1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1994
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 201-397-3000
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of
exchange on
which
registered
___________________
___________________
Common Stock, New York Stock
Exchange
$.01 par value
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 )
The aggregate market value of the common stock of the registrant
held by
nonaffiliates as of February 28, 1995 was approximately
$164,164,429. For
purposes of the foregoing calculation only, all directors and
officers of
the registrant have been deemed affiliates. As of February 28,
1995, there
were 47,001,356 shares of the registrants common stock $.01 par
value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement dated March
20, 1995
issued in connection with the 1995 annual meeting of shareholders
(Part
III).
2
TABLE OF CONTENTS
PART I
Item Description
Page
1. Business.
1
2. Properties.
12
3. Legal Proceedings.
12
4. Submission of Matters to a Vote of
Security-Holders. 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.
12
6. Selected Financial Data.
13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
18
8. Financial Statements and Supplementary Data.
32
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
69
PART III
10. Directors and Executive Officers of the Registrant.
69
11. Executive Compensation.
70
12. Security Ownership of Certain Beneficial Owners and
Management.
70
13. Certain Relationships and Related Transactions.
71
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
71
3
PART I
ITEM 1. BUSINESS
RESTRUCTURING AND INITIAL PUBLIC OFFERING
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 is the
successor
entity to certain businesses of AT&T Capital Holdings, Inc.
(formerly known
as AT&T Capital Corporation, renamed AT&T Capital Holdings, Inc.
("Old
Capital") on March 31, 1993) a wholly owned subsidiary of AT&T
Corp.
("AT&T") and AT&T Credit Holdings, Inc. which commenced
operations in 1985,
and renamed AT&T Credit Holdings, Inc. ("Old Credit") on March
31, 1993, an
indirect wholly owned subsidiary of AT&T. In a restructuring
that occurred
on March 31, 1993, (the "Restructuring") Old Capital and Old
Credit
transferred substantially all their assets to the Company except
for
certain assets, consisting principally of equity interests in
project
finance transactions and leveraged leases of commercial aircraft
("Lease
Finance Assets"), 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 a direct,
full and
unconditional guarantee 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 (the "Support Agreement"), 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.
An initial public stock offering combined with a management
stock
offering totalling approximately 14 percent of the Company's
stock occurred
on August 4, 1993. (See Note 8 to the Consolidated Financial
Statements).
As a result of the stock offerings, approximately 86 percent of
the
outstanding common stock of the Company is owned indirectly by
AT&T
(through Old Capital and Old Credit.)
In connection with its initial public offering, the Company
entered
into certain intercompany, operating, license and tax agreements
with AT&T.
The Intercompany Agreement includes a provision requiring minimum
ownership
by AT&T of 20% of the Company's common stock outstanding
immediately after
the initial public offering for a period of five years.
Provisions for
management by the Company of certain portfolios owned by AT&T,
allowing the
Company to utilize certain AT&T corporate and administrative
services (for
a fee) and generally requiring the Company to continue certain
equipment
financing programs for AT&T are also included. The Operating
Agreement,
provides, among other things, that AT&T is required to promote
the
Company's financing and ancillary services and to provide the
Company with
certain preferred provider rights in connection with the
financing of AT&T
products and services. In addition, the Operating Agreement
restricts AT&T
from competing with the Company with respect to certain products
of the
Company. The License Agreement defines the Company's rights to
use certain
AT&T service marks and trade names, and to use "AT&T" as part of
the
corporate names of the Company and certain of its subsidiaries.
The
initial term of the License Agreement will expire on the seventh
1
4
anniversary of the date of the initial public offering. The
License
Agreement may be terminated prior to the end of its term by
either party if
the other party breaches or defaults on terms of the Intercompany
agreement, the Operating Agreement or the License Agreement.
Additionally,
AT&T can elect to terminate the license agreement if the
long-term
unsecured debt of the Company is rated below investment grade by
at least
two nationally recognized rating agencies or if the Company
receives a
qualified audit opinion from its independent accountants.
Because such
license is an important strategic asset of the Company,
termination of the
License Agreement could have an adverse effect on the Company.
DESCRIPTION OF THE BUSINESS
AT&T Capital 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 is a full-service, diversified
equipment
leasing and finance company that operates in the United States,
Canada,
Europe, the Asia/Pacific Region and Mexico.
The Company leases and finances equipment manufactured and
distributed
by AT&T and its affiliates and numerous other companies. The
Company's
customers include many of the nation's largest industrial and
service
companies, as well as many small and mid-size business customers
and
federal, state and local governments and their agencies.
AT&T Capital, through its various subsidiaries, leases and
finances
telecommunications equipment (such as private branch exchanges
("PBXs"),
telephone systems and voice processing units), general purpose
equipment
(such as office equipment and manufacturing equipment), data
center
equipment (including mainframe computers and related equipment),
other data
processing equipment (such as personal computers, retail
point-of-sale
computers, automatic teller machines and bank transaction
processing
equipment) and transportation equipment (primarily vehicles).
The Company
is the largest lessor in the United States of telecommunications
equipment.
The Company also provides inventory financing for equipment
dealers and
distributors, Small Business Administration ("SBA")lending, and
asset
management and remarketing services. In addition, the Company
offers its
customers certain equipment rental and repair services and
certain other
asset administration services.
AT&T Capital offers a variety of lease and other finance
instruments,
including leases where the Company is the owner of the equipment
for tax or
accounting purposes and leases and installment sales arrangements
where the
end-user is such owner. At December 31, 1994, 12.1% of the
Company's net
investment in leases and finance receivables ("portfolio assets")
consisted
of leases where the Company was the owner of the equipment for
both tax and
accounting purposes. The Company's portfolio assets, which
aggregated
approximately $7.5 billion at December 31, 1994, are diversified
across
various types of financed equipment, with telecommunications
equipment
comprising approximately 26% of such portfolio assets at such
date. At
December 31, 1994, approximately 5% of the Company's portfolio
assets were
comprised of real estate assets (including commercial loans
collateralized
2
5
by real estate generated through the Company's small business
lending
activity, e.g., SBA and franchise lending) and commercial
aircraft leases.
AT&T Capital's portfolio assets are diversified among a
large customer
base as well as geographic regions. At December 31, 1994, the
Company's 99
largest customers (after AT&T and its affiliates) accounted for
approximately 20% of the Company's portfolio assets, and no
single customer
(with the exception of AT&T and its affiliates) accounted for
more than
1.0% of such portfolio assets.
A substantial part of the Company's total United States
assets,
revenue and net income are attributable to leasing and financing
of AT&T
equipment provided to customers of AT&T and its affiliates
(collectively,
"Customers of AT&T Equipment"). AT&T and its affiliates and
employees
(collectively, "AT&T as End-User") are also significant customers
of the
Company, primarily with respect to data processing equipment and
vehicles
leased to as them as end-users.
The following table shows (in millions of dollars) the
assets,
revenue, net income(loss) and income before cumulative effect of
accounting
change and impact of tax rate change related to United States
operations
(together with the respective percentages of the assets, revenue,
net
income(loss) and income before cumulative effect of accounting
change and
impact of tax rate change related to United States operations
represented
by such dollar amounts) attributable to (I) leasing and financing
services
provided by the Company to customers of AT&T equipment, (ii)
transactions
involving AT&T as End-User and (iii) the Company's non-AT&T
businesses, in
each case at and for the years ended December 31, 1992, 1993 and
1994. The
net income(loss) and income before cumulative effect of
accounting change
and impact of tax rate change amounts shown below were calculated
based
upon what the Company believes to be a reasonable allocation of
interest,
income taxes and certain corporate overhead expenses.
Customers of AT&T Equipment
Income
before
cumulative effect
of 1993
accounting
change
and impact
Assets Revenue Net Income of tax
rate change
__________________________________________________________________________
$ % $ % $ % $
%
___________________________________________________________________________
1992 $2,305.0 40.1% $410.5 32.8% $52.4 60.0%
$52.4 60.0%
1993 $2,441.7 40.7% $423.3 33.2% $68.5 87.8%
$75.9 80.1%
1994 $2,749.8 38.4% $458.5 36.7% $84.2 80.5%
$84.2 80.5%
3
6
AT&T as End-User
Income
before
cumulative effect
of 1993
accounting
change
and impact
Assets Revenue Net Income of tax
rate change
___________________________________________________________________________
$ % $ % $ % $
%
___________________________________________________________________________
1992 $658.4 11.4% $185.2 14.8% $13.0 14.9% $13.0
14.9%
1993 $608.8 10.1% $201.9 15.9% $14.2 18.3% $16.9
17.9%
1994 $548.0 7.7% $131.2 10.5% $ 8.5 8.2% $ 8.5
8.2%
Non-AT&T Businesses
Income
before
cumulative effect
of 1993
accounting
Net Income change
and impact
Assets Revenue (Loss) of tax
rate change
___________________________________________________________________________
$ % $ % $ % $
%
___________________________________________________________________________
1992 $2,786.9 48.5% $655.8 52.4% $21.9 25.1% $21.9
25.1%
1993 $2,952.4 49.2% $649.4 50.9% ($ 4.7) (6.1%) $ 1.9
2.0%
1994 $3,850.9 53.9% $660.9 52.8% $11.9 11.3% $11.9
11.3%
The net income(loss) and income before cumulative effect of
accounting
change and impact of tax rate change from the Company's United
States non-AT&T businesses reflects the fact that costs and
expenses associated with
developing additional and changing existing non-AT&T business
units were
substantial. Conversely, the securitization of certain non-AT&T
portfolio
assets positively impacted the non-AT&T businesses in 1992, 1993
and 1994
(see Note 6 to the Consolidated Financial Statements). The
Company intends
to pursue its strategy of expanding its non-AT&T businesses,
while at the
same time enhancing its AT&T relationship. Because the desired
growth in
revenue generated by the Company's non-AT&T businesses can be
expected to
lag behind the incurrence of costs and expenses necessary to
expand and
operate such businesses, the Company anticipates that the
percentage of its
total United States net income and revenue growth attributable to
non-AT&T
businesses may vary from year to year depending upon the
developmental
stages associated with the non-AT&T businesses.
Although the Company operates principally in the United
States, the
Company began operations in the United Kingdom in 1991 and,
through the
hiring of certain employees and the acquisition of certain
operating assets
(but not Portfolio Assets), began significant operations in
Canada in 1992.
In January 1994, the Company purchased the stock of Australian
Guarantee
Corporation Finance (H.K.) Limited ("A.G.C. Finance"), a Hong
Kong-based
vehicle and equipment leasing finance company with assets at that
time of
approximately $150 million. Also in January 1994, the Company,
through its
wholly-owned Canadian subsidiary, acquired the vehicle portfolio
and
infrastructure assets constituting the Avis Canada Leasing
Division of
AvisCar, Inc. ("Avis Leasing"). Avis Leasing provides automobile
leasing
to small and mid-size commercial and corporate clients in Canada
and had
4
7
approximately $90 million in assets at the time of acquisition.
Also in 1994, the Company opened offices in Mexico and
Australia. The
Company, from time to time, investigates potential opportunities
to make
acquisitions abroad, and the Company may open additional foreign
offices on
a limited basis either directly or through acquisition.
On January 4, 1995, the Company acquired the vendor leasing
and
finance companies of Banco Central Hispano and certain of its
affiliates
(collectively, "CFH Leasing International") located in the
United Kingdom,
Germany, France, Italy, Belgium, the Netherlands and Luxembourg.
CFH
Leasing International provides financial services to equipment
manufacturers and vendors. With offices throughout much of
western
Europe, it serves approximately 4,600 customers and had
approximately $540
million in assets at the time of acquisition.
The Company's assets, revenue and net income related to
foreign
operations are not reflected in the above tables which show
assets,
revenue, net income(loss) and income before cumulative effect of
accounting
change and impact of tax rate change attributable to the
Company's United
States operations. At December 31, 1994, 1993 and 1992, the
total assets
of the Company's foreign operations were $873.2 million (or 10.9%
of total
assets), $406.9 million (or 6.3% of total assets) and $145.1
million (or
2.5% of total assets), respectively. The total revenue of such
operations
for the years ended December 31, 1994, 1993 and 1992, were $133.5
million
(or 9.6% of total revenue), $85.0 million (or 6.2% of total
revenue) and
$14.0 million (or 1.1% of total revenue), respectively, and such
operations
generated net losses of $4.2 million, $9.4 million and $13.8
million,
respectively. Such losses reflected the fact that most of the
Company's
foreign operations are in the start-up phase, with revenue from
such
operations not yet covering operating costs and expenses.
Although a substantial majority of the Company's foreign
assets and
revenues at and for the years ended December 31, 1994, 1993 and
1992, were
attributable to the Company's non-AT&T businesses, a principal
focus of
such foreign operations is to serve foreign customers of AT&T and
its
affiliates as well as other vendors. Total assets, revenue and
net income
related to non-AT&T businesses including both domestic and
international
businesses for the year ended December 31, 1994 were $4,698.7
million (or
58.6% of total assets), $789.9 million (or 57.1% of total
revenue), and
$9.0 million (or 9.0% of total net income), respectively. Total
assets,
revenue and net loss (before cumulative effect of accounting
change and the
impact of the tax rate change) related to non-AT&T businesses
including
both domestic and international businesses for the year ended
December 31,
1993 were $3,337.1 million, $731.6 million and $7.5 million,
respectively.
Total assets, revenue and net loss related to non-AT&T businesses
including
both domestic and international businesses for the year ended
December 31,
1992 were $2,906.3 million, $668.1 million and $11.7 million,
respectively.
Income Tax Considerations
The Company is currently a member of AT&T's consolidated
group for
federal income tax purposes. The Company would cease to be a
member of
such consolidated group for federal income tax purposes (a "Tax
5
8
Deconsolidation") if, among other events, AT&T's ownership
interest in the
outstanding common stock decreases to below 80%. Tax
Deconsolidation would
have certain adverse effects on the Company.
As long as the Company is a part of the AT&T consolidated
federal
income tax group, the payment of federal and state income taxes
in all
states in which combined returns are filed associated with sales
of
products manufactured by AT&T is deferred (the amount of such
taxes so
deferred being herein called "Gross Profit Tax Deferral"),
generally as the
products are 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 has extended and has agreed to extend
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 are repayable by
the
Company when and to the extent that any such deferred taxes are
required to
be paid by AT&T. Upon any Tax Deconsolidation, the Company would
be
required to repay such loans and would no longer receive such
loans, which
have constituted a competitive advantage to the Company in
financing AT&T
products.
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 is generally allocated among the members of the AT&T
consolidated
group that report taxable income. Members of the AT&T
consolidated group
that report tax losses are compensated currently by AT&T (through
cash
payments made on a quarterly basis) for their losses to the
extent those
losses are used to reduce the AT&T consolidated federal income
tax
liability. Similar principles and cash payments also apply to
certain
state and local income tax liabilities.
Upon any Tax Deconsolidation, the Company would no longer be
entitled
to receive quarterly cash payments from AT&T in compensation for
the use of
any tax losses. The tax losses would, instead, be 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 1994, on a stand-alone basis, the
Company had
taxable income.
In addition, upon Tax Deconsolidation, it is possible that
the Company
could be subject to the federal alternative minimum tax. A
taxpayer's
alternative minimum tax liability is computed by applying the
alternative
minimum tax rate, which is lower than the regular tax rate, to a
measure of
taxable income that is broader than that used in computing the
regular tax.
Payments of any alternative minimum tax incurred by the Company
after a Tax
Deconsolidation would be available in the future as credits
against the
Company's regular tax liability.
Although AT&T has the right to reduce its ownership interest
in the
6
9
Company (subject to certain contractual restrictions in the
Intercompany
Agreement between the Company and AT&T) and effect a Tax
Deconsolidation at
any time, AT&T has advised the Company that no decision has been
made to
reduce its ownership interest in the Company. AT&T has indicated
to the
Company that any decision by AT&T to reduce such ownership
interest would
be made, in the future on the basis of all the circumstances
existing at
such time including the effect of any such reduction on AT&T
(including any
benefit to AT&T from the removal from AT&T's consolidated balance
sheet of
the Company's indebtedness (and assets) in the event AT&T's
interest in the
common stock of the Company is reduced below 50%), the needs of
AT&T, the
success of the Company, stock market conditions and other
factors.
Credit Quality
The control 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, customer
type,
geographic location and maturity. The Company's financing
activities have
been spread across a wide range of equipment segments (e.g.,
telecommunications, general, data center, other data processing
and
transportation) and a large number of end-users located
throughout the
United States and, to a lesser extent, abroad.
The table below provides allowance for credit losses
components by
loan classification (as prescribed by the Securities and Exchange
Commission, "SEC") where Lease Financing includes capital leases
and
rentals receivable on operating leases and Commercial and
Financial
includes finance receivables (collectively "finance assets"), as
well as
other key credit quality indicators. 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.
