Dell Financial Services Inc. From 1982 to 1997, Mr. Sharpless was a senior partner with Blake, Cassels and Graydon. Glenn A. Votek, 39, has been Executive Vice President and Treasurer of the Company since January 1998. From October 1995 to January 1998 Mr. Votek was Vice President and Treasurer of the Company and from 1991 to 1995 he served in a number of capacities within the treasury group of the Company. Item 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during the past three fiscal years to the Company's CEO, the four most highly compensated executive officers serving as such on December 31, 1997 (other than the CEO) 97 and two former executive officers who would have been among the four most highly compensated executive officers had they not ceased serving as executive officers in September and December 1997, respectively.
SUMMARY COMPENSATION TABLE ------------------------------------------- -------------------------------------------- Annual Compensation Long-Term Compensation ------------------------------------------- -------------------------------------------- ------------------------------------------- -------------------------------------------- Awards Payouts ------------------------------------------- -------------------------------------------- - --------------------- ------ ----------- ------------ ---------- ---------- ---------- ------- ----------------- Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Other Position ($) ($) Annual Stock Underlying Payouts Compensation Compensation Award(s) Options(#) ($) ($)(3) ($)(1) ($)(2) - --------------------- ------ ----------- ------------ ---------- ---------- ---------- ------- ----------------- David F. Banks, 1997 369,863 937,500 0 0 150,000 0 0 Chief Executive 1996 N/A N/A N/A N/A N/A N/A N/A Officer 1995 N/A N/A N/A N/A N/A N/A N/A Charles D. Van 1997 325,000 0 6,889 0 0 0 86,159 Sickle, 1996 305,750 346,900 6,889 0 195,000 445,952 4,424,479 Group President 1995 284,344 346,900 7,594 0 10,500 0 46,684 Mani A. Sadeghi, 1997 279,167 115,000 6,889 0 0 0 68,421 Group President 1996 206,917 178,530 3,100 0 145,000 1,483,886 1995 182,546 178,530 3,100 0 4,000 17,968 James S. Tenner 1997 223,950 96,299 3,100 0 0 0 45,539 Strategic Business 1996 195,367 133,609 3,100 0 145,000 269,172 2,330,979 Leader-AT&T Capital 1995 176,648 128,863 3,100 0 1,500 0 35,206 Leasing Services Ramon Oliu, Jr., 1997 218,750 120,000 21,472 0 0 0 48,221 Senior Vice 1996 154,583 118,967 3,100 0 95,000 41,200 1,829,583 President and Chief 1995 140,000 118,967 663 0 1,000 0 29,545 Financial Officer Thomas C. Wajnert, Former Chairman of 1997 625,000 375,000 6,889 0 0 0 8,349,000 the Board 1996 553,625 677,808 6,889 0 598,900 796,936 10,627,954 1995 502,079 677,808 11,718 0 60,000 218,228 103,935 Ruth A. Morey, 1997 174,521 0 7,184 0 0 0 2,933,918 Former Senior Vice 1996 247,250 266,000 7,109 0 135,000 354,038 3,170,704 President - Chief 1995 231,798 266,568 6,437 0 7,500 0 40,617 Information Officer
98 - --------- (1) Includes tax gross-ups for financial counseling and relocation expenses to the named executive officers (other than Mr. Banks) and former executive officers in the following amounts: Mr. Van Sickle, $6,889; Mr. Sadeghi, $6,889; Mr. Tenner, $3,100; Mr. Oliu, $21,472; Mr. Wajnert, $6,889; and Ms. Morey, $7,184. (2) In connection with the 1998 Newcourt Acquisition, the shares held by Messrs. Van Sickle, Sadeghi, Tenner, Oliu and Wajnert were cashed out at $17.43 per share in the following amounts: Mr. Van Sickle, $3,693,748, Mr. Sadeghi, $1,293,550; Mr. Tenner, $2,544,518; Mr. Oliu, $1,680,077; and Mr. Wajnert, $9,769,706. Part of these proceeds were used to pay off the Loan made by the Company to the named executive officers and former executive officer (see "Indebtedness of Management" on page 104). Ms. Morey received $1,751,850 (plus $63,263 in interest reimbursement) for the sale of her shares on September 30, 1997 to Hercules Holdings (Cayman) Limited at the time of her termination of employment. (3) (i) Severance in connection with termination of employment on August 25, 1997 and December 30, 1997, respectively, to the following former executive officers: Ms. Morey, $1,214,636 and Mr. Wajnert, $2,321,226; (ii) qualifying termination payments under the Company's Senior Executive Annual Incentive Plan ("SEAIP")" to Ms. Morey in the amount of $266,568; (iii) termination payments under the Company's Executive Benefit Plan for the following named executive officers: Mr. Wajnert, $5,813,336 and Ms. Morey, $1,403,134; (iv) Company contributions to the Company's Retirement and Savings Plan and related non-qualified plans in the following amounts: Mr. Wajnert, $186,170; Mr. Van Sickle, $86,159; Ms. Morey, $49,580; and Mr. Sadeghi, $68,421; Mr. Tenner $45,539 and Mr. Oliu, $48,221; (v) the dollar value of the benefit of premiums paid for split-dollar life insurance policies (Mr. Wajnert, $28,269). The following table sets forth the number of shares of the Company's Common Stock subject to stock options granted to the individuals listed in the Summary Compensation Table during 1997, together with related information. 99 OPTION GRANTS IN 1997 Individual Grants --------------------------------------------------
Number of Potential Realizable Securities Percent of Value at Assumed Underlying Total Options Exercise Annual Rate of Stock Options Granted to or Base Price Appreciation Granted Employees in Price Expiration for Option Term(3) Name (#)(1) Fiscal Year(2) ($/Sh) Date 5%($) 10%($) - ------ --------- -------------- ------ ---- ----- ------ - -------------------------------------------------------------------------------- David F. Banks 150,000 53.590% $16.48 5/30/08 1,437,347 3,752,982 Charles D. Van Sickle 0 0.000 N/A N/A N/A N/A Mani A. Sadeghi 0 0.000 N/A N/A N/A N/A James S. Tenner 0 0.000 N/A N/A N/A N/A Ramon Oliu, Jr. 0 0.000 N/A N/A N/A N/A Thomas C. Wajnert 0 0.000 N/A N/A N/A N/A Ruth A. Morey....... 0 0.000 N/A N/A N/A N/A
- --------- (1) In connection with the 1998 Newcourt Acquisition, all of the vested options held by the named executive officers and former executive officer were cashed out in the following amounts: Mr. Banks, $142,500; Mr. Van Sickle, $289,770; Mr. Sadeghi, $215,470; Mr. Tenner, $215,470; Mr. Oliu, $141,170; and Mr. Wajnert, $1,486,000. Unvested options (other than Mr. Wajnert's, which were forfeited) were converted into restricted shares of Newcourt common stock and vest over a three year period subject to the following schedule: 25% in year 1, 25% in year 2, and 50% in year 3. As a result of the termination of employment of Ms. Morey, all options held by her were forfeited. (2) The indicated percentages represent the aggregate options to purchase the Company's Common Stock granted to the named executive officers and former executive officers expressed as a percentage of the aggregate options to purchase the Company's Common Stock granted to all members of the Company and its subsidiaries in 1997. (3) The 5 and 10 percent growth rates are set forth in accordance with the rules of the Securities and Exchange Commission. Because the exercise price for such options equals the market price of the Common Stock on the date of grant, no gain to the executives is possible without an increase in the stock price, which increase would benefit the stockholders as a whole. Zero growth in the stock price will result in zero realizable value to the executive. The 5 and 10 percent growth rates are intended for illustration only and are not intended to be predictive of future growth, if any; the actual value, if any, that may be realized by any executive will depend on 100 the value of the Common Stock on the date of exercise. At present, there is no public market for the Common Stock. The following table sets forth the number of shares of the Company's Common Stock subject to stock options exercised by the individuals listed in the Summary Compensation Table during 1997, together with related information, and the value of unexercised options. AGGREGATED COMPANY OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
Number of Securities Underlying Unexercised Unexercised in-the-Money Options at Options at Fiscal Year-End(#) Fiscal Year-End($)(2) Shares ----------------------------------------- Acquired on Exercisable/ Exercisable/ Name Exercise Value Unexercisable Unexercisable (#)(1) Realized($) - -------------------------------------------------------------------------------- David F. Banks 0 0 150,000 142,500 0 0 Charles D. Van Sickle0 0 39,000 289,770 156,000 1,159,080 Mani A. Sadeghi......0 0 29,000 215,470 116,000 861,880 James S. Tenner 0 0 29,000 215,470 116,000 861,880 Ramon Oliu, Jr. 0 0 19,000 141,170 76,000 564,680 Thomas C. Wajnert....0 0 200,000 1,486,000 0 0 Ruth A. Morey 0 0 0 0
0 0 (1) See Footnote 2, clause (i) of the Summary Compensation Table on page. (2) In accordance with the terms of the applicable stock option agreements pursuant to which the options in the table were granted, a professional appraisal firm determined that the fair market value of the Common Stock as of June 30, 1997 was $12.80 per share (on a fully diluted basis). Such appraisal assumed, as required by the stock option agreements, that the value would not be affected by any discount attributable to the illiquidity of the Common Stock or the fact that any shares of Common Stock may constitute a majority interest in the Company or any premium attributable to any special rights of any stockholder with respect to its shares of Common Stock. The valuation analysis conducted by the valuation firm was based upon a number of other assumptions with respect to industry performance, general business, financial, market and economic conditions and other matters, many of which are beyond the control of the Company. It did not purport to be an appraisal or to reflect the prices at which the Company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. Subsequent to the date of such appraisal, the Company entered into a stock purchase agreement in connection with the Newcourt Acquisition (the "Stock Purchase Agreement"). Options were valued at $17.43 per share, the value at which the Common Stock was purchased by Newcourt on January 12, 1998 pursuant to the Stock Purchase Agreement. DEFINED BENEFIT PLAN RETIREMENT BENEFITS The Company has two nonqualified pension plans, effective January 1, 1994, in which Mr. Tenner is the only named executive officer who participates: the AT&T Capital Corporation Executive Benefit Plan ("EBP") and the AT&T Capital Corporation Supplemental Executive Retirement Plan ("SERP"). 101 Under the EBP, a participant's benefit equals 40% of "Final Pay" (as defined in the EBP), less benefits provided under all other qualified and non-qualified sources from both AT&T and the Company (including the SERP described below, subject to reduction if benefits commence before age 60). Under the SERP, certain executives will be provided with supplemental retirement benefits to ease the transition from coverage under the AT&TMPP (as such term is defined below) to coverage under the Company's new defined contribution plan. The EBP and the SERP are considered "unfunded" plans under the Employee Retirement Income Security Act of 1974, as amended; however, the Company has made a contribution to a rabbi trust to satisfy its obligations under the EBP. Through December 31, 1993, Messrs. Wajnert and Van Sickle, and Ms. Morey, participated in the AT&T Management Pension Plan ("AT&TMPP"), a non-contributory pension plan which covers all management employees, including executive officers, of AT&T and certain of its affiliates. Mr. Wajnert is also covered by a supplemental AT&T Mid-Career Pension Plan. The plan provides additional pension credits equal to the difference between age 35 and their maximum possible years of service attainable at age 65, but not to exceed actual net credited service, at approximately one-half the rate of the AT&TMPP. Messrs. Wajnert and Van Sickle and Ms. Morey ceased to participate in the above-mentioned pension plans effective January 1, 1994. Their accrued annual pension amounts under these plans are $105,660, $45,799, AND $21,003, respectively. Pensions will be payable to each of them when each reaches age 65. EMPLOYMENT, CHANGE IN CONTROL AND TERMINATION ARRANGEMENTS Mr. Banks' employment with the Company commenced on May 30, 1997 and terminates on the earlier of (i) May 30, 1998 or (ii) the termination of Mr. Banks' employment pursuant to the terms of the Employment Agreement dated as of May 30, 1997 between the Company and Mr. Banks (the "Employment Agreement"). The Employment Agreement provides for a base salary of $625,000 per year (subject to increases as may be approved by the Board from time to time), and an annual incentive bonus for 1997 in an amount between $312,500 and $937,500 and for 1998 a target annual incentive of 60% of base salary. The agreement also provides for the grant in 1997 of options to purchase 150,000 shares of Company stock. Of these options, all of which were immediately vested upon grant (See "Option Grants in 1997" table on page 100). Upon his termination of employment, Mr. Banks would be entitled to the product of (i) the quotient of (a) the excess of (1) 180 over (2) the number of days of notice provided prior to termination, divided by (b) 365, multiplied by (ii) the base salary. On January 12, 1998, Mr. Banks and the Company mutually agreed to terminate his Employment Agreement with the Company in order to replace such agreement with a New Employment Agreement between Mr. Banks and Newcourt. Pursuant to an employment agreement dated September 30, 1996 between Mr. Wajnert and Antigua Acquisition Corporation, as amended, Mr. Wajnert will continue to provide advisory services to the Company (i.e., general consulting advice regarding equipment leasing and finance, strategy, markets and related issues) commencing December 31, 1997 for which he will be paid fees according to the following schedule: 24 equal monthly payments aggregating $3,049,959 commencing on January 30, 1998; a payment of $1,478,570 on January 2, 1999; and a payment of $1,478,570 on January 2, 2000. 102 The SEAIP, LTIP and the EBP contain certain provisions which become operative upon a "Sale of Control" (as defined in such plans). The Company has also adopted a 1996 Leadership Severance Plan ("1996 LSP") in which the named executives participate, pursuant to which benefits may become payable on certain terminations of employment prior to and following a change in control (as defined in the 1996 LSP). In the event of a "Qualifying Termination" under the SEAIP, each participant in the SEAIP becomes vested with the right to receive a cash award for that year equal to the higher of (i) 110% of that participants' target incentive, if any, and (ii) such participants' cash award for the immediately preceding year. The EBP provides for 100% accelerated vesting for the named executives and former executive upon the occurrence of (i) a change in control of the Company or (ii) the participant's termination of employment (other than a "Nonqualifying Termination" as defined in the EBP). Under the 1996 LSP, in the event of (x) a termination of employment as a result of a reduction in force, change in operations, facility relocation or closing or other job elimination or (y) a "Qualifying Termination" of employment prior to the second anniversary of the Closing Date or "Other Eligible Termination" in connection with a Change in Control (a "RIF Termination"), each of the named executive officers (other than Mr. Banks) would receive severance benefits equal to (i) the greater of (A) 2 weeks compensation for each full year of continuous service and (B) 200% of Final Annual Pay and (ii) 135% of the premium which would be required to maintain "COBRA" continuing medical and dental coverage for 24 months (the "continuation period"). If the named executive's employment is terminated by the Company (other than as a result of a RIF Termination, cause, disability or retirement prior to the second anniversary of the Closing Date or "Other Eligible Termination"), the executive would receive severance benefits equal to (i) the greater of (A) one weeks compensation for each full year of continuous service and (B) 150% of Final Annual Pay and (ii) 135% of an 18-month continuation period "COBRA" premium. 103 Additional benefits upon severance include continued basic life insurance and supplemental life insurance (at the executive's cost) for the relevant continuation period. By executing a release of claims, the executive may receive an enhanced severance payment equal to 20% of a severance payment. If any payments from the Company under the 1996 LSP or otherwise, would be subject to an excise tax under Section 4999 of the Internal Revenue Code, then the named executive would be entitled to receive an additional payment so that he would retain an amount of such payments as if the excise tax had not applied. INDEBTEDNESS OF MANAGEMENT Each of the individuals named in the Summary Compensation Table (except Mr. Banks) is indebted to the Company pursuant to notes originally executed under the LSPP or the 1993 Long Term Incentive Plan ("1993 LTIP"). Under the LSPP or 1993 LTIP, each of the named executive officers, except Messrs. Banks and Sadeghi, was required to purchase shares of Common Stock with an aggregate purchase price approximately equal to a specified multiple of such executive's base salary. Between 88.5% and 97.7% of the purchase price for the shares of Common Stock purchased by a participant (the "Purchased Shares") was paid for out of the proceeds of a seven-year full recourse loan (a "Loan") made by the Company to such participant, with the balance of such purchase price being paid by such participant in cash. Interest accrued on each Loan at the rate of 6% per annum compounded annually (or, if higher, the safe harbor rate under applicable tax laws as of the date of purchase of the Purchased Shares). The Purchased Shares of a participant were pledged to the Company to secure repayment of the Loan to such participant. In connection with the 1998 Newcourt Acquisition, the shares held by Messrs. Van Sickle, Sadeghi, Tenner, Oliu and Wajnert were cashed out at $17.43 per share in the following amounts: Mr. Van Sickle, $3,693,748, Mr. Sadeghi, $1,293,550; Mr. Tenner, $2,544,518; Mr. Oliu, $1,680,077; and Mr. Wajnert, $9,769,706. Part of these proceeds were used to pay off the Loan (as defined above) made by the Company to the named executive officers. Ms. Morey received $1,751,850 (plus $63,263.09 in interest reimbursement) for the sale of her shares to Hercules Holdings (Cayman) Limited at the time of her termination of employment. The following table sets forth for each for each named executive officer and former officers named in the Summary Compensation Table the largest aggregate amount of his or her indebtedness to the Company (all of which is related to the Loans referred to above) outstanding at any time during 1997 (the "Highest 1997 Loan Balance") and the amount of the indebtedness outstanding as of December 31, 1997 (the "Current Balance"): 104
Current Balance Highest 1997 Name at December 31, 1997 Loan Balance David F. Banks Chief Executive Officer..........................N/A N/A Charles D. Van Sickle ........................$1,172,485 $1,172,485 Group President Mani A. Sadeghi.................................$451,686 $451,686 Group President James S. Tenner.................................$781,645 $781,645 Strategic Business Leader- AT&T Capital Leasing Services Ramon Oliu, Jr..................................$557,602 $557,602 Senior Vice President and Chief Financial Officer Thomas C. Wajnert ........................... $3,101,148 $3,101,148 Former Chairman of the Board Ruth A. Morey ........................................$0 $953,155 Former Senior Vice President - Chief Information Officer
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following tables set forth information with respect to beneficial ownership of the Company's Common Stock as of January 12, 1998 by each director, by each nominee for director, by each of the five executive and two former executive officers of the Company named in the Summary Compensation Table under Item 11 above, by all directors and executive officers of the Company as a group, and by each person who is known to be the beneficial owner of more than 5% of the Common Stock: (a) Security Ownership of Beneficial Owners of More than 5% of the Company's Voting Securities
Amount of and Nature of Name and Address of Beneficial Percent Title of Class Beneficial Owner Ownership of Class - ------------------------------------------------------------------------------- Common Stock Newcourt Holdings USA, Inc. 90,337,379 100%
105 (b) Security Ownership of Directors, Nominees for Director and Management I. Equity Securities of AT&T Capital Corporation
Amount of Percent and Nature of Class of Beneficial Title of Class Name of Beneficial Owner Ownership - ------------------------------------------------------------------------------------ Common Stock David F. Banks......................0(1) (1) Common Stock Steven K. Hudson....................0(1) (1) Common Stock Charles D. Van Sickle...............0(1) (1) Common Stock Mani A. Sadeghi.....................0(1) (1) Common Stock James S. Tenner.....................0(1) (1) Common Stock Ramon Oliu, Jr. ....................0(1) (1) Common Stock Thomas C. Wajnert...................0(1) (1) Common Stock Ruth A. Morey.......................0(1) (1)
All directors and executive officers as a group, including the above.(1) - --------- (1) In connection with the 1998 Newcourt Acquisition, all of the shares outstanding and held by the named executive officers (except for Ms. Morey who sold her shares on September 30, 1997) were sold to Hercules Holdings (Cayman) Limited. on January 12, 1998, Hercules Holdings (Cayman) Limited sold all of the shares outstanding to Newcourt Credit Group Inc. which in turn transferred such shares to Newcourt Holdings USA, Inc. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information is set forth under the caption "Executive Compensation". 106 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of the report: (1) Financial Statements: Page Consolidated Balance Sheets 48 Consolidated Statements of Income 49 Statements of Changes in Shareowners' Equity 50 Consolidated Statements of Cash Flows 51 Notes to the Consolidated Financial Statements 54 Report of Management 91 Report of Independent Public Accountants - Arthur Andersen LLP 93 Report of Independent Auditors - Coopers & Lybrand L.L.P. 94 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts Financial statement schedules other than the one listed above are omitted because the required information is included in the financial statements or notes thereto or because of the absence of conditions under which they are required. Report of Independent Public Accountants - Arthur Andersen LLP Report of Independent Auditors - Coopers & Lybrand LLP (3) Exhibits: Exhibit Number 2. Certificate of Merger, filed October 1, 1996 3(a). Restated Certificate of Incorporation of the registrant is incorporated by reference to Exhibit 3(i) of the registrant's Current Report on Form 8-K [No. 1-11237] dated October 1, 1996, filed with the Securities and Exchange Commission. 3(b). Amended and Restated By-laws of the registrant is incorporated by reference to Exhibit 3(ii) of the registrant's Current Report on Form 8-K [No. 1-11237] dated October 1, 1996, filed with the Securities and Exchange Commission. 107 4(a). Indenture dated as of July 1, 1993 between the registrant and Chemical Bank, Trustee (the "Indenture") is incorporated by reference to Exhibit 4A of the registrant's Registration Statement on Form S-3 [No. 33-49671] filed with the Securities and Exchange Commission. 4(b). First Indenture Supplement dated as of June 24, 1994, to the Indenture is incorporated by reference to Exhibit 4A-2 of the registrant's Registration Statement on Form S-3 [No.33-54359] filed with the Securities and Exchange Commission. 4(c). Instruments other than described above in 4(a) and 4(b) that define the rights of holders of long-term debt of the registrant and all of its consolidated subsidiaries, are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 4(d). Second Indenture Supplement dated as of January 10, 1997, to the Indenture incorporated by reference to Exhibit 4A-3 of the registrant's Registration Statement on Form S-3 [No. 33- 18367] filed with the Securities and Exchange Commission. 10(a). Operating Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.1 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(b). First Amendment to Operating Agreement between the registrant and AT&T dated January 5, 1995 is incorporated by reference to Exhibit 10(b) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(c). Intercompany Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.2 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(d). License Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.3 of the registrant's Registration Statement on Form S-1 [No. 33- 49605] filed with the Securities and Exchange Commission. 10(e). Registration Rights Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.4 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(f). Tax Agreements between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.5 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 108 10(g). AT&T Capital Corporation 1993 Long Term Incentive Plan is incorporated by reference to Exhibit 10.9 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(h). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan is incorporated by reference to Exhibit 10.14 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(i). Form of Stock Purchase Agreement and related exhibits under the 1993 Leveraged Stock Purchase Plan is incorporated by reference to Exhibit 10.15 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(j). AT&T Capital Corporation 1993 Share Performance Incentive Plan is incorporated by reference to Exhibit 10.17 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(k). Amendment Number 1 to the 1993 Share Performance Incentive Plan dated November 14, 1995 is incorporated by reference to Exhibit 10(o) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(l). Restructuring Agreement dated as of March 29, 1993, among the Registrant, Old Capital, Old Credit and AT&T is incorporated by reference to Exhibit 10.18 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(m). AT&T Capital Corporation 1993 Employee Compensation Adjustment Plan is incorporated by reference to Exhibit 10.21 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(n). AT&T Capital Corporation 1993 Financial Counseling Plan is incorporated by reference to Exhibit 10.22 of the registrant's Registration Statement on Form S-1 [No.33-49605] filed with the Securities and Exchange Commission. 10(o). AT&T Capital Corporation 1995 Annual Incentive Plan is incorporated by reference to Exhibit 10(w) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1994, filed with the Securities and Exchange Commission. 10(p). AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan is incorporated by reference to Exhibit A of the registrant's definitive Proxy Statement dated March 20, 1995 issued in connection with the 1995 Annual Meeting of Stockholders. 109 10(q). AT&T Capital Corporation Executive Benefit Plan as amended and restated effective as of December 4, 1995 is incorporated by reference to Exhibit 10(y) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(r). AT&T Capital Corporation Supplemental Executive Retirement Plan effective January 1, 1994 is incorporated by reference to Exhibit 10(z) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(s). T&T Capital Corporation Compensation Limit Excess Plan effective January 1, 195 is incorporated by reference to Exhibit 10(aa) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(t). Amendment to the AT&T Capital Corporation Compensation Limit Excess Plan dated October 1, 1995 is incorporated by reference to Exhibit 10(ab) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(u). AT&T Capital Corporation Leadership Severance Plan effective October 2, 1995 is incorporated by reference to Exhibit 10(ac)of the registrant's Annual Report on Form 10-K [No. 1- 11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(v). The Agreement between the registrant and AT&T dated January 5, 1996 is incorporated by reference to Exhibit 10(ad) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(w). Lucent Technologies Operating Agreement dated as of April 2, 1996 between the Company and Lucent Technologies Inc. is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(x). NCR Operating Agreement dated as of May 6, 1996 between the Company and NCR Corporation is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 110 10(y). Letter Agreement dated April 2, 1996 between Lucent Technologies Inc. and the Company regarding the applicability of the Intercompany Agreement to Lucent Technologies Inc. is incorporated by reference to Exhibit 10(c) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(z). Letter Agreement dated April 2, 1996 between Lucent Technologies Inc. and the Company regarding the License to Use Lucent Name and Mark is incorporated by reference to Exhibit 10(d) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(aa). Letter Agreement dated April 18, 1996 between NCR Corporation and the Company regarding the applicability of the Intercompany Agreement to NCR Corporation is incorporated by reference to Exhibit 10(e) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(ab). Letter Agreement dated April 18, 1996 between NCR Corporation and the Company regarding the License to Use NCR Name and Mark is incorporated by reference to Exhibit 10(f) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(ac). AT&T Capital Corporation 1993 Long Term Incentive Plan, as amended is incorporated by reference to the Company's Proxy Statement dated March 19, 1996. 10(ad). Amendment to the AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(ae). Amendment to the AT&T Capital Corporation Supplemental Executive Retirement Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No.1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(af). Amendment to Share Performance Award under the AT&T Capital Corporation 1993 Long-Term Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(c) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 111 10(ag). Amendment Number 2 to the AT&T Capital Corporation 1993 Share Performance Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(d) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities Exchange Commission. 10(ah). 1996 AT&T Capital Corporation Leadership Severance Plan effective October 1, 1996 is incorporated by reference to Exhibit 10(e) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(ai). Employment Agreement between Antigua Acquisition Corporation and Thomas C. Wajnert dated September 30, 1996 is incorporated by reference to Exhibit 10(f) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(aj). AT&T Capital Corporation Stock Option Agreement dated October 1, 1996 is incorporated by reference to Exhibit 10(g) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(ak). AT&T Capital Corporation 1996 Long Term Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(h) of the registrant's Quarterly Report on Form 10-Q [No. 1- 11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(al). Credit Agreement dated as of September 16, 1996, among AT&T Capital Corporation, the Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent (5-year term) is incorporated by reference to Exhibit 10(i)of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(am). Credit Agreement dated as of September 16, 1996, among AT&T Capital Corporation, the Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent (364-day term) is incorporated by reference to Exhibit 10(j) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(an). Form of first Amendment to Agreement and Plan of Merger among AT&T Capital Corporation, AT&T Corp., Hercules Limited and Antigua Acquisition Corporation dated August 20, 1996 is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], filed with the Securities and Exchange Commission. 112 10(ao). Amendment No. 2 to the 1996 AT&T Capital Corporation Leadership Severance Plan effective January 17, 1997 is incorporated by reference to Exhibit 10(ao) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1996, filed with the Securities and Exchange Commission. 10(ap). Letter Agreement dated as of May 30, 1997 between and among registrant, Thomas C. Wajnert, and Nomura International plc covering the resignation of Thomas C. Wajnert from the position of Chief Executive Officer is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended June 30, 1997, filed with the Securities and Exchange Commission. 10(aq). Letter Agreement dated as of December 29, 1997 between and among the registrant and Thomas C. Wajnert covering the mutual agreement of the termination of his employment as Chairman of the Company is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], dated January 5, 1998, filed with the Securities and Exchange Commission. 10(ar). Employment Agreement dated as of May 30, 1997 between the registrant and David F. Banks is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended June 30, 1997, filed with the Securities and Exchange Commission. 10(as). Stock Purchase Agreement dated as of November 17, 1997, among the Company, Newcourt, Hercules Holdings (Cayman) Limited and other selling stockholders of the Company is incorporated by reference to Exhibit 99. A) of the registrant's Current Report on Form 8-K [No. 1-11237], dated November 19, 1997 (as amended on the Company's Current Report on Form 8-K/A dated February 11, 1998), filed with the Securities and Exchange Commission. 10(at). Support Agreement dated February 9, 1998 between Newcourt Credit Group Inc. and AT&T Capital Corporation is incorporated by reference to Exhibit 10(a) of the registrant's Current Report on Form 8-K [No. 1-11237], dated February 9, 1998 (as amended on the Company's Current Report on Form 8-K/A dated February 18, 1998), filed with the Securities and Exchange Commission. 10(au). Guarantee dated February 20, 1998 made by AT&T Capital Corporation is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], dated February 20, 1998, filed with the Securities and Exchange Commission. 10(av). Financial Services Agreement dated as of March 9, 1998 between Lucent Technologies Inc., a Delaware Corporation and Newcourt Credit Group Inc., an Ontario Corporation. CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE 113 COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. 12. Computation of Ratio of Earnings to Fixed Charges 16(a). Letter on change in certifying accountants - to the Securities and Exchange Commission from Coopers & Lybrand L.L.P., dated February 12, 1997 is incorporated by reference to Exhibit 16 of the registrant's Current Report on Form 8-K [No. 1-11237], dated February 12, 1997, filed with the Securities and Exchange Commission. 16(b). Letter on change in certifying accountants - to the Securities and Exchange Commission from Arthur Andersen LLP, dated March 4, 1998 is incorporated by reference to Exhibit 16 of the registrant's Current Report on Form 8-K [No. 1- 11237], dated March 4, 1998, filed with the Securities and Exchange Commission. 21. Subsidiaries of the registrant. 24(a). Powers of Attorney executed by officers and directors who signed this report. 24(b). Certificate of Corporate Resolution. 27. Financial Data Schedule 99. AT&T Capital Corporation Excess Benefit Plan for the fiscal year December 31, 1997 (b) Current Reports on Form 8-K: Report on Form 8-K dated November 19, 1997 was filed pursuant to Item 1 (Changes in Control of the Registrant) and Item 5 (Other Events). 114 SCHEDULE II AT&T CAPITAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars In Thousands)
Column A Column B Column C Column D Column E Column F - -------------------------------------------------------------------------------- Other Balance at Charge-offs, Additions/ Balance Beginning Net of (Deductions) at End of Period Additions Recoveries (a) of Period - -------------------------------------------------------------------------------- 1997 Allowance for Credit Losses: US: Lease Financing(1)$ 82,123 $ 62,228 $ 27,221 $ (50,993) $ 66,137 Finance Receivables(2) 50,850 32,433 4,806 (6,908) 71,569 Foreign 36,013 19,639 10,688 (4,118) 40,846 - -------------------------------------------------------------------------------- Total $ 168,986 $114,300 $ 42,715 $ (62,019) $ 178,552 ================================================================================ 1996 Allowance for Credit Losses: US: Lease Financing(1)$144,666 $ 69,931 $ 68,378 $ (64,096) $ 82,123 Finance Receivables(2) 52,607 27,916 13,087 (16,586) 50,850 Foreign 25,947 15,758 4,847 (845) 36,013 - -------------------------------------------------------------------------- Total $223,220 $113,605 $ 86,312 $ (81,527) $ 168,986 ========================================================================== 1995 Allowance for Credit Losses: US: Lease Financing(1)$113,735 $ 66,505 $ 34,890 $ (684) $144,666 Finance Receivables(2) 46,637 15,167 9,043 (154) 52,607 Foreign 16,056 4,542 2,837 8,186 25,947 - -------------------------------------------------------------------------------- Total $176,428 $ 86,214 $ 46,770 $ 7,348 $223,220 ================================================================================
(1) Shown on the balance sheet as a deduction from applicable finance assets, primarily capital leases. (2) Shown on the balance sheet as a deduction from finance receivables. (a) Primarily includes transfers out of credit losses related to receivables securitized, transfers in of reserves related to businesses acquired and reclassifications. 115 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the 1997 consolidated financial statements of AT&T Capital Corporation and Subsidiaries (the "Company") included on page 48 in this Form 10-K, and have issued our report thereon dated March 11, 1998 (except with respect to the matter discussed in Note 7, as to which the date is March 20, 1998). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The 1997 information included in the related schedules listed as an exhibit on page 107 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission rules and are not part of the basic financial statements. These schedules have been subject to the auditing procedures applied if the audit of the 1997 basic financial statements and, in our opinion, fairly state in all material respects the 1997 financial data required to be set forth therein in relation to the 1997 basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 11, 1998 116 REPORT OF INDEPENDENT AUDITORS ------------------------------ Our report on the balance sheet of AT&T Capital Corporation and Subsidiaries on December 31, 1996 and the related consolidated statements of income, changes in shareowners' equity, and cash flows for each of the two years in the period ended December 31, 1996 is included on page 94 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the 1996 and 1995 information included within the related financial statement schedule listed as an exhibit on page 107 of this Form 10-K. In our opinion, the 1996 and 1995 financial statement information referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. 1301 Avenue of the Americas New York, New York March 6, 1997 117 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By Steven K. Hudson ------------------------- Steven K. Hudson March 25, 1998 (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: David F. Banks Chairman Steven K. Hudson Chief Executive Officer Principal Financial Officer: Daniel A. Jauernig Group President and Chief Financial Officer By Steven K. Hudson ----------------------- Principal Accounting Officer: (Steven K. Hudson, Attorney-in-fact* and on his own behalf as Thomas G. Adams Vice President and Director and a Principal Controller Executive Officer). Directors: D.F. Banks March 30, 1998 S.K. Hudson * by power of attorney 118 EXHIBIT INDEX Exhibit Number 2. Certificate of Merger, filed October 1, 1996 3(a). Restated Certificate of Incorporation of the registrant is incorporated by reference to Exhibit 3(i) of the registrant's Current Report on Form 8-K [No. 1-11237] dated October 1, 1996, filed with the Securities and Exchange Commission. 3(b). Amended and Restated By-laws of the registrant is incorporated by reference to Exhibit 3(ii) of the registrant's Current Report on Form 8-K [No. 1-11237] dated October 1, 1996, filed with the Securities and Exchange Commission. 4(a). Indenture dated as of July 1, 1993 between the registrant and Chemical Bank, Trustee (the "Indenture") is incorporated by reference to Exhibit 4A of the registrant's Registration Statement on Form S-3 [No. 33-49671] filed with the Securities and Exchange Commission. 4(b). First Indenture Supplement dated as of June 24, 1994, to the Indenture is incorporated by reference to Exhibit 4A-2 of the registrant's Registration Statement on Form S-3 [No.33-54359] filed with the Securities and Exchange Commission. 4(c). Instruments other than described above in 4(a) and 4(b) that define the rights of holders of long-term debt of the registrant and all of its consolidated subsidiaries, are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 4(d). Second Indenture Supplement dated as of January 10, 1997, to the Indenture incorporated by reference to Exhibit 4A-3 of the registrant's Registration Statement on Form S-3 [No. 33- 18367] filed with the Securities and Exchange Commission. 10(a). Operating Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.1 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(b). First Amendment to Operating Agreement between the registrant and AT&T dated January 5, 1995 is incorporated by reference to Exhibit 10(b) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(c). Intercompany Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.2 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 119 10(d). License Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.3 of the registrant's Registration Statement on Form S-1 [No. 33- 49605] filed with the Securities and Exchange Commission. 10(e). Registration Rights Agreement between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.4 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(f). Tax Agreements between the registrant and AT&T dated as of June 25, 1993 is incorporated by reference to Exhibit 10.5 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(g). AT&T Capital Corporation 1993 Long Term Incentive Plan is incorporated by reference to Exhibit 10.9 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(h). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan is incorporated by reference to Exhibit 10.14 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(i). Form of Stock Purchase Agreement and related exhibits under the 1993 Leveraged Stock Purchase Plan is incorporated by reference to Exhibit 10.15 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(j). AT&T Capital Corporation 1993 Share Performance Incentive Plan is incorporated by reference to Exhibit 10.17 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(k). Amendment Number 1 to the 1993 Share Performance Incentive Plan dated November 14, 1995 is incorporated by reference to Exhibit 10(o) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(l). Restructuring Agreement dated as of March 29, 1993, among the Registrant, Old Capital, Old Credit and AT&T is incorporated by reference to Exhibit 10.18 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 10(m). AT&T Capital Corporation 1993 Employee Compensation Adjustment Plan is incorporated by reference to Exhibit 10.21 of the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission. 120 10(n). AT&T Capital Corporation 1993 Financial Counseling Plan is incorporated by reference to Exhibit 10.22 of the registrant's Registration Statement on Form S-1 [No.33-49605] filed with the Securities and Exchange Commission. 10(o). AT&T Capital Corporation 1995 Annual Incentive Plan is incorporated by reference to Exhibit 10(w) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1994, filed with the Securities and Exchange Commission. 10(p). AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan is incorporated by reference to Exhibit A of the registrant's definitive Proxy Statement dated March 20, 1995 issued in connection with the 1995 Annual Meeting of Stockholders. 10(q). AT&T Capital Corporation Executive Benefit Plan as amended and restated effective as of December 4, 1995 is incorporated by reference to Exhibit 10(y) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(r). AT&T Capital Corporation Supplemental Executive Retirement Plan effective January 1, 1994 is incorporated by reference to Exhibit 10(z) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(s). AT&T Capital Corporation Compensation Limit Excess Plan effective January 1, 1995 is incorporated by reference to Exhibit 10(aa) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(t). Amendment to the AT&T Capital Corporation Compensation Limit Excess Plan dated October 1, 1995 is incorporated by reference to Exhibit 10(ab) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(u). AT&T Capital Corporation Leadership Severance Plan effective October 2, 1995 is incorporated by reference to Exhibit 10(ac)of the registrant's Annual Report on Form 10-K [No. 1- 11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 10(v). The Agreement between the registrant and AT&T dated January 5, 1996 is incorporated by reference to Exhibit 10(ad) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1995, filed with the Securities and Exchange Commission. 121 10(w). Lucent Technologies Operating Agreement dated as of April 2, 1996 between the Company and Lucent Technologies Inc. is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(x). NCR Operating Agreement dated as of May 6, 1996 between the Company and NCR Corporation is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(y). Letter Agreement dated April 2, 1996 between Lucent Technologies Inc. and the Company regarding the applicability of the Intercompany Agreement to Lucent Technologies Inc. is incorporated by reference to Exhibit 10(c) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(z). Letter Agreement dated April 2, 1996 between Lucent Technologies Inc. and the Company regarding the License to Use Lucent Name and Mark is incorporated by reference to Exhibit 10(d) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(aa). Letter Agreement dated April 18, 1996 between NCR Corporation and the Company regarding the applicability of the Intercompany Agreement to NCR Corporation is incorporated by reference to Exhibit 10(e) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(ab). Letter Agreement dated April 18, 1996 between NCR Corporation and the Company regarding the License to Use NCR Name and Mark is incorporated by reference to Exhibit 10(f) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 10(ac). AT&T Capital Corporation 1993 Long Term Incentive Plan, as amended is incorporated by reference to the Company's Proxy Statement dated March 19, 1996. 10(ad). Amendment to the AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended March 31, 1996, filed with the Securities and Exchange Commission. 122 10(ae). Amendment to the AT&T Capital Corporation Supplemental Executive Retirement Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(af). Amendment to Share Performance Award under the AT&T Capital Corporation 1993 Long-Term Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(c) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(ag). Amendment Number 2 to the AT&T Capital Corporation 1993 Share Performance Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(d) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities Exchange Commission. 10(ah). 1996 AT&T Capital Corporation Leadership Severance Plan effective October 1, 1996 is incorporated by reference to Exhibit 10(e) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(ai). Employment Agreement between Antigua Acquisition Corporation and Thomas C. Wajnert dated September 30, 1996 is incorporated by reference to Exhibit 10(f) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(aj). AT&T Capital Corporation Stock Option Agreement dated October 1, 1996 is incorporated by reference to Exhibit 10(g) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(ak). AT&T Capital Corporation 1996 Long Term Incentive Plan dated October 1, 1996 is incorporated by reference to Exhibit 10(h) of the registrant's Quarterly Report on Form 10-Q [No. 1- 11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(al). Credit Agreement dated as of September 16, 1996, among AT&T Capital Corporation, the Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent (5-year term) is incorporated by reference to Exhibit 10(i)of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 123 10(am). Credit Agreement dated as of September 16, 1996, among AT&T Capital Corporation, the Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent (364-day term) is incorporated by reference to Exhibit 10(j) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended September 30, 1996, filed with the Securities and Exchange Commission. 10(an). Form of first Amendment to Agreement and Plan of Merger among AT&T Capital Corporation, AT&T Corp., Hercules Limited and Antigua Acquisition Corporation dated August 20, 1996 is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], filed with the Securities and Exchange Commission. 10(ao). Amendment No. 2 to the 1996 AT&T Capital Corporation Leadership Severance Plan effective January 17, 1997 is incorporated by reference to Exhibit 10(ao) of the registrant's Annual Report on Form 10-K [No. 1-11237] for the year ended December 31, 1996, filed with the Securities and Exchange Commission. 10(ap). Letter Agreement dated as of May 30, 1997 between and among registrant, Thomas C. Wajnert, and Nomura International plc covering the resignation of Thomas C. Wajnert from the position of Chief Executive Officer is incorporated by reference to Exhibit 10(a) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended June 30, 1997, filed with the Securities and Exchange Commission. 10(aq). Letter Agreement dated as of December 29, 1997 between and among the registrant and Thomas C. Wajnert covering the mutual agreement of the termination of his employment as Chairman of the Company is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], dated January 5, 1998, filed with the Securities and Exchange Commission. 10(ar). Employment Agreement dated as of May 30, 1997 between the registrant and David F. Banks is incorporated by reference to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q [No. 1-11237] for the Quarter Ended June 30, 1997, filed with the Securities and Exchange Commission. 10(as). Stock Purchase Agreement dated as of November 17, 1997, among the registrant, Newcourt Credit Group Inc., Hercules Holdings (Cayman) Limited and other selling stockholders of the Company is incorporated by reference to Exhibit 99. A) of the registrant's Current Report on Form 8-K [No. 1-11237], dated November 19, 1997 (as amended on the Company's Current Report on Form 8-K/A dated February 11, 1998), filed with the Securities and Exchange Commission. 10(at). Support Agreement dated February 9, 1998 between Newcourt Credit Group Inc. and the registrant is incorporated by reference to Exhibit 10(a) of the registrant's Current Report on Form 8-K [No. 1-11237], dated 124 February 9, 1998 (as amended on the registrant's Current Report on Form 8-K/A dated February 18, 1998), filed with the Securities and Exchange Commission. 10(au). Guarantee dated February 20, 1998 made by AT&T Capital Corporation is incorporated by reference to Exhibit 10 of the registrant's Current Report on Form 8-K [No. 1-11237], dated February 20, 1998, filed with the Securities and Exchange Commission. 10(av). Financial services Agreement dated as of March 9, 1998 between Lucent Technologies Inc., a Delaware Corporation and Newcourt Credit Group Inc., an Ontario Corporation. CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. 12. Computation of Ratio of Earnings to Fixed Charges 16(a). Letter on change in certifying accountants - to the Securities and Exchange Commission from Coopers & Lybrand L.L.P., dated February 12, 1997 is incorporated by reference to Exhibit 16 of the registrant's Current Report on Form 8-K [No. 1-11237], dated February 12, 1997, filed with the Securities and Exchange Commission. 16(b). Letter on change in certifying accountants - to the Securities and Exchange Commission from Arthur Andersen LLP, dated March 4, 1998 is incorporated by reference to Exhibit 16 of the registrant's Current Report on Form 8-K [No. 1- 11237], dated March 4, 1998 filed with the Securities and Exchange Commission. 21. Subsidiaries of the registrant. 24(a). Powers of Attorney executed by officers and directors who signed this report. 24(b). Certificate of Corporate Resolution. 