(Dollars in Thousands)
1994 1993 1992 1991
1990
___________________________________________________________________________
Balance at beginning
of year:
- - Lease Financing $102,760 $ 87,774 $ 74,106 $ 57,578
$ 31,886
- - Commercial and
Financial 57,059 36,187 19,861 17,791
5,982
___________________________________________________________________________
Total 159,819 123,961 93,967 75,369
37,868
___________________________________________________________________________
Additions Charged
to Operations:
- - Lease Financing 66,306 95,034 88,577 100,445
58,767
- - Commercial and
Financial 14,582 28,644 23,138 8,190
16,741
___________________________________________________________________________
Total $ 80,888 $123,678 $111,715 $108,635
$ 75,508
___________________________________________________________________________
7
10
1994 1993 1992 1991
1990
___________________________________________________________________________
Charge-offs:
- Lease Financing $ 50,294 $ 61,517 $ 76,587 $ 76,422
$ 49,468
- Commercial and
Financial 23,223 14,135 18,183 15,466
4,970
___________________________________________________________________________
Subtotal 73,517 75,652 94,770 91,888
54,438
___________________________________________________________________________
Recoveries:
- Lease Financing 16,316 15,505 15,038 8,261
7,953
- Commercial and
Financial 1,656 1,118 1,365 1,672
38
___________________________________________________________________________
Subtotal 17,972 16,623 16,403 9,933
7,991
___________________________________________________________________________
Net Charge-offs:
- - Lease Financing 33,978 46,012 61,549 68,161
41,515
- - Commercial and
Financial 21,567 13,017 16,818 13,794
4,932
___________________________________________________________________________
Total 55,545 59,029 78,367 81,955
46,447
___________________________________________________________________________
Transfers and Other (a):
- - Lease Financing (6,558) (34,036) (13,360)
(15,756) 8,440
- - Commercial and
Financial (2,176) 5,245 10,006 7,674
-
___________________________________________________________________________
Total (8,734) (28,791) (3,354)
(8,082) 8,440
___________________________________________________________________________
Balance at end of year:
- - Lease Financing 128,530 102,760 87,774 74,106
57,578
- - Commercial and
Financial 47,898 57,059 36,187 19,861
17,791
___________________________________________________________________________
Total $ 176,428 $159,819 $123,961 $ 93,967
$ 75,369
===========================================================================
Percentage of lease
financing assets to
total finance assets 80.6% 80.3% 79.9% 78.9%
78.3%
===========================================================================
Percentage of commercial
and financial assets
to total finance
assets 19.4% 19.7% 20.1% 21.1%
21.7%
===========================================================================
8
11
1994 1993 1992 1991
1990
___________________________________________________________________________
Ratio of Net Charge-offs
during the year to
average finance assets
(excluding operating leases)
outstanding during the
year:
- Lease Financing 0.71% 1.21% 1.89% 2.35%
1.72%
- Commercial and
Financial 1.67% 1.13% 1.51% 1.34%
0.56%
===========================================================================
Nonaccrual assets $120,494 $160,574 $151,562 $ 85,381 $ 80,156
===========================================================================
(a) Primarily includes transfers out of allowance for credit
losses
related to receivables securitized, transfers in of reserves
related
to businesses acquired and reclassifications.
AT&T has agreed in the Operating Agreement to repurchase
certain
finance assets that go into default. Finance assets subject to
such
provisions were $243.0 million, $321.0 million and $282.4 million
at
December 31, 1994, 1993 and 1992, respectively. The Company
believes that
the remaining net investment in finance assets is adequately
reserved for
given the level of the Company's total allowance for credit
losses.
Portfolio credit performance indicators in 1994 have
continued to show
positive trends. Delinquency and charge-off levels have declined
during
1994, and the provision for credit losses decreased $42.8
million, or
34.6%, compared with 1993. The allowance for credit losses as a
percentage
of portfolio assets at December 31, 1994 was 2.30% compared with
2.56% at
December 31, 1993. At December 31, 1994 the allowance for credit
losses
was $176.4 million compared with $159.8 million at December 31,
1993.
Nonaccrual assets at December 31, 1994 totalled $120.5 million
compared
with $160.6 million at December 31, 1993.
The ratio of net charge-offs to average commercial and
financial
assets 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 (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.
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 1994 on nonaccrual assets had these assets been earning at the
original
contractual rate amounted to approximately $12.9 million.
Revenue actually
recognized in 1994 for assets in nonaccrual status at December
31, 1994
amounted to approximately $7.3 million.
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
9
12
with Statement of Financial Accounting Standards ("SFAS") No. 13,
"Accounting for Leases." During the past five years, the Company
has had
no significant earning finance assets that are required to be
reported as a
troubled debt restructuring pursuant to SFAS No. 15, "Accounting
by Debtors
and Creditors for Troubled Debt Restructurings".
Residual Value Realization
The establishment and realization of residual values on
leases are
also important elements of the Company's business. 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.
These
estimates are derived by the Company from, among other things,
market
information on sales of used equipment, end-of-lease customer
behavior and
estimated obsolescence trends. The Company's risk management
department,
in conjunction with the management of 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 adjustments to depreciation expense for operating leases over
the
shorter of the useful life of the asset or the remaining term of
the lease.
In January 1994, the Company entered into a significant lease
extension
associated with mainframe computers leased to AT&T. This
extension
significantly reduced related mainframe residual exposure. At
December 31,
1994 and 1993, total portfolio assets related to mainframe
computers were
$527.1 million, or 7.0%, and $687.0 million, or 11.3%,
respectively. The
related residual values of mainframe computers were $79.1 million
and
$232.2 million at December 31, 1994 and 1993, respectively.
The Company actively manages its residuals by working with
lessees
during the lease term to encourage lessees to extend their leases
or
upgrade and enhance their leased equipment, as appropriate, and
by
monitoring the various equipment industry segments, particularly
the data
center and other data processing industry segments, for
obsolescence
trends. The Company utilizes its asset management (including
asset
remarketing), engineering and other technical expertise to help
manage its
residual positions.
In 1994, 1993 and 1992, the Company recognized, in total
revenue,
amounts in excess of recorded residuals upon the re-lease, sale
or other
disposition by the Company of leased equipment.
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, residual management, etc.). Adequate risk management
is
required to achieve satisfactory returns on investment and to
provide
appropriate pricing of finance products. The Company believes
that
innovation is necessary to compete in the industry, involving
specialization in certain types of equipment, financial
structuring for
10
13
larger transactions, utilization of alternative channels of
distribution
and optimization of tax treatment between owner and user.
End-users of
equipment generally desire transactions to be simple, flexible
and
customer-responsive.
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 the available cash resources of end-users (i.e.,
end-users
may use their available cash resources to purchase for cash
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 capital at a lower cost than
the
Company.
Recently there have been substantial changes in the
equipment leasing and
finance industry, including the sale or cessation of operations
of certain
large 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 AT&T'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 37%
for the year
ended December 31, 1994. The Company does not expect material
increases in
this penetration rate, and there can be no assurance that the
existing rate
will be maintained. Although, the Company has a lower
penetration rate
(approximately 22% for the year ended December 31, 1994) with
respect to
sales of AT&T Global Information Solutions products (data
processing and
related products, including personal computers, retail
point-of-sale
computers, automatic teller machines and bank transaction
processing
equipment), the penetration rate has increased in 1994 compared
with 1993.
Additionally, the Company has an insignificant penetration rate
with
respect to international sales of AT&T'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 shorter 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 by AT&T and its affiliates' industries
may
adversely affect the Company because of the significance to the
Company of
its business with customers of AT&T and its affiliates. Those
industries
11
14
are highly competitive and subject to rapid changes in technology
and
customer needs. Many of AT&T and its affiliates' competitors are
large
companies that have substantial capital, technology and marketing
resources.
Employees
AT&T Capital has approximately 2,700 employees as of
February 28,
1995, each of whom is referred to within the Company as a
"member". Titles
are generally not used internally. In general, the members
function using
a team approach, with business conducted on a collaborative
rather than
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
and warehouses for the storage and refurbishment of equipment.
The Company
has its headquarters in Morristown, New Jersey, with its
principal domestic
offices and warehouses located in Parsippany, New Jersey;
Framingham,
Massachusetts; Bloomfield Hills, Michigan; Miamisburg, Ohio;
Towson,
Maryland; and Dallas, Texas. The Company's principal
international offices
are in London, England; Toronto, Canada; Hong Kong; Sydney,
Australia; and
Mexico City, Mexico. All these offices and warehouses are leased
(some
being subleased from AT&T or one of its affiliates), except for
two
buildings (of approximately 23,000 and 9,000 square feet) in
Framingham,
Massachusetts, owned by a subsidiary of the Company. Each of
these two
buildings is used for office space and storage and one is
partially sublet
to a nonaffiliated company. The Company considers its present
locations
suitable and adequate to carry on its current business.
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 have been no matters submitted to a vote of security
holders
during the fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS
(a) Market Information
The principal market on which the common stock of the
Company is
traded is the New York Stock Exchange.
12
15
Quarter Ended: Quarterly Stock Prices
Dividends
declared
per
share
High Low
December 31, 1993 $29.250 $22.375
$0.09
March 31, 1994 $27.000 $22.875
$0.09
June 30, 1994 $24.750 $21.625
$0.09
September 30, 1994 $24.375 $21.375
$0.09
December 31, 1994 $24.500 $19.750
$0.10
(b) Holders
As of February 28, 1995, there were 815 holders of
record of the
Company's common stock, including AT&T through Old
Capital and
Old Credit (which held 40,250,000 shares or
approximately 86% of
total shares outstanding).
(c) Dividends
It is anticipated that the Company will continue to pay
regular
quarterly dividends. The declaration of dividends and
their
amounts will be at the discretion of the Company's
board of
directors, and there can be no assurance that
additional
dividends will be declared.
ITEM 6. SELECTED FINANCIAL DATA
The Results of Operations Data for the years ended December
31, 1994,
1993, 1992, 1991 and 1990, as well as the Balance Sheet Data and
Other Data
at December 31, 1994, 1993, 1992 and 1991, 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. The Results of Operations Data for the years ended
December
31, 1989, 1988, 1987, 1986 and 1985, as well as the Balance Sheet
Data and
Other Data at December 31, 1990, 1989, 1988, 1987, 1986 and 1985,
are
derived from unaudited consolidated financial information. In
management's
opinion, the Company's unaudited consolidated financial
statements at or
for the years ended December 31, 1990, 1989, 1988, 1987, 1986 and
1985,
include all adjustments (consisting of normal recurring
adjustments)
necessary for a fair presentation.
The selected financial data as presented under the
"Financial
Highlights" caption in the Company's Annual Report 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.
13
16
For the years ended December
31,
(Dollars in thousands, 1994 1993 1992 1991
1990
except per share amounts)______ ______ ______ ______
______
Results of Operations Data:
Total revenue $1,384,079 $1,359,589 $1,265,526 $1,160,150
$ 881,183
Interest expense 271,812 236,335 252,545 275,650
262,646
Operating and
administrative
expenses 427,187 381,515 359,689 298,833
193,882
Provision for credit
losses 80,888 123,678 111,715 108,635
75,508
Income before income
taxes, extraordinary
loss and cumulative
effect on prior years
of accounting change 173,614 138,040 114,875 82,559
70,891
Income before extra-
ordinary loss, cumu-
lative effect on prior
years of accounting
change and impact of
tax rate change 100,336 83,911 73,572 54,199
47,755
Extraordinary loss - - - -
-
Cumulative effect on
prior years of
accounting change (1) - (2,914) - -
-
Impact of 1993 tax rate
change (1) - (12,401) - -
-
Net income (1) 100,336 68,596 73,572 54,199
47,755
Earnings per share (1) 2.14 1.60 1.83 1.35
1.19
Earnings per share
before tax charges
(1), (2) 2.14 1.95 1.83 1.35
1.19
Dividends paid 17,338 4,216 49,632 55,512
34,423
Dividends per share (7) 0.37 0.09 - -
-
Return on average
equity 10.5% 8.5% 11.4% 10.7%
11.0%
Return on average
assets 1.4% 1.1% 1.3% 1.1%
1.1%
Return on average equity
before tax charges (2) 10.5% 10.3% 11.4% 10.7%
11.0%
Return on average assets
before tax charges (2) 1.4% 1.4% 1.3% 1.1%
1.1%
___________________________________________________________________________
Balance Sheet Data, at December 31:
Total assets 8,021,923 6,409,726 5,895,429 5,197,245
4,722,694
Total debt(3) 5,556,458 4,262,405 4,089,483 3,594,247
3,312,421
Total liabilities 7,013,705 5,485,283 5,158,808 4,647,979
4,257,186
Total shareowners'
equity $1,008,218 $ 924,443 $ 736,621 $ 549,266
$ 465,508
14
17
For the years ended December
31,
(Dollars in thousands, 1989 1988 1987 1986
1985
except per share amounts)______ ______ ______ ______
______
Results of Operations Data:
Total revenue $ 466,508 $ 319,029 $ 259,716 $ 191,284
$ 130,473
Interest expense 177,474 130,913 93,275 67,145
55,947
Operating and
administrative
expenses 118,430 90,528 76,752 55,211
28,198
Provision for credit
losses 32,222 19,135 39,227 28,049
5,970
Income before income
taxes, extraordinary
loss and cumulative
effect on prior years
of accounting change 59,346 47,306 40,269 38,816
39,283
Income before extra-
ordinary loss, cumu-
lative effect on prior
years of accounting
change and impact of
tax rate change 44,416 30,756 26,147 22,659
21,256
Extraordinary loss - - - (1,157)
-
Cumulative effect on
prior years of
accounting change (1) - - - -
-
Impact of 1993 tax rate
change (1) - - - -
-
Net income (1) 44,416 30,756 26,147 21,502
21,256
Earnings per share (1) 1.10 0.76 0.65 0.53
0.53
Earnings per share
before tax charges
(1), (2) 1.10 0.76 0.65 0.53
0.53
Dividends paid 17,746 28,192 24,674 15,195
7,348
Dividends per share (7) - - - -
-
Return on average
equity 12.7% 11.5% 11.8% 13.0%
16.8%
Return on average
assets 1.4% 1.2% 1.3% 1.7%
3.1%
Return on average equity
before tax charges (2) 12.7% 11.5% 11.8% 13.0%
16.8%
Return on average assets
before tax charges (2) 1.4% 1.2% 1.3% 1.7%
3.1%
___________________________________________________________________________
Balance Sheet Data, at December 31:
Total assets 3,836,799 2,715,592 2,324,695 1,552,847
1,048,583
Total debt(3) 2,742,843 1,692,556 1,640,879 1,019,970
739,888
Total liabilities 3,435,792 2,417,280 2,074,198 1,360,870
911,006
Total shareowners'
equity $ 401,007 $ 298,312 $ 250,497 $ 191,977
$ 137,577
15
18
At or for the years ended December
31,
(Dollars in thousands, 1994 1993 1992 1991
1990
except per share amounts)______ ______ ______ ______
______
Other Data:
Net portfolio assets
of the Company $7,484,798 $6,076,805 $5,600,741 $4,956,830
$4,513,280
Allowance for credit
losses 176,428 159,819 123,961 93,967
75,369
Assets of others
managed by the
Company 2,659,526 2,795,663 1,374,354 649,014
313,981
Volume of equipment
financed (4) 4,251,000 3,467,000 3,253,000 2,453,000
2,300,000
Ratio of earnings to
fixed charges (5) 1.62 1.57 1.44 1.29
1.26
Ratio of total debt to
shareowners' equity 5.51 4.61 5.55 6.54
7.12
Ratio of allowance for
credit losses to net
charge-offs 3.18 2.71 1.58 1.15
1.62
Ratio of charge-offs to
net investment (6) 0.73% 0.95% 1.37% 1.62%
1.01%
Ratio of allowance for
credit losses to net
investment (6) 2.30% 2.56% 2.17% 1.86%
1.64%
At or for the years ended December
31,
1989 1988 1987 1986
1985
______ ______ ______ ______
______
Other Data:
Net portfolio assets
of the Company 3,228,609 2,529,834 2,094,593 1,440,626
948,307
Allowance for credit
losses 37,868 42,733 52,695 29,015
8,794
Assets of others
managed by the
Company 102,003 18,529 - -
-
Volume of equipment
financed (4) $1,729,000 $1,489,000 $1,409,000 $1,101,000
$ 679,000
Ratio of earnings to
fixed charges (5) 1.33 1.36 1.43 1.58
1.70
Ratio of total debt to
shareowners' equity 6.84 5.67 6.55 5.31
5.38
Ratio of allowance for
credit losses to net
charge-offs 1.02 1.47 3.04 3.71
4.40
Ratio of charge-offs to
net investment (6) 1.13% 1.13% 0.81% 0.53%
0.21%
Ratio of allowance for
credit losses to net
investment (6) 1.16% 1.66% 2.45% 1.97%
0.92%
16
19
(1) Net income and earnings per share for 1993 were 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). (See
Note 10 to
the Consolidated Financial Statements.) Net income and earnings
per share
without these charges for 1993 would have been $83.9 million and
$1.95 per
share, respectively.