27. Financial Data Schedule 99. AT&T Capital Corporation Excess Benefit Plan for the fiscal year ended December 31, 1997 125 EX-10 2 EXHIBIT 10(AV) Exhibit 10 (av) Form 10-K for 1997 File no. 1-11237 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. [EXECUTION COPY] ---------------------------------------------------------------- FINANCIAL SERVICES AGREEMENT DATED AS OF MARCH 9, 1998 BETWEEN LUCENT TECHNOLOGIES INC. A DELAWARE CORPORATION AND NEWCOURT CREDIT GROUP INC. AN ONTARIO CORPORATION ---------------------------------------------------------------- Exhibit 10 (av) Form 10-K for 1997 File no. 1-11237 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. FINANCIAL SERVICES AGREEMENT FINANCIAL SERVICES AGREEMENT dated as of March 9, 1998 (this "Agreement") between LUCENT TECHNOLOGIES INC. a Delaware corporation ("Lucent") and NEWCOURT CREDIT GROUP INC., an Ontario corporation ("Newcourt"). WHEREAS, Newcourt is a controlling affiliate of Capital; WHEREAS, Capital and Lucent are parties to the Intercompany Agreement, the License Agreement, and the Operating Agreement (collectively, the "Original Agreements") and other related agreements; WHEREAS, it is the intention of the parties hereto that the Original Agreements and certain other related agreements be replaced by this Agreement; WHEREAS, Lucent's Customers from time to time finance their purchases of Products, making their intent to do so known to Lucent or its Authorized Dealers; WHEREAS, Lucent desires LTPF to provide such financing on ready and competitive terms to enhance the sales of its Products; WHEREAS, LTPF desires to make credit available on terms seen as competitive by both it and Lucent and to compensate Lucent for introduction to such Customers; WHEREAS, Lucent desires to promote LTPF as its primary provider of Financing Services and Ancillary Services so long as LTPF does so on ready and competitive terms; and WHEREAS, it is the mutual objective of the parties to this Agreement that during the term of this Agreement: LTPF will, either through Newcourt or one or more of its Subsidiaries or third parties acceptable to Lucent, (i) make available to Customers of Lucent and Authorized Dealers appropriate forms of Customer Financings for the purchase, lease or other acquisition of Products, and otherwise provide Lucent and Authorized Dealers with Customer Financing in the form of purchases or financings of receivables arising from the sale, lease or other furnishing by Lucent or Authorized Dealers of Products to Customers; (ii) make available to Authorized Dealers appropriate forms of Dealer Financing and make available to Lucent appropriate forms of Outsource Financing; and (iii) make available to Lucent, Customers and Authorized Dealers, where appropriate, various types of Ancillary Services. NOW, THEREFORE, in consideration of the mutual promises herein set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions and upon the terms hereof, the parties hereby agree as follows: 2 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. ARTICLE I DEFINITIONS SECTION 1.1. Defined Terms. As used in this Agreement, the following terms will have the following meanings, applicable both to the singular and the plural forms of the terms defined: "AAA" has the meaning ascribed thereto in SECTION 14.4(b). "ADJUSTED FINANCEABLE PRODUCT SALES" has the meaning for such or similar term in the then current Annual Operating Plan, or if no definition is specified, means, with respect to any measurement period, the aggregate purchase price (net of discount) paid by or on behalf of Customers to Lucent Entities or Authorized Dealers, together with any related sales taxes and installation and similar costs, for Financeable Products during such measurement period. "ADJUSTED FINANCING AMOUNT" has the meaning for such or similar term in the then current Annual Operating Plan, or if no definition is specified, means, with respect to any measurement period, the aggregate amount paid by NCT for Financeable Products sold by Lucent Entities during such measurement period, together with the aggregate amount of Financings of any related sales taxes and installation and similar costs. If during any period for which Adjusted Financeable Product Sales are calculated there has occurred a disposition, phase-in or an acquisition by Lucent Entities of any significant Financeable Product line, the Adjusted Financing Amount and Adjusted Financeable Product Sales amount with respect to such period shall be normalized in a fair and reasonable manner. "ADJUSTED NOTIONAL FEE BASE" shall mean the (a) Notional Fee Base for each period during the Term minus (b) (i) *** as to the each of the first *** consecutive Monthly Payments, or (ii) *** as to the next *** such payments, or (iii) *** as to all subsequent such payments, as the case may be, of the *** for such period. "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to vote a majority of the securities having voting power for the election of directors (or other Persons acting in similar capacities) of such Person or otherwise to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AFTER-TAX BASIS" means, with respect to any payment to be received or accrued by any Person, the amount of such payment supplemented by a further payment or payments (which shall be payable either simultaneously with the initial payment or, in the event that taxes resulting from the receipt or accrual of such initial payment are not payable in the year of receipt or accrual, at the time or times such taxes become payable) so that the sum of all such initial and supplemental payments, after deduction of all taxes imposed by any taxing authority (after taking into account any credits or deductions or other tax benefits arising 3 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. therefrom to the extent such are currently utilized) resulting from the receipt or accrual of such payments (whether or not such taxes are payable in the year of receipt or accrual) will be equal to the initial payment to be so received or accrued. "AGREEMENT" has the meaning ascribed thereto in the preamble hereto, as such agreement is amended and supplemented from time to time in accordance with its terms. "ALTERNATIVE FINANCING SERVICE" means a Financing offered or provided to Lucent, Customers or Authorized Dealers by a Person (other than an Affiliate of Lucent or NCT, or a Person that contracts with NCT to enable NCT to indirectly provide such Financing program) that offers financings or other services competitive with Financings or Ancillary Services offered by NCT hereunder. "ALTERNATIVE FINANCING SERVICE PROVIDER" means a Person which provides Alternative Financing Services. "ANCILLARY SERVICES" means (i) the provision of property, casualty or similar types of insurance with respect to Products, (ii) asset monitoring, recovery and remarketing services with respect to Products, and (iii) any other value-added services relating to Products or Financings offered by NCT from time to time and agreed to by the parties to be treated as Ancillary Services for purposes of this Agreement. "ANNUAL OPERATING PLAN" has the meaning ascribed thereto in SECTION 12.1. "AT&T" means AT&T Corp., a New York corporation, formerly known as American Telephone and Telegraph Company. "AUTHORIZED DEALER" means any Person that is authorized by BCS to acquire Products directly or indirectly from Lucent for resale on a wholesale or retail basis. "BASE RATE" means as of any date, the implicit annual rate of a Payment Stream generally applicable with respect to comparable equipment under a comparable Finance Contract to a comparable Customer, all as determined from time to time by LTPF in accordance with generally accepted financial principles and in a manner consistent with the Annual Operating Plan and by reference to LTPF's standard rates for such transactions. The Base Rate shall be calculated in a manner consistent with the methodology used to determine the Implicit Rate. "BCS" means the business unit of the Lucent Entities now commonly known as Business Communications Systems, as such business may be renamed or divided into separate divisions of Lucent Entities or consolidated with other divisions of Lucent Entities, in which later case this Agreement shall apply to the portion of the divisions which are continuing the BCS business. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which banking institutions in New Jersey are authorized or required by law to be closed. 4 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "BUY-OUT NOTICE" has the meaning ascribed thereto in SECTION 16.1. "BUY-OUT OPTION" has the meaning ascribed thereto in SECTION 16.1. "CAPITAL" means AT&T Capital Corporation, a Delaware corporation, and its successors and permitted assigns. *** "CEO" has the meaning ascribed thereto in SECTION 11.3(a). "CHANGE OF CONTROL" means, with respect to a Person, the occurrence of any of the following events: (a) the consummation of a merger or consolidation of the Person with any other entity resulting in holders of the Person's voting Securities receiving less than 50% of the voting Securities of the surviving entity; (b) the sale, lease, exchange or transfer of all or substantially all of the Person's assets; (c) the approval by the holders of the Person's voting Securities of any plan or proposal for the liquidation or dissolution of the Person; (d) the acquisition by any other Person of *** or more of the outstanding voting power of the Person's Securities; or (f) a change in a majority of the directors of the Person in any period of less than two years, not counting persons elected or nominated by a vote of at least two-thirds of the directors in office at the beginning of such period or whose election or nomination was previously so approved; provided, however, that no transaction with respect to an NCT Entity shall constitute a Change of Control hereunder if, following such transaction, 100% of the capital stock or equity interests in such NCT Entity is owned directly or indirectly by Newcourt. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor Federal income tax code. "COMMENCEMENT DATE" has the meaning ascribed thereto in SECTION 15.1(a). "CREDIT LOSS RESERVE" means the credit loss reserve for LTPF established from time to time by LTPF which is intended to provide for LTPF's future expected or estimated credit losses on all Finance Contracts included within the Old Portfolio and the New Portfolio at the time the amount of the reserve is established. The amount of the Credit Loss Reserve shall be established by LTPF pursuant to the Annual Operating Plan, evaluating all relevant factors and criteria with respect thereto including the historical performance of the Old and New Portfolio, trends and standards in the industry for losses and reserves and all other published industry credit loss information which is relevant to the establishment of the Credit Loss Reserve. The adequacy of, and the method for calculating, the Credit Loss Reserve shall be evaluated and, as necessary, adjusted by LTPF, from time to time, but in no event less than annually. "CUSTOMER" means any Person that is an end user of Products, and does not include Authorized Dealers. 5 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "CUSTOMER FINANCING" means any direct or indirect (i) financing of the sale, lease or other furnishing of Products by Lucent Entities (or Authorized Dealer) to Customers, and includes, without limitation, Finance Contracts entered into directly with Customers and (ii) purchase or financing of receivables arising form such sales, leases or other furnishings of Products by Lucent Entities (or Authorized Dealer). "CUSTOMER OUTSOURCING PROGRAM" means any program of Lucent Entities for the acquisition, maintenance and/or operation by Lucent Entities of telecommunications, computer, data and/or information networks or operations for Customers and Authorized Dealers under what is generally referred to in the industry as an outsourcing or network or systems management contract ("Outsourcing Contract") between the applicable Customer and the applicable Lucent Entities. "DEALER FINANCING" means any direct or indirect (i) financing of the purchase or lease by Authorized Dealers of Products for resale or re-lease to Customers, including, without limitation, floor planning loans and other forms of inventory financing and (ii) provision of other types of secured loans to such Authorized Dealers. "DEDICATED EMPLOYEES" has the meaning ascribed thereto in SECTION 16.3(f). "DISCOUNT RATE" means, for any Funding Date, a per annum rate equal to (a) the Discount Rate Margin plus (b) the Weighted Average Terms Treasury Rate. "DISCOUNT RATE MARGIN" means, initially, *** as modified in accordance with SECTION 3.4. "DISCOUNT RATE PROPOSAL" has the meaning ascribed thereto in SECTION 3.4. "DOLLARS" and "$" mean the lawful money of the United States of America. *** "ESTIMATED RESIDUAL VALUE" means the estimated residual value, at the end of the term of the Finance Contract of the Financed Product, as determined by LTPF at the inception of the Financing in accordance with GAAP and the Annual Operating Plan. "FINANCE CONTRACT" means a lease, conditional sale contract, promissory note or other financing contract, entered into between LTPF (or NCT on behalf of LTPF) and a Customer from time to time with respect to a Financing and any and all amendments, riders and other documents which pertain thereto. "FINANCE MARKETING SUPPORT" has the meaning ascribed thereto in SECTION 6.1(a). "FINANCED PRODUCTS" means Products with respect to which Financing has been provided. 6 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "FINANCEABLE PRODUCTS" means all Products (other than consumables or maintenance, service or similar contracts) sold to Customers within the applicable area and marketing channel. "FINANCING" means Customer Financing, Dealer Financing and Outsource Financing. *** "FINANCING SERVICES" means the offering or providing of (i) Financings with respect to the sale or furnishing of Products and related services by Lucent including, without limitation, leases, installment sales contracts, conditional sales contracts and loans (whether secured or unsecured) and (ii) any other forms of financing or extensions of credit. "FUNDING DATE" shall have the meaning set forth in SECTION 3.2(a). "GAAP" means generally accepted accounting principles in the United States, consistently applied, as may be in effect from time to time. "IMPLICIT RATE" means the annual implicit rate of return under a Finance Contract, as calculated by LTPF utilizing (a) generally accepted financial principles; (b) the Estimated Residual Value (the future value for purposes of such calculation); (c) the True Product Cost (the present value for purposes of such calculation); and (d) the Payment Stream (the payments for purposes of such calculation). "INFORMATION SUPPORT" has the meaning ascribed thereto in SECTION 6.1(e). "INITIAL TERM" has the meaning ascribed thereto in SECTION 15.1(a). "INTERCOMPANY AGREEMENT" means the Intercompany Agreement between Capital and AT&T dated as of June 25, 1993, to the extent such agreement applies to Lucent pursuant to a letter agreement dated as of April 2, 1996, regarding "Applicability of Intercompany Agreement to Lucent Technologies, Inc." among Lucent, AT&T and Capital. "INVESTMENT BALANCE" means as of any date of determination with respect to a Finance Contract, an amount equal to (a) all Payments due, past due, and to become due LTPF under such Finance Contract (excluding rental taxes, if applicable), discounted to their then net present value using the Discount Rate for such Finance Contract as of the Funding date for such Finance Contract, plus ***. "LIBOR" means, for any month, a rate of interest determined on the basis of at least two offered rates for deposits in United States dollars for a 30 day period appearing on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day that is two London business days prior to the first day of such month. If at least two such offered rates appear on the Reuters Screen LIBO Page, the rate with respect to the month will be the arithmetic 7 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. average (rounded upwards to the next 1/16th of 1%) of such offered rates. If fewer than two offered rates appear, LIBOR in respect of that month will be determined on the basis of the rates at which deposits in United States dollars are offered by The Chase Manhattan Bank at approximately 11:00 a.m. (London time) on the day that is two London business days preceding the first day of such month to prime banks in the London interbank market for a 30 day period commencing on the first day of such month. "LICENSE AGREEMENT" means the License Agreement between Capital and AT&T dated as of June 25, 1993, to the extent such agreement applies to Lucent pursuant to a letter agreement dated as of April 2, 1996 regarding "License to Use Lucent Name and Mark" among Lucent, AT&T and Capital. "LOCATION SUPPORT" has the meaning ascribed thereto in SECTION 6.1(c). "LTPF" has the meaning ascribed thereto in SECTION 2.1. "LUCENT" has the meaning ascribed thereto in the preamble. "LUCENT ENTITIES" means Lucent (and its successors) and all Persons that constitute Subsidiaries of Lucent from time to time. "LUCENT MANAGEMENT FEE" has the meaning ascribed thereto in SECTION 4.1(a). "LUCENT RESPONSIBILITY" has the meaning ascribed thereto in SECTION 9.2(b). "MAJORITY VOTE" means, with respect to actions by the Operating Committee, *** of the *** votes which can be cast. "MARKS" means the Lucent trade names, trademarks and service marks specified on SCHEDULE 1.1, which shall be agreed to by the parties within 30 days of the date of this Agreement and which may be updated or modified from time to time by mutual agreement of the parties. "MEMBERS" means the Persons designated to serve on the Operating Committee in accordance with SECTION 11.2(a). "MONTHLY PAYMENT DATE" means the fifteenth calendar day of each calendar month during the Term (except for that calendar month or portion thereof which occurs during the Initial Term), and if such date is not a Business Day, the next succeeding Business Day. "NCT" shall mean Newcourt and/or one or more of its Subsidiaries reasonably acceptable to Lucent which shall be performing under this Agreement or provide Financing. 8 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "NCT PURCHASER" means the Newcourt Entitiy through which LTPF shall be deemed to be operating in order to most efficiently and effectively underwrite transactions in a given country, channel or product line. "NEW PORTFOLIO" means the Finance Contracts and related equipment subject thereto which are originated by the Newcourt Entities through LTPF after ***. "NEW PORTFOLIO FEE BASE" means, in any month, all New Portfolio Proceeds realized by LTPF. "NEW PORTFOLIO PROCEEDS" means, in any month, an amount equal to: (a) the net present value of the Payment Stream under each Finance Contract originated in the New Portfolio during such month, calculated as of the applicable Funding Date for each Finance Contract, ***, minus (b) the net present value of the Payment Stream under each such Finance Contract, calculated as of the applicable Funding Date for each Finance Contract, utilizing ***; plus (c) all proceeds realized by LTPF during such month from *** with respect to Products subject to Finance Contracts included within the New Portfolio which proceeds are in excess of the *** and which are net of all costs and expenses incurred by LTPF in connection with such sale or other disposition ***. "NEWCOURT" means Newcourt Credit Group Inc., an Ontario corporation, and its successors. "NEWCOURT ENTITIES" means Newcourt and all Persons that constitute Subsidiaries of Newcourt from time to time. "NEXT YEAR" has the meaning ascribed thereto in SECTION 3.4. "NON-RENEWAL NOTICE" has the meaning ascribed in SECTION 15.1(a). "NOTIFICATION" means all notices permitted or required to be given to any Person hereunder. Such Notification must be given in writing and will be deemed to be duly given on the date of delivery if delivered in person or sent by facsimile transmission or on the earlier of actual receipt or 3 Business Days after the date of mailing if mailed by registered or certified mail, first class postpaid, return receipt requested, to such Person, at the last known address of such Person. "NOTIONAL EQUITY CHARGE" means, in any month, the sum of the following items which are properly allocable to such month: (a) an amount equal to (i) *** of the *** for each Finance Contract deemed to be purchased by NCT from LTPF during such month multiplied by (ii) the *** then in effect; and (b) an amount equal to (i) (A) the aggregate amount of all outstanding *** as of the end of the previous month plus the aggregate amount of all outstanding 9 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. *** as of the end of the current month, divided by (B) 2, multiplied by (ii) the *** then in effect. "NOTIONAL FEE BASE" shall have the meaning set forth in SECTION 4.2. "NOTIONAL FEE CHARGES" means, in any month, the following: (a) all of the following expenses incurred during such month by or on behalf of LTPF, determined in accordance with GAAP, which are properly allocable to LTPF: (i) *** (ii) all credit losses of LTPF under the Old Portfolio or New Portfolio which are in excess of the Credit Loss Reserve, and (iii) all SG&A Expenses; plus (b) the Notional Equity Charge for such month; plus (c) any net increase in the Credit Loss Reserve during such month; minus (d) any net decrease in the Credit Loss Reserve during such month; plus (e) any residual value insurance premiums. "NOTIONAL RESIDUAL EQUITY RATE" means for one year the period of *** through ***, an annual rate of interest equal to ***, compounded monthly, and for each succeeding one year period ending on ***, an annual rate of interest, compounded monthly, equal to the sum of (x) the average asking yield for U.S. Treasury Notes with maturities one year from the last day of immediately preceding one year period, as published in The Wall Street Journal, plus (y) *** basis points. "NOTIONAL STREAM EQUITY RATE" means a monthly rate of interest equal to *** during the period of *** through ***, and thereafter during each month, a monthly rate of interest equal to (i) (a) the sum of (x) LIBOR, plus (y) *** basis points, divided by (b) 12, or if LIBOR can not be determined prior to the first day of the month, the parties shall equitably adjust the formula using the Prime Rate or such other measure as the parties shall mutually agree. "NOTIONAL THIRD PARTY DIRECT FEES" means all gross fees, income or revenues received by LTPF for any Financings or Ancillary Services performed by a third party financing source on behalf of LTPF or which contracted with LTPF to provide such Financings or Ancillary Services. "NOTIONAL THIRD PARTY INDIRECT FEES" means any net fees, income or revenue (after all related costs , expenses and charges of Lucent Entities) received by Lucent Entities if (i) a third party financing source is selected by LTPF to provide Financings or Ancillary Services for a particular market channel or geographic region or a Product line within a particular market channel or geographic region, (ii) ***, and (iii) ***. 10 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "OLD PORTFOLIO" means the Old Securitized Portfolio and the Old Unsecuritized Portfolio. "OLD PORTFOLIO BASE RTE" means a cumulative *** return *** on equity to Newcourt of ***, compounded monthly, with respect to the average net book value of (a) the ***, (b) the ***, and (c) the net of any other balance sheet accounts pertaining to the items described in clauses (a) and (b) hereof (all as reflected on Newcourt's books maintained in accordance with GAAP without regard to any sale, syndication or securitization of the Finance Contracts ***), determined utilizing a notional debt to equity ratio of ***. "OLD PORTFOLIO FEE BASE" means in any month, all Old Securitized Portfolio Proceeds and all Old Unsecuritized Portfolio Proceeds realized by Newcourt in excess of the Old Portfolio Base RTE. "OLD SECURITIZED PORTFOLIO" means the Finance Contracts and any related equipment subject thereto being serviced by Capital or its Subsidiaries that were originated by Capital or its Subsidiaries prior to ***, and sold, syndicated or securitized prior to such date ***. "OLD SECURITIZED PORTFOLIO PROCEEDS" means, in any month (a) the *** included with the Old Securitized Portfolio determined in accordance with GAAP, plus (b) the income recognized by LTPF during such month *** of the Old Securitized Portfolio that was sold, syndicated or securitized ***, plus (c) any gain or loss realized by LTPF during such month in connection with *** of the Old Securitized Portfolio, determined in accordance with GAAP, ***, plus (d) any *** realized by LTPF during such month with respect to the Old Securitized Portfolio, which *** shall be determined in accordance with ***. "OLD UNSECURITIZED PORTFOLIO" means the Finance Contracts and any related equipment subject thereto being serviced by Capital or its Subsidiaries that were originated by Capital or its Subsidiaries prior to ***, but which are not included within the Old Securitized Portfolio. "OLD UNSECURITIZED PORTFOLIO PROCEEDS" means, in any month (a) the *** included within the Old Unsecuritized Portfolio, determined in accordance with GAAP without regard to any sale, syndication, or securitization of such Finance Contracts; plus (b) any gain or loss realized during such month in connection with *** of the Old Unsecuritized Portfolio, determined in accordance with GAAP, ***. "OPERATING AGREEMENT" means the Lucent Operating Agreement between Capital and Lucent dated as of April 2, 1996. "OPERATING COMMITTEE" means the Operating Committee designated in accordance with SECTION 11.1. 11 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "ORIGINAL AGREEMENTS" has the meaning ascribed thereto in the preamble hereto. "OUTSOURCE FINANCING" means any direct or indirect financing (including, without limitation, through secured loans and leases) of or with respect to any Customer Outsourcing Program. "OWNED AND MANAGED ASSETS" shall mean the Old Portfolio assets and New Portfolio assets which are managed by LTPF. For purposes of this definition, the value of portfolio assets that have been securitized will be equal to the present value of the contracted lease or loan payments discounted at the implicit rate of the financing. "PARTIAL TERMINATION NOTICE" has the meaning ascribed thereto in SECTION 15.3(a). "PAYMENT STREAM" means the fixed monthly or periodic amounts a Customer is required to pay under the terms of a Finance Contract and shall not include any end of the term extension, renewal or buy-out payment. "PERFORMANCE METRICS" means the performance metrics *** set forth in the then current Annual Operating Plan, as modified from time to time by the parties for the following measures of LTPF's performance: ***. "PERMITTED GENERAL PURPOSES" means, with respect to the use of the Marks by Newcourt Entities, the use of such Marks solely in connection with the operations of LTPF for purposes of identifying NCT as the provider of Financing Services or such Ancillary Services as Lucent may agree to Customers (including, without limitation, in agreements, letterheads, brochures, building directories, signs, computer programs, newsletters and other publications and other forms of communication or advertising). "PERSON" means any individual, partnership, joint venture, corporation, trust, unincorporated organization, government (and any department or agency thereof) or other entity. "PERSONNEL SUPPORT" has the meaning ascribed thereto in SECTION 6.1(b). "PRIME RATE" means, for any month, the rate of interest per annum publicly announced by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City as of the first day of that month. "PRODUCTS" means any products (including, without limitation, related Software licenses, but not including real estate) and related installation and maintenance services provided, furnished, manufactured, sold and/or marketed by BCS which results in revenue or income to BCS, and such additional Lucent goods or services as the parties may from time to time agree. 12 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. "RENEWAL TERM" has the meaning ascribed thereto in SECTION 15.1. "REPLACEMENT FUNDING AGREEMENT" has the meaning ascribed thereto in SECTION 3.4. "RESIDUAL INVESTMENT" means the present value, as of the Funding Date, of the Estimated Residual Value discounted at the Implicit Rate. "RETROACTIVE DATE" means ***. *** "SALES SITE" means any site, office or location from which Lucent conducts the sale or marketing of Products. "SERVICE AREAS" has the meaning ascribed thereto in SECTION 2.3(a). "SENIOR MANAGEMENT EXECUTIVES" has the meaning ascribed thereto in SECTION 14.3. *** "SG&A EXPENSES" means, with respect to any period, all expenses or costs incurred by LTPF or allocated to LTPF from other sources (e.g., from a Lucent Entity or Newcourt Entity) in connection with the management, operation, promotion or administration of LTPF which are properly deductible in accordance with GAAP as an expense for such period, including but not limited to salaries & benefits (including commissions); bonuses; relocation expenses; travel, living and conferences; dues and memberships; occupancy costs; professional fees; data processing costs; telecommunications costs; operational expenses; external administration costs (including warehousing, portfolio servicing, debt servicing, etc.); repairs and maintenance for off-lease equipment, repossession and restructuring charges; advertising and promotions; supplies, postage and contributions; trustee fees; outside printing; subscriptions and memberships; and loss on disposal of support assets. "SIGNIFICANT ACCOUNT" means an Authorized Dealer or a Customer that (i) has one or more Finance Contracts with an aggregate accounting net investment balance in excess of *** (ii) has been designated by BCS as a Global account, or (iii) has been reasonably designated by BCS as a "Significant Account" by notice to LTPF. "SOFTWARE" means any Product comprising intellectual property commonly or generically known as software, together with related storage disks and instructional and other documents, the acquisition or use of which by any Person is customarily financed by NCT Entities. "STANDARD DOCUMENTS" means forms of documents prepared (and periodically revised) by NCT Entities in connection with the offering of various types of Financings and 13 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. Ancillary Services, including forms of leases, loan agreements, security agreements, guarantees, financing statements and other documents appropriate for the conducting of NCT Entities' business of providing Financing and Ancillary Services. "START-UP DATE" means the date on which LTPF commences operations, which date shall be as soon as reasonably practicable following the Commencement Date. "SUBSIDIARY" means, with respect to any Person, any other Person which is directly or indirectly controlled by such Person. For purposes of this definition, "control", as applied to any Person, means the possession, directly or indirectly, of the power to vote a majority of the securities having voting power for the election of directors (or other Persons acting in similar capacities) of such Person or otherwise to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "SYSTEMS SUPPORT" has the meaning ascribed thereto in SECTIONS 5.3(b) AND 6.1(d). "TERM" means the Initial Term and any Renewal Term. "TRANSITION PERIOD" has the meaning ascribed thereto in SECTION 15.1(b). "TRUE PRODUCT COST" means the price shown on the invoice for the Financed Product, including any applicable sales and similar taxes, shipping, installation and other costs, less any down payments or capital cost reductions made by the Customer and any discounts paid or payable to Customer. "U.S. RATING AGENCY" means any of the following: ***. "VIRTUAL PURCHASE PRICE" means, with respect to each Finance Contract, the present value, as of the Funding Date, of the Payment Stream, discounted at ***. *** "WEIGHTED AVERAGE TERMS TREASURY RATE" means a rate equal to the average of the asking yield for Treasury Notes with a period to maturity equivalent to the weighted average of the original term (rounded to the nearest month) of all Finance Contracts added to the New Portfolio on a Funding Date, as published in The Wall Street Journal, for each Funding Date. SECTION 1.2. CORRELATIVE MEANINGS. Capitalized terms used herein without definition (such as "Financed") that have correlative defined terms (such as "Financing") will have a meaning correlative to the defined term. 14 ARTICLE II CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. LEASING VEHICLE SECTION 2.1 LEASING VEHICLE--LTPF. (a) NCT shall cooperate with Lucent to provide Financing Services and Ancillary Services using the name "Lucent Technologies Product Finance" ("LTPF") or such other name as the parties hereto may agree. LTPF shall be a division of one or more Newcourt Entities (which is managed as provided in this Agreement) and, for all purposes including legal, tax and accounting purposes, shall not be a corporation, partnership, joint venture, limited liability company or any other form of distinct legal entity separate from NCT. NCT shall maintain fair, accurate, detailed, independent and separate books and records for purposes of reflecting the financial status of, results of operations of, and for gauging the business efficiency of LTPF and determining the separate fee payments to be made by NCT to Lucent hereunder, including the provision of credit by third parties with whom NCT contracts. (b) Lucent and NCT shall at all times be and remain independent contractors with respect to each other and the operation of LTPF and neither shall have any fiduciary duty to the other as a partner, co-venturer, joint owner or the like. SECTION 2.2 PURPOSE. The primary purpose of NCT in operating LTPF will be to support and enhance sales of Products by providing for its sole profit integrated Financing Services and Ancillary Services for Customers and Authorized Dealers in all direct and indirect marketing channels worldwide. Financing Services and Ancillary Services will cover Products, but may also include incidental related products and services (which may be manufactured, marketed or sold by third parties). LTPF may engage in such other business activities related to the purpose set forth above (including providing additional financial products and asset management services) as are approved by the parties. SECTION 2.3 SCOPE OF LTPF SERVICES. (a) LTPF shall be the select provider of Financing Services (directly or indirectly) for the geographic areas set forth in the initial Annual Operating Plan (each such area being a "Service Area") ***, except that initially the only Service Areas shall be the United States and Canada. (b) New Service Areas (i.e., geographic areas or specific channels within geographic areas) will be added as LTPF demonstrates that it has the ability to (i) commence providing Financing Services within the period set forth in the Annual Operating Plan (or any proposed amendment thereto) on a ready and competitive basis and (ii) meet the Performance Metrics for the new Service Area. New Services Areas shall be designated or added by ***. LTPF shall be considered for any potential new Service Area, and Lucent and Newcourt agree that their preference is to have LTPF be the Financing Service provider for a potential Service Area ***. (c) If a new Service Area is added, LTPF shall meet the time requirements set forth in the Annual Operating Plan to begin providing Financing Services in the new Service Area and shall begin meeting the Performance Metrics within the timeframes set forth in the Annual 15 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. Operating Plan for the new Service Area. If LTPF fails to begin providing Financing Services within the required time, or fails to meet the Performance Metrics, the Service Area shall become subject to partial termination pursuant to the provisions of SECTION 15.3. (d) LTPF will select, for any Service Area and any market channel, geographic region or Product line within a Service Area, the financing or funding source best able in its opinion (and reasonably acceptable to Lucent) to meet the service and performance requirements of Lucent. (e) The goal of Newcourt and Lucent is that LTPF eventually have the capability to be the worldwide provider directly and indirectly of Financing Services for the sale of Products and that as LTPF develops these capabilities and performs under this Agreement, more areas may be added as Service Areas. SECTION 2.4 LOCATION. LTPF will have its administrative headquarters in New Jersey (or such other location as the parties may agree). The parties shall determine an suitable co-location plan with respect to the appropriate employees of Lucent and LTPF in accordance with the primary purpose of LTPF as described in SECTION 2.2 above. ARTICLE III CERTAIN MECHANICS AND PROCEDURES RELATING TO FINANCINGS UNDERTAKEN BY LTPF SECTION 3.1 IN GENERAL. All Financings shall be booked in the name of LTPF or such other names as shall from time to time be designated by LTPF. Except as otherwise set forth herein, LTPF shall maintain segregated books and records for business of LTPF including all transactions and activities relating to the Old Portfolio and the New Portfolio as if LTPF were a separate entity as opposed to a division of one or more NCT entities. All such books and records shall be maintained in accordance with GAAP, except as otherwise directed by the Operating Committee in order to reflect the virtual nature of LTPF. SECTION 3.2 LTPF PAYMENTS TO LUCENT. (a) True Product Cost. On the Business Day immediately following the date on which NCT receives such customary documents as NCT and the Operating Committee may from time to time require in order to evidence the origination of a Financing, LTPF shall pay Lucent or its designees on the aggregate True Product Costs with respect to Financings originated on that immediately preceding Business Day (such date on which LTPF is required to fund Lucent or its designee shall be referred to as a "Funding Date"). (b) *** SECTION 3.3 NCT VIRTUAL PURCHASE. (a) Pursuant to the terms and conditions of this Agreement, LTPF shall be deemed to have sold, assigned and conveyed to the NCT Purchaser 16 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. on each Funding Date all LTPF rights in the Payment Stream for each Financing Contract originating on that Funding Date. (b) The purchase price which NCT shall be deemed to have paid to LTPF in consideration of its deemed sale to NCT of a Finance Contract shall be the Virtual Purchase Price. SECTION 3.4 ADJUSTMENT TO DISCOUNT RATE. *** LTPF shall deliver to Lucent a written proposal ("Discount Rate Proposal") setting forth the applicable "Discount Rate Margin" to be used in determining the Virtual Purchase Price for Finance Contracts ***. Lucent shall have a period of 45 days after LTPF's delivery to Lucent of the Discount Rate Proposal to (i) accept the Discount Rate Proposal with respect to all Finance Contracts originated ***, which acceptance shall be in writing; or (ii) reject the Discount Rate Proposal with respect to all Finance Contracts originated ***. If Lucent accepts the Discount Rate Proposal, then the applicable Discount Rate Margin set forth in the Discount Rate Proposal shall become effective, as of ***, with respect to all Finance Contracts and such Discount Rate Margin shall be deemed to replace the definition of Discount Rate Margin in the Agreement. Conversely, if Lucent rejects the Discount Rate Proposal, then ***. ARTICLE IV NOTIONAL FEE BASE AND MANAGEMENT FEE SECTION 4.1 LUCENT MANAGEMENT FEE (a) NCT shall pay to Lucent (the "Lucent Management Fee"): (i) on each of the first *** consecutive Monthly Payment Dates (beginning ***), an amount equal to *** of the Adjusted Notional Fee Base for the immediately preceding calendar month; (ii) on *** Monthly Payment Dates, an amount equal to *** of the Adjusted Notional Fee Base for the immediately preceding calendar month; and (iii) on *** Monthly Payment Dates, an amount equal to *** of the Adjusted Notional Fee Base for the immediately preceding calendar month ***. (b) If the Adjusted Notional Fee Base is ever less than $0, then any such deficiency (a "Deficiency") shall be subtracted from the Adjusted Notional Fee Base in each of the next succeeding months until such time as the Adjusted Notional Fee Base for any of such months is a positive number. In no event shall Lucent ever have any liability or obligation to NCT to repay any portion of the Lucent Management Fee or compensate NCT for any portion of a Deficiency; provided, however, this sentence shall not prohibit NCT from receiving from Lucent any portion of any Lucent Management Fee which is in excess of the proper amount of such Fee as determined pursuant to any audit of the books and records of LTPF pursuant to SECTION 4.4. SECTION 4.2 NOTIONAL FEE BASE The notional fee base ("Notional Fee Base") for each period during the Term shall be equal to: (a) the Old Portfolio Fee Base, plus (b) the New Portfolio Fee Base, plus (c) Notional 17 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. Third Party Direct Fees, plus (d) Notional Third Party Indirect Fees minus (e) all Notional Fee Charges, in each case determined on an accrual basis for the period to which the Notional Fee Base relates. SECTION 4.3 RETROACTIVE ECONOMIC BENEFITS. Within 30 days after the Commencement Date, NCT shall pay to Lucent an amount equal to *** of NCT's estimate of the *** for the period beginning *** and ending *** utilizing the methodology set forth in the initial Annual Operating Plan. NCT shall provide Lucent with detailed, supporting information as to NCT's calculation of the amount of such payment. For a period of thirty (30) days after the date on which such sum is paid (the "True-up Period"), either NCT or Lucent may propose any adjustments to such payment amount. At the end of such thirty (30) day period, if the agreed upon adjustments indicate that NCT has overpaid Lucent, Lucent shall pay NCT such overpayment, or if such adjustments indicate NCT has underpaid such payment, NCT shall pay Lucent such underpayment. SECTION 4.4 RIGHT TO INSPECT AND AUDIT. At any time during the Term, Lucent shall have the right at reasonable times and places, to inspect and audit any NCT records or books of account necessary to determine the fairness and accuracy of the Lucent Management Fee and NCT's efficient operation of LTPF and achievement of the Performance Metrics. For these purposes NCT will secure the full cooperation of its personnel and any independent accountants who have examined such books and records for NCT or otherwise reported on the fair and accurate nature of NCT's financial statements. Such full cooperation will include granting Lucent access to any such accountant's work papers. ARTICLE V COVENANTS OF NEWCOURT ENTITIES SECTION 5.1 FINANCING SERVICES PROVIDED BY LTPF. (a) LTPF shall, during the Term of this Agreement and within the Service Areas, through Newcourt Entities or third parties reasonably acceptable to Lucent: (1) provide Financing Services and Ancillary Services to Customers and Authorized Dealers; (2) as BCS introduces new Products, use its good faith efforts, in cooperation with Lucent, to modify existing or devise new Financing Services and Ancillary Services to support the sale, lease or other furnishings of such new Products; (3) cooperate with BCS and Authorized Dealers, as requested, in promoting and advertising the availability of the Financing Services and Ancillary Services to Customers, including providing their sales and marketing personnel with information with respect to such Financings and Ancillary Services and generally responding to inquiries made by Customers or 18 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. the employees of BCS or Authorized Dealers with respect to such Financing Services and Ancillary Services; (4) prepare Standard Documents for use in connection with standardized types of Financings and maintain the capacity to (A) modify such Standard Documents to document particular Financings and Ancillary Services and (B) prepare appropriate documentation for any customized Financings and Ancillary Services that LTPF may offer to particular Customers or Authorized Dealers pursuant to this Agreement; (5) cooperate with BCS and Authorized Dealers to facilitate Financings (including, where appropriate, extensions, renewals or modifications of existing Financings) of replacements or upgrades of Financed Products or additions of Products to previously Financed Products (subject to adequate protection of the interests of LTPF in any Financings that would be affected thereby); (6) employ or retain personnel having the requisite financial, legal and other skills to respond to the requests of Customers or Authorized Dealers with respect to unusual, specialized or complex Financings and Ancillary Services; and (7) endeavor to maintain good relations with Customers and Authorized Dealers and, by offering courteous, efficient and informed Financing Services and Ancillary Services, promote and support the efforts of BCS and Authorized Dealers to sell, distribute and market the Products. (b) In connection with the activities described in paragraph (a) above, NCT shall, during the term of this Agreement and within the Service Areas: (1) employ and train appropriate personnel and maintain, adapt and upgrade its telecommunications, information-processing and record-keeping systems as it deems necessary or appropriate for the purpose of carrying out such activities; and (2) obtain and maintain such franchises, licenses and permits as it deems necessary or appropriate for the purpose of carrying out such activities. SECTION 5.2 TRAINING OF LUCENT PERSONNEL. LTPF shall conduct training programs for appropriate sales personnel employed by Lucent and Authorized Dealers at which such individuals shall be trained in the proper documentation of Financings, the techniques of using Financing Services and Ancillary Services offered by LTPF as sales tools and the details of such Financing Services and Ancillary Services. LTPF shall also provide appropriate training and assistance to the Lucent Entities' operational and office support personnel with respect to the implementation of any procedures for implementing Financing Services, the electronic systems interfaces between the Lucent Entities and the NCT Entities' computer systems and related matters. 19 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SECTION 5.3 PROVIDING LUCENT WITH INFORMATION AS TO FINANCINGS AND FINANCE MARKETS. (a) LTPF shall provide to Lucent on a monthly basis (or as otherwise reasonably requested) information concerning levels of applications for and approvals of Financings and Ancillary Services, turn-around times for processing applications for Financings and Ancillary Services, levels of completed and outstanding Financings, payment and delinquency histories with respect to Financings and Ancillary Services, and any other information with respect to Financings and Ancillary Services under this Agreement reasonably requested by Lucent, including on a monthly basis specific reports showing Customer end-of-term status. (b) NCT shall permit and facilitate reasonable and appropriate linkages between the NCT Entities' and Lucent Entities' computer and telecommunications systems for the purpose of retrieving and transmitting between the systems information and documentation in connection with the offering, documentation and monitoring of Financings and Ancillary Services (including the information described in SECTION 5.3(a) and otherwise facilitating the efficient implementation of the relationships and activities contemplated in this Agreement as more fully described in the Annual Operating Plan (which type of support is referred to herein as "Systems Support"); SECTION 5.4 SUPPORTING WORLDWIDE ACTIVITIES. LTPF will perform any commercially reasonable services required by Lucent to facilitate centralized control for Lucent to track and monitor Customers and Customer Financings. BCS and NCT will use all commercially reasonable efforts to have any other financing sources operate through LTPF to help in this worldwide coordination and control. *** ARTICLE VI COVENANTS OF LUCENTARTICLE COVENANTS OF LUCENT SECTION 6.1 SUPPORT OF NCT ENTITIES. Lucent agrees that during the Term of this Agreement in connection with the offering or provision of Financing Services or Ancillary Services in the Service Areas by LTPF: (a) Lucent shall promote LTPF to Customers and Authorized Dealers as its select provider of Customer Financings and Dealer Financings, as appropriate, and Ancillary Services made available by LTPF (which type of support described in this paragraph is referred to herein as "Finance Marketing Support"), in the Service Areas. Lucent covenants and agrees that Lucent's sales representatives engaged in the sale or marketing of Products for which LTPF offers Customer Financing or Dealer Financings or Ancillary Services shall be made aware of Lucent promotional and informational literature provided by LTPF concerning such Financing Services and Ancillary Services and, where appropriate, Standard Documents. Lucent covenants and agrees that such sales representatives shall make Financing options offered by LTPF known to Customers and Authorized Dealers interested in Financing the purchase, lease or other acquisition of Products and, where appropriate, shall make the Ancillary Services offered by LTPF known to such Customers and Authorized Dealers. In addition, Lucent covenants and agrees that such sales representatives shall make the 20 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. existence of LTPF Financing Services and Ancillary Services of LTPF known to Customers and Authorized Dealers. (b) Lucent shall cooperate with LTPF by causing Lucent sales representatives to make available to Customers and Authorized Dealers access to LTPF Customer Financings and Dealer Financings and, as appropriate, Ancillary Services, and to provide training to appropriate personnel employed by LTPF with respect to the Products and the sales and marketing thereof (which type of support described in this paragraph is referred to herein as "Personnel Support"). (c) Lucent shall provide appropriate personnel of designate by LTPF with office space at appropriate Sales Sites and appropriate office support services on the terms and conditions set forth in SCHEDULE 6.1 attached hereto and made a part hereof (which type of support is referred to herein as "LOCATION SUPPORT"); (d) Lucent shall permit and facilitate reasonable and appropriate linkages between the Newcourt Entities' and Lucent Entities' computer and telecommunications systems for the purpose of retrieving and transmitting between the systems information and documentation in connection with the offering, documentation and monitoring of Financings and Ancillary Services and otherwise facilitating the efficient implementation of the relationships and activities contemplated in this Agreement (which type of support shall be referred to "Systems Support"); (e) Lucent shall, subject to confidentiality terms of this Agreement, provide to LTPF appropriate information with respect to Lucent's Product development and marketing plans for the purposes of permitting LTPF to more effectively design appropriate programs for Financing Services and Ancillary Services and to determine the likely residual values of Products (which type of support described in this paragraph is referred to herein as "Information Support"). Without limiting the foregoing, Lucent shall keep LTPF informed on a regular and timely basis of Product development and marketing plans and results to the extent Lucent deems it relevant to the activities contemplated under this Agreement. Lucent agrees that Lucent shall also provide LTPF with appropriate information within the possession or control of Lucent that is relevant to an analysis of the credit standing of any Customer or Authorized Dealer proposed to directly or indirectly receive Financing Services or Ancillary Services from LTPF. SECTION 6.2 OTHER FINANCING SOURCES. (a) Subject to SECTION 2.3, this Agreement shall, at any time, apply only to the then current Service Areas, ***, and in any areas which are not Service Areas, Lucent may, subject to SECTION 2.3, provide or set up any Financing or Ancillary programs with any Persons Lucent Entities may desire. *** (b) Notwithstanding the other provisions of this ARTICLE VI, Lucent may, but shall not be required to, provide to LTPF any (i) Finance Marketing Support in connection with any Customer Outsourcing Program, (ii) Location Support or Systems Support in connection with 21 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. any Customer Outsourcing Program in addition to that currently provided by Lucent, and (iii) Information Support in connection with any Customer Outsourcing Program except that Lucent shall provide information to NCT relating to the specific Products being Financed by NCT in connection with any Customer Outsourcing Program. In addition to the foregoing, Lucent may, in connection with any Customer Outsourcing Program with any Customer, without providing a right to bid thereon to LTPF or NCT, (x) guarantee or assume the payment obligations of such Customer under financings for products provided to such Customer by any Alternative Financing Service Provider and (y) finance, through the financing program or arrangement in effect with such alternative financing source, upgrades or add-ons to the products that have been so financed through such Alternative Financing Service Provider. (c) *** the Alternative Financing Service Providers set forth on Schedule 6.2 *** (and any fees, income or revenue *** from these programs shall be included as Notional Third Party Indirect Fees). ARTICLE VII COVENANT NOT TO COMPETE 7.1 COVENANT NOT TO COMPETE (a) In General. Subject to SECTION 7.1(b), the Newcourt Entities shall not at any time during the Term, directly or indirectly, enter into any program, joint venture or similar arrangement relating to the financing or leasing within any Service Area of the following entities' products which compete with Products financed by or through LTPF or relating to the provision of Ancillary Services (collectively the "Competing Business") to the following entities and their respective Affiliates ("Lucent Competitors"): *** (b) Exceptions. Notwithstanding SECTION 7.1(a), the restrictions set forth in SECTION 7.1(a) shall not impair, affect or interfere with the ability of the Newcourt Entities to: (i) enter into any relationship with any Lucent Competitor which Lucent has consented to in writing; (ii) purchase only the indebtedness portion of completed transactions of any type; provided that the Newcourt Entities shall not provide a quote, provide an indication of interest, letter of intent or similar interest, or agree or commit to purchase any such transaction or an interest in such transaction until *** (iii) lease products directly to, provide loans directly to, or otherwise provide financial services directly to a Lucent Competitor; 22 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (iv) enter into any programs, joint ventures or other similar arrangements or to effect any fundings or the purchase of any transactions originated outside any Service Area; provided, however, in the event that a Newcourt Entity enters into a relationship with a Lucent Competitor in a geographic territory which is not then a Service Area and such territory later becomes a Service Area, the Newcourt Entities shall be entitled to continue such relationship; provided that such arrangement shall not be continued beyond the later of (A) 180 days after the date the geographic territory becomes a Service Area or (B) the then applicable term specified in the program, joint venture or other applicable documents (v) continue the relationships described on Schedule 7.1; (vi) continue a program or joint venture which constitutes a Competing Business that has been acquired by a Newcourt Entity; provided, however, (I) such business shall not be continued beyond 180 days after the date of such acquisition, and (II) the Newcourt Entities shall not acquire a business or entity which has, as substantially all of its business, a Competing Business, unless the Newcourt Entities divested or discontinued within 180 days after such acquisition. (c) During the Term, Lucent may add in good faith additional Lucent Competitors, provided, however, that if Newcourt has an existing program, joint venture or similar arrangement with any of these additional Lucent Competitors, Newcourt may continue such arrangement as if such arrangement were listed on Schedule 7.1. SECTION 7.2 COVENANT NOT TO SOLICIT. The Lucent Entities and the Newcourt Entities agree that during the Term they shall not solicit for employment any employees of each other who are engaged, in any significant manner, in the activities subject to this Agreement. SECTION 7.3 MUTUAL STANDSTILL. During the Term and any Transition Period, neither the Newcourt Entities, on one hand, nor the Lucent Entities, on the other hand, will, without the prior written consent of the other party, (i) propose any transaction between the parties or their respective security holders involving any of the other party's (or its ultimate parent company's) securities or security holders or (ii) acquire, or assist, advise or encourage any other Person in acquiring, directly or indirectly, control of the other party (other than the party's interest in LTPF). 