(2) The Company defines return on average equity before tax
charges, return
on average assets before tax charges and earnings per share
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,
average assets and divided by average weighted shares
outstanding,
respectively.
(3) Does not include certain interest free loans from AT&T to the
Company
under certain tax agreements, in aggregate outstanding principle
amounts of
$214.1 million, $188.6 million, $193.1 million, $206.6 million,
$239.6
million, $232.6 million, $244.5 million, $209.0 million, $134.1
million and
$56.9 million at December 31, 1994, 1993, 1992, 1991, 1990, 1989,
1988,
1987, 1986 and 1985, respectively.
(4) Total principal amount of loans and total cost of equipment
associated
with finance and lease transactions recorded by the Company and
the
increase, if any, in outstanding inventory financing loans.
(5) Earnings before income taxes, extraordinary loss 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 divided by the sum of interest on indebtedness and the
portion of
rentals representative of the interest factor. A portion of the
Company's
indebtedness to AT&T does not bear interest.
(6) Net investment includes net investment in finance
receivables, capital
leases and operating leases, prior to deduction of allowance for
credit
losses.
(7) Prior to July 28, 1993, AT&T owned 100% of the Company's
stock and
therefore, dividends per share is not meaningful.
17
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1994 versus 1993
Net income for the year ended December 31, 1994, was $100.3
million,
an increase of $31.7 million, or 46.3%, compared with 1993.
Earnings per
share for the year ended December 31, 1994, were $2.14, a 33.8%
increase
over the $1.60 reported in 1993. The increase in net income and
earnings
per share for 1994 compared with 1993 was impacted by the 1993
adoption of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income
Taxes" ("SFAS No. 109"), which resulted in a cumulative effect of
accounting
change of $2.9 million, and an $11.4 million charge to reflect
the impact
on deferred tax balances of the third quarter 1993 increase in
the income
tax rate to 35% from 34%. Absent the 1993 effect of adopting
SFAS No. 109
and the impact of the increase in the income tax rate, net income
increased
$17.4 million, or 21.0%, and earnings per share increased $.21
per share.
The increase principally reflected a higher average level of
finance assets
resulting from both origination volume and acquisitions of
portfolios and
businesses, and improved portfolio performance attributable to a
stronger
economy, which contributed to a lower provision for credit
losses.
Finance revenue of $120.8 million increased $13.4 million,
or 12.4%,
for 1994, compared with 1993, while the average earning finance
receivable
portfolio increased $165.3 million, or 15.8%, to $1,213.3 million
for 1994.
The increase in finance revenue due to the higher average earning
finance
receivables was offset by slightly lower average rates earned on
the
average 1994 portfolio compared with rates earned on the average
1993
portfolio. This is consistent with the Company's slightly lower
average
cost of borrowing for 1994, compared with 1993. (See interest
expense
discussion below.) A higher interest rate environment generally
does not
impact the margin on assets that are already recorded by the
Company, since
the Company employs a well-defined strategy to match fund assets
with
borrowings in order to limit interest rate risk. The effects of
higher
borrowing costs would be reflected in the pricing of new assets
leased or
financed. As the lower yielding earning assets (as well as the
corresponding lower cost borrowings) are replaced with higher
yielding
assets, reflective of the current interest rate environment, the
Company's
average rates associated with recorded assets and associated
borrowings
will increase.
Capital lease revenue of $477.9 million increased $85.9
million, or
21.9%, for 1994, compared with 1993, while the average earning
capital
lease portfolio increased $1,007.4 million, or 27.6%, to $4,653.3
million
for 1994. $40.7 million of the increase in capital lease revenue
for 1994,
compared with 1993, is due to international acquisitions and
expansion.
The growth in capital lease revenue resulted from a higher level
of assets
(including an AT&T mainframe lease extension which resulted in
the
reclassification of the lease from an operating lease to a
capital lease)
but was partially offset by a decline in yields due to lower
average rates
associated with recorded assets of the Company. As noted above,
this is
18
21
consistent with the Company's slightly lower cost of borrowing
for 1994,
compared with 1993. However, the Company has experienced some
margin
compression in certain equipment leasing portfolios as pricing in
connection with some portfolios is less reactive to interest rate
movements.
Rental revenue on operating leases of $475.4 million
decreased $26.8
million, or 5.3%, for 1994, compared with 1993. Depreciation on
operating
leases of $313.6 million decreased $20.6 million, or 6.2%, for
the year
ended December 31, 1994, compared with the year ended December
31, 1993.
These decreases were primarily due to the AT&T mainframe computer
lease
extension during the first quarter of 1994. The terms of the
extension,
which reduced the Company's mainframe residual exposure, resulted
in the
reclassification of the lease from an operating lease to a
capital lease.
The impact of this lease extension reduced rental revenue and
depreciation
by $75.3 million and $51.2 million, respectively, for the year
ended
December 31, 1994, compared with the year ended December 31,
1993. While
domestic rental revenue and depreciation have decreased, rental
revenue and
depreciation related to the Company's international operations
increased
$13.0 million and $10.8 million, respectively, for the year ended
December
31, 1994, compared with the year ended December 31, 1993. Rental
revenue
less associated depreciation ("operating lease margin") was
$161.8 million
or 34.0% of rental revenue for 1994, compared with $167.9
million, or
33.4%, for 1993.
Market forces, economic uncertainty and the transition to a
new
generation of mainframes and technological alternatives, have
adversely
impacted the market for mainframe computers. At December 31,
1994, $527.1
million, or 7.0%, of portfolio assets (with related residual
values of
$79.1 million) related to mainframe computers. This compares
with $687.0
million, or 11.3%, (with related residual values of $232.2
million) at
December 31, 1993. The Company regularly monitors its estimates
of
residual values for all leased equipment including mainframe
computers and
believes that its residual values are conservatively stated.
For the year ended December 31, 1994, revenue from sales of
equipment
purchased for resale of $126.6 million decreased $35.0 million,
or 21.6%,
compared with 1993. Cost of equipment sales of $117.0 million
decreased
$28.8 million, or 19.8%, for 1994, compared with 1993. Equipment
sales
revenue less associated cost of equipment sold ("equipment sales
margin")
was $9.6 million, or 7.6%, of equipment sales revenue for the
year ended
December 31, 1994. Equipment sales margin for the year ended
December 31,
1993, was $15.7 million, or 9.7%, of equipment sales revenue.
The decrease
in the equipment sales margin as a percentage of related revenue
for 1994,
compared with 1993, reflects continued softness in the mainframe
computer
market, as well as increased competition. In 1993, the Company,
was able
to seize an opportunity to expand this activity to Europe.
However, the
European market has experienced increased competition in 1994.
Therefore,
the Company was not able to maintain its 1993 level of European
sales and
expects that future European activity in this area will be
limited.
Other revenue of $183.5 million decreased $13.0 million, or
6.6%, in
1994, compared with 1993. Other revenue consists mainly of sales
of leased
and off-lease equipment, gains on securitization of lease
receivables and
19
22
service fee revenue. (See Note 6 to the Consolidated Financial
Statements.) The decrease in other revenue for 1994, compared
with 1993,
is primarily due to lower securitization gains of $36.7 million
and lower
service fee revenue of $10.2 million recognized for the year
ended December
31, 1994, compared with the year ended December 31, 1993. The
decreases
were partially offset by increased gains on sales of leased and
off-lease
equipment of $26.8 million.
In the fourth quarter of 1994, the Company securitized
$259.1 million
of lease receivables resulting in a gain of $14.8 million.
Similar
securitizations in the first and fourth quarters of 1993 of
$561.9 million
in lease receivables resulted in $51.5 million in gains. While
the assets
securitized in 1994 were down by 53.9%, the related gain
decreased by
71.3%. The difference is primarily attributable to a higher
discount rate
used in the 1994 securitization due to the higher interest rate
environment.
Under the terms of these securitizations, the Company is
liable to the
purchasers of such receivables for a limited amount of recourse
granted by
the Company to such purchasers. In the unlikely event that all
such
receivables became uncollectible at December 31, 1994, the
Company's
maximum exposure under limited recourse provisions granted to the
purchasers of all securitized lease receivables was $353.1
million. In
addition, the Company provides such purchasers with billing and
collection
and other services with respect to such securitized receivables.
At December 31, 1994, total assets managed by the Company on
behalf of
others were $2.7 billion compared with $2.8 billion at December
31, 1993.
Of the total assets managed by the Company on behalf of others,
55.9% in
1994 and 59.2% in 1993, were assets managed on behalf of AT&T and
its
affiliates.
A substantial part of the Company's total United States
assets,
revenue and net income are attributable to leasing and financing
of AT&T
equipment and to leasing and financing equipment to AT&T and its
affiliates
and employees of AT&T (together, the "relationship with AT&T").
Total
United States assets associated with the relationship with AT&T
were
$3,297.8 million (or 46.1% of total United States assets) and
$3,050.5
million (or 50.8% of total United States assets) at December 31,
1994 and
1993, respectively. Total United States revenue and net income
associated
with the relationship with AT&T was $589.7 million (or 47.2% of
total
United States revenue) and $92.7 million (or 88.7% of total
United States
net income) for 1994, and $625.2 million (or 49.1% of total
United States
revenue) and $92.8 million (or 98.0% of total United States net
income,
excluding the cumulative effect of accounting change and impact
of the tax
rate change) for 1993. The Company's United States non-AT&T
businesses had
assets of $3,850.9 million (or 53.9% of total United States
assets) and
$2,952.4 million (or 49.2% of total United States assets) at
December 31,
1994 and 1993, respectively. The Company's United States
non-AT&T
businesses contributed revenue of $660.9 million (or 52.8% of
total United
States revenue) and net income of $11.9 million (or 11.3% of
total United
States net income) for 1994, and revenue of $649.4 million (or
50.9% of
total United States revenue) and net income of $1.9 million (or
2.0% of
20
23
total United States net income, excluding the cumulative effect
of
accounting change and the impact of the tax rate change) for
1993.
At December 31, 1994 and 1993, the total assets of the
Company's
international operations were $873.2 million (or 10.9% of total
assets) and
$406.9 million (or 6.3% of total assets), respectively. The
total revenue
of such operations for the years ended December 31, 1994, 1993
and 1992,
were $133.5 million (or 9.6% of total revenue), $85.0 million (or
6.2% of
total revenue) and $14.0 million (or 1.1% of total revenue),
respectively.
The profitability of the Company's international operations
continued to
improve in 1994. While such operations generated net losses of
$4.2
million for the year ended December 31, 1994, the results compare
favorably
to the $9.4 million loss reported in 1993 and the $13.8 million
loss
reported in 1992. These losses reflected the fact that most of
the
Company's international operations are in the start-up phase,
with revenue
from such operations not covering operating costs and expenses.
The
Company's operations in the United Kingdom, which were
established in 1991,
were profitable for the first time in 1994.
Although a substantial majority of the Company's
international assets
and revenues at and for the years ended December 31, 1994, 1993
and 1992,
were attributable to the Company's non-AT&T businesses, a
principal focus
of such foreign operations is to serve foreign customers of AT&T
and its
affiliates as well as other vendors.
Total non-AT&T net income, revenue and total assets
including both
United States and international businesses for the year ended
December 31,
1994, was $9.0 million (or 9.0% of total net income), $789.9
million (or
57.1% of total revenue) and $4,698.7 million (or 58.6% of total
assets),
respectively. For the year ended December 31, 1993, total
non-AT&T net
loss (before the impact of SFAS No. 109 and the impact of the
1993 increase
in the federal tax rate), revenue and total assets including both
United
States and international businesses were $7.5 million, $731.6
million (or
53.8% of total revenue) and $3,337.1 million (or 52.1% of total
assets),
respectively.
Growth in the Company's portfolio assets caused the average
borrowings
outstanding to increase by 15.6%, or $650.2 million, to $4.8
billion, while
the Company's interest expense increased 15.0%, or $35.5 million,
to $271.8
million during the year ended December 31, 1994, compared with
the year
ended December 31, 1993. The increase in average borrowings
caused
interest expense to increase by approximately $37.0 million.
This increase
was partially offset by $1.5 million in lower interest expense
due to lower
average interest rates for the year ended December 31, 1994,
compared with
the year ended December 31, 1993. The Company's average interest
rate on
borrowings was 5.65% for the year ended December 31, 1994,
compared with
5.68% for the year ended December 31, 1993. The recent increase
in
borrowing costs is reflected in new borrowings made by the
Company.
Generally, the Company's product pricing is impacted by interest
rate
movements. As interest rates change, product pricing is
generally adjusted
to compensate for the Company's higher or lower cost of funds.
Although,
in certain portfolios, the Company may not be able to increase
its product
pricing commensurate with, or simultaneous to, any future
increases in its
borrowing costs.
21
24
Operating and administrative costs of $427.2 million
increased $45.7
million, or 12.0%, in 1994, compared with 1993. The increase is
primarily
attributable to costs of approximately $30 million associated
with the
start-up of certain non-AT&T businesses, acquisitions and
international
expansion as well as costs of $10.9 million associated with the
Company's
new benefit and incentive plans for the year ended December 31,
1994,
compared with the year ended December 31, 1993. Also
contributing to the
increase were higher costs associated with managing a higher
level of
finance assets. For 1994, operating and administrative costs to
total
year-end assets decreased to 5.3% compared with 6.0% for 1993.
This
decrease can be attributed to some of the Company's start-up
businesses
more fully utilizing their infrastructure, increased operating
efficiencies
and timing of assets financed. The Company's goal is to reach
4.5% or
lower within the next few years.
Effective January 1, 1993, the Company adopted SFAS No. 109.
The
change in accounting for income taxes resulted in a charge to
earnings of
$2.9 million in the first quarter of 1993 as the cumulative
effect on prior
years of this change, but had no effect on cash flows. The
majority of
this charge related to establishing a valuation allowance against
certain
deferred tax assets relating to state and local income taxes.
The effective income tax rate was 42.2% and 48.2% for 1994
and 1993,
respectively. The decrease was primarily due to the effect of
the
retroactive tax rate increase recorded in the third quarter of
1993. Due
to the increase in the federal statutory corporate income tax
rate from 34%
to 35% signed into law in August 1993, the Company recorded an
additional
charge to the provision for income taxes of $12.4 million in
1993. The
$12.4 million charge includes the impact of increasing previously
recorded
deferred tax liabilities by $11.4 million. (See Note 10 to the
Consolidated Financial Statements.) Excluding the $11.4 million
impact of
increasing previously recorded deferred tax liabilities to
reflect the
increase in the federal statutory corporate income tax rate for
1993, the
effective tax rate would have been 39.9%. The increase in the
effective
tax rate for 1994, compared with the adjusted effective tax rate
for 1993,
was due to increased non-deductible goodwill amortization expense
related
to goodwill associated with assets that were sold during the
second quarter
of 1994 as well as various other increases.
See "Credit Quality" below for a discussion of the provision
for
credit losses.
1993 versus 1992
Income before income taxes and cumulative effect of an
accounting change
for the year ended December 31, 1993, of $138.0 million increased
$23.2
million, or 20.2%, compared with the year ended December 31,
1992. Total
revenue of $1,359.6 million for the year ended December 31, 1993,
grew
$94.1 million, or 7.4%, compared with the year-earlier period,
while total
expenses of $1,221.5 million (excluding the provision for income
taxes and
cumulative effect of accounting change) increased $70.9 million,
or 6.2%.
The impact of the federal statutory tax rate increase from 34% to
35% in
1993 of $12.4 million (of which $11.4 million related to the
impact of
adjusting deferred tax balances) adversely affected net income
for 1993,
22
25
compared with 1992. Also in the first quarter of 1993, the
Company adopted
SFAS No. 109, resulting in a charge to earnings of $2.9 million.
Without
these charges, net income for the year ended December 31, 1993,
would have
been $83.9 million or $1.95 per share, a 14.1% increase over net
income in
the prior year. Reported net income for 1993 was $68.6 million,
or $1.60
per share.
The Company's increase in earnings before income taxes for
the year
ended December 31, 1993, compared with 1992, principally resulted
from a
higher average level of finance assets, increased gains on end of
lease
activity, lower rates on borrowings and higher servicing fees for
managed
portfolios.
Finance revenue of $107.4 million decreased $11.8 million,
or 9.9%,
for 1993, compared with 1992, while the average finance
receivable
portfolio increased $73.0 million, or 7.2%, over the same period.
The
positive revenue variance generated by the increased asset level
was more
than offset by a decline in rates charged to customers that
reflected the
lower interest rate environment of 1993, compared with 1992.
Capital lease revenue of $392.0 million increased $10.8
million, or
2.8%, for 1993, compared with 1992, while the average capital
lease
portfolio increased 14.8%. The growth in capital lease revenue
resulted
from a higher level of assets but was partially offset by a
decline in
product pricing reflective of the lower interest rate
environment.
Rental revenue on operating leases of $502.1 million
increased $31.1
million, or 6.6%, for 1993, compared with 1992. This increase
was due to
increased rates charged to customers and to a slight increase in
the
average net investment in operating leases for 1993, compared
with 1992.