23 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. ARTICLE VIII REMARKETING OF PRODUCTS SECTION 8.1 IN GENERAL. (a) The Operating Committee and NCT shall develop and coordinate the strategies with respect to the disposition or re-lease (whether by the extension of the existing lease or by a new lease to a third party) of Products financed by NCT (whether at the end of the lease term or upon the return or repossession of the leased Product prior to the end of such term), with the objective of maintaining the relevant Customers and Authorized Dealers as purchasers and users of Products. Subject to (b) below, NCT will not be restricted in terms of its right to sell, release or otherwise dispose of returned or repossessed Products (including Products that have been leased by or subject to security interests or other claims in favor of NCT). (b) Lucent shall have the right to purchase any Products which are returned to LTPF at ***. If Lucent does not exercise this option, Lucent shall have the right to match any bid received by LTPF for any such Products if the bid is less than ***. Lucent may exercise this option to purchase Products for an aggregate purchase price payable by Lucent not in excess of *** of Financings expected to be originated in the then current fiscal year based upon the then current Annual Operating Plan. SECTION 8.2 RIGHTS TO USE SOFTWARE. Lucent hereby grants, on behalf of itself and any other applicable Lucent Entity, a license to the appropriate Newcourt Entity to use any and all Software associated with routine use of Products, which license shall with respect to any such Software be effective automatically and immediately upon Financing by NCT through LTPF of such Products in connection with which such Software is to be used. Except as provided herein, the scope of the license granted to NCT shall be consistent with the scope of the license granted by Lucent in its standard form of sales agreement with respect to such Software. NCT shall (i) not be required to pay any license fee for such Software or otherwise comply with the terms of any applicable license agreement for so long as NCT is merely providing Financing for such Software or any related Products or has foreclosed on or otherwise repossessed or reacquired such Software in connection with a default under or expiration or termination of the related Financing but is not using such Software (except for purposes of testing or demonstrating such Software in connection with any proposed disposition of such Software) and (ii) be entitled to assign its license to any other Person, provided that if such Person is not NCT and Lucent's standard form of license agreement for such Software requires the prior consent of Lucent to assign such license, NCT shall assign such license only upon execution and delivery by the assignee of the Lucent's standard form of license agreement for such Software and agreement by such assignee to pay, at the then-prevailing rate, any fees required to be paid by a licensee of such Software to Lucent pursuant to the terms of such license agreement. 24 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. ARTICLE IX ARTICLE REPRESENTATIONS AND WARRANTIES; ALLOCATION OF RISKS SECTION 9.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Unless otherwise agreed with respect to particular Financings or Ancillary Services or programs with respect thereto, Lucent will be deemed to make the following representations, warranties and covenants to NCT when NCT initially provides a Financing or Ancillary Service with respect to a Product (to the extent such representations, warranties or covenants are applicable to the particular Financing or Ancillary Service): (1) NCT will, upon payment to Lucent of the True Product Cost of any Product being Financed, receive (A) if the Financing involves a lease or an installment sale, whereby title to the Product shall be transferred by a Lucent Entity to NCT, marketable title to the Product (other than Products constituting Software) free and clear of any lien or charge thereon created by or through any Lucent Entity and (B) to the extent any portion of such Product is not manufactured or developed by a Lucent Entity and with respect to which a Lucent Entity has received a warranty or indemnity from another Person, an assignment by the Lucent Entity of the remaining portion of any such applicable warranty, express or implied, and indemnity rights applicable to such Product to the extent that such warranty and indemnity rights are assignable (and if any such warranty or indemnity rights are not so assignable, the Lucent Entity will hold any such warranty and indemnity rights for the benefit of NCT and will, at the direction and expense of NCT, take all such actions as such NCT Entity reasonably requests to enforce all or any part of such warranty and indemnity rights); (2) none of the Lucent Entities nor, to Lucent's knowledge, any of their employees or agents will knowingly participate in, or fail to disclose to NCT any knowledge of, any fraudulent or illegal act in connection with the Financing or Ancillary Service; (3) the Products financed by NCT, if sold by a Lucent Entity to the Customer or NCT, will be delivered to the Customer or Authorized Dealer named in the applicable Financing agreement and installed at the location, if any, indicated in the applicable Financing agreement in accordance with such Lucent Entity's normal operating practices and the terms of the contract with the Customer or Authorized Dealer, and the Lucent Entity will honor all express and implied warranties and agreements, representations and assurances made by it to any Customer or Authorized Dealer with respect to any such Product; and (4) if an employee of a Lucent Entity obtained the Customer's signature on a Finance Contract, Lucent has delivered or will deliver such Finance Contract to NCT, and to the Lucent Entity and its employees' knowledge, there are no other original copies; and (5) the Lucent Entities and their employees, agents and representatives will not make any representation, warranty or covenant on behalf of LTPF or any Newcourt Entity to a 25 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. Customer or Authorized Dealer with respect to the: (A) Financing, (B) the Standard Documents, (C) or other documents provided by an NCT Entity, or (D) the Ancillary Service, except (i) with the consent of a Newcourt Entity, (ii) in accordance with standard operating practices between the Lucent Entities, on the one hand, and LTPF and/or the Newcourt Entities, on the other hand, or (iii) at the direction of LTPF or any Newcourt Entity. (b) Unless otherwise agreed with respect to particular Financings, Ancillary Services or programs with respect thereto, NCT will be deemed to make the following representations, warranties and covenants to Lucent each time that NCT resells a Financed Product to Lucent or provides Financing or Ancillary Service with respect to a Product (to the extent such representations, warranties or covenants are applicable to the particular Financing or Ancillary Service), or if Lucent purchases a Finance Contract from NCT or LTPF: (1) Lucent will, upon payment of the purchase price of any Financed Product, receive (A) marketable title to the Product free and clear of any lien or charge thereon created by or through NCT and (B) to the extent any portion of such Product is not manufactured or developed by Lucent and with respect to which NCT has received a warranty or indemnity from a Person other than Lucent, an assignment of any such applicable warranty, express or implied, and indemnity rights to the extent that such rights are assignable (and if any such warranty or indemnity rights are not so assignable, NCT will hold any such warranty and indemnity rights for the benefit of such Lucent Entity and will, at the direction and expense of Lucent, take all such actions as Lucent reasonably requests to enforce all or any part of such warranty and indemnity rights); (2) neither NCT nor, to its knowledge any employees or agents thereof will knowingly participate in, or fail to disclose to Lucent any knowledge of, any fraudulent or illegal act in connection with the Financing or Ancillary Service; (3) Lucent will, upon payment of the Investment Balance (or such other amount as may be agreed upon for Lucent to purchase a Finance Contract), receive title to the Finance Contract free and clear of any lien or charge thereon created by or through any Newcourt Entity, except for rights of the Customer under the Finance Contract; and (4) The Newcourt Entities and their employees, agents and representatives will not make any representation, warranty or covenant on behalf of any Lucent Entity to a Customer or Authorized Dealer with respect to the any products and any contract, agreement or other documents provided by a Lucent Entity or related to the furnishing of products or services by any Lucent Entity. SECTION 9.2 ALLOCATION OF CERTAIN RISKS. (a) LTPF shall assume responsibility for and bear the risks of delinquency, default and non-payment under any Financings unless (i) Lucent and NCT agree otherwise in writing, (ii) NCT is entitled to indemnification for such risks pursuant to the terms of ARTICLE XIII, or (iii) such delinquency, default or non-payment is a Lucent Responsibility, as defined below (in which event such risks will be borne in accordance with this SECTION 9.2). 26 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (b) A "Lucent Responsibility" means a delinquency, default or non-payment by a Customer or an Authorized Dealer under any Financing resulting from: (1) a demonstrated failure by a Lucent Entity to deliver, install or service, as the case may be, such Product in accordance with its contractual or legal obligation to deliver, install or service such Product; (2) a demonstrated failure of any Product to comply with any contractual representation, warranty or covenant provided by a Lucent Entity with respect to such Product or with any warranty of a Lucent Entity applicable to such Product by operation of law; (3) any adjudicated offset or counterclaim prevailed upon by the relevant Customer or Authorized Dealer against the amounts due by it under the Financing on the basis of disputes between such Customer or Authorized Dealer and a Lucent Entity (or on the basis of amounts owing by a Lucent Entity to such Customer or Authorized Dealer) under any business dealings between such Customer or Authorized Dealer and a Lucent Entity, whether or not related to such Product or such Financing; (4) a demonstrated breach or violation by a Lucent Entity or any of its employees of the provisions of SECTION 9.1(a) (whether or not such breach or violation gives rise to a right of termination of this Agreement); (5) a finding as a matter of law or equity, that any Lucent Entity is responsible for the Customer's or Authorized Dealer's failure to honor its obligations under a Financing or such Customer or Authorized Dealer is able to avail itself of a defense to any claim asserted by the relevant NCT Entity with respect to such Financing based on non-performance by any Lucent Entity of any obligations of any such Lucent Entity (whether or not related to the Financed Product) or any breach by a Lucent Entity of any warranty (at contract or at law) with respect to any Product, despite customary "hell or high water" contained in the Finance Contract. (c) If a Lucent Responsibility occurs, or Lucent breaches a representation or warranty contained in SECTION 9.1(a), then Lucent shall pay to LTPF the amount of the damages to LTPF or NCT as a result of such event, not to exceed the Investment Balance, and if such damages were incurred by NCT, LTPF shall pay over such amount to NCT. If Lucent pays the Investment Balance, Lucent shall be entitled to purchase the Finance Contract and title to the related Equipment, which shall be conveyed to Lucent in accordance with the representations and warranties contained in SECTION 9.1(b)(3). (d) If NCT breaches a representation or warranty contained in SECTION 9.1(b), NCT shall pay to Lucent the amount of Lucent's daamages, not to exceed the amount Lucent paid LTPF or NCT for the relevant Product and/or Finance Contract. SECTION 9.3 COLLECTION AND REPOSSESSION ACTIONS. Except as provided in SECTION 9.4, NCT will be entitled, in its discretion, and on behalf of LTPF, to take or not to take any and all 27 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. actions to collect amounts due and unpaid or otherwise enforce its rights upon the occurrence of a default by a Customer or Authorized Dealer under a Financing including, without limitation, to make demand for payment or performance, institute an action for payment of amounts due or for specific performance, institute collection proceedings, effect acceleration or termination of the Financing, foreclose upon or take possession of security (which may include the Financed Product) provided by or on behalf of the Customer or Authorized Dealer or enforce remedies to take possession and control of the Product. SECTION 9.4 ACTIONS AGAINST SIGNIFICANT ACCOUNTS. LTPF shall, to the extent practicable, provide advance notice to Lucent of any legal proceeding or repossession action to be initiated against a Significant Account. ARTICLE X GRANT OF LICENSE SECTION 10.1 GRANT OF LICENSE. Lucent hereby grants to NCT a non-exclusive, non-transferable, worldwide license and right to use the Marks for Permitted General Purposes. Under such license, NCT shall be entitled to use the Marks for purposes of identifying NCT as the source of any Financing Services or Ancillary Services offered or provided by NCT hereunder from time to time (including, without limitation, in agreements, business cards, letterheads, brochures, and computer programs) in a manner satisfactory to Lucent and in accordance with SECTION 10.3 below. SECTION 10.2 TERMINATION OF LICENSE. From and after the earlier of (i) *** days after notice by Lucent to NCT and (ii) the termination of this Agreement, NCT shall discontinue use of the Marks and the license granted to NCT shall terminate, except that to the extent the existing Finance Contracts utilize the Marks in the Finance Contracts and related documentation, NCT may continue to use the marks to the extent reasonably necessary to facilitate the orderly servicing and disposition of such Finance Contracts. SECTION 10.3 OTHER ISSUES. (a) NCT agrees to abide by Lucent's guidelines specifying the dimensions and other aspects of the use and appearance of the Marks as they may be generally in effect from time to time. (b) NCT's use of the Marks shall be subject to prepublication review and approval with respect to, but not limited to, content, style, appearance, composition, timing and media. One copy of all such marketing material shall be provided to Lucent (Attention: ***). (c) NCT agrees to provide Lucent with any documents reasonably requested by Lucent in connection with its registration and enforcement of the Marks worldwide. 28 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (d) NCT agrees that it acquires no rights to the Marks by its use and that any use of the Marks by NCT inures to the sole benefit of Lucent. (e) In the event that NCT becomes aware of any unauthorized use of the Marks by third parties, NCT agrees to promptly notify Lucent and to cooperate fully, at Lucent's expense, in any enforcement of Lucent's rights against such third parties. Nothing contained in this paragraph shall be construed to require Lucent to enforce any rights against third parties or to restrict Lucent's rights to license or consent to such third parties' use of the Marks. ARTICLE XI MANAGEMENT OF LTPF SECTION 11.1 MANAGEMENT OF LTPF. Except as otherwise expressly provided in this Agreement, NCT shall, in accordance with SECTION 11.3, operate LTPF in consultation with, as to certain matters, and with the consent of as to other matters, an operating committee (the "Operating Committee"). SECTION 11.2 OPERATING COMMITTEE; NUMBER AND ELECTION OF MEMBERS; ADDITIONAL COMMITTEES. (a) The Operating Committee shall initially consist of four members (each, a "Member"), two designated by Lucent and two by NCT. (b) If additional committees of LTPF are formed by the Operating Committee, NCT and Lucent shall be entitled to the same representation on any such additional committee as NCT and Lucent receive on the Operating Committee. (c) *** (d) The Members of the Operating Committee shall conduct the affairs of the Operating Committee in a commercially reasonable manner. SECTION 11.3 POWERS OF OPERATING COMMITTEE; IMPASSE. (a) Newcourt shall extensively consult with the Operating Committee on the operation of LTPF as to: (1) Financing product and market strategy; (2) internal audits; (3) appointment, termination and compensation of senior officers of LTPF, other than the chief executive officer, or officer holding the equivalent position, of LTPF (the "CEO"); (4) LTPF's compliance with its Performance Metric targets and other obligations; 29 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (5) matters specified in an Annual Operating Plan; and (6) other matters agreed upon by Lucent and Newcourt. (b) Operating Committee approval and consent shall be necessary for the approval or amendment of each Annual Operating Plan; provided, that if the Operating Committee reaches an impasse with respect to any matter related to the business affairs of LTPF, or fails to approve any Annual Operating Plan after employing all reasonable efforts to resolve such impasse, the matter will be resolved in accordance with ARTICLE XIV. (c) The CEO shall be nominated by Newcourt, and Operating Committee approval shall be required to appoint the CEO. (d) Either Newcourt or the Operating Committee may request the removal of the CEO, but the CEO may not be removed without the approval of the other party or group. If Newcourt and the Operating Committee can not reach agreement on the removal of the CEO, the matter shall be resolved in accordance with ARTICLE XIV. SECTION 11.4 PLACE OF MEETINGS. Meetings of the Operating Committee may be held either within or without the State of New Jersey. The Members serving on the Operating Committee, by Majority Vote, may appoint from among themselves a chairperson to preside at meetings of the Operating Committee. Any Member shall be permitted to attend any meeting of the Operating Committee in person or by conference call. SECTION 11.5 REGULAR MEETINGS. The Operating Committee shall meet at least once a month (unless otherwise agreed by the parties). No notice need be given to Members of regular meetings for which the Members have previously designated a time and place for the meeting. SECTION 11.6 SPECIAL MEETINGS. Special meetings of the Operating Committee may be held at any time upon the request of at least two Members. Notification of any special meeting shall be given to each Member at least two Business Days before the meeting. Notification of the time, place and purpose of such meeting may be waived in writing before or after such meeting. Attendance of a Member at such meeting shall also constitute a waiver of Notification thereof. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Operating Committee need be specified in the notice or waiver of notice of such meeting. SECTION 11.7 QUORUM OF AND ACTION BY OPERATING COMMITTEE. The presence, in person or by written proxy, of a majority of the Members shall constitute a quorum for the transaction of business at any meeting of the Operating Committee. Except as otherwise expressly set forth in this Agreement, any action to be taken or approved by the Operating Committee hereunder must be taken or approved by Majority Vote of the Operating Committee and any action so taken or approved shall constitute the act of the Operating Committee. SECTION 11.8 COMPENSATION; REIMBURSEMENT. (a) The Members shall serve in such capacity without compensation from LTPF therefor. The Members at all times shall remain the employees of their respective employers 30 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. and shall owe duties of loyalty and care to such respective employers, and not to any other Persons. (b) The compensation policies and arrangements (including base salaries, bonuses and incentive programs) applicable to members of the Operating Committee who are "dedicated" to LTPF will be set by the senior executive management representatives of Lucent and NCT, and the compensation policies and arrangements (including base salaries, bonuses and incentive programs) applicable to all other LTPF dedicated employees will be set as indicated in the Annual Operating Plan. Incentive compensation shall be equally aligned with the economic performance of LTPF and with Lucent's applicable sales targets. (c) LTPF will reimburse each of the parties for the direct costs reflected in the Annual Operating Plan, incurred in performed administrative or other services that are outsourced to or otherwise performed by such party on behalf of LTPF, as agreed to between NCT and Lucent. SECTION 11.9 RESIGNATION AND REMOVAL. Any Member may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time is specified, at the time of its receipt by LTPF. Each party hereto will have the right to remove and replace its designees to the Operating Committee at any time. In addition, each party will have the right to propose the removal of the other party's designees at any time; provided, that the removal of a party's designees may be effected only with that party's consent, which consent shall not be unreasonably withheld or delayed. SECTION 11.10 ACTION BY WRITTEN CONSENT. Any action that may be taken at a meeting of the Operating Committee may be taken without a meeting if a consent in writing, setting forth the action to be taken, shall be signed by all of those Persons entitled to vote at that meeting, and such consent shall have the same force and effect as a unanimous vote of the Operating Committee at a meeting duly called and held. No notice shall be required in connection with the use of a written consent pursuant to this SECTION 11.10. SECTION 11.11 OFFICERS; EMPLOYEES. (a) The officers of LTPF will consist of the CEO and such other or alternative senior officers as may be appointed from time to time in consultation with the Operating Committee or its designee. Except with respect to the CEO, each party will have the right to nominate officers, but the appointment of any them requires consultation with the Operating Committee. The Operating Committee may request LTPF to remove and replace any officer, except the CEO, at any time and from time to time. Unless NCT objects, NCT shall promptly remove any such officer. If NCT objects, NCT shall set forth its basis for such objection. In the event NCT and the Operating Committee reach an impasse on such issue, such issue shall be resolved pursuant to the procedure set forth in ARTICLE XIV. (b) The officers of LTPF will be responsible for identifying managing the day to day operations of LTPF, including any employees within or external to NCT's organization who will be providing services to LTPF and any third party financing sources which will be funding or 31 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. originating Financings on behalf of or in coordination with LTPF. Lucent may identify employees of Lucent who will be "dedicated" to LTPF, with the reasonable consent of the CEO. (c) The appropriate officers of LTPF will submit to the Operating Committee such reasonable periodic reports regarding the actual and planned business activities of LTPF as the Operating Committee reasonably directs. In addition, the officers of LTPF will cooperate fully with each of the parties hereto (including submitting requested forecasts, projections and other reports) as may be reasonably requested as a part of such party's own business planning and forecasting activities. ARTICLE XII ANNUAL OPERATING PLAN; BOOKS AND RECORDS SECTION 12.1 ANNUAL OPERATING PLAN. (a) The business activities of LTPF will be conducted by NCT pursuant to an annual operating plan (the "Annual Operating Plan"). The Annual Operating Plan will be prepared by LTPF and approved by the Operating Committee. The Annual Operating Plan, covering the period from the Commencement Date through September 30, 1998, which will include the financial commitments of LTPF for the periods of October 1, 1997, to September 30, 1998, and October 1, 1998 to September 30, 1999, will be mutually agreed to by Newcourt and Lucent as soon as possible. The appropriate officers of LTPF will prepare and submit subsequent Annual Operating Plans by June 30 of each year during the Term for the next one year period, commencing June 30, 1998 with an Annual Operating Plan for the period October 1, 1998 to September 30, 1999, and in such detail as will allow the Operating Committee to consider and approve the plans prior to the beginning of the fiscal year covered by any such plans. (b) Each Annual Operating Plan will address such matters as the CEO determines or the Operating Committee directs; and should, address at least the following (and where appropriate, by channel, product line and geographic region): (i) fully detailed financial projections and assumptions as to such period's Notional Fee Base; (ii) organizational structure and staffing requirements; (iii) compensation structure; (iv) Financing product offerings; (v) target credit approval rates; (vi) ***; (vii) target customer response times; (viii) lease rate *** policies; (ix) residual policies; (x) ***; (xi) bad debt reserve levels, usage and reserve policies; (xii) ***; and (xiii) ***. (c) Should the Operating Committee fail to approve an Annual Operating Plan, the impasse will be resolved according to the process set forth in ARTICLE XIV hereof. If an Annual Operating Plan has not been established with respect to any fiscal year NCT shall be responsible for operating LTPF in accordance with the parameters set forth in the prior fiscal year's Annual Operating Plan (except that the *** shall be increased by *** over the target for the prior fiscal year) until an Annual Operating Plan is established for the then current period, in which event NCT shall be responsible to operate LTPF in accordance with the newly established Annual Operating Plan. 32 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SECTION 12.2 BOOKS AND RECORDS; RIGHT OF INSPECTION. (a) During the Term, NCT shall maintain LTPF's management books and records appropriate or necessary in connection with the conduct of the business of LTPF pursuant to the terms of this Agreement. (b) Lucent may examine and copy in person, at any reasonable time and for any reasonable purpose, such information as it deems necessary regarding the business, affairs and operations of LTPF. SECTION 12.3 *** If for any fiscal year, LTPF shall achieve a *** for that year which is less than *** of the amount specified for the Annual Operating Plan for that year, the *** shall be *** for the next fiscal year, unless the Operating Committee agrees otherwise by a Majority Vote. Any revision to the Annual Operation Plan for the next fiscal year shall specify whether or not the *** is included. ARTICLE XIII INDEMNIFICATION SECTION 13.1 NEWCOURT INDEMNITY. Newcourt agrees to save, protect, indemnify and hold harmless, on an After-Tax Basis, the Lucent Entities and their respective employees, officers, directors, agents and representatives from and against all liabilities, costs (including attorneys fees and disbursements), claims and charges arising from or relating to: (i) the breach by any Newcourt Entity of any representations, warranties or covenants of any Newcourt Entity contained in or delivered pursuant to this Agreement, or any other agreement of any Newcourt Entity relating to Products, Financings or Ancillary Services; or (ii) any violation by any Newcourt Entity or any of its employees or agents of any law applicable to the sale, lease or other furnishing of Products or to any related Financings or Ancillary Services (including, without limitation, any law relating to the reporting of or extension or denial of credit, the collection of debt or the repossession or disposition of products). The foregoing indemnity shall not apply in respect of liabilities, costs, claims or charges to the extent arising from or relating to (x) any action, sufferance or omission by any Lucent Entity or its employees effected in bad faith or (y) any breach or violation by a Lucent Entity of the provisions of this Agreement or any such other applicable agreement between a Lucent Entity and a Newcourt Entity (whether or not such breach or violation gives rise to a right of termination of this Agreement or such other agreement). SECTION 13.2 LUCENT INDEMNITY. Lucent agrees to save protect, indemnify and hold harmless, on an After-Tax Basis, the Newcourt Entities and their respective employees, officers, directors, agents and representatives of each of the foregoing from and against all liabilities, costs (including attorneys fees and disbursements), claims and charges arising from or relating to: (i) breach by a Lucent Entity of any representations, warranties or covenants contained in or delivered pursuant to this Agreement or any other agreement relating to 33 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. Products, Financings or Ancillary Services; (ii) any products, environmental or other similar adjudicated liability relating to the Products ; (iii) any misrepresentation made by any employee or agent of a Lucent Entity to any Customer or Authorized Dealer as to the commitment of a Newcourt Entity to provide any Financings or Ancillary Services to such Customer or Authorized Dealer or the likely availability thereof; (iv) Lucent's rights to or ownership interests in the Marks or the invalidity or ineffectiveness of or any infringement against the Marks to the extent such liabilities, costs, claims or damages arise or are asserted (or are sustainable) under applicable United States federal, state or local law; (v) the invalidity or ineffectiveness of the license granted under this Agreement or pursuant hereto to the extent such liabilities, costs, claims or damages are asserted (or are sustainable) under applicable United States federal, state or local law. The foregoing indemnity shall not apply in respect of liabilities, costs, claims or charges to the extent arising from or relating to (x) any action, sufferance or omission by a Newcourt Entity or an employee of a Newcourt Entity that is effected in bad faith or (y) any breach or violation by Newcourt Entity or any employee of Newcourt Entity of the provisions of this Agreement or any such other applicable agreement between a Lucent Entity and a Newcourt Entity (whether or not such breach or violation gives rise to a right of termination of this Agreement or such other agreement). SECTION 13.3 INDEMNITY PROCEDURE. Each indemnified party under SECTION 13.1 or SECTION 13.2 shall, promptly after receipt of notice of a claim or action against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the claim or action; provided, that the failure to notify the indemnifying party will not relieve it from any liability which it may have to an indemnified party on account of the indemnity agreement contained in SECTION 13.1 or SECTION 13.2 unless, and only to the extent that, the indemnifying party was prejudiced by such failure, and in no event will such failure relieve the indemnifying party from any other liability which it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall have notified the indemnifying party thereof, the indemnifying party will be entitled to participate therein, and, to the extent that it wishes, to assume the defense thereof with counsel satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of any claim or action, the indemnifying party will not be liable to the indemnified party under SECTION 13.1 or SECTION 13.2 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, that the indemnified party will have the right to employ separate counsel to represent it if, in the reasonable judgment of such indemnified party, it is advisable for it to be represented by separate counsel, and in such event the fees and expenses of such separate counsel will be paid by such indemnified party. The indemnifying party may not without the prior written consent of the indemnified party agree to any settlement of any claim or action as the result of which any remedy or relief, other than solely for monetary damages for which the indemnifying party will be responsible hereunder, will be applied to or against the indemnified party. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel satisfactory to the indemnified party, the indemnified party will continue to be entitled to participate in the defense thereof, with counsel of its own choice, but the indemnifying party will not be obligated hereunder to reimburse the indemnified party for the costs thereof. 34 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. ARTICLE XIV DISPUTE RESOLUTION SECTION 14.1 DISPUTES. The procedures for discussion, negotiation and arbitration set forth in this ARTICLE XIV will apply to all disputes solely between the parties or their respective Affiliates under this Agreement. SECTION 14.2 RESOLUTION OF DISPUTES. The parties hereto agree and acknowledge that they shall use good faith to resolve all differences and disputes. Consistent with the foregoing principles, the parties desire to avoid the expense and delay of resolving disputes by use of traditional civil litigation. Accordingly the parties agree to resolve their differences and disputes by first engaging in extensive discussions at the Operating Committee level. SECTION 14.3 REFERRAL TO EXECUTIVE OFFICERS. Either party may, by giving written notice to the other party, demand that any dispute or difference be referred to the President of Newcourt Financial and the *** of Lucent (or such other senior executive appointed by the applicable party) (the "Senior Management Executives") who will attempt in good faith and reasonable diligence to resolve the dispute. Any such notice shall state, with reasonable particularity, the nature of the dispute. The parties and their respective Senior Management Executives shall endeavor in good faith to resolve the dispute. If the dispute is not resolved by the Senior Management Executives within 30 calendar days, either party may have the matter will be submitted to mediation pursuant to the provisions of SECTION 14.4 hereof. SECTION 14.4 MEDIATION. (a) If, and only if, a notice pursuant to SECTION 14.3 has been given and the Senior Management Executives of the parties have not resolved the dispute within 30 days after the giving of such notice, then either party may submit the dispute to mediation. (b) Except as otherwise provided in this Section or as otherwise agreed upon, in writing by the parties, such mediation shall be administered by the American Arbitration Association (the "AAA") under its Commercial Mediation Rules as in effect at such time (the "Mediation Rules"). (c) The party desiring such mediation shall first provide notice to the other party requesting mediation. If the other party objects to mediation within 10 days after the request for mediation has been given, the dispute shall not be submitted for mediation. If the other party does not object in writing to the request for mediation within 10 days, the party sending the request for mediation shall initiate the mediation by filing a written request for mediation with the AAA and delivering a copy of such request to the other party. Such request shall state, with reasonable particularity, the nature of the dispute and shall include such additional information as may be required by the Mediation Rules. (d) Upon delivery of the mediation request, the parties shall endeavor in good faith to select a neutral mediator who is acceptable to each party. If the parties have not selected a 35 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. mutually acceptable neutral mediator within five Business Days after the delivery of the mediation request, they shall so notify the AAA and the AAA shall appoint a mediator in accordance with the Mediation Rules. Unless otherwise agreed upon by the parties, all mediation sessions shall be held at the AAA's regional office in New Jersey. The parties shall endeavor in good faith to resolve the dispute through the mediation process contemplated by this Section and neither party shall be entitled unilaterally to terminate the mediation prior to thirty days after the appointment of a mediator. (e) The fees and expenses of the mediator and AAA will be borne one-half by Lucent and one-half by NCT. All other expenses in connection with the arbitration shall be the responsibility of the party incurring such expense. SECTION 14.5 ARBITRATION. (a) If a party receiving a request for mediation pursuant to SECTION 14.4 has objected to mediation in accordance with SECTION 14.4 or if the dispute has been submitted to mediation pursuant to SECTION 14.4 and such mediation has been properly terminated (without resolution of the dispute) pursuant to the Mediation Rules and this Agreement, then either party may demand that the dispute be resolved by binding arbitration. (b) The party desiring such arbitration shall initiate the arbitration by delivering a written demand for arbitration to the other party and taking such other action as is required by the Arbitration Rules. Such demand shall state, with reasonable particularity, the nature of the Dispute and shall include such additional information as may be required by the Arbitration Rules. (c) The parties shall attempt to select, within 5 days after such notice of demand for arbitration is given, a neutral arbitrator satisfactory to each. (d) If the parties are not able to jointly select an arbitrator within such 5 day period, the parties shall each appoint, by notice to the other party, a reasonably qualified neutral arbitrator within 10 days after provision of the notice referred to in paragraph (c) above. If one party appoints such an arbitrator within such time period and the other party fails to appoint an arbitrator within such time period, the arbitrator appointed by the one party shall be the sole arbitrator of the dispute. (e) In the event that an arbitrator is not selected pursuant to paragraph (c) or (d) above, and, instead, two arbitrators are selected pursuant to paragraph (d) above, the two arbitrators will, within 10 days after the appointment of the later of them to be appointed, select a third reasonably qualified neutral arbitrator who will act as the sole arbitrator of the dispute. After selection of such sole arbitrator, the two initial arbitrators shall have no further role with respect to the dispute. (f) The sole arbitrator selected pursuant to paragraph (c), (d) or (e) above will set a time for the hearing of the dispute which will not be later than 30 days after the date of appointment of the sole arbitrator pursuant to paragraph (c), (d) or (e) above, and the final decision of such 36 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. arbitrator will be rendered in writing to the parties not later than 30 days after the last hearing date, unless otherwise agreed by the parties in writing. (g) Except as otherwise set forth herein or agreed to by the parties, any arbitration hereunder will be conducted in accordance with the Commercial Arbitration Rules of the AAA then prevailing, and the decision of the arbitrator will be final and binding on the parties, and will be enforceable in any court having jurisdiction over the parties. Compliance with the provisions of this Agreement concerning arbitration of disputes is a condition precedent to the commencement of any suit, action or proceeding in any Federal, state or local court with respect to any dispute governed by this ARTICLE XIV. (h) The arbitrator will be limited to interpreting or construing the applicable provisions of this Agreement, and will have no authority or power to alter, amend, revoke or suspend any provision of this Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement and to fashion appropriate remedies for breaches of this Agreement; provided that the arbitrator shall not (1) have any authority in excess of the authority a court having jurisdiction over the parties and the controversy or dispute would have absent these arbitration provisions and (2) have any right or power to award punitive, special, indirect, consequential or exemplary damages. (i) If a party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing party. (j) The fees and expenses of the arbitrator and AAA will be borne one-half by Lucent and one-half by NCT. All other expenses in connection with the arbitration shall be the responsibility of the party incurring such expense. SECTION 14.6 CONFIDENTIALITY. The existence, substance and results of any mediation or arbitration hereunder shall be held confidential by the parties and their Affiliates and shall not be disclosed to other Persons except (1) to their respect legal counsel, auditors or directors, or (2) to the extent such disclosure is either (I) required to enforce the arbitration award or remedy or (II) required by applicable law, regulation, rule, court order or similar legal process. The existence and results of any dispute resolution procedure under this Article shall be held in confidence by the parties and their Affiliates and shall not be disclosed to any third party. All views expressed and suggestions, admissions and proposals made by the parties during the course of the procedures contemplated by this ARTICLE XIV shall be entitled to the same degree of confidentiality as they would enjoy under a mediation or arbitration proceeding pursuant to the Mediation Rules or Arbitration Rules. Notwithstanding any other provision of this Agreement, the Mediation Rules and/or the Arbitration Rules to the contrary, the foregoing restrictions do not apply to disclosures (a) to the parties' attorneys, auditors, and/or directors, (b) which are necessary or appropriate to enforce or apply any resolution of the Dispute (including, without limitation, any arbitration decision, award or remedy), and/or (c) which are required by applicable law, regulation, court order or rule, or similar legal process. 37 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SECTION 14.7 LITIGATION. Compliance with the provisions of this Article is a condition precedent to the commencement or maintenance of any action, claim, suit or proceeding (whether in the form of an original action, third-party action, counterclaim, cross claim or otherwise) with respect to any Dispute in any court (federal, state, local, foreign or otherwise) or other judicial tribunal and no such action, suit or proceeding may be commenced or maintained unless and until the dispute resolution procedures contemplated by SECTIONS 14.2 through 14.6 have been exhausted by the parties. SECTION 14.8 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this ARTICLE XIV. ARTICLE XV TERM AND TERMINATION; TRANSITION PERIOD SECTION 15.1 INITIAL TERM AND RENEWAL. (a) This Agreement shall become effective on the date hereof (the "Commencement Date") and, subject to SECTION 15.2, shall remain in effect until, and shall terminate on, September 30, 2002 (the "Initial Term"). This Agreement shall automatically be renewed and remain in effect for a period of three years (the "Renewal Term"), commencing upon the expiration of the Initial Term or any previous Renewal Term, unless either party elects not to extend the terms of this Agreement beyond the Initial Term by giving the other party notice of such election (a "Non-Renewal Notice") at least 6 months prior to the expiration of the Initial Term or the Renewal Term (it being understood that failure to give timely notice of non-renewal (which time for the delivery of notice shall be of the essence of this Agreement) will be deemed to constitute an election by the parties to renew the term of this Agreement for the Renewal Term as provided herein). (b) If this Agreement is not renewed at the end of the Initial Term or any Renewal Term, then this Agreement shall remain in effect for a period of 18 months beginning on the later of one year before the scheduled end of the Term or the day the Non-Renewal Notice is delivered (the "Transition Period"). During the last 6 months of the Transition Period (the "Wind Down Period"), (i) except as set forth in SECTION 15.5, all of the parties' rights and obligations under this Agreement shall continue in full force and effect, and (ii) the parties shall take appropriate steps to wind down the operations of LTPF in an orderly manner in accordance with SECTION 15.5(a). Upon the expiration of the Transition Period, this Agreement shall terminate. SECTION 15.2 EARLY TERMINATION. This Agreement may be terminated in its entirety prior to the expiration of the Term: (a) at any time, by the mutual written consent of Newcourt and Lucent; or 38 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (b) at the election of Lucent, by notice to NCT, in the event that NCT commences a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy or similar law or statute or makes an assignment of its property or any substantial portion thereof for the benefit of creditors and such proceeding or assignment is continuing or in effect as the time of such notice; or (c) at the election of Lucent, by notice to NCT, in the event that there is commenced against NCT an involuntary proceeding seeking to have NCT declared a bankrupt or seeking to have a receiver appointed with respect to a substantial portion of its property which is not dismissed within 60 days of commencement or there is entered an order declaring NCT a bankrupt or appointing a receiver with respect to a substantial portion of its property and such order is not dismissed within 60 days and such proceeding or order is continuing or in effect at the time of such notice; or (d) at the election of NCT, by notice to Lucent, in the event that Lucent commences a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy or similar law or statute or makes an assignment of its property or any substantial portion thereof for the benefit or creditors and such proceeding or assignment is continuing or in effect at the time of such notice; or (e) at the election of NCT, by notice to Lucent, in the event that there is commenced against Lucent an involuntary proceeding seeking to have Lucent declared a bankrupt or seeking to have a receiver appointed with respect to a substantial portion of its property which is not dismissed within 60 days of commencement, or there is entered an order declaring Lucent a bankrupt or appointing a receiver with respect to a substantial portion of its property and such order is not dismissed within 60 days and such proceeding or order is continuing or in effect at the time of such notice; or (f) at the election of Lucent by notice to Newcourt, if (i) for any period of ninety (90) consecutive days, the long-term senior unsecured debt of Newcourt shall not be rated investment grade credit or equivalent by at least one U.S. Rating Agency; and (ii) within such 90 day period Newcourt shall be unable to secure a six month or longer forward funding commitment from one or more financial or insurance institutions with long-term senior unsecured debt rated investment grade credit or equivalent by at least one U.S. Rating Agency to ensure sufficient funding of LTPF; and (iii) such forward funding commitment (or its replacement) is not renewed or replaced with a similar forward funding commitment at least 90 days prior to its scheduled expiration date; or (g) at the election of Lucent by notice to Newcourt, if LTPF fails ***; or (h) at the election of Lucent by notice to Newcourt upon a Change in Control of NCT by a Person that (i) is a Lucent Competitor or (ii) does financings for products of a Lucent Competitor that if performed by NCT, would violate NCT's covenants set forth in SECTION 7.1, unless within 90 days of the acquisition, the entity that finances the Lucent Competitor divests itself of such financing arrangement; or 39 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (i) at the election of Lucent by notice to Newcourt, if any Newcourt Entity shall materially breach any of its obligations under SECTION 7.1 or ARTICLE X, and either (I) such breach is not cured within 15 days after notice or (II) within 15 days after notice, Newcourt fails to submits to Lucent a written explanation of the manner in which the breach shall be cured, or (III) Newcourt provides Lucent with a written explanation of the manner in which it will cure the breach, but and in any event such breach is not cured within 45 days after notice; or (j) at the election of Lucent by notice to Newcourt if any amounts due to Lucent under Articles III or IV or *** are not paid when due (other than amounts which are being disputed in good faith) and such failure is not cured within 30 days after notice to Newcourt; or (k) at the election of Newcourt by notice to Lucent, if any Lucent Entity shall materially breach any of (x) its obligations under Article XVII or (y) its material obligations under Article VI, and in the case of Article VI, such breach is not cured within 30 days after notice to Lucent. SECTION 15.3 PARTIAL EARLY TERMINATIONS AND PERFORMANCE METRICS. (a) Performance Metrics Partial Termination Events. If any of the Performance Metrics set forth below in this Section 15.3(a) are in any material respects not satisfied and are not remedied within the applicable cure period specified in paragraphs (i) through (iii) of this Section 15.3(a), Lucent may, upon written notice to NCT ("Partial Termination Notice") within 30 days after the expiration of the applicable cure period specified below, terminate this Agreement as to ***: (i) If LTPF *** fails to achieve ***, Lucent may give NCT written notice of such failure. NCT shall, within thirty (30) days of the date of delivery of such notice, supply Lucent with a plan to remedy the situation. Unless NCT, within *** after the date of the delivery of such notice, (A) ***, or (B) ***, Lucent shall be entitled, upon delivery of the Partial Termination Notice, to ***. If LTPF, *** after the delivery by Lucent to NCT of the notice indicating that *** has not been accomplished, is unable cure the deficiency as required above or ***, Lucent shall be entitled, upon delivery of the Partial Termination Notice, to ***. If LTPF, within the applicable cure period, achieves *** and LTPF, ***, Lucent shall be entitled, upon delivery of the Partial Termination Notice, to ***. (ii) If LTPF *** fails to ***, Lucent may give NCT written notice of such failure. NCT shall, within thirty (30) days of the date of delivery of such notice, supply Lucent with a plan to remedy the situation. Unless NCT, within *** after the date of the delivery of such notice, (A) ***, or (B) ***, Lucent shall be entitled, upon delivering a Partial Termination Notice, to ***. If LTPF, within *** after the delivery by Lucent to NCT of the notice ***, is unable to ***, Lucent shall be entitled, upon delivery of the Partial Termination Notice, to ***. If LTPF ***, and LTPF, ***, Lucent shall be entitled, upon delivery of the Partial Termination Notice, to ***; and 40 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (iii) If LTPF fails ***, Lucent may give LTPF written notice of such failure. If Lucent provides such notice, LTPF shall, within 30 days after the notice, supply Lucent with a plan to remedy the deficiency or situation. Unless LTPF *** or ***, Lucent shall be entitled, upon delivery of a Partial Termination Notice, to ***. As used in this paragraph, ***. (b) Consequences of Partial Terminations. If Lucent terminates this Agreement with respect to *** prior to the expiration of the Term in accordance with SECTION 15.3(a), (x) Lucent shall be free to establish a joint venture, strategic alliance or other vendor financing relationship with one or more other parties with respect to ***; (y) the non-competition provisions of ARTICLE VII shall, effective 180 days after the delivery of the applicable Termination Notice, cease and be of no further force or effect with respect to ***; and (z) the parties shall wind down the operations of LTPF with respect to *** pursuant to provisions which are substantially similar to those set forth in SECTION 15.5(a). Notwithstanding the foregoing, all of the Outstanding Portfolio that was originated in the Product line, channel, region, country or area, subject to the termination, shall continue to be part of the Old or New Portfolio, as applicable. (c) Performance Metric Makeup/Payment. If any of the Performance Metrics set forth below in this SECTION 15.3(c) is in any material respect not satisfied and is not remedied within the applicable cure period specified in paragraphs (i), (ii) or (iii) of this SECTION 15.3(c), Newcourt shall pay damages to Lucent according to the following: (i) If LTPF *** fails to *** Lucent may give Newcourt written notice of such failure. Within *** of receipt of ***. (ii) If LTPF *** fails to *** Lucent may give notice to Newcourt of ***. Newcourt shall, within thirty (30) days of the date of delivery of such notice, supply Lucent with a plan designed to address the problem and within ***. (iii) If *** Newcourt shall ***. SECTION 15.4 OVERRIDING PRINCIPLES. Notwithstanding anything else contained in SECTION 15.2 or SECTION 15.3 to the contrary, if a Performance Metrics is not achieved as a result of an event which: (a) arises by reason of Lucent's material breach of this Agreement, or (b) is beyond the control of NCT and generally effects comparable financing sources in materially adverse and similar manner, then the portion of the non-performance which is attributable to such event shall not serve as a basis or part of the basis for Lucent to exercise any of its termination rights under this ARTICLE XV. Newcourt will bear the burden of proving that the exception in clause (b) has been met. Thereafter, LTPF will utilize commercially reasonable efforts to cure such failure. To the extent that the effect of such non-performance is a *** or less reduction of the *** and is not caused by Lucent's material breach, such reduction shall be *** for the following year. 41 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SECTION 15.5 EFFECT OF TERMINATION. (a) Non-Renewal. If Lucent or Newcourt delivers a timely Non-Renewal Notice pursuant to SECTION 15.1(a), the parties rights and obligations under this Agreement shall continue in full force and effect, except with respect to the following: (i) The parties shall immediately enter into good faith negotiations regarding a final 18-month transition Operating Plan or shorter period if the Non-Renewal Notice is delivered in the First Renewal Period or any subsequent Renewal Period (the "Transition Operating Plan"). Such Transition Operating Plan shall (A) supersede any existing Operating Plan (including any Performance Matrix in any prior Operating Plan), and (B) provide for (1) the continued operation of LTPF during the period prior to the Wind Down Period in a manner that will not require any material capital commitments; and (2) the orderly winding down of LTPF during the Wind Down Period. The Transition Operating Plan will provide for orderly removal of co-located employees and the de-installation of all systems during the Wind Down Period. (ii) During the Transition Period, LTPF shall establish and maintain appropriate accruals and reserves in anticipation of the additional charges and costs, including employee terminations to be incurred in connection with the wind down of the operations of LTPF throughout the Transition Period and Wind Down Period and so long as the Old Portfolio and New Portfolio have Finance Contracts with remaining unpaid payments or unrealized Residual Investments. Throughout the Transition Period and Wind Down Period and so long as the Old Portfolio and New Portfolio have Finance Contracts with remaining unpaid payments or unrealized Residual Investments, NCT shall continue to maintain segregated books and records for the business of LTPF and shall continue to pay Lucent the Lucent Management Fee. (iii) The covenants of NCT and its affiliates set forth in Article VII shall cease to be of any effect as of ***. (iv) The covenants of Lucent in SECTION 6.1 AND 6.2 shall cease to be of any effect as of ***. (v) Upon the expiration of the Transition Period, Lucent may purchase one or more Finance Contracts by giving NCT three (3) business days written notice that it desires to purchase such Finance Contract. The purchase price for such Finance Contract shall be an amount equal to (a) all Payments due, past due, and to become due LTPF under such Finance Contract (excluding rental taxes, if applicable), discounted to their net present value as of the applicable date of purchase at an interest rate of ***. 42 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (vi) Except as provided in SECTIONS 15.5(a)(v) AND (x), Lucent shall have no additional rights to any property of LTPF, including, but not limited to the operating systems, the interfaces or equipment of LTPF or used by LTPF. (vii) Throughout the Transition Period and a period of *** thereafter, neither Lucent nor any Lucent Entity will, without the prior written consent of NCT, hire or engage, as an employee, independent contractor or in any other similar capacity, any Dedicated Employee whose primary duties are related to the servicing of either the Old Portfolio or the New Portfolio. (viii) Throughout the Transition Period and a period of *** thereafter, neither Lucent nor any Lucent Entity will, without the prior written consent of NCT, hire or engage, as an employee, independent contractor or in any other similar capacity, any Dedicated Employee whose primary duties are not related to the servicing of either the Old Portfolio or the New Portfolio. (ix) NCT shall deliver to Lucent an image of the then current Lucent customer database and lease portfolio in a mutually agreed upon medium and format with recognizably defined fields (for example, defined fields for "customer", "product" and others). (x) NCT shall service all owned and managed assets in the Old Portfolio and New Portfolio pursuant to the terms and conditions set forth in SECTION 16.3(g), and Lucent shall continue to have systems interfaces to track and monitor the Customers and the Finance Contracts. (xi) Any time during the Wind Down Period, Lucent may terminate the Location Support upon *** notice to Newcourt. (xii) Except as specified in SECTION 15.6, upon the expiration of the Transition Period, all obligations of NCT and Lucent under this Agreement shall terminate. (b) Complete Early Termination by Lucent. If Lucent terminates this Agreement in its entirety prior to the expiration of the Term in accordance with SECTION 15.2, the following terms and conditions shall be applicable: (i) The parties shall immediately enter into good faith negotiations regarding a final 6-month transition Operating Plan (the "Early Termination Transition Operating Plan"). Such Early Termination Transition Operating Plan shall (a) supersede any existing Operating Plan, and (b) provide for the immediately orderly winding down of LTPF during the six months transition period (the "Early Termination Wind Down Period") including the immediate orderly removal of co-located employees and the de-installation of all systems. (ii) During the Early Termination Wind Down Period, LTPF shall establish and maintain appropriate accruals and reserves in anticipation of the additional 43 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. charges and costs associated to be incurred in connection with the wind down of the operations of LTPF. Throughout the Transition Period and Wind Down Period and so long as the Old Portfolio and New Portfolio have Finance Contracts with remaining unpaid payments or unrealized Residual Investments, NCT shall continue to maintain segregated books and records for the business of LTPF and shall continue to pay Lucent the Lucent Management Fee. (iii) The covenants of NCT and its affiliates set forth in Article VII shall cease to be of any effect on ***. (iv) The covenants of Lucent in SECTION 6.1 AND 6.2 shall cease to be of any effect as of ***. (v) Upon the expiration of the Early Termination Wind Down Period, Lucent may purchase one or more Finance Contracts by giving NCT three (3) business days written notice that it desires to purchase such Finance Contract. The purchase price for such Finance Contract shall be an amount equal to (a) all Payments due, past due, and to become due LTPF under such Finance Contract (excluding rental taxes, if applicable), discounted to their net present value as of the applicable date of purchase at an interest rate of ***. (vi) Except as provided in SECTIONS 15.5(b)(v) AND (viii), Lucent shall have no additional rights to any property of LTPF, including, but not limited to the operating systems, the interfaces or equipment of LTPF or used by LTPF. (vii) NCT shall deliver to Lucent an image of the then current Lucent customer database and lease portfolio in a mutually agreed upon medium and format with recognizably defined fields (for example, defined fields for "customer", "Product" and others). (viii) Newcourt shall service the owned and managed assets in the Old Portfolio and New Portfolio pursuant to the terms and conditions set forth in Section 16.3(g), and Lucent shall continue to have systems interfaces to track and monitor the Customers and the Finance Contracts. (ix) Except as specified in SECTION 15.6, upon the expiration of the Transition Period, all obligations of NCT and Lucent under this Agreement shall terminate. (x) Throughout the Early Termination Wind Down Period and a period of *** thereafter, neither Lucent nor any Lucent Entity will, without the prior written consent of Newcourt, hire or engage, as an employee, independent contractor or in any other similar capacity, any Dedicated Employee whose primary duties are related to the servicing of either the Old Portfolio or the New Portfolio. (xi) If the termination is pursuant to Section 15.2(g), Newcourt shall pay to Lucent upon demand, as liquidated damages and not as a penalty and in lieu of all other 44 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. damages, losses or expenses suffered or incurred by Lucent as a result of the occurrence the termination event set forth in Section 15.2(g), the sum of ***. (c) Complete Early Termination by Newcourt. If Newcourt terminates this Agreement in its entirety prior to the expiration of the Term in accordance with SECTION 15.2, the following terms and conditions shall be applicable: (i) The parties shall immediately enter into good faith negotiations regarding a final 6-month transition Operating Plan (the "Early Termination Transition Operating Plan"). Such Early Termination Transition Operating Plan shall (a) supersede any existing Operating Plan, and (b) provide for the immediately orderly winding down of LTPF during the six months transition period (the "Early Termination Wind Down Period") including the immediate orderly removal of co-located employees and the de-installation of all systems. (ii) During the Early Termination Wind Down Period, LTPF shall establish and maintain appropriate accruals and reserves in anticipation of the additional charges and costs associated to be incurred in connection with the wind down of the operations of LTPF. Throughout the Transition Period and Wind Down Period and so long as the Old Portfolio and New Portfolio have Finance Contracts with remaining unpaid payments or unrealized Residual Investments, NCT shall continue to maintain segregated books and records for the business of LTPF and shall continue to pay Lucent the Lucent Management Fee. (iii) The covenants of Newcourt and its affiliates set forth in Article VII shall cease to be of any effect as of ***. (iv) The covenants of Lucent in SECTION 6.1 AND 6.2 shall cease to be of any effect as of ***. (v) Except as provided in SECTIONS 15.5(c)(vii) AND (ix), Lucent shall have no additional rights to any property of LTPF, including, but not limited to the operating systems, the interfaces or equipment of LTPF or used by LTPF. (vi) NCT shall deliver to Lucent an image of the then current Lucent customer database and lease portfolio in a mutually agreed upon medium and format with recognizably defined fields (for example, defined fields for "customer", "Product" and others). (vii) Upon the expiration of the Early Termination Wind Down Period, Lucent may purchase one or more Finance Contracts by giving NCT three (3) business days written notice that it desires to purchase such Finance Contract. The purchase price for such Finance Contract shall be an amount equal to (a) all Payments due, past due, and to become due LTPF under such Finance Contract (excluding rental taxes, if applicable), discounted to their net present value as of the applicable date of purchase at an interest rate of ***. 45 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (viii) Throughout the Early Termination Wind Down Period and a period of *** thereafter, neither Lucent nor any Lucent Entity will, without the prior written consent of Newcourt, hire or engage, as an employee, independent contractor or in any other similar capacity, any Dedicated Employee whose primary duties are related to the servicing of either the Old Portfolio or the New Portfolio. (ix) Newcourt shall service the owned and managed assets in the Old Portfolio and New Portfolio pursuant to the terms and conditions set forth in SECTION 16.3(g), and Lucent shall continue to have systems interfaces to track and monitor the Customers and the Finance Contracts. (x) Except as specified in SECTION 15.6, upon the expiration of the Transition Period, all obligations of Newcourt and Lucent under this Agreement shall terminate. SECTION 15.6 EFFECT OF TERMINATION. Upon the termination of this Agreement as provided in this ARTICLE XV, all obligations of the parties hereto with respect to any future Financings and Ancillary Services under this Agreement will cease; provided, that the obligations of the parties set forth herein as they relate to completed Financings and Ancillary Services (including the obligations set forth in SECTION 8.2, ARTICLE IX, SECTION 10.2, SECTION 15.5 and this SECTION 15.6 and the provisions herein as to indemnification, dispute resolution, confidentiality and miscellaneous matters (ARTICLES XIII, XIV, XVII AND XVIII) will continue in full force and effect. ARTICLE XVI BUY-OUT OPTION SECTION 16.1 BUY-OUT OPTION NOTICE. At least *** prior to the expiration of the Term, Lucent, may, by delivery of notice (the "Buy-Out Notice") to Newcourt, elect to have the fair market value of LTPF determined in order for Lucent to determine whether to exercise its Buy-Out Option (the "Buy-Out Option") under SECTION 16.2. SECTION 16.2 BUY-OUT OPTION. (a) The fair market value of LTPF shall be an amount equal to: (x) Notional Fee Base for (i) the latest full fiscal year of LTPF's operations, or (ii) the twelve (12) month period ending on the last day of the calendar month of the Buy-Out Notice, whichever is greater, multiplied by (y) the average earnings multiples at which "Three Comparables" trade or would be purchased in the United States as of the date of the Buy-Out Notice, as determined by a mutually acceptable independent investment bank or appraisal firm. "Three Comparables" shall mean three equipment finance companies with similar businesses, portfolios and operations which are most comparable to the LTPF operation and the Old Portfolio and the New Portfolio. If the parties can not agree on an investment bank or appraisal firm, each party shall select its own investment bank or appraisal firm, and those two banks or firms shall select a third independent investment bank or appraisal firm. 46 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (b) The parties shall instruct the investment bank or appraisal firm to complete the determination of the Three Comparables and issue a final report within 45 days after Lucent provided the Buy-Out Notice. During this period, Newcourt shall also provide Lucent with an accounting or an estimate of the components set forth in clauses (ii) to (iv) of Section 16.3(c) that Lucent would be required to pay at the closing of any purchase if Lucent were to exercise the Buy-Out Option. (c) Upon Lucent's receipt of a final report by the investment bank or appraisal firm establishing the average earnings multiples for the Three Comparables and Newcourt's estimate of the notional debt of LTPF pursuant to Section 16.2(b), Lucent shall have 15 days to determine whether it will exercise its Buy-Out Option. Lucent shall exercise its Buy-Out Option by giving notice to Newcourt within the foregoing 15 day period that Lucent is exercising its Buy-Out Option. If Lucent fails to make any election or fails provide the appropriate notice to Newcourt within the 15 day period, Lucent shall be deemed to have elected not to exercise its Buy-Out Option. If Lucent elects not to exercise the Buy-Out Option, or fails to properly exercise the Buy-Out Option in accordance with this paragraph (c), then the Buy-Out Option shall terminate. (d) If Lucent shall have exercised its Buy-Out Option, then Lucent, effective as of the Purchase Effective Date (as defined below), shall purchase from NCT all of NCT's interest in the Old Portfolio and New Portfolio as of the Purchase Effective Date and all of the assets of NCT relating to the LTPF (collectively, "NCT's Interest") for a purchase price (the "Purchase Price") equal to ***. SECTION 16.3 CLOSING AND PURCHASE. The following terms and conditions shall govern the purchase and sale of NCT's Interest: (a) Unless otherwise agreed by Lucent and NCT, the closing of such purchase and sale shall occur at the principal offices NCT where LTPF maintained its headquarters, on the expiration of the Term or as soon as practical thereafter (the "Purchase Effective Date"). (b) At the closing, NCT shall sell, assign, transfer and convey its NCT's Interests to Lucent, free and clear of all liens, claims and other encumbrances (other than those arising pursuant to this Agreement). (c) At the closing, Lucent shall pay to NCT an amount equal to ***. (d) *** (e) The following assets shall be included within the definition of NCT's Interest: (i) all of NCT's interest in the Old Portfolio and the New Portfolio as of the Purchase Effective Date; 47 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (ii) all fixed and other assets of NCT with respect to which allocations previously were made in calculating the Management Fee accrued to Lucent and that were still being utilized to operate LTPF as of the date of the Buy-Out Notice; and (iii) a non-exclusive, non-transferable perpetual license in all the operating systems and software of NCT which were being utilized to operate LTPF as of the date of the Buy-Out Notice. (f) NCT shall provide Lucent with the opportunity to hire any NCT employees who are dedicated on a full-time basis to LTPF other than any member of NCT's Senior Management team dedicated to the Business (the "Dedicated Employees"), and shall support Lucent's efforts to hire the Dedicated Employees. (g) Servicing. Subsequent to the Closing, NCT shall continue servicing the Old and New Portfolios for the account of Lucent pursuant to a servicing agreement to be entered into between Newcourt and Lucent based on then market fees and standards. (h) The remaining terms and conditions of the purchase and sale of NCT's Interest shall be negotiated in good faith promptly after Lucent delivers to Newcourt the Buy-Out Notice. If the parties do not finalize the purchase and sale agreement within 90 days after the establishment of the fair market value and Lucent's confirmation that it will be exercising its option, the matter will be resolved pursuant to Article XIV. ARTICLE XVII CONFIDENTIALITY SECTION 17.1 CONFIDENTIALITY. Newcourt and Lucent agree that the terms of this Agreement may be publicly disclosed to the extent required in any public filing made by the Lucent Entities or Newcourt Entities with the Securities and Exchange Commission, the Canadian securities commission or similar securities agencies (collectively "Securities Commissions"); however, Newcourt and Lucent covenant and agree that each shall, and shall cause its respective Affiliates to, treat any information provided by the Lucent Entities (including the Customer list) to Newcourt Entities (in the case of Newcourt's obligations hereunder) or by the Newcourt Entities to the Lucent Entities (in the case of Lucent's obligations hereunder) pursuant to this Agreement (including, without limitation, any proprietary information otherwise acquired hereunder) as confidential and to hold such information and use it solely for purposes of this Agreement and not without the prior consent of the other party hereto, to disclose, or cause to be disclosed, such information to any Person, except that any such information may be disclosed (a) to the Newcourt Entities' or the Lucent Entities' agents, directors, officers, employees, representatives, accountants, counsel or special counsel who have a need to know or have access to such information and who have been instructed or have a duty to keep such information confidential in accordance with the terms hereof, (b) to the Affiliates of Newcourt and Lucent, and such Affiliates' agents, directors, officers, employees, representatives, accountants, counsel or special counsel who have a need to know or have access to such information and who have been instructed or have a duty to keep such information confidential and to use it in accordance with the terms hereof, (c) to such other Persons who are reasonably 48 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. deemed necessary by Newcourt and Lucent, as the case may be, in connection with the enforcement of their rights under this Agreement, (d) to the extent required pursuant to applicable law or any governmental authority (including, but not limited to, the IRS, state taxing authorities, any Securities Commission or federal or state judicial authorities), (e) to the extent required or appropriate to be disclosed in response to a reasonable request by rating agencies, underwriters, or creditors in connection with financing transactions undertaken by Newcourt or Lucent or their Affiliates, who agree or are under a duty to hold such information confidential in accordance with the terms hereof, (f) to the extent that prior to such disclosure, such information is in the public domain or (g) to Persons other than Lucent Competitors involved in potential acquisitions of, mergers with or purchase of all or substantially all of the assets of Newcourt (or any other Newcourt Entity) or Lucent (or any other Lucent Entity) who, in each case, agree in writing to hold such information confidential in accordance with the terms hereof. Newcourt and Lucent will take such action as may be reasonably necessary to ensure that the competitors of the other party do not acquire such information. ARTICLE XVIII MISCELLANEOUS SECTION 18.1 AMENDMENTS; WAIVERS. (a) This Agreement can be amended only by a writing duly executed by the parties hereto. (b) Any waiver of a breach or non-performance, or any failure to exercise any remedy within the time periods set forth in this Agreement, shall not be deemed a waiver of any other breach or non-performance, or subsequent breach or non-performance, whether or not similar or identical in nature. SECTION 18.2 NO PARTNERSHIP. Nothing contained in this Agreement will be construed in any manner to constitute the creation of a partnership between the parties. All Lucent Entities and all NCT Entities are, and will at all times be and remain independent contractors with respect to the subject matter of this Agreement. SECTION 18.3 THIRD PARTIES. Nothing in this Agreement, expressed or implied, is intended or will be construed to confer upon any Person (including Customers and Authorized Dealers) other than the parties hereto and their permitted successors and assigns any right, remedy or claim under or by reason of this Agreement. SECTION 18.4 INTELLECTUAL PROPERTY RIGHTS AND CUSTOMER LISTS. Any software or management system developed solely for and paid for by LTPF will be the sole property of LTPF. *** SECTION 18.5 TRANSFER OF INTERESTS. (a) Newcourt will not sell, assign, transfer or otherwise dispose of or encumber (collectively, "assign"), this Agreement or its interest in LTPF to another Person, except a wholly-owned Subsidiary of Newcourt without the prior written consent of Lucent. 49 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (b) Lucent will not sell, assign, transfer or otherwise dispose of (collectively, "assign") or encumber its rights under this Agreement without the prior written consent of Newcourt except (i) to a Lucent Entity or (ii) to another Person which acquires all or substantially all of the assets now comprising BCS (the "Assets"). Lucent shall use its diligent efforts to have this Agreement assigned to and assumed by a Person acquiring the Assets. SECTION 18.6 SUBSIDIARIES. (a) Lucent agrees and acknowledges that Lucent shall be responsible for, and hereby guarantees, the due and punctual payment and performance, in accordance with their terms, of the obligations hereunder applicable to any Lucent Entity or any business unit or division within a Lucent Entity or in any other agreement or commitment of a Lucent Entity or any business unit or division within a Lucent Entity entered into at any time and from time to time in connection with this Agreement with or for the benefit of any Newcourt Entity or any business unit or division within a Newcourt Entity. Lucent further acknowledges and agrees that the foregoing undertaking and guarantee shall extend for the benefit of any permitted assignee of Newcourt or such business unit's or division's rights and benefits with respect to any such agreement or commitment and, if reasonably requested by Newcourt, Lucent shall affirm such undertaking and guarantee for the benefit of any such assignee. Newcourt agrees that any obligation of Lucent hereunder or thereunder that is paid or performed by a Lucent Entity (other than Lucent) shall be deemed to be paid or performed, as the case may be, by Lucent. (b) Newcourt agrees and acknowledges that Newcourt shall be responsible for and hereby guarantees the due and punctual payment and performance, in accordance with their terms, of the obligations hereunder applicable to any Newcourt Entity or any business unit or division of any Newcourt Entity or in any other agreement or commitment of such Newcourt Entity or any business unit or division within any Newcourt Entity entered into at any time and from time to time in connection with this Agreement with or for the benefit of the Lucent Entities or any business unit or division within a Lucent Entity. Newcourt further acknowledges and agrees that the foregoing undertaking and guarantee shall extend for the benefit of any permitted assignee of Lucent's, with respect to any such agreement or commitment and, if reasonably requested by Lucent, Newcourt shall affirm such undertaking and guarantee for the benefit of any such assignee. Lucent agrees that any obligation of Newcourt hereunder or thereunder that is paid or performed by any Newcourt Entity shall be deemed to be paid or performed, as the case may be, by Newcourt. SECTION 18.7 NOTICES. All notices, consents, deliveries, demands, approvals and other communications which are required or permitted to be given hereunder will be in writing and will be deemed to have been duly given if personally delivered (including overnight courier service), telecopied or mailed certified first class mail, postage prepaid, addressed as follows: 50 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (a) if to Lucent, to: Lucent Technologies Inc. 600 Mountain Avenue Murray Hill, New Jersey 07974 Telecopier Number: Attn: Treasurer with a copy to: Paul D. Diczok Lucent Technologies Inc. 219 Mt. Airy Road Room 2F220 Basking Ridge, New Jersey 07920 Telecopier Number: 908-953-4912 Attn: Paul D. Diczok, Esq. (b) If to NCT, to: NEWCOURT CREDIT GROUP INC. BCE Place 181 Bay Street Suite 3500 P.O. Box 827 Toronto, Ontario, Canada M5J2T3 Telecopier Number: 416-594-2515 Attn: Bradley D. Nullmeyer with a copy to: AT&T/Newcourt 44 Whippany Road Morristown, NJ 07962 Telecopier Number: 973-397-4440 Attn: Scott Moore, General Counsel SECTION 18.8 ORIGINAL AGREEMENTS. (a) Upon the Commencement Date, the following agreements, as between Lucent and Capital, shall terminate the Original Agreements, the Location Support Agreement (as defined in the Operating Agreement (and any related letter supplements), and any agreements relating to the payment of sales assistance or similar fees to Lucent and their employees, except to the extent any term of any of the Original Agreements or such other agreement specifies that it survives termination of that agreement. 51 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. (b) Lucent and Newcourt each hereby mutually waive and release any and all claims each party or any of its Affiliates may have has against the other party or its Affiliates as a result of any actual or purported breach or violation of the Original Agreements and the other agreements terminated pursuant to SECTION 18.8(a). SECTION 18.9 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the choice of law provisions of its conflicts of law rules. SECTION 18.10 HEADINGS. This article and section headings and subheading contained in this Agreement are intended solely for the convenience of reference and will not affect in any manner the meaning or interpretation of this Agreement. SECTION 18.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original instrument, but all of which together will constitute one and the same agreement, and will become binding when one or more counterparts have been executed and delivered by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. [Signatures on following page] 52 CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. LUCENT TECHNOLOGIES INC. NEWCOURT CREDIT GROUP INC. /s/ William T. O'Shea /s/ Robert J. Hicks BY: _______________________________ BY: ______________________________ NAME: William T. O'Shea NAME: Robert J. Hicks TITLE: Group President--BCS TITLE: Senior Vice President /s/ Donald K. Peterson /s/ Daniel A. Jauernig BY: _______________________________ BY: ______________________________ NAME: Donald K. Peterson NAME: Daniel A. Jauernig TITLE: Executive Vice President TITLE: Chief Financial Officer and CFO CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SCHEDULES SCHEDULE 1.1 APPLICABLE TRADE NAMES AND SERVICE MARKS SCHEDULE 6.1 LOCATION SUPPORT SCHEDULE 6.2 EXISTING ALTERNATIVE FINANCING SERVICE PROVIDERS SCHEDULE 7.1 PERMITTED LUCENT COMPETITORS CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SCHEDULE 1.1 APPLICABLE TRADE NAMES AND SERVICE MARKS CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SCHEDULE 6.1 LOCATION SUPPORT (a) SUPPORT SPACE AND SERVICES. Subject to the availability of space in each appropriate Sales Site, Lucent agrees to provide to LTPF, (i) appropriate furnished office space ("Support Space"), and (ii) basic office support services for such Support Space during regular business hours (including, cleaning, relamping, data and telephone lines, duplicating facilities, file storage, mail room and similar services), which service shall be limited in any event to the support services that are regularly available at such Sales Site. Lucent further agrees that, to the extent practicable, the Support Space shall be located in reasonable proximity to the appropriate Lucent sales personnel. (b) COMPLIANCE WITH RULES AND REGULATIONS AND LEASES. NCT agrees that LTPF shall occupy its respective Support Space in accordance with the rules and regulations and general office business practices for the Sales Site in question, whether such Sales Site is owned or leased by a Lucent Entity. Lucent shall provide LTPF with a copy of such rules and regulations and advise LTPF regarding any other general office business practices to permit the LTPF to fulfill its obligations hereunder. LTPF's occupancy of any leased or subleased sales sites shall be in compliance with any applicable leases or subleases with third parties. (c) REIMBURSEMENT FOR SUPPORT SPACE. NCT agrees to reimburse (on behalf of LTPF) Lucent for the proportionate costs of provision of the Support Space and of such Support Space's allocable share of any common expenses associated with the Sales Site, including, but not limited to, (i) building operating expenses, (ii) utility user charges (at actual cost for dedicated utilities and as appropriately apportioned or otherwise measured if not so dedicated to LTPF) and (iii) fixed general charges for building amenities or services that are not charged on a per-use basis (collectively, the "Reimbursement Cost"). The Reimbursement Cost for each Support Space (i) shall be mutually agreed on a periodic basis by Lucent and NCT as part of the Annual Operating Plan and (ii) shall be paid by NCT, on behalf of LTPF, without requiring any prior invoice therefor, in equal monthly installments in advance on the first day of each calendar month. NCT further agrees to pay or reimburse, on behalf of LTPF, Lucent (i) for the office support services (if same have not previously been included in the Reimbursement Cost) and (iii) for any specially-ordered building services incurred with respect to the use and occupancy of the Support Space by LTPF, for which all such payments should be due within 30 days of receipt of a periodic statement for such user and office service charges. (d) TERM OF OCCUPANCY. The term of occupancy (the "Support Space Term") for each Support Space identified by the parties shall commence, for those Support Spaces occupied by LTPF personnel on the Commencement Date on such date and shall commence for each Support Space hereafter identified pursuant to the terms hereof on the date LTPF shall first occupy such Support Space. The Support Space Term for any given Support Space shall expire and terminate on the earliest to occur of (i) the effective date of the termination of the Agreement, (ii) the date the Sales Site containing the Support Space is vacated for any reason CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. by Lucent, or (iii) the date which is 90 days from the date of notice of termination given by the LTPF to Lucent. (e) END OF SUPPORT SPACE TERM. Upon the expiration of the Support Space Term in accordance with the terms of this Agreement or other termination of occupancy of any Support Space by LTPF, LTPF shall (i) vacate and surrender the Support Space to Lucent or the Company owning or controlling the Sales Site, broom clean and in good order, condition and repair, ordinary wear and tear and damage by the elements, fire or other casualty excepted, (ii) on or prior to such date, at LTPF's sole cost and expense, remove from the Support Space any unauthorized alterations and restore the Support Space as appropriate, and (iii) remove all of the LTPF's personal property. (f) NO LEASE. The terms of this SCHEDULE 6.1 and LTPF's occupancy of any Support Space are intended to provide for "location support" and shall not constitute or be deemed to constitute a lease, sublease or co-tenancy agreement. CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SCHEDULE 6.2 EXISTING ALTERNATIVE FINANCING SERVICE PROVIDERS *** CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1934, AS AMENDED, AND RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS. SCHEDULE 7.1 PERMITTED LUCENT COMPETITORS *** EX-12 3 EXHIBIT 12 EXHIBIT 12 Form 10-K for 1997 File No. 1-11237 AT&T CAPITAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Year Ended December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- Earnings from continuing operations: Income before income taxes and extraordinary loss $ 32,036 $278,602 $208,239 $173,614 $138,040 Deduct undistributed earnings on equity investments, net of losses - - - - Add fixed charges included in income before income taxes and cumulative effect of accounting change 460,221 465,121 418,624 277,913 242,100 - --------------------------------------------------------------------------- Total earnings from continuing operations, as adjusted $492,257 $743,723 $626,863 $451,527 $380,140 - --------------------------------------------------------------------------- Total fixed charges* $460,221 $465,121 $418,624 $277,913 $242,100 Ratio of earnings to fixed charges 1.07 1.60 1.50 1.62 1.57 - ---------------------------------------------------------------------------
* Fixed charges include interest on indebtedness and the portion of rentals representative of the interest factor. Fixed charges do not include distributions on Company-obligated preferred securities of the Company's subsidiaries. EX-21 4 EXHIBIT 21 EXHIBIT 21 Form 10-K for 1997 File No. 1-11237 SUBSIDIARIES OF AT&T CAPITAL CORPORATION As of December 31, 19947
State or Other Jurisdiction of Incorporation Name of Subsidiary(*) or Organization - --------------------------------------------------------------------------- Antigua Funding Corporation Delaware AT&T Automotive Services, Inc. Delaware AT&T Capital Canada, Inc. (1) Ontario, Canada 1177662 Ontario Inc. Ontario, Canada AT&T Capital FSC, Inc. Virgin Islands AT&T Capital Limited England AT&T Capital (Automotive Services) Limited England AT&T Commercial Finance Corporation (2) Delaware American Express CapitaFinance LLC (a) Arizona ATMOR Holdings Inc. Delaware ATMOR Properties Inc. (in trust) Delaware AT&T Capital Leasing Services, Inc. (3) Massachusetts The Lease Factor, Inc. Massachusetts Eaton Express Corporation Massachusetts Thermo Capital Company LLC (b) Delaware Picker Financial Group LLC (c) Delaware AT&T Capital Services Corporation Delaware AT&T Systems Leasing Corporation Michigan AT&T Credit Corporation Delaware AT&T Credit Consumer Finance Corporation Delaware AT&T Credit Corporation of Puerto Rico Delaware Capita Credit Corporation Delaware The Capita Corporation Singapore Pte Ltd. Singapore AT&T Small Business Lending Corporation Delaware Capita Beteiligungs AG Germany Capita Colombia Holding Corp. Delaware Global Vendor Services Ltda. Colombia Capita Global Finance Corporation Delaware Capita Hungary Trading and Servicing Company Limited Hungary Capita Russia Holdings I Corp. Delaware Capita Russia Holdings II Corp. Delaware Capita Corporation CIS Russian Federation The Capita Corporation Polska Sp.zo.o Poland Capita Funding Pty Limited Australia Capita International L.L.C. Delaware Arrendadora Capita Corporation S.A. de C.V. Mexico Capita Servicios, S.A. de C.V. Mexico The Capita Corporation de Mexico S.A. de C.V. Mexico Capita Leasing GmbH Austria Capita Premium Finance Corporation Delaware Capita Resources, Inc. Delaware Capital Syndication Corporation Delaware Midrange Solutions Group Inc. Delaware The Capita Corporation de Argentina SA Argentina The Capita Corporation de Mexico, S.A. de C.V.(5) Mexico The Capita Corporation Holding B. V. Netherlands Capita Corporation Italy, S.p.A. Italy
EXHIBIT 21 Form 10-K for 1997 File No. 1-11237 SUBSIDIARIES OF AT&T CAPITAL CORPORATION As of December 31, 19947 (Continued) Capita Holding France, S.A. France The Capita Corporation Finance France SNC France Capita Holding Germany GmbH Germany Capita A.G. & Co. Germany Capita Holdings U.K. Limited England AT&T Capital (Vendor Services) Limited England The Capita Corporation Nederland B.V. The Netherlands The Capita Corporation NV/SA Belgium The Capita Corporation AG Switzerland The Capita Corporation Australia Limited (7) Australia Hunter Leasing Limited Australia Lonsfield Pty. Ltd. Australia The Capita Corporation do Brasil Ltda. Brazil The Capita Corporation Hong Kong Limited (6) Hong Kong The Capita Corporation New Zealand Limited New Zealand The Capita Leasing Corporation People's Republic of China The Capita Leasing Corporation (BVI) Ltd. British Virgin Islands The Equipment Insurance Company Vermont
(*) All subsidiaries do business under their corporate names, and the other names indicated in the footnotes below. (1) Hyster Credit Company (2) Hyster Credit Company and JCB Finance Company (3) Eaton Financial Company (4) AT&T Capital Corporation and The Capita Corporation (5) AT&T Capital de Mexico and The Capita Corporation (6) AT&T Capital Corporation (7) The Capita Corporation (a) 50%/50% joint venture with American Express Travel Related Services Company, Inc. (b) 50%/50% joint venture with Thermo Electron Company (c) 50%/50% joint venture with Picker Financial Corporation EX-24 5 EXHIBIT 24(A) Exhibit 24(a) Form 10-K for 1997 File No. 1-11237 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CAPITAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director, an officer, or both an officer and a director of the Company, as indicated below under his name: NOW, THEREFORE, the undersigned hereby constitutes and appoints DANIEL A. JAUERNIG and STEVEN K. HUDSON, and each of them, as attorneys for him and in his name, place and stead, and in each of his offices and capacities as a director, an officer, or both an officer and a director of the Company, to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendment or amendments thereto on Form 8 or any other applicable form, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, including the use or transmission of any personal identification numbers assigned to the undersigned by the Securities and Exchange Commission, as fully, for all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of March, 1998. /s/ David F. Banks ------------------ David F. Banks Director and Chairman of the Board Exhibit 24(a) Form 10-K for 1997 File No. 1-11237 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CAPITAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director, an officer, or both an officer and a director of the Company, as indicated below under his name: NOW, THEREFORE, the undersigned hereby constitutes and appoints DANIEL A. JAUERNIG as attorney for him and in his name, place and stead, and in each of his offices and capacities as a director, an officer, or both an officer and a director of the Company, to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendment or amendments thereto on Form 8 or any other applicable form, hereby giving and granting to said attorney full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, including the use or transmission of any personal identification numbers assigned to the undersigned by the Securities and Exchange Commission, as fully, for all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of March, 1998. /s/ Steven K. Hudson -------------------- Steven K. Hudson Director and Chief Executive Officer Exhibit 24(a) Form 10-K for 1997 File No. 1-11237 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CAPITAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director, an officer, or both an officer and a director of the Company, as indicated below under his name: NOW, THEREFORE, the undersigned hereby constitutes and appoints THOMAS G. ADAMS AND STEVEN K. HUDSON, and each of them, as attorneys for him and in his name, place and stead, and in each of his offices and capacities as a director, an officer, or both an officer and a director of the Company, to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendment or amendments thereto on Form 8 or any other applicable form, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, including the use or transmission of any personal identification numbers assigned to the undersigned by the Securities and Exchange Commission, as fully, for all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of March, 1998. /s/ Daniel A. Jauernig ---------------------- Daniel A. Jauernig Group President and Chief Financial Officer Exhibit 24(a) Form 10-K for 1997 File No. 1-11237 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CAPITAL CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), proposes to file shortly with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director, an officer, or both an officer and a director of the Company, as indicated below under his name: NOW, THEREFORE, the undersigned hereby constitutes and appoints DANIEL A. JAUERNIG, as attorney for him and in his name, place and stead, and in each of his offices and capacities as a director, an officer, or both an officer and a director of the Company, to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendment or amendments thereto on Form 8 or any other applicable form, hereby giving and granting to said attorney full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, including the use or transmission of any personal identification numbers assigned to the undersigned by the Securities and Exchange Commission, as fully, for all intents and purposes, as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of March, 1998. /s/ Thomas G. Adams ------------------- Thomas G. Adams Vice President and Controller EX-24 6 EXHIBIT 24(B) Exhibit 24(b) Form 10-K for 1997 File No. 1-11237 CERTIFICATE OF CORPORATE RESOLUTIONS I, Glen J. DuMont, an Assistant Secretary of AT&T Capital Corporation, hereby certify that the following resolutions were duly adopted by the Board of Directors of AT&T Capital Corporation by consent dated March 17, 1997: RESOLVED: that the Company's Annual Report on Form 10-K for 1997 substantially in the form presented to the Board is approved, with such changes as the Chief Financial Officer may approve, provided that any material changes will also be approved by the General Counsel and the Chief Executive Officer and that the Board of Directors will be advised of any material changes made in the financial statements (or related notes) in the Form 10-K; and FURTHER RESOLVED: that the Chief Executive Officer, the Chief Financial Officer and the Controller are each severally authorized to sign the Form 10-K in the name and on behalf of the Company. Dated: March 17, 1998 /s/ Glen J. DuMont ------------------ Glen J. DuMont EX-99 7 EXHIBIT 99 Exhibit 99 Form 10-K for 1997 File No. 1-11237 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 11-K (X) ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ____ to ____ Commission File Number 1-11237 AT&T CAPITAL CORPORATION EXCESS BENEFIT PLAN AT&T CAPITAL CORPORATION A DELAWARE I.R.S. EMPLOYER CORPORATION NO. 22-3211453 44 Whippany Road, Morristown, New Jersey 07962-1983 Telephone Number 973-397-3000 Total number of pages in this filing are 11. The Exhibit Index is on page 11. 1 TABLE OF CONTENTS Signatures 3 Report of Independent Public Accountants - Arthur Andersen LLP 4 Report of Independent Accountants - Coopers & Lybrand L.L.P. 5 Statements of Financial Condition at December 31, 1997 and 1996 6 Statements of Income and Changes in Plan Equity for the three years ended December 31, 1997 7 Notes to Financial Statements 8 Exhibit Index 11 (Financial statement schedules are not included because of the absence of conditions under which they are required.) 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the members of the Administrative Committee of the AT&T Capital Corporation Excess Benefit Plan have executed this annual report. AT&T CAPITAL CORPORATION EXCESS BENEFIT PLAN Date: March 30, 1998 By Sara R. McAuley ---------------------------------- Sara R. McAuley Senior Vice President- Corporate Resources Officer Date: March 30, 1998 By Scott J. Moore ----------------------------------- Scott J. Moore Senior Vice President - Legal General Counsel and Secretary Date: March 30, 1998 By Daniel A. Jauernig ------------------------------------ Daniel A. Jauernig Group President and Chief Financial Officer 3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS --------------------------------- To the Participants and Administrative Committee of the AT&T Capital Corporation Excess Benefit Plan: We have audited the accompanying statement of financial condition of the AT&T Capital Corporation Excess Benefit Plan (the "Plan") at December 31, 1997, and the related statement of income and changes in plan equity for the year then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial condition of the Plan at December 31, 1997, and the results of its operations and changes in its plan equity for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York March 30, 1998 4 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Participants and Administrative Committee of the AT&T Capital Corporation Excess Benefit Plan: We have audited the accompanying statements of financial condition of the AT&T Capital Corporation Excess Benefit Plan (the "Plan") at December 31, 1996, and the related statements of income and changes in plan equity for each of the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform 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 financial condition of the Plan at December 31, 1996, and the income and changes in plan equity for each of the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. 1301 Avenue of the Americas New York, New York March 28, 1997 5 AT&T CAPITAL CORPORATION EXCESS BENEFIT PLAN STATEMENTS OF FINANCIAL CONDITION
At December 31, 1997 1996 - --------------------------------------------------------------------- Assets: Receivable from Employer $ 3,346,759 $ 2,347,382 ------------ ----------- Total Plan assets: $ 3,346,759 $ 2,347,382 =========== =========== Total Plan equity $ 3,346,759 $ 2,347,382 =========== ===========
The accompanying notes are an integral part of these financial statements. 6 AT&T CAPITAL CORPORATION EXCESS BENEFIT PLAN STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
For the Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------- Additions: Earnings on employer contributions $ 121,695 $ 82,753 $ 39,373 Employer contributions, net of forfeitures 1,132,869 784,938 815,786 ---------- ---------- ---------- Total additions 1,254,564 867,691 855,159 ---------- ---------- ---------- Deductions: Distributions to participants (255,187) (27,759) (11,576) ---------- ---------- ---------- Total deductions (255,187) (27,759) (11,576) ---------- ---------- ---------- Net increase 999,377 839,932 843,583 Plan equity, beginning of year 2,347,382 1,507,450 663,867 ---------- ---------- ---------- Plan equity, end of year $3,346,759 $2,347,382 $1,507,450 ========== ========== ==========
7 The accompanying notes are an integral part of these financial statements. AT&T CAPITAL CORPORATION EXCESS BENEFIT PLAN NOTES TO FINANCIAL STATEMENTS 1. Description of Plan The following description of the AT&T Capital Corporation Excess Benefit Plan (the "Plan"), a nonqualified defined contribution plan, provides a summary of the material terms of the Plan. General AT&T Capital Corporation (the "Company" or "Employer") sponsors the AT&T Capital Corporation Retirement and Savings Plan, as amended (the "RSP"), a qualified defined contribution money purchase and profit sharing plan covering employees of the Company and its domestic subsidiaries. Effective January 1, 1994, the Company adopted the Plan to allow eligible employees to receive contributions which would otherwise be limited under the RSP by Section 415 of the Internal Revenue Code (the "IRC") to the lesser of $30,000 or 25% of the participant's taxable wages (up to the IRC compensation limit pursuant to Section 401(a)(17) of $160,000 in 1997, and $150,000 for 1996 and 1995). Under the RSP, participants are entitled to make before and after-tax contributions limited to 12% of annual pay. The Company makes a matching contribution equal to 66-2/3% of the participant's contributions up to 6% of their annual pay (the "Company match"). In addition, the Company is required to make annual contributions (the "uniform points contributions") to the Plan equal to 5% of total payroll with respect to each year. The Company may also make a discretionary uniform points contribution with respect to each Plan year. Unless and until the Company's Board of Directors or Compensation Committee otherwise directs, the discretionary uniform points contribution shall equal 4% of total payroll, as defined. The uniform points contributions are allocated to participants based on years of service and pay. Participants in the RSP with aggregate participant and Employer contributions for the year that exceed the IRC limitations automatically participate in the Plan. The provisions of the Plan allow for Company match and uniform points contributions, in excess of IRC limits described above, to be credited to participant accounts under the Plan. RSP participant before and after-tax contributions exceeding these IRC limitations will be refunded to the participant. Vesting As a result of a change in control of the Company resulting from the 1996 Merger (defined in Note 6), all Plan participants employed by the Company before October 1, 1996 became fully vested in the uniform points contributions, Company match and related earnings. As a result of a change in control of the Company resulting from the 1998 Merger (defined in Note 6) all Plan participants employed by the Company before January 12, 1998 became fully vested in the uniform points contribution, Company match and related earnings. 8 Subsequent to January 12, 1998, participants become vested in the Company match and related earnings within 1-1/2 years of continuous service and become vested in the uniform points contributions and related earnings over 5 years of continuous service at a rate of 20% per year. Regardless of the number of years of continuous service, a participant shall be fully vested in the Company match and uniform points contributions and related earnings if the participant terminates employment because of disability, terminates employment on or after attaining age 65 or upon the occurrence of certain other events (including a change in control of the Company) as defined in the Plan document. Forfeitures Non-vested contributions credited under the Plan are forfeited upon termination. For the year ended December 31, 1997 and 1996, forfeited non-vested accounts were $13,418 and $15,874, respectively. Payment of Benefits The vested portion of a participant's account will be paid to the participant in 60 monthly installments upon the participant attaining the age of 65. The Company, at its sole discretion, may commence such payments to a terminated participant prior to their 65th birthday. Upon death, a lump sum payment equaling the vested portion of the participant's account will be paid to the participant's beneficiary. 2. Accounting Policies Funding The Plan is considered an unfunded nonqualified deferred compensation plan under the IRC, and therefore, not subject to most of the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The cumulative contributions due to the Plan and related earnings are held in an irrevocable grantor trust by the Employer with Merrill Lynch (the "Trust"). Benefits payable under the Plan will be paid from the Trust. The assets of the Trust have been invested in the Merrill Lynch Government Fund (the "Government Fund"). The Government Fund invests in a portfolio of securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Administrative Costs All costs and expenses of the Plan are paid by the Company. Receivable from Employer The receivable from the Employer represents the cumulative contributions and related earnings held by the Employer with Merrill Lynch, in addition to the contribution due by the Employer to the Trust as of the end of each year. The Company funded the 1997 and 1996 Employer contributions due the Plan plus related earnings to the Trust in March 1998 and 1997, respectively. 9 The contribution due to the Trust from the Employer at year end earns interest at a rate no less than the rate of return on investments in the Government Fund, a similar investment option, from December 31st of that year until such amounts are funded to the trust. 3. Administration of the Plan The Plan is administered by an Administrative Committee appointed by the Compensation Committee of the Company's Board of Directors. Merrill Lynch has been appointed as recordkeeper for the Plan. 4. Federal Income Tax Status The Plan is not a qualified plan under Section 401 of the IRC and; therefore, is a nonqualified deferred compensation plan. Earnings on Trust assets are taxable to the Company. Plan participants are not taxed, for federal income tax purposes, on Company contributions to the Plan or earnings on Plan assets until the taxable year in which such contributions are received by the participant. The Company is not entitled to a current tax deduction for contributions made to the Plan until such time as the benefits are taxable to the participant. 5. Plan Termination Although it has not expressed any intention to do so, the Compensation Committee of the Board of Directors of the Company reserves the right to amend, suspend, or terminate the Plan at any time. 6. 1996 and 1998 Mergers On January 12, 1998, all of the Company's outstanding shares of common stock were purchased by Newcourt Credit Group Inc., an Ontario corporation ("Newcourt") in a transaction accounted for under the purchase method of accounting (the "1998 Merger"). The Company currently is an indirect wholly-owned subsidiary of Newcourt. On October 1, 1996, the Company completed a merger (the "1996 Merger") to which the Company was merged with and into an indirect wholly-owned subsidiary of GRS Holding Company, Ltd., owner of a UK rail leasing business, with the Company being the surviving entity. 10 EXHIBIT INDEX Exhibit Number None 11 EX-27 8 FINANCIAL DATA SCHEDULE*
5 This schedule contains summary financial information primarily extracted from AT&T Capital Corporation's audited consolidated income statement and balance sheet for and at the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-31-1997 DEC-31-1997 0 0 0 (178,552) 0 0 0 (772,437) 8,775,895 0 5,249,409 903 0 0 742,876 8,775,895 49,349 1,814,139 44,769 598,828 0 114,301 451,470 32,036 11,029 21,007 0 0 0 21,007 0 0 * In accordance with Regulation S-K item 601(c) 2, inapplicable or immaterial financial data is reflected as zero value. - Accumulated depreciation relates to equipment under operating leases. - This item is not applicable since the Company does not prepare a classified balance sheet. - Includes Company-obligated preferred securities of $200,000. -----END PRIVACY-ENHANCED MESSAGE-----