Depreciation on operating leases of $334.2 million increased
$28.7 million,
or 9.4%, for 1993, compared with 1992. Rental revenue less
associated
depreciation ("operating lease margin") was $167.9 million, or
33.4%, of
rental revenue for 1993, compared with $165.5 million, or 35.1%,
for 1992.
The operating lease margin for 1993, was somewhat lower than the
operating
lease margin for 1992, due to lower estimated residual value
assumptions of
equipment in both the primary and secondary markets, particularly
for
computers, resulting in higher depreciation expense.
Market forces, economic uncertainty and the transition to a
new
generation of mainframes and technological alternatives, have
impacted the
market for mainframe computers. At December 31, 1993, $687.0
million, or
11.3%, of portfolio assets, the majority of which were operating
leases,
related to mainframe computers. This compares with $791.9
million, or
14.1%, at December 31, 1992. The Company regularly monitors its
estimates
of residual values for all leased equipment including mainframe
computers
and believes that its residual values are conservatively stated.
As a
result of the Company's analysis of developments affecting the
major
mainframe computer manufacturers and their pricing policies, and
technological advances in the computer industry (e.g., advances
made in
client server architectures), declines in the future residual
value of
certain mainframe computers were identified during 1993. The
effect of
this change increased depreciation expense by $2.5 million in
1993.
23
26
For the year ended December 31, 1993, revenue from sales of
equipment
purchased for resale increased $28.8 million, or 21.7%, to $161.5
million
compared with 1992. Cost of equipment sales of $145.8 million
increased
$24.7 million, or 20.3%, for 1993, compared with 1992. During
1993, the
Company expanded this activity to Europe which caused the
increase from the
prior year.
In 1993 and 1992, the Company's total United States revenue
associated
with financing provided for customers of AT&T and its affiliates
was $423.3
million, or 33.2%, of total United States revenue, and $410.5
million, or
32.8%, of total United States revenue, respectively. United
States revenue
generated from AT&T and its affiliates and employees of AT&T and
its
affiliates as end-users of equipment was $201.9 million, or
15.9%, and
$185.2 million, or 14.8%, in 1993 and 1992, respectively, of
total United
States revenue. Therefore, $625.2 million, or 49.1%, in 1993 and
$595.7
million, or 47.6%, in 1992, of the Company's total United States
revenue
was associated with the Company's relationship with AT&T.
Other revenue of $196.5 million grew $35.1 million, or
21.8%, in 1993,
compared with 1992. Other revenue consists mainly of gains on
securitization of lease receivables, sales of leased and
off-lease
equipment and service fee revenue. (See Note 6 to the
Consolidated
Financial Statements.) The increase in other revenue for 1993,
compared
with 1992, is primarily due to increased gains on sales of leased
and off-lease equipment of $9.8 million and increased service fee
revenue of $18.8
million, of which $18.4 million relates to service fees from AT&T
for
managing certain assets on behalf of AT&T.
In the first and fourth quarters of 1993, the Company
securitized
$151.9 million and $410.0 million of lease receivables,
respectively,
resulting in a gain of $51.5 million. A similar securitization
in the
fourth quarter of 1992, resulted in a $52.4 million gain.
Under the terms of these securitizations, the Company is
liable to the
purchasers of such receivables for a limited amount of recourse
granted by
the Company to such purchasers. In the unlikely event that all
such
receivables became uncollectible at December 31, 1993, the
Company's
maximum exposure under limited recourse provisions granted to the
purchasers of all securitized lease receivables was $347.3
million. In
addition, the Company provides such purchasers with billing and
collection
and other services with respect to such securitized receivables.
At December 31, 1993, total assets managed by the Company on
behalf of
others were $2.8 billion compared with $1.4 billion at December
31, 1992.
Included in assets managed at December 31, 1993, was $1.4 billion
of lease
finance assets retained by AT&T as a result of the Restructuring.
These
assets consist principally of equity interests in project finance
transactions and leveraged leases of commercial aircraft. Of the
total
assets managed by the Company, 59.2% in 1993, and 21.6% in 1992,
were
assets managed on behalf of AT&T and its affiliates.
The Company continued to benefit from lower interest rates
on its
borrowings. Interest expense of $236.3 million decreased $16.2
million, or
6.4%, in 1993, compared with 1992. The decrease was the result
of a lower
24
27
cost of funds in 1993, compared with 1992. The lower cost of
funds was
partially offset by an increase in average borrowings for 1993,
compared
with 1992.
Operating and administrative costs of $381.5 million
increased $21.8
million, or 6.1%, in 1993, compared with 1992. The increase in
operating
and administrative costs for 1993, compared with 1992, reflected
an
increase of $11.4 million in the Company's cost of operations in
Europe and
Canada over 1992. The Company's European and Canadian operations
generated
an aggregate net loss of $9.4 million for 1993, compared with an
aggregate
net loss of $13.8 million for 1992.
The Company also incurred an additional $6.7 million in
operating and
administrative costs related to start-up businesses such as Small
Business
Administration ("SBA") lending (which commenced operations late
in 1992)
for 1993, compared with 1992. The balance of the increase in
operating and
administrative expenses for the year ended December 31, 1993,
compared with
the year ended December 31, 1992, is due primarily to costs
associated with
managing a higher level of finance assets.
Effective January 1, 1993, the Company adopted SFAS No. 109.
The
change in accounting for income taxes resulted in a charge to
earnings of
$2.9 million, in the first quarter of 1993, as the cumulative
effect on
prior years of this change, but had no effect on cash flows. The
majority
of this charge related to establishing additional net deferred
tax credits
relating to state and local income taxes.
The effective income tax rate was 48.2% and 36.0% for 1993
and 1992,
respectively. The increase was primarily due to the effect of
the
retroactive 1993 tax rate increase recorded in the third quarter
of 1993.
Due to the increase in the federal statutory corporate income tax
rate from
34% to 35% signed into law in August 1993, the Company recorded
an
additional charge to the provision for income taxes of $12.4
million in
1993. The $12.4 million charge includes the impact of increasing
previously recorded deferred tax liabilities by $11.4 million.
(See Note
10 to the Consolidated Financial Statements.)
See "Credit Quality" below for a discussion of the provision
for
credit losses.
FINANCIAL CONDITION
Portfolio assets (investment in finance receivables, capital
leases
and operating leases), net of reserves, increased by $1,408.0
million, or
23.2%, at December 31, 1994, to $7,484.8 million compared with
December 31,
1993, principally due to growth in the Company's international
lease
portfolio and the domestic automobile lease portfolio, as well as
a lower
level of assets securitized in 1994.
During January 1994, the Company purchased Australian
Guarantee
Corporation Finance (H.K.) Limited ("A.G.C. Finance"), a
subsidiary of
Australian Guarantee Corporation Limited and A.G.C. Overseas
Holdings
Limited. A.G.C. Finance, renamed The Capita Corporation Hong
Kong Limited,
25
28
is a Hong Kong based automobile and equipment financing and
leasing company
which also provides commercial and personal loans. Also in
January 1994,
the Company purchased Avis Leasing, a division of AvisCar, which
provides
automobile fleet leasing and supporting service programs to small
and mid-size commercial and corporate customers in Canada. The
total assets
acquired through these two international acquisitions were
approximately
$240 million.
Additionally, during 1994, the Company opened offices in
Mexico and
Australia. The Company has from time to time investigated
potential
opportunities to make acquisitions abroad, and the Company may
open
additional foreign offices on a limited basis either directly or
through
acquisition.
As a result of the above mentioned acquisitions, the
Company's
international assets (excluding cross border transactions) at
December 31,
1994, grew to 10.9% of total assets, up from 6.3% at December 31,
1993.
In January 1995, the Company acquired the vendor leasing and
finance
companies of Banco Central Hispano and certain of its affiliates
("CFH
Leasing International") located in the United Kingdom, Germany,
France,
Italy, Belgium, the Netherlands and Luxembourg. CFH Leasing
International
provides financial services to equipment manufacturers and
vendors. With
offices throughout western Europe, it serves approximately 4,600
customers
and had approximately $540 million in assets at the time of
acquisition.
The net investment in finance receivables increased by
$255.6 million,
or 21.4%, at December 31, 1994, to $1,452.9 million compared with
December
31, 1993, due primarily to increases in the Company's
telecommunications
systems portfolio, small business lending portfolio and the
acquisition of
A.G.C. Finance.
The net investment in capital leases increased by $1,229.1
million, or
31.5%, at December 31, 1994, to $5,129.3 million compared with
December 31,
1993. This increase was primarily due to an increase in the
international
lease portfolio and the domestic automobile lease portfolio, as
well as to
a lower level of assets securitized in the Company's small ticket
business
equipment lease portfolio in 1994. Also contributing to the
increase was
the AT&T lease extension in the first quarter of 1994. The terms
of the
extension, which reduced the Company's mainframe residual
exposure,
resulted in a reclassification of the mainframe lease from an
operating
lease to a capital lease. The net investment recorded in capital
leases at
December 31, 1994, with respect to this lease, was approximately
$150
million.
The net investment in operating leases decreased by $76.8
million, or
7.8%, at December 31, 1994, to $902.5 million compared with
December 31,
1993. The decline was primarily due to the AT&T lease extension
during the
first quarter of 1994, discussed above, but was somewhat offset
by
increases in the international lease portfolio and the domestic
automobile
lease portfolio.
26
29
LIQUIDITY AND CAPITAL RESOURCES
The Company generates a substantial portion of its funds
from lease
and rental receipts, but is also highly dependent upon external
financing,
including the issuance of commercial paper and medium-term notes
in public
markets and, to a lesser extent, privately placed asset-backed
financings
(or securitizations). Standard & Poor's Corporation, Moody's
Investors
Service, Inc., and Duff & Phelps Credit Rating Co. have rated the
Company's
senior long-term debt A, A3 and A, respectively, and have rated
the
Company's commercial paper A-1, P-1 and D-1, respectively.
Funds required to support the Company's operations during
1994, were
derived internally primarily from principal and interest
collections from
customers (which include realization of cash from residual values
through
remarketing activities), and externally from issuances of
commercial paper,
and issuances of medium-term debt. The Company estimates that,
under
existing lease and loan terms, gross cash receipts of
approximately $8.1
billion may be generated in the future.
In 1994, the Company issued commercial paper of $29.0
billion, issued
medium-term notes of $2.1 billion and made commercial paper
repayments of
$28.4 billion and medium-term note repayments of $1.4 billion.
In 1993,
the Company issued commercial paper of $17.0 billion and made
commercial
paper repayments of $17.4 billion, and issued medium-term notes
of $1.2
billion and repaid medium-term notes of $632.6 million.
Additionally, the
Company borrowed and repaid approximately $5.0 billion from AT&T
on a
short-term basis during 1993.
During 1994 and 1993, principal collections from customers
and
proceeds from securitized receivables of approximately $3.8
billion and
$4.1 billion, respectively, were received. These receipts were
primarily
used for financing portfolio assets (including purchases of
finance asset
portfolios and businesses) of approximately $5.5 billion in 1994,
and $5.1
billion in 1993.
In conjunction with the Hong Kong acquisition, the Company
assumed
$106.1 million of A.G.C. Finance's debt, of which $93.0 million
was
outstanding at December 31, 1994.
The Company has paid quarterly dividends every quarter since
the
fourth quarter of 1993, its first full quarter of operations
after its
initial public offering. On January 20, 1995, the Company's
board of
directors declared a quarterly dividend of ten cents per share.
The
dividend was paid on February 28, 1995, to shareowners of record
as of
February 10, 1995.
During 1993, the Company's borrowings consisted primarily of
loans
from AT&T, until July 14, 1993, when the Company established its
own
commercial paper facility. The Company filed a shelf
registration with the
Securities and Exchange Commission ("SEC") on July 26, 1993,
registering
$2.5 billion of debt securities. Borrowing under this shelf
registration
commenced on August 5, 1993. In July 1994, the Company
registered with the
SEC an additional $2.5 billion of debt securities (including
medium-term
notes) and warrants to purchase debt securities, currency
warrants, index
27
30
warrants and interest rate warrants. At December 31, 1994,
$2,474.7
million of medium-term debt was outstanding under these debt
registrations.
Also in July 1994, the Company re-established credit
facilities of
$2.0 billion. These facilities, negotiated with a consortium of
32 lending
institutions, support the commercial paper issued. At December
31, 1994,
these facilities were unused. The Company also has available
local lines
of credit to meet local funding requirements in Hong Kong,
Canada, the
United Kingdom and Australia of approximately $134 million, of
which
approximately $29 million was unused at December 31, 1994.
On August 4, 1993, the Company received $117.2 million of
proceeds
(excluding costs of the transaction of approximately $1.7
million) from
stock offerings. (See Notes 1 and 8 to the Consolidated
Financial
Statements.) These proceeds were used to reduce the amount of
the
Company's outstanding commercial paper and loans from AT&T
otherwise
required to be "rolled over" (i.e., refinanced at maturity with
the
proceeds of newly-incurred indebtedness for borrowed money).
The Company has, from time to time, borrowed funds directly
from AT&T,
including on an interest free basis pursuant to tax agreements.
These
interest free loans amounted to $214.1 million at December 31,
1994. These
sources of funds would not be available if the Company were to
cease being
a member of AT&T's consolidated group for federal income tax
purposes.
The Company anticipates obtaining all necessary external
financing
through issuances of commercial paper, privately placed
asset-backed
financings (or securitizations), available lines of credit for
certain
foreign operations and debt registrations.
Future financing is contemplated to be arranged through a
large number
of financial institutions as necessary to meet the Company's
capital and
other requirements with the timing of issue, principal amount and
form
depending on the Company's needs, prevailing market and general
economic
conditions.
The Company considers its current financial resources,
together with the
debt facilities referred to above, and estimated future cash
flows, to be
adequate to fund the Company's future growth and operating
requirements.
ASSET AND LIABILITY MANAGEMENT
AT&T Capital's asset and liability management ("ALM")
process takes a
coordinated approach to the management of interest rate and
foreign
currency risks. The Company's overall strategy is to match the
average
maturities of its borrowings with the 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
28
31
describes certain key elements of this process, including AT&T
Capital's
use of derivatives to manage risk.
Match Funding
AT&T Capital 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
AT&T Capital 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-term notes, 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. This is a continual process due to
prepayments, refinancings, non-performing 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. The Company expects to
enter into
more foreign exchange contracts and currency swaps in 1995, as a
result of
the January 1995 acquisition of CFH Leasing International,
described above.
Using Derivatives to Manage Interest Rate and Currency Risk
AT&T Capital 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 AT&T Capital issues medium-term notes, 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
which will
determine the final mix of medium-term notes, commercial paper
and swaps
29
32
(or other derivatives) used to manage interest rate risk. Notes
7 and 13
to the Consolidated Financial Statements provide more details
regarding the
Company's debt portfolio and interest rate and currency swap and
foreign
exchange contract positions.
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 AT&T Capital 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 "A" or
better by
national rating agencies, with the majority of the Company's
counterparties
being rated "AA" or better.
There were no past due amounts or reserves for credit losses
at
December 31, 1994, related to derivative transactions, nor were
there any
charge-offs during the three years ended December 31, 1994.
Debt to Equity
Total debt to equity at December 31, 1994, of 5.51 increased
from 4.61
at December 31, 1993. This increase was due to the deployment of
the
proceeds of the initial public offering of the Company's common
stock in
the third quarter of 1993. As a result of the January 1995
acquisition of
CFH Leasing International, leverage increased to approximately
6.00.
CREDIT QUALITY
The control 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, customer
type,
geographic location and maturity. The Company's financing
activities have
been spread across a wide range of equipment segments (e.g.,
telecommunications, general, data center, other data processing,
and
transportation) and a large number of customers located
throughout the
United States and, to a lesser extent, abroad.
Portfolio credit performance indicators continued to improve
in 1994.
Delinquency and charge-off levels declined during 1994, while
nonaccrual
assets at December 31, 1994, totalled $120.5 million compared
with $160.6
30
33
million at December 31, 1993. This lower level of nonaccrual
assets,
charge-off levels and delinquency, resulted in a decrease in the
Company's
provision for credit losses of $42.8 million, or 34.6%, to $80.9
million,
compared with 1993. For 1994, charge-offs to investment in
portfolio
assets improved to .73%, compared with .95% for 1993. As a
result of the
improved credit performance indicators and the strong economy,
the
allowance for credit losses was 2.30% of the Company's investment
in
portfolio assets at December 31, 1994, compared with 2.56% at
December 31,
1993. At December 31, 1994, the allowance for credit losses was
$176.4
million, compared with $159.8 million at December 31, 1993.
The Company maintains an allowance for credit losses at an
amount
based on a detailed analysis of delinquencies and problem
portfolio assets,
an assessment of overall risk and management's evaluation of
probable
losses in the portfolio as a whole given its diversification, and
a review
of historical loss experience. Management also takes into
consideration
the potential impact of existing and anticipated economic
conditions.
The Company's management believes that the diversity and
strength of
its portfolio assets, along with vigilant attention to risk
management,
position it to deal effectively with a changing global economic
environment.
RECENT PRONOUNCEMENTS
For a discussion of the effect on the Company of SFAS No.
114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No.
118,
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and
Disclosures", each of which was recently issued by the Financial
Accounting
Standards Board ("FASB"), see Note 4 to the Consolidated
Financial
Statements included herein.
The FASB also recently issued SFAS No. 119, "Disclosure
about
Derivative Financial Instruments and Fair Value of Financial
Instruments",
which was effective for the Company's December 31, 1994,
financial
statements. SFAS No. 119 required or suggested certain
disclosures with
respect to derivative financial instruments. (See Note 13 to the
Consolidated Financial Statements included herein.)
31
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
___________________________________________________________________________
At December 31, 1994
1993
(Dollars in Thousands)
___________________________________________________________________________
ASSETS:
Cash and cash equivalents (Note 2) $ 54,464 $
-
Net investment in finance
receivables (Note 4) 1,452,947
1,197,303
Net investment in capital leases
(Notes 4 and 12) 5,129,326
3,900,224
Net investment in operating leases, net of
accumulated depreciation of $567,398 in
1994 and $573,639 in 1993 (Notes 5 and 12) 902,525
979,278
Deferred charges and other assets (Notes 2,
6 and 12) 482,661
332,921
___________________________________________________________________________
Total Assets 8,021,923
6,409,726
___________________________________________________________________________
LIABILITIES AND SHAREOWNERS' EQUITY:
LIABILITIES:
Short-term notes, less unamortized discounts
of $4,619 in 1994 and $3,018 in 1993 (Note 7) 2,176,877
1,546,562
Deferred income taxes (Notes 2 and 10) 555,287
445,613
Income taxes and other payables (Notes 2 and 10) 545,270
479,265
Payables to AT&T and affiliates
(Notes 10 and 12) 356,690
298,000
Due to AT&T and affiliates for
borrowings (Notes 7 and 12) -
35,290
Medium- and long-term debt (Note 7) 3,379,581
2,680,553
Commitments and contingencies (Notes 12 and 13)
___________________________________________________________________________
Total Liabilities $7,013,705
$5,485,283
___________________________________________________________________________
(Continued on next page)
32
35
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
___________________________________________________________________________
At December 31, 1994
1993
(Dollars in Thousands)
___________________________________________________________________________
SHAREOWNERS' EQUITY (Notes 1, 8 and 11):
Common stock, one cent par value:
Authorized 100,000,000 shares, issued and
outstanding, 46,962,439 shares in 1994 and
46,867,022 in 1993 $ 470 $
469
Additional paid-in capital 782,785
780,591
Recourse loans to senior executives (19,651)
(17,788)
Foreign currency translation adjustments (2,158)
(2,603)
Retained earnings 246,772
163,774
___________________________________________________________________________
Total Shareowners' Equity 1,008,218
924,443
___________________________________________________________________________
Total Liabilities and Shareowners' Equity $8,021,923
$6,409,726
___________________________________________________________________________
The accompanying notes are an integral part of these
Consolidated
Financial Statements.
33
36
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
___________________________________________________________________________
For the Years Ended December 31, 1994 1993
1992
(Dollars in Thousands, except per share amounts)
___________________________________________________________________________
REVENUE:
Finance revenue (Notes 2 and 4) $ 120,800 $ 107,436
$ 119,231
Capital lease revenue (Notes 2, 4 and 12) 477,875 391,985
381,141
Rental revenue on operating leases
(includes $79,573 in 1994,
$158,592 in 1993, and $143,012 in
1992 from AT&T and affiliates)
(Notes 2, 5 and 12) 475,375 502,132
471,039
Equipment sales (includes $18,689 in 1992
from AT&T and affiliates) (Note 12) 126,567 161,529
132,709
Other revenue, net (Notes 6 and 12) 183,462 196,507
161,406
___________________________________________________________________________
Total Revenue 1,384,079 1,359,589
1,265,526
___________________________________________________________________________
EXPENSES:
Interest (includes $21,602 in 1993
and $27,879 in 1992 to AT&T and
affiliates) (Notes 2, 7, 12 and 13) 271,812 236,335
252,545
Operating and administrative (includes
$24,729 in 1994, $44,775 in 1993, and
$37,457 in 1992 to AT&T and affiliates)
(Notes 2, 11 and 12) 427,187 381,515
359,689
Depreciation on operating leases (Notes
2 and 5) 313,583 334,191
305,523
Cost of equipment sales (Note 12) 116,995 145,830
121,179
Provision for credit losses (Note 2) 80,888 123,678
111,715
___________________________________________________________________________
Total Expenses 1,210,465 1,221,549
1,150,651
___________________________________________________________________________
Income before income taxes and cumulative
effect on prior years of accounting change 173,614 138,040
114,875
Provision for income taxes (Notes 2 and 10) 73,278 66,530
41,303
___________________________________________________________________________
Income before cumulative effect on prior
years of accounting change 100,336 71,510
73,572
Cumulative effect on prior years of
accounting change (Notes 2 and 10) - (2,914)
-
___________________________________________________________________________
NET INCOME $ 100,336 $ 68,596
$ 73,572
___________________________________________________________________________
(Continued on next page)
34
37
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
___________________________________________________________________________
For the Years Ended December 31, 1994 1993
1992
(Dollars in Thousands, except per share amounts)
___________________________________________________________________________
Earnings per common share and common
share equivalent (Note 8):
Income before cumulative effect on
prior years of accounting change $ 2.14 $ 1.67
$ 1.83
Cumulative effect on prior years of
accounting change - (.07)
-
___________________________________________________________________________
Net Income Per Share $ 2.14 $ 1.60
$ 1.83
___________________________________________________________________________
Weighted average shares
outstanding (thousands): 46,906 43,002
40,250
___________________________________________________________________________
The accompanying notes are an integral part of these
Consolidated
Financial Statements.
35
38
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS'
EQUITY
___________________________________________________________________________
For the Years Ended December 31, 1994 1993
1992*
(Dollars in Thousands)
___________________________________________________________________________
Common stock
Balance at beginning of year $ 469 $ 403
$ 403
Stock issuances:
Public offering (Note 1) - 58
-
Pension and benefit plans (Note 11) 1 8
-
___________________________________________________________________________
Balance at end of year 470 469
403
___________________________________________________________________________
Additional paid-in capital
Balance at beginning of year 780,591 638,371
473,409
Capital contributions - 9,106
164,962
Stock issuances:
Public offering (Note 1) - 114,482
-
Pension and benefit plans (Note 11) 2,194 18,632
-
___________________________________________________________________________
Balance at end of year 782,785 780,591
638,371
___________________________________________________________________________
Recourse loans to senior executives
(Note 11)
Balance at beginning of year (17,788) -
-
Loans made (2,760) (17,788)
-
Loans repaid 897 -
-
___________________________________________________________________________
Balance at end of year (19,651) (17,788)
-
___________________________________________________________________________
Foreign currency translation adjustments
Balance at beginning of year (2,603) (1,547)
-
Unrealized translation gain (loss) 445 (1,056)
(1,547)
___________________________________________________________________________
Balance at end of year (2,158) (2,603)
(1,547)
___________________________________________________________________________
Retained earnings
Balance at beginning of year 163,774 99,394
75,454
Net income 100,336 68,596
73,572
Cash dividends paid (Note 8) (17,338) (4,216)
(49,632)
___________________________________________________________________________
Balance at end of year 246,772 163,774
99,394
___________________________________________________________________________
Total Shareowners' Equity $1,008,218 $924,443
$736,621
___________________________________________________________________________
* Certain amounts have been reclassified to conform to the
1994 and 1993
presentation.
The accompanying notes are an integral part of these
Consolidated
Financial Statements.
36
39
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
___________________________________________________________________________
For the Years Ended December 31, 1994 1993
1992*
(Dollars in Thousands)
___________________________________________________________________________
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 100,336 $ 68,596 $
73,572
Noncash items included in income:
Depreciation and amortization 353,954 384,933
308,419
Deferred taxes 106,384 43,419
111,973
Provision for credit losses 80,888 123,678
111,715
Gain on receivables
securitizations (14,799) (51,496)
(52,887)
Cumulative effect on prior years
of accounting change - 2,914
-
Increase in receivables
from AT&T and affiliates - -
(66)
(Increase) decrease in deferred
charges and other assets (41,837) 78,174
(97,156)
Increase (decrease) in income taxes
and other payables 3,068 72,451
(24,607)
Increase (decrease) in payables to
AT&T and affiliates (10,257) (1,340)
7,523
___________________________________________________________________________
Net Cash Provided by
Operating Activities 577,737 721,329
438,486
___________________________________________________________________________
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of fixed
assets, net (6,622) (6,555)
(15,849)
Purchase of businesses, net of cash
acquired (234,375) -
(28,504)
Purchase of finance asset portfolios (217,939) (100,589)
(228,512)
Financings and lease equipment
purchases (5,031,041) (5,027,031)
(4,782,911)
Principal collections from
customers, net of amounts
included in income 3,572,112 3,621,189
3,457,271
Cash proceeds from receivables
securitizations 203,934 507,160
612,709
Increase in investments, net - -
19
___________________________________________________________________________
Net Cash Used for Investing
Activities $(1,713,931) $(1,005,826) $
(985,777)
___________________________________________________________________________
(Continued on next page)
37
40
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
___________________________________________________________________________
For the Years Ended December 31, 1994 1993
1992*
(Dollars in Thousands)
___________________________________________________________________________
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
notes, net $ 523,370 $ (355,463) $
62,648
Additions to medium- and
long-term debt 2,142,993 1,161,638
1,317,618
Repayments of medium- and
long-term debt (1,448,470) (632,563)
(388,903)
Increase (decrease) in payables to AT&T
and affiliates (9,897) 9
(559,402)
Capital contributions from AT&T - -
164,962
Dividends paid (17,338) (4,216)
(49,632)
Proceeds from sale of common stock, net - 115,092
-
___________________________________________________________________________
Net Cash Provided by Financing
Activities 1,190,658 284,497
547,291
___________________________________________________________________________
Net Increase in Cash
and Cash Equivalents 54,464 -
-
Cash and Cash Equivalents at
Beginning of Period - -
-
___________________________________________________________________________
Cash and Cash Equivalents at
End of Period $ 54,464 $ - $
-
___________________________________________________________________________
Interest paid was $253,960, $247,565 and $206,861 during
1994, 1993 and
1992, respectively.
Net income taxes received were $55,712, $22,972 and $68,753,
during
1994, 1993 and 1992, respectively.
Noncash Investing and Financing Activities:
In 1994, 1993 and 1992, the Company entered into capital
lease
obligations of $41,442, $25,259 and $64,917, respectively, for
equipment
that was subleased. In 1994, the Company assumed $106,945 of
debt in
conjunction with acquisitions. In 1993, Old Capital (as defined
in Note 1)
made capital contributions to the Company of $9,106 primarily
relating to
deferred tax assets arising as a result of the Restructuring.
* Certain amounts have been reclassified to conform to the
1994
presentation.
The accompanying notes are an integral part of these
Consolidated
Financial Statements.
38
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. BACKGROUND, INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION
Background
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 on March 31, 1993. The Company is the successor
entity to
certain businesses of AT&T Capital Corporation, a wholly owned
subsidiary
of AT&T Corp. ("AT&T") that was renamed AT&T Capital Holdings,
Inc., on
March 31, 1993 ("Old Capital"), and AT&T Credit Corporation, a
wholly owned
subsidiary of Old Capital that commenced operations in 1985, and
was
renamed AT&T Credit Holdings, Inc., on March 31, 1993 ("Old
Credit"). In a
restructuring which 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
("Lease
Finance Assets"), 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 a direct,
full and
unconditional guarantee 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.
Initial Public Offering
An initial public stock offering combined with a management
stock
offering totalling approximately 14 percent of the Company's
stock occurred
on August 4, 1993. (See Note 8.) As a result of the stock
offerings,
approximately 86 percent of the outstanding common stock of the
Company is
owned by AT&T through Old Credit and Old Capital.
Basis of Presentation
The consolidated financial statements reflect the financial
position,
results of operations and cash flows of the businesses
transferred to the
Company on March 31, 1993, by Old Capital and Old Credit as a
result of the
Restructuring. The Restructuring was accounted for in a manner
similar to
a pooling of interests. The common stock issued in connection
with the
incorporation of the Company has been reflected as outstanding
for all
periods presented.
The consolidated financial statements include allocations of
certain
liabilities and expenses relating to the businesses transferred
to the
Company by Old Capital and Old Credit.
39
42
In the Restructuring described above, the Company assumed
all the
outstanding indebtedness (including indebtedness to third
parties) of Old
Capital, but none of the outstanding indebtedness to third
parties of Old
Credit. For the periods and at the dates reflected in the
consolidated
financial statements, the statements reflect outstanding
indebtedness in an
aggregate principal amount equal to the aggregate principal
amount of
indebtedness associated with the assets and business (the "AT&T
Capital
Business") transferred to the Company and its subsidiaries in the
Restructuring. However, as actually occurred in the
Restructuring, no
third-party indebtedness of Old Credit was directly allocated to
the AT&T
Capital Business. To the extent the third-party indebtedness of
Old
Capital was not associated with the AT&T Capital Business, such
amount was
reflected as a reduction of the debt shown as "Due to AT&T and
affiliates
for borrowings." Conversely, to the extent the third-party
indebtedness of
Old Credit was associated with the AT&T Capital Business, such
amount was
reflected as an increase in the debt shown as "Due to AT&T and
affiliates
for borrowings." Interest expense shown in the consolidated
financial
statements reflects the actual interest expense associated with
the AT&T
Capital Business for the periods indicated. See Note 10 for a
discussion
of certain interest free loans made by AT&T to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include
all
majority-owned subsidiaries. The accounts of operations located
outside of
the United States are included on the basis of their fiscal
years, ended
either November 30, or December 31.
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. Unguaranteed residual values are
determined on
the basis of studies prepared by the Company, professional
appraisals,
historical experience and industry data.
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 specifically identified). Accrual is resumed when the
receivable becomes contractually current and management believes
there is
no longer any significant probability of loss.
40
43
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 term.
Residual Values
Residual values are reviewed by the Company at least
annually.
Declines in residual values for capital leases are recognized as
an
immediate charge to income. Declines in residual values for
operating
leases are recognized as adjustments to depreciation expense on
operating
leases over the shorter of the useful life of the asset or the
remaining
term of the lease.
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 at a
level
deemed adequate by management considering delinquencies and
problem assets,
an assessment of overall risks and management's evaluation of
probable
losses in the portfolio as a whole given its diversification, and
a review
of historical loss experience. The Company's charge-off policy
is based on
an analysis of the aging of the Company's portfolio, a review of
all non-performing receivables and leases, and prior collection
experience. An
account is reserved for or charged off when analysis indicates
that the
account is uncollectible. Additionally, Company policy generally
requires
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.
Income Taxes
Through 1992, the Company used the deferred method under
Accounting
Principles Board Opinion No. 11, "Accounting for Income Taxes" to
compute
deferred taxes. Effective January 1, 1993, the Company adopted
SFAS No.
109, which changed the method of accounting for income taxes from
the
deferred method to the liability method and requires deferred tax
balances
to be determined using the enacted income tax rates for the years
in which
these taxes will actually be paid or refunds received.
In the first quarter of 1993, the Company recognized a
charge to net
income of $2.9 million as the cumulative prior years' effect of
this
accounting change. This change in accounting for income taxes
had no
effect on cash flows. Also during 1993, the Company recorded an
additional
$12.4 million to the provision for income taxes due to the
increase in the
highest federal corporate income tax rate from 34% to 35% of
which $11.4
million relates to adjusting prior years deferred tax balances.
41
44
Other Assets
The cost of property and equipment is depreciated on a
straight-line
basis over their estimated useful lives, which generally range
from three
to twenty-five years. Leasehold improvements are amortized over
the lesser
of the term of the related lease or the estimated useful lives of
the
related assets on a straight-line basis.
Goodwill represents the excess of the cost of companies
acquired over
the fair value of their net assets at dates of acquisition, and
is
amortized as a charge against income on a straight-line basis
generally
over three to twenty year periods.
Derivative Financial Instruments
The Company enters into derivative financial instruments,
mainly
interest rate swaps and currency swaps, to hedge interest rate
and foreign
currency exchange risk and to match fund assets and liabilities.
Interest
rate swaps generally involve the exchange of interest payments
without the
exchange of underlying notional principal amounts. Currency
swaps
generally involve both the exchange of principal and interest
payments in
distinct currencies. The criteria which must be satisfied for
hedges are
as follows: (1) the asset or liability to be hedged exposes AT&T
Capital,
as a whole, to interest rate or currency exchange risk, (2) the
derivative
acts to reduce the interest rate or currency exchange risk by
reducing the
sensitivity to interest rate or currency exchange movements, and
(3) the
derivative is designated and effective as a hedge.
For interest rate swaps, the Company records a net
receivable or
payable related to interest to be received or paid as an
adjustment to
interest expense. In the event of an early termination of a swap
contract,
the gain or loss on a swap accounted for as a hedge is amortized
over the
remaining life of the related asset. 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 would
be
considered speculative. The gain or loss on a speculative swap
would be
recognized immediately.
The Company enters into foreign exchange contracts as a
hedge against
assets and liabilities denominated in foreign currencies. Gains
and losses
are recognized on the contracts and offset foreign exchange gains
or losses
on the related assets and liabilities.
Foreign Currency Translation
The financial statements of the Company's foreign operations
are
translated into U.S. dollars in accordance with SFAS No. 52,
"Foreign
Currency Translation", the resulting translation adjustments are
recorded
42
45
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.
Earnings Per Common Share and Common Share Equivalent
Earnings per common share and common share equivalent are
calculated
using the weighted average number of common shares outstanding
during the
period giving effect to dilutive common stock equivalents in the
form of
stock options using the treasury stock method. Fully diluted
earnings per
share is not materially different from primary earnings per
share.
3. ACQUISITIONS
In January 1994, the Company purchased the stock of
A.G.C. Finance,
a Hong Kong-based vehicle and equipment leasing finance company
with assets
at the time of acquisition of approximately $150 million. Also
in January
1994, the Company, through its wholly owned Canadian subsidiary
acquired
the vehicle portfolio and infrastructure assets constituting the
Avis
Canada Leasing Division of AvisCar, Inc. ("Avis Leasing"). Avis
Leasing
provides automobile leasing to small and mid-size commercial and
corporate
clients in Canada and had approximately $90 million in assets at
the time
of acquisition.
In April 1994, the Company acquired Goldome Industrial
Credit
Corporation ("GICC"), with assets at the time of acquisition of
approximately $75 million. GICC provides financing programs for
machine
tool vendors, distributors and manufacturers.
On January 4, 1995, the Company acquired the vendor leasing
and
finance companies of Banco Central Hispano and certain of its
affiliates
("CFH Leasing International") located in the United Kingdom,
Germany,
France, Italy, Belgium, the Netherlands and Luxembourg. CFH
Leasing
International provides financial services to equipment
manufacturers and
vendors and had approximately $540 million in assets at the time
of
acquisition. This acquisition will be reflected in the Company's
financial
statements in the first quarter of 1995.
The above acquisitions were accounted for by the purchase
method and
the total cash paid for all of the above was approximately $311.9
million.
In addition, the Company assumed certain existing debt associated
with
these acquisitions. The results of operations are included, or
in the case
of CFH Leasing International, will be included, in the income
statement of
the Company from the respective acquisition dates. Unaudited pro
forma
revenue, net income and earnings per share would have been
approximately
$1,442.0 million, $108.0 million and $2.31, respectively, for
the year
ended 1994 had the acquisitions occurred on January 1, 1994, and
approximately $1,461.0 million, $78.0 million and $1.82,
respectively, for
the year ended 1993 had the above acquisitions occurred on
January 1, 1993.
The pro forma information is based on various assumptions and is
not
necessarily indicative of results of operations that would have
been
43
46
reported had the acquisitions been completed at the dates
mentioned above.
The associated goodwill is amortized over periods not to exceed
15 years.
4. INVESTMENT IN FINANCE ASSETS
The finance receivable and capital lease portfolios
consisted of the
following:
Finance
Receivables Capital
Leases
At December 31, 1994 1993 1994
1993
___________________________________________________________________________
Receivables $1,634,454 $1,348,691 $5,712,848
$4,267,481
Estimated unguaranteed
residual values - - 606,207
566,668
Unearned income (133,620) (94,328) (1,066,457)
(835,845)
Allowance for credit losses (47,887) (57,060) (123,272)
(98,080)
___________________________________________________________________________
Net investment $1,452,947 $1,197,303 $5,129,326
$3,900,224
___________________________________________________________________________
The schedule of maturities at December 31, 1994 for the
finance
receivable and capital lease portfolios is as follows:
Finance
Capital
Receivables
Leases
___________________________________________________________________________
1995 $ 488,403
$1,765,863
1996 268,133
1,485,331
1997 209,750
1,231,372
1998 157,735
689,336
1999 98,396
314,064
2000 and thereafter 412,037
226,882
___________________________________________________________________________
Total $1,634,454
$5,712,848
___________________________________________________________________________
Rights to certain lease receivables are purchased at a
discount from
AT&T. AT&T is appointed as agent to bill and collect purchased
receivables, and is reimbursed for the reasonable cost thereof.
All
rights, title, and interest in these receivables are assigned to
the
Company by AT&T. AT&T has agreed to repurchase certain finance
receivables
and capital leases that go into default, and the Company will be
reimbursed
for any adjustments in the face value of the purchased finance
assets. At
December 31, 1994 and 1993, $155,312 and $222,803, respectively,
of the
Company's net investment in finance receivables contained such
recourse
provisions. At December 31, 1994 and 1993, $87,716 and $98,223,
respectively, of the Company's net investment in capital leases
contained
such provisions.
44
47
The FASB recently issued SFAS No. 114, "Accounting by
Creditors for
Impairment of a Loan", and SFAS No. 118, "Accounting by Creditors
for
Impairment of a Loan - Income Recognition and Disclosures", each
of which
must be adopted by the Company by the first quarter of 1995. The
new
standards require that impaired loans be measured based on the
present
value of expected cash flows, discounted at the loan's effective
interest
rate or the fair value of the collateral if the loan is secured,
as well as
certain related disclosures. When adopted, the new standards
will not have
a material effect on the consolidated financial statements of the
Company.
5. EQUIPMENT UNDER OPERATING LEASES
The following is a summary of equipment under operating
leases at
December 31, 1994 and 1993, including equipment on lease to AT&T
affiliates
(see Note 12):
At December 31, 1994
1993
___________________________________________________________________________
Data processing $ 571,504 $
838,952
Telecommunications equipment 366,259
348,017
Automobiles 304,936
188,321
Test equipment and other 204,153
134,545
___________________________________________________________________________
1,446,852
1,509,835
Less: Accumulated depreciation (567,398)
(573,639)
Rentals receivable, net 23,071
43,082
___________________________________________________________________________
Net investment in operating leases $ 902,525 $
979,278
___________________________________________________________________________
Minimum future rentals to be received on noncancelable
operating
leases as of December 31, 1994, are as follows:
1995
$362,694
1996
199,671
1997
104,534
1998
30,340
1999
16,203
2000 and thereafter
4,306
___________________________________________________________________________
Total minimum future rentals
$717,748
___________________________________________________________________________
45
48
6. OTHER REVENUE
Other revenue consisted of the following:
For the Years Ended December 31, 1994 1993
1992
___________________________________________________________________________
Net gain on sale of leased and off-lease
equipment $ 76,453 $ 49,653
$ 39,868
Gain on receivables securitizations 14,799* 51,496*
52,887*
Service fee revenue 27,203 37,363
18,559
Other portfolio related revenue 65,007 57,995
50,092
___________________________________________________________________________
Total other revenue $183,462 $196,507
$161,406
___________________________________________________________________________
* $14,799, $39,106 and $52,887 relates to securitizations in
the fourth
quarter of 1994, 1993 and 1992, respectively; and $12,390 relates
to a
securitization in the first quarter of 1993.
For the years ended December 31, 1994, 1993 and 1992, the
Company
securitized portions of its capital lease portfolio amounting to
$259,061,
$561,943 and $511,188, with proceeds received of $287,550,
$648,887 and
$587,292, respectively. In conjunction with the 1994 and 1993
securitizations, at December 31, 1994, $96,177 of the sale
proceeds were
retained by the purchaser until certain receivable collections
are attained
and are included in other assets. In addition, in 1992, the
Company
securitized portions of its finance receivable portfolio of
$24,664, with
proceeds received of $25,417. The transactions provide for
limited
recourse to the Company for any uncollectible amounts. Under the
agreements, the Company will service these accounts for the
purchasers. A
portion of the gains have been deferred representing service fees
to be
earned over the terms of the agreements plus an estimate of the
losses
under recourse provisions for the lease receivables securitized.
In 1992,
the Company increased the allowance for losses related to prior
securitizations by $8.9 million to reflect the Company's
increased exposure
to recourse provisions due to economic conditions. At December
31, 1994
and 1993, $853,003 and $985,104, respectively, of receivables
previously
securitized remained outstanding. The Company's maximum exposure
under
these recourse provisions, in the unlikely event that all such
receivables
became uncollectible, amounted to $353,143 at December 31, 1994,
and
$347,317 at December 31, 1993. The Company has recorded a
liability for
the amount that it expects to reimburse.
7. DEBT
Commercial Paper
Commercial paper is generally issued at a discount. The
maturities of
commercial paper ranged up to eight months (with the majority
maturing
within 90 days) at December 31, 1994 and 1993, respectively.
Interest
rates ranged from 5.0% to 6.0% and 3.1% to 3.4% at December 31,
1994 and
1993, respectively. The discount amortized on commercial paper
amounted to
$3,176 and $12,009 in 1994 and 1993, respectively. Interest is
payable at
maturity.
46
49
The Company has revolving credit facilities totalling $2.0
billion,
all of which were available at December 31, 1994 and 1993, to
support the
commercial paper issued. These facilities contain certain
restrictive
covenants with which the Company is in compliance. In addition,
certain of
the Company's foreign operations had short-term bank lines of
credit of
approximately $134.0 million, of which approximately $28.6
million was
unused at December 31, 1994.
Data with respect to short-term notes (principally
commercial paper)
are as follows:
1994 1993
1992
___________________________________________________________________________
End of year balance, net $2,176,877 $1,546,562
$1,899,655
Weighted average interest rate at
December 31, 5.8% 3.3%
3.2%
Highest month-end balance 2,176,877 2,067,592
2,128,463
Average month-end balance (a) 1,741,872 1,313,312
1,829,298
Weighted average interest rate (b) 4.3% 3.3%
4.0%
___________________________________________________________________________
(a) The average month-end balance was computed by dividing the
total of
the outstanding month-end balances by the number of months
in the
year.
(b) The weighted average interest rate during the year is
calculated by
dividing the interest charged for the year by the weighted
average
short-term notes outstanding during the year.
Medium- and Long-term Debt
Medium- and long-term debt outstanding at December 31, 1994
and 1993,
consisted of the following:
Maturities 1994
1993
___________________________________________________________________________
3.24% - 5.99% Medium-term notes 1994 - 1998 $1,340,625
$1,731,215
6.00% - 6.99% Medium-term notes 1994 - 1999 1,548,900
377,300
7.00% - 10.05% Medium-term notes 1994 - 2002 326,795
439,520
11.88% - 11.95% Subordinated
serial notes 1994 - 1996 6,250
11,250
Other long-term debt 1994 - 2001 157,011
121,268
___________________________________________________________________________
Total medium- and long-term debt $3,379,581
$2,680,553
___________________________________________________________________________
47
50
The Company's medium- and long-term debt matures as follows:
1995
$1,750,172
1996
835,814
1997
507,399
1998
139,018
1999
74,903
2000 and thereafter
72,275
___________________________________________________________________________
Total
$3,379,581
___________________________________________________________________________
Long-term debt outstanding at December 31, 1994 and 1993,
included
$980,000 and $475,000, respectively, of variable rate debt with
interest
rates ranging from 5.79% to 6.20%, and 3.24% to 3.98%,
respectively. Such
variable rate debt periodically reprices based on various indices
and
generally matures in one to two years.
To reduce exposure to interest rate movements, the Company
enters into
interest rate swap agreements. (See Note 13 for a discussion of
the
Company's derivative activities.) The weighted average interest
rate on
average total debt outstanding was 5.65% and 5.68% for the years
ended
December 31, 1994 and 1993, respectively.
In addition, the Company had interest bearing debt payable
to AT&T and
affiliates of $35,290 at December 31, 1993, bearing interest at
3.34%.
During 1994, the Securities and Exchange Commission ("SEC")
declared
effective a debt registration statement (which allows the Company
to issue
debt to the public) of $2.5 billion. As of December 31, 1994,
$1,808,325
of this debt registration was available for issuance.
As a result of the Restructuring (see Note 1), medium-term
notes
outstanding at March 31, 1993, entitled to the benefit of a
support
agreement between AT&T and Old Capital (which agreement was
terminated in
the Restructuring) became directly guaranteed by AT&T. At
December 31,
1994 and 1993, the amount of such guaranteed debt was $747,895
and
$1,441,035, respectively.
8. SHAREOWNERS' EQUITY AND EARNINGS PER SHARE
During 1994, the Company's board of directors declared
dividends
totalling thirty-seven cents per share. In addition, on January
20, 1995,
the Company's board of directors declared a quarterly dividend of
ten cents
per share to shareowners of record on February 10, 1995. The
dividend was
paid on February 28, 1995.
On June 28, 1993, the Company effected a 402,500 for one
stock
reclassification. The par value of the stock remained at $.01
per share.
Accordingly, common stock and additional paid-in capital have
been restated
to reflect the reclassification.
48
51
On August 4, 1993, the Company sold common shares in an
initial public
stock offering and in a management stock offering. The shares
issued
represent approximately 14 percent of the total shares
outstanding after
the offerings. AT&T, through Old Credit and Old Capital, remains
the owner
of 40,250,000 shares. The net proceeds received by the Company
from the
sale of the common stock in the stock offerings were $115,092.
Certain
costs of the offerings not offset by the proceeds were borne by
AT&T. Such
proceeds did not include $17,788 of future proceeds attributable
to the
purchases of common stock in the management stock offering that
were funded
by recourse loans from the Company to certain senior executives
of the
Company.
9. 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, 1994
and 1993:
Cash and Cash Equivalents
For cash and cash equivalents the carrying amount is a
reasonable
estimate of fair value.
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 and Due to AT&T for Borrowings
The carrying amount is a reasonable estimate of fair value.
Gross Profit Tax Deferral Payable to AT&T
The fair value of the gross profit tax deferral is estimated
by
discounting the expected future cash flows using the Company's
current cost
of debt.
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.
49
52
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 the rate at
which the
Company could terminate the swaps in the market today.
Foreign Exchange Contracts
The fair value of foreign exchange contracts is estimated
based on
current market quotes for foreign exchange contracts with the
same
remaining terms.
Credit Facilities
The fair value of the credit facilities are based on fees
currently
paid for similar arrangements.
The following is the carrying value and fair value (as
determined
using the methods described above):
December 31, 1994 December
31, 1993
___________________________________________________________________________
Carrying Fair Carrying
Fair
Amount Value Amount
Value
___________________________________________________________________________
Assets:
Cash and cash equivalents $ 54,464 $ 54,464 $ -
$ -
Net investment in finance
receivables (Note 4) 1,452,947 1,432,070 1,197,303
1,213,982
Liabilities:
Short-term notes (Note 7) 2,176,877 2,176,877 1,546,562
1,546,562
Gross profit tax deferral
payable to AT&T (Note 10) 214,066 184,238 188,562
162,753
Medium- and long-term debt
(Note 7) 3,379,581 3,319,101 2,680,553
2,727,578
Due to AT&T and affiliates
for borrowings (Notes 7 $ - $ - $ 35,290
$ 35,290
and 12)
___________________________________________________________________________
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
decreased fair value of the Company's debt has been offset by the
decreased
fair value of the Company's lease portfolio at December 31, 1994.
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 loan portfolio has been
disclosed.
50
53
Off-balance Sheet Financial Instruments
At December 31, 1994 and 1993, the Company had interest rate
swaps
with a notional amount of $2,711,773 and $2,713,569,
respectively. Had the
Company terminated these swaps at December 31, 1994 and 1993, it
would have
received $57,033 and $195, respectively, and would have paid
$4,726 and
$27,764, respectively. (See Note 13.)
At December 31, 1994 and 1993, the Company had $221,817 and
$149,210,
respectively, of currency swaps outstanding. If terminated at
December 31,
1994 and 1993, the Company would have received $11,200 and
$1,977,
respectively, and would have paid $2,338 and $1,734,
respectively, for
these currency swaps.
At December 31, 1994 and 1993, the Company had $318,054 and
$165,969,
respectively, of foreign exchange forward contracts outstanding.
The
contracts had a fair value of $321,290 and $165,688 at December
31, 1994
and December 31, 1993, respectively.
The fees for the Company's $2.0 billion revolving credit
facilities
are .0775% of the unused portion per year plus a .0125% set-up
fee. In
addition, the Company had approximately $28.6 million of unused
foreign
credit facilities for which the fees are negligible. (See Note
7.)
At December 31, 1994 and 1993, the Company had a maximum
exposure
under limited recourse provisions related to asset
securitizations, in the
unlikely event that all such receivables became uncollectible, of
$353,143
and $347,317, respectively. The Company has recorded a liability
for the
amount that it expects to reimburse. (See Note 6.)
10. INCOME TAXES
The Company is included in the consolidated federal income
tax return,
and for certain states, combined state returns, of AT&T. AT&T
does not
expect to be subject to the alternative minimum tax ("AMT")
provisions of
the 1986 Tax Reform Act in 1994. Also, in 1993, the Company
utilized all
AMT credits arising from 1990 and 1992 AMT payments made. The
Company's
income tax expense would not have differed materially from that
reported
had the Company filed tax returns on a stand-alone basis.
As part of an intercompany agreement, the Company has
received
interest free loans to the extent of the tax deferrals generated
by
transactions between AT&T and the Company. These interest free
loans
amounted to $214,066 and $188,562 at December 31, 1994 and 1993,
respectively. The average balance outstanding for such loans was
$213,172,
$200,835 and $198,255 for the years ended December 31, 1994, 1993
and 1992,
respectively. These amounts are repaid to AT&T as the temporary
differences that generated the deferrals reverse. In the event
the Company
was not eligible for inclusion in the consolidated tax return of
AT&T,
these loans would not be available.
51
54
At December 31, 1994 and 1993, taxes currently receivable
from AT&T
and third parties were $23,286 and taxes currently payable to
AT&T and
third parties were $70,010, respectively.
Effective January 1, 1993, the Company adopted SFAS No. 109.
Among
other provisions, this standard requires deferred tax balances to
be
determined using the enacted income tax rates for the years in
which taxes
will be paid or refunds received. Prior to 1993, the Company's
deferred
tax accounts reflected the statutory rates that were in effect
when the
deferrals were initiated. The adoption of SFAS No. 109 resulted
in a
charge to net income in 1993 of $2,914 which was recorded as the
cumulative
effect of an accounting change.
Also in 1993, the Company recorded an additional $12.4
million ($11.4
million of which relates to prior years deferred tax balances) to
the
provision for income taxes under SFAS No. 109 to reflect the
increase in
the highest federal corporate income tax rate from 34% to 35%.
The provision (benefit) for income taxes consisted of the
following:
For the Years Ended December 31, 1994 1993
1992
___________________________________________________________________________
Current:
Federal $(13,494) $ (8,948)
$(82,057)
State and local (23,150) 31,448
10,691
Foreign taxes 3,538 611
696
___________________________________________________________________________
Total current portion (33,106) 23,111
(70,670)
___________________________________________________________________________
Deferred:
Federal 72,729 67,101
115,242
State and local 33,655 (23,682)
(3,269)
Foreign - -
-
___________________________________________________________________________
Total deferred portion 106,384 43,419
111,973
___________________________________________________________________________
Total provision for income taxes $ 73,278 $ 66,530
$ 41,303
___________________________________________________________________________
The Company recorded tax credits of $3,446 in 1994 and $1,019
in 1992.
No tax credits were recorded in 1993.
52
55
Deferred income tax (liabilities) assets are composed of the
following:
At December
31,
1994
1993
__________________________________________________________________________
Gross deferred income tax liabilities:
Lease related differences $(607,085)
$(521,371)
Other (89,463)
(36,843)
__________________________________________________________________________
Gross deferred income tax liabilities (696,548)
(558,214)
__________________________________________________________________________
Gross deferred income tax assets:
Allowance for credit losses 101,591
92,766
Pensions 8,052
7,751
State and foreign net operating losses 18,802
12,617
Other 17,293
4,411
__________________________________________________________________________
Gross deferred income tax assets 145,738
117,545
__________________________________________________________________________
Valuation allowance (4,477)
(4,944)
__________________________________________________________________________
Net deferred income tax liabilities $(555,287)
$(445,613)
__________________________________________________________________________
A valuation allowance has been recorded to offset related
deferred tax
assets due to the uncertainty of realizing the benefit of
separate state
net operating loss carryforwards and net operating loss
carryforwards of
foreign subsidiaries. State tax loss carryforwards of $285,194
related to
various state jurisdictions expire in the following years:
1995
$ 4,663
1996
10,974
1997
26,090
1998
19,896
1999
9,463
2000 and thereafter
214,108
___________________________________________________________________________
Total
$285,194
___________________________________________________________________________
Financial statements for the years prior to the January 1993
adoption
of SFAS No. 109 were not restated to reflect the new accounting
standard.
53
56
This table shows the principal sources of the provision for
deferred taxes
for 1992:
For the Year Ended December 31,
1992
___________________________________________________________________________
Additional tax depreciation on
leased equipment
$ 403,796
Financing income on leased equipment
(318,754)
Provision for credit losses
(23,699)
Gain on sale of assets
39,046
Deferred AMT credits
(7,046)
Other, net
18,630
___________________________________________________________________________
Total deferred tax provision
$ 111,973
___________________________________________________________________________
A reconciliation between the federal statutory tax rate and
the
Company's effective tax rate is shown below:
For the Years Ended December 31, 1994
1993 1992
___________________________________________________________________________
Federal statutory income tax rate 35.0%
35.0% 34.0%
State and local income taxes, net of federal
income tax effect 3.9
3.7 4.3
Impact of federal tax rate increase on prior years
deferred taxes -
8.4 -
Excess deferred credits on terminated leases -
- - (4.4)
Tax exempt lease income (1.7)
(0.8) (0.2)
Goodwill 1.2
0.8 1.1
Other 3.8
1.1 1.2
___________________________________________________________________________
Effective tax rate 42.2%
48.2% 36.0%
___________________________________________________________________________
The Company has no available AMT credit carryforwards at
December 31,
1994, to reduce future federal income taxes payable.
For the years ended December 31, 1994, 1993 and 1992, the
consolidated
income (loss) before income taxes and cumulative effect of
accounting
change by domestic and foreign source was $177,662 and $(4,048),
$153,010
and $(14,970), and $132,297 and $(17,422), respectively.
11. PENSION AND BENEFIT PLANS
Pension
Effective January 1, 1994, all employees of the Company and
its
domestic subsidiaries were covered by the AT&T Capital
Corporation
Retirement and Savings Plan ("RSP"), a qualified defined
contribution plan.
54
57
Under a defined contribution plan, the amount of future pension
benefits is
based solely on the amount contributed and the returns earned on
those
amounts. The RSP is composed of a profit sharing plan (including
a cash or
deferred arrangement) under Section 401(k) of the Internal
Revenue Code and
a money purchase plan. The Company's annual contribution, 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, the Company matches an amount equal to
66-2/3% of
the first 6% 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 $13,525 of
expense in
1994 related to the RSP. In addition, the Company recorded
pension expense
of $1,366 in connection with RSP-related nonqualified defined
contribution
plans. The Company also sponsors various international plans
which are
available to certain employees of its international subsidiaries.
The
plans are similar to the RSP, in that they provide for employees
of the
Company to contribute a percentage of their salary to provide for
postretirement income. The Company recorded $1,034 of pension
expense in
1994 related to the various international plans.
Prior to 1994, most of the Company's employees were covered
by AT&T's
noncontributory defined benefit pension plans. Also, through
December 31,
1993, other eligible employees of several wholly owned
subsidiaries of the
Company were covered by an AT&T qualified defined contribution
retirement
plan, with provisions similar to the RSP. The Company recorded
pension
expense related to the AT&T noncontributory defined benefit plans
of $4,457
and $3,320 in 1993 and 1992, respectively. In addition, the
Company
recorded costs of $6,312 and $1,795, in 1993 and 1992,
respectively,
related to the AT&T qualified defined contribution retirement
plan.
On December 8, 1993, the Company sponsored three unfunded
supplemental
nonqualified defined benefit retirement plans, which became
effective on
January 1, 1994, that provide certain employees with additional
benefits
after retirement. The costs of these plans in 1994 included the
following
components:
________________________________________________________________________
Service cost - benefits earned
$ 575
Interest cost on projected benefit obligation
427
Amortization
374
________________________________________________________________________
Net periodic pension cost
$1,376
________________________________________________________________________
55
58
The funded status of the plans at December 31, 1994 is as
follows:
________________________________________________________________________
Accumulated benefit obligations:
Vested benefit obligation
$1,119
Non-vested benefit obligation
2,578
Total
3,697
Additional benefits on estimated future salary
1,176
Total projected benefit obligation
4,873
Plan assets at fair value
-
Unfunded projected benefit obligation
4,873
Unrecognized prior service cost
4,391
Unrecognized net gain
(894)
Unrecognized transition obligation
-
Additional liability
2,387
Accrued pension liability recorded
$3,763
________________________________________________________________________
For 1994, the projected benefit obligation was determined
using an
assumed discount rate of 8.75% and assumed long-term rates of
increase in
future compensation levels of 4.5% or 5.5%, depending on the
plan.
Share Performance Incentive Plan
The Company's Share Performance Incentive Plan ("SPIP") is
designed to
grant cash incentive awards to key employees at the end of a
three-year
performance period, based on the appreciation of the Company's
stock
relative to (1) the share performance of a select benchmark group
of
companies in the leasing, finance or lending business, and (2)
the return
of three-year risk-free treasury notes plus 150 basis points.
The cash
awards will be calculated at the end of performance periods
ending June 30,
1996, 1997, 1998, 1999 and 2000, respectively. The estimated
compensation
expense relating to the SPIP is charged against income over the
respective
performance periods.
Leveraged Stock Purchase Plan
In 1993, the Company adopted the Leveraged Stock Purchase
Plan
("LSPP") under which 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 mature on
August 4, 2000,
and have a stated interest rate of 6.0% compounded on an annual
basis. The
purchased shares are pledged as collateral for the recourse
loans. Sale of
these shares is prohibited prior to August 4, 1996, and is
contingent upon
repayment of the loan and certain other requirements. The
recourse loans
are shown on the balance sheet as a reduction of equity.
56
59
In addition, under the LSPP, the same senior management
employees were
granted premium priced stock options which will provide
participants with
an opportunity to purchase up to 1,095,040 shares of Company
stock at an
exercise price equal to 125% of the initial public offering price
($26.875
per share). The options are exercisable during the period from
August 4,
1996, through August 4, 2003. During 1994, 54,895 options were
forfeited.
No options were forfeited during 1993. Pursuant to the terms of
the LSPP,
no further purchases of stock, Company loans or option grants
will be made
under the LSPP.
Long Term Incentive Plan
In 1993, the Company adopted a Long Term Incentive Plan
("LTIP") under
which the Company may grant various stock-based and other awards
to
employees of the Company. The number of shares available for
grant under
the LTIP is 2,000,000. Similar to the LSPP, eligible employees
have 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
are due
seven years from the loan date, have stated interest rates
ranging from
6.0% to 7.74% compounded on an annual basis. The purchased
shares are
pledged as collateral for the recourse loans. Sale of these
shares is
prohibited for a three-year period and is contingent upon
repayment of the
loan and certain other requirements. The recourse loans are
shown on the
balance sheet as a reduction of equity. Awards under the LTIP
will be made
to executives and employees of the Company at the Company's
discretion.
The following table summarizes the option activity relating
to the
LTIP:
Shares Under Option Number Price
Per Share
___________________________________________________________________________
Options granted in connection with
initial public offering 697,908
$21.50
Changes in 1993:
Options canceled (11,605)
$21.50
___________________________________________________________________________
Options outstanding at December 31, 1993 686,303
$21.50
Changes in 1994:
Options exercised (274)
$21.50
Options canceled (85,367)
$21.50-$26.15
Options granted 502,707
$21.81-$30.63
___________________________________________________________________________
Options outstanding at December 31, 1994 1,103,369
$21.50-$30.63
___________________________________________________________________________
Options exercisable at December 31, 1994 7,264
$21.50-$26.13
___________________________________________________________________________
In addition, the Company has awarded restricted stock under
the LTIP
to certain employees in consideration of services rendered.
During 1994
and 1993, respectively, restricted stock awards of 17,801 and
15,306 were
made to employees under the LTIP.
57
60
As of December 31, 1994 and 1993, respectively, 735,936 and
1,298,391
shares were available for issuance under the LTIP. The shares
are not
subject to stock appreciation right features.
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") enables employees to
purchase shares
of AT&T Capital common stock at a discount. The price per share
is 90% of
the fair market value of the common stock at the time of its
purchase. No
compensation expense is recorded in connection with the ESPP.
The maximum
aggregate number of shares of common stock that may be purchased
under the
ESPP is 500,000. During 1994, 13,484 shares were purchased by
employees at
prices ranging from $19.02 to $21.83 per share. At December 31,
1994,
there were 486,516 shares available for offering under the ESPP.
Postretirement and Postemployment Benefits
Effective January 1, 1993, the Company in conjunction with
AT&T,
adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits
Other Than Pensions". The standard requires companies to accrue
postretirement benefits during the years employees are working
and earning
benefits for retirement. Previously, the Company expensed these
benefits
as the claims were incurred. During 1992, it was decided that
AT&T would
keep the responsibility for the initial liability at the AT&T
consolidated
level and charge the Company only for the earned benefit service
cost in
each period. Accordingly, the Company has no identifiable
initial
liability and all costs associated with such obligation have been
assumed
by AT&T. However, had the Company recorded its initial
transition
obligation in the first quarter of 1993, the amount would have
been
immaterial to the Company's financial position and results of
operations.
Additionally, management believes that SFAS No. 106 will not have
a
material impact on the Company's financial position or its
results of
operations in the future as postretirement benefits are generally
not
extended.
In November 1992, the FASB issued SFAS No. 112, "Employers'
Accounting
for Postemployment Benefits" ("SFAS No. 112"). Analogous to SFAS
No. 106
for postretirement benefits, this standard requires companies to
accrue for
estimated future postemployment benefit expenses during the
periods when
employees are working. Postemployment benefits are any benefits
other than
retirement benefits that are provided after employment is
discontinued.
The Company, in conjunction with AT&T, elected to adopt SFAS No.
112 in
1993. Initial adoption of SFAS No. 112 did not have an effect on
the
Company. Additionally, management believes that SFAS No. 112
will not have
a material impact on the Company's financial position or its
results of
operations in the future.
58
61
12. RELATED-PARTY TRANSACTIONS
The Company leases certain office facilities from AT&T and
affiliates.
Future minimum rental payments under noncancelable,
long-term leases
with AT&T and affiliates are as follows:
1995
$ 4,291
1996
4,243
1997
2,640
1998
52
1999
-
2000 and thereafter
-
___________________________________________________________________________
Total
$11,226
___________________________________________________________________________
Rental expense under existing leases with AT&T and
affiliates amounted
to $4,101, $7,998 and $8,164, in 1994, 1993 and 1992,
respectively.
The Company purchases services from AT&T and affiliates,
including
data processing, billing and collection, administration and other
services.
The Company's expenses for such services were $20,628 in 1994,
$32,320 in
1993 and $19,529 in 1992. Additionally, the Company was charged
a fee by
AT&T for corporate overhead allocations of $6,444 in 1992. The
Company was
not charged such a fee from AT&T in 1994 or 1993.
At December 31, 1994, 1993 and 1992, the Company was the
lessor to
AT&T of equipment comprising $268,616, $145,812 and $142,499 of
capital
leases and $204,647, $376,970 and $468,497 of equipment under
operating
leases, respectively. Revenue related to these leases was
$108,808,
$170,788 and $153,087 in 1994, 1993 and 1992, respectively.
In 1992, revenue from equipment sales to AT&T and affiliates
was
$18,689, and the cost of these sales was $17,753. The Company
had no
significant sales of equipment to AT&T and affiliates in 1994 and
1993.
The Company also had an interest bearing intercompany note
receivable
from AT&T and affiliates of $40,105 at December 31, 1994 and an
interest
bearing intercompany debt payable to AT&T and affiliates of
$35,290 at
December 31, 1993, respectively. (See Note 7.) Additionally,
the Company
had interest free loans related to tax agreements from AT&T at
December 31,
1994 and 1993, respectively, of $214,066 and $188,562. (See Note
10.)
In 1993, AT&T and the Company entered into an operating
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
59
62
a basis consistent with past practice. The Company and AT&T have
also
entered into an intercompany agreement whereby the Company
manages and
administers, for a fee, certain lease portfolios, including the
Lease
Finance Assets of Old Capital and Old Credit which were not
transferred to
the Company. (See Note 1.) During 1994, 1993 and 1992, the
Company
recognized service fee revenue of $8,551, $18,361 and $4,200,
respectively,
for such services.
In connection with the Restructuring, AT&T has issued a
direct, full
and unconditional guarantee 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 that was transferred
to the
Company. Debt issued by the Company subsequent to March 31,
1993, is not
guaranteed or supported by AT&T. At December 31, 1994 and 1993,
the amount
of such guaranteed debt was $747,895 and $1,441,035,
respectively.
13. 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, 1994 and 1993, in management's opinion,
there was
no significant risk of loss in the event of nonperformance of the
counterparties to derivative contracts. Generally, the Company
does not
require collateral or other security to support financial
instruments with
credit risk. There were no past due amounts, nor were there any
reserves
for credit losses on derivatives as of December 31, 1994, 1993
and 1992.
Information is provided below for each significant
derivative product
type. The derivatives, with which the Company is involved, are
primarily
interest rate swaps, currency swaps, and foreign currency forward
exchange
contracts.
Interest Rate and Currency Swaps
The Company enters into interest rate and foreign currency
swap
agreements with major money center banks and intermediaries
located in
major financial 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
allow the Company to raise funds at floating rates and
effectively swap
them into fixed rates that are lower than those available to the
Company if
fixed-rate borrowings were made directly. Foreign currency swaps
are used
primarily to hedge Canadian dollars and pounds sterling.
Under interest rate swaps, the Company agrees with other
parties to
60
63
exchange, at specified intervals, the difference between
fixed-rate and
floating-rate interest amounts calculated by reference to an
agreed
notional principal amount. A generic swap's notional amount
generally does
not change for the life of the contract. Amortizing and
accreting swaps'
notional amounts generally change based upon a predetermined
amortization
or accretion schedule.
The notional amounts shown below represent an agreed upon
amount on
which calculations of amounts to be exchanged are based. They do
not
represent amounts exchanged by the parties and, therefore, are
not a
measure of the exposure of the Company. 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 9.) 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 1994 and 1993, is summarized as
follows:
Generic Amortizing Generic
Pay Pay Pay Currency
Notional Amounts Fixed Fixed Floating Swaps
Total
___________________________________________________________________________
December 31, 1992 $ 650,000 $ 936,684 $ 50,000 $ 32,186
$1,668,870
Additions 789,000 582,744 450,000 117,024
1,938,768
Maturities/
amortization (300,000) (394,859) (50,000) -
(744,859)
Terminations - - - -
-
__________________________________________________________________________
December 31, 1993 1,139,000 1,124,569 450,000 149,210
2,862,779
Additions 607,800 285,972 175,000 129,860
1,198,632
Maturities/
amortization (175,000) (445,568) (450,000) (57,253)
(1,127,821)
Terminations - - - -
-
__________________________________________________________________________
December 31, 1994 $1,571,800 $ 964,973 $175,000 $221,817
$2,933,590
__________________________________________________________________________
The schedule of maturities at December 31, 1994 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 Swaps
Total
___________________________________________________________________________
Total notional
amounts $1,571,800 $964,973 $175,000 $221,817
$2,933,590
Weighted average
pay rate 5.75% 5.57% 6.04% 6.21%
5.74%
Weighted average
receive rate 6.08% 6.09% 5.94% 6.09%
6.08%
___________________________________________________________________________
61
64
Generic Amortizing Generic
Pay Pay Pay Currency
Fixed Fixed Floating Swaps
Total
___________________________________________________________________________
1995 Maturities $350,000 $414,180 $175,000 $108,455
$1,047,635
Weighted average
pay rate 4.29% 5.19% 6.04% 6.27%
5.14%
Weighted average
receive rate 6.09% 6.09% 5.94% 6.09%
6.07%
1996 Maturities $527,000 $291,935 - $ 74,970 $
893,905
Weighted average
pay rate 5.42% 5.35% - 5.83%
5.43%
Weighted average
receive rate 6.04% 6.09% - 6.09%
6.06%
1997 Maturities $163,300 $141,019 - $ 36,603 $
340,922
Weighted average
pay rate 5.72% 5.89% - 6.80%
5.91%
Weighted average
receive rate 6.14% 6.09% - 6.09%
6.11%
1998 Maturities $300,000 $ 46,749 - $ 1,789 $
348,538
Weighted average
pay rate 6.41% 7.03% - 6.05%
6.49%
Weighted average
receive rate 6.09% 6.09% - 6.09%
6.09%
1999 Maturities $200,000 $ 30,736 - - $
230,736
Weighted average
pay rate 8.01% 6.83% - -
7.86%
Weighted average
receive rate 6.09% 6.09% - -
6.09%
2000-2017 Maturities $ 31,500 $ 40,354 - - $
71,854
Weighted average
pay rate 7.01% 7.24% - -
7.14%
Weighted average
receive rate 6.09% 6.09% - -
6.09%
___________________________________________________________________________
Foreign Currency Forward Exchange Contracts
The Company enters into foreign currency forward exchange
contracts to
manage foreign exchange risk (primarily Canadian dollars and
pounds
sterling). The notional amount of such contracts was $318,054
and $165,969
at December 31, 1994 and 1993, 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 not be adversely
affected by
changes in exchange rates.
62
65
Other Commitments and Contingencies
Certain regional office facilities and equipment of the
Company are
leased from unrelated parties with renewal options of one to five
years.
Rental expense to unrelated parties for the years ended December
31, 1994,
1993 and 1992 was $14,202, $9,626 and $16,992, respectively.
Rental
expense associated with sublease rentals on operating leases for
1994, 1993
and 1992, was $115, $419 and $5,026, respectively. Minimum
annual rental
commitments at December 31, 1994, under these agreements are as
follows:
1995
$21,828
1996
18,171
1997
13,247
1998
7,769
1999
7,540
2000 and thereafter
3,729
___________________________________________________________________________
Total
$72,284
___________________________________________________________________________
The total of minimum rentals to be received in the future
under
noncancelable subleases related to operating leases as of
December 31,
1994, was $11,998. The total of minimum rentals to be received
in the
future under noncancelable subleases related to capital leases as
of
December 31, 1994, was $65,010.
The Company is not currently a party to any material legal
proceeding,
nor is the Company aware of any pending or threatened litigation
which in
the opinion of management would have a material impact on its
financial
condition or results of operations.
14. FOREIGN OPERATIONS
The Company operates primarily in one business segment -
equipment
leasing and financing. This segment represents more than 90% of
consolidated revenue, net income and total assets.
The following data on other geographic areas pertain to
operations
that are located outside the U.S. (primarily Canada, Europe and
Hong Kong).
Net income includes certain allocated operating expenses and
interest
expense. Revenues between geographic areas are not material.
63
66
A summary of the Company's operations by geographic area is
presented
below:
For the years ended December 31, 1994 1993
1992
__________________________________________________________________________
Total Revenue:
United States $1,250,591 $1,274,615
$1,251,493
Foreign 133,488 84,974
14,033
__________________________________________________________________________
Total $1,384,079 $1,359,589
$1,265,526
__________________________________________________________________________
Net Income (Loss):
United States $104,558 $78,024
$87,329
Foreign (4,222) (9,428)
(13,757)
__________________________________________________________________________
Total $100,336 $68,596
$73,572
__________________________________________________________________________
At December 31, 1994 1993
1992
__________________________________________________________________________
Total Assets:
United States $7,148,737 $6,002,857
$5,750,294
Foreign 873,186 406,869
145,135
__________________________________________________________________________
Total $8,021,923 $6,409,726
$5,895,429
__________________________________________________________________________
15. QUARTERLY DATA (Unaudited)
Quarters First Second Third Fourth
Total
1994
___________________________________________________________________________
Total revenue $326,012 $332,216 $348,368 $377,483
$1,384,079
Interest expense 60,107 65,654 68,942 77,109
271,812
Net income 15,805 18,901 25,040 40,590
100,336
Earnings per share 0.34 0.40 0.53 0.86 $
2.14
Stock price per share
high 27.000 24.750 24.375 24.500
low $ 22.875 $ 21.625 $ 21.375 $ 19.750
___________________________________________________________________________
64
67
Quarters First Second Third Fourth
Total
1993
___________________________________________________________________________
Total revenue $327,542 $317,019 $330,718 $384,310
$1,359,589
Interest expense 59,572 57,747 57,911 61,105
236,335
Income before
cumulative
effect on prior
years of
accounting
change 14,722 13,769 3,166 39,853
71,510
Net income 11,808 13,769 3,166 39,853
68,596
Earnings per share $ 0.29 $ 0.34 $ 0.07 0.85
$ 1.60
Stock price per share
high - - - 29.250
low - - - $ 22.375
___________________________________________________________________________
Net income and earnings per share in the first and fourth
quarters of
1993, and the fourth quarter of 1994, reflected certain
securitization
transactions. (See Note 6.)
Net income and earnings per share for the first quarter of
1993, were
impacted by a $2,914 charge, or $.07 per share, for the adoption
of SFAS
No. 109. (See Notes 2 and 10.)
Net income and earnings per share for the third quarter of
1993, were
impacted by a $11.4 million charge related to the increase in the
federal
tax rate to 35%. (See Notes 2 and 10.)
Earnings per share are computed independently for each
quarter
presented. Because of changes in the weighted average number of
shares
outstanding, the sum of the quarterly earnings per share may not
equal the
earnings per share for the year.
65
68
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 AT&T Code of 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, in
conjunction with AT&T's internal auditors, monitor 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.
The Audit Committee of the board of directors, which is
composed of
directors who are not employees of the Company or AT&T, meets
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 meet
privately
with the Audit Committee. Both the internal auditors and the
independent
auditors have access to the Audit Committee and its individual
members at
any time.
66
69
The financial statements have been audited by Coopers &
Lybrand
L.L.P., Independent Auditors. Their audits were conducted in
accordance
with generally accepted auditing standards and include a
consideration of
the internal control structure and substantive tests of
transactions.
Their report follows.
Thomas C. Wajnert
Chairman and
Chief Executive Officer
Edward M. Dwyer
Senior Vice President,
Chief Financial Officer and Treasurer
67
70
REPORT OF INDEPENDENT AUDITORS
______________________________
To the Shareowners of AT&T Capital Corporation:
We have audited the consolidated balance sheets of AT&T
Capital
Corporation and Subsidiaries at December 31, 1994 and 1993, and
the related
consolidated statements of income, changes in shareowners' equity
and cash
flows for each of the three years in the period ended December
31, 1994.
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, 1994
and 1993,
and the consolidated results of their operations and their cash
flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the Consolidated Financial
Statements, in
1993, the Company changed its method of accounting for income
taxes.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
January 26, 1995
68
71
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in independent auditors and no
disagreements with independent auditors on any accounting
or
financial disclosure during the past two years.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information set forth under the caption "Nominees for
Election" in the
Company's Proxy Statement for its Annual Meeting of Stockholders
to be
held on April 21, 1995 (the "Proxy Statement") to be filed within
120 days
after the end of the Company's fiscal year ended December 31,
1994, is
incorporated herein by reference.
EXECUTIVE OFFICERS
Executive officers of the Company serve at the discretion of the
Board of
Directors. No officer of the Company has a written employment or
noncompetition agreement with the Company, although each such
officer has
agreed not to disclose confidential information of the Company.
The
Company does not have "key man" insurance coverage on any of its
officers.
The executive officers of the Company comprise the Corporate
Leadership
Team consisting of the following six officers: Messrs. Wajnert,
Rothman,
Van Sickle, Dwyer, and McCarthy and Ms. Morey.
Thomas C. Wajnert, 51, has served as Chairman of the Board
of
Directors and Chief Executive Officer of the Company since July
1993 and as
a director of the Company since April 1993. From April 1993 to
July 1993
Mr. Wajnert was President, Chief Executive Officer and Vice
Chairman of the
Board of Directors of the Company. From February 1990 to March
1993, Mr.
Wajnert was President and Chief Executive Officer and a director
of Old
Capital. From October 1984 to May 1993, Mr. Wajnert was the
Chief
Executive Officer of Old Credit.
Irving H. Rothman, 47, has served as Group President of the
Company
since April 1993. Together with Mr. Van Sickle, Mr. Rothman
shares
responsibility for the operations of the Company, with the heads
of the
Company's several business units reporting to Messrs. Rothman and
Van
Sickle jointly. From March 1992 to March 1993 Mr. Rothman served
as Vice
Chairman of Old Credit. From November 1991 to March 1993, Mr.
Rothman was
Group President of Old Capital. From March 1990 to January 1992,
Mr.
Rothman was president and Chief Operating Officer of Old Credit
and from
February 1990 to March 1993, Mr. Rothman was a director of Old
Credit.
From February 1988 to February 1990, Mr. Rothman was Executive
Vice
President and Chief Financial Officer of Old Credit.
69
72
Charles D. Van Sickle, 52, has served as Group President of
the
Company since April 1993. Together with Mr. Rothman, Mr. Van
Sickle shares
responsibility for the operations of the Company, with the heads
of the
Company's business units reporting to Messrs. Van Sickle and
Rothman
jointly. From November 1991 to March 1993, Mr. Van Sickle was
Group
President of Old Capital and from March 1992 to March 1993, he
was Vice
Chairman of Old Capital's Capital Markets division. From January
1991 to
March 1992 Mr. Van Sickle was President and Chief Operating
Officer of Old
Capital's Capital Markets division. From March 1990 to January
1991 and
from November 1991 to March 1993, Mr. Van Sickle was a director
of Old
Credit. From February 1988 to January 1991, Mr. Van Sickle was a
Senior
Vice President of Old Credit's Capital Markets division.
Edward M. Dwyer, 38, has served as Senior Vice President,
Chief
Financial Officer and Treasurer of the Company since July 1994.
From April
1993 to June 1994, Mr. Dwyer was Vice President and Treasurer of
the
Company. From July 1991 to March 1993, he was Vice President and
Treasurer
of Old Capital. From February 1990 to July 1991, Mr. Dwyer was
Chief
Financial Officer of Old Capital's Capital Markets division.
From October
1989 to February 1990, he was Old Capital's Head of Business
Planning.
G. Daniel McCarthy, 45, has served as Senior Vice President,
General
Counsel, Secretary and Chief Risk Management Officer of the
Company since
April 1993. From February 1990 to March 1993, Mr. McCarthy was
Senior Vice
President, General Counsel, Secretary and Chief Risk Management
Officer of
Old Capital. From February 1988 to February 1990 he was Vice
President,
General Counsel and Secretary of Old Credit.
Ruth A. Morey, 51, has served as Senior Vice President and
Corporate
Resource Officer of the Company since April 1993. From February
1990 to
March 1993, Ms. Morey served as Senior Vice President and Chief
Administrative Officer of Old Capital. From March 1989 to
February 1991,
Ms. Morey was Vice President of Old Credit's Human Resources
division and
from March 1990 to March 1993 she was a director of Old Credit.
From 1987
to March 1989, Ms. Morey was the head of Old Credit's Human
Resources
division.
Item 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive
Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth under the caption "Security
Ownership" in
the Proxy Statement is incorporated herein by reference.
70
73
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Executive
Compensation"
in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 10-K.
(a) Documents filed as a part of the report:
(1) Financial Statements: Page
Consolidated Balance Sheets 32
Consolidated Statements of Income 34
Consolidated Statements of Changes
in Shareowners' Equity 36
Consolidated Statements of Cash Flows 37
Notes to the Consolidated Financial
Statements 39
Report of Management 66
Report of Independent Auditors 68
(2) Financial Statement Schedules:
Schedule VIII - 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 Auditors
(3) Exhibits:
Exhibit
Number
3(a). Restated Certificate of Incorporation of the
registrant
(incorporated by reference to Exhibit 3.1 to the
registrant's
Registration Statement on Form S-1 [No. 33-49605],
filed with
the Securities and Exchange Commission).
3(b). Amended and Restated By-laws of the registrant
dated as of
October 21, 1994.
71
74
4(a). Indenture dated as of July 1, 1993 between the
registrant
and Chemical Bank, Trustee (the
"Indenture")(incorporated
by reference to Exhibit 4A to 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 (incorporated by reference to Exhibit
4A-2 to 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.
10(a). Operating Agreement between the registrant and AT&T
dated as
of June 25, 1993 (incorporated by reference to
exhibit 10.1
to the registrant's Registration Statement on Form
S-1 [No.
33-49605] filed with the Securities and Exchange
Commission).
10(b). Intercompany Agreement between the registrant and
AT&T dated
as of June 25, 1993 (incorporated by reference to
Exhibit
10.2 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(c). License Agreement between the registrant and AT&T
dated as of
June 25, 1993 (incorporated by reference to Exhibit
10.3 to
the registrant's Registration Statement on Form S-1
[No. 33-
49605] filed with the Securities and Exchange
Commission).
10(d). Registration Rights Agreement between the
registrant and AT&T
dated as of June 25, 1993 (incorporated by
reference to
Exhibit 10.4 to the registrant's Registration
Statement on
Form S-1 [No. 33-49605] filed with the Securities
and
Exchange Commission).
10(e). Tax Agreements between the registrant and AT&T
dated as of
June 25, 1993 (incorporated by reference to Exhibit
10.5 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(f). AT&T Capital Corporation 1993 Long Term Incentive
Plan
(incorporated by reference to Exhibit 10.9 to the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(g). Form of Stock Option Agreement under the 1993 Long
Term
Incentive Plan (incorporated by reference to
Exhibit 10.10 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
72
75
10(h). Form of Restricted Stock Agreement under the 1993
Long Term
Incentive Plan (incorporated by reference to
Exhibit 10.11 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(i). Form of Director's Stock Option Agreement under the
1993 Long
Term Incentive Plan (incorporated by reference to
Exhibit
10.12 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(j). Form of Director's Restricted Stock Award under the
1993 Long
Term Incentive Plan (incorporated by reference to
Exhibit
10.13 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(k). AT&T Capital Corporation 1993 Leveraged Stock
Purchase Plan
(incorporated by reference to Exhibit 10.14 to the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(l). Form of Stock Purchase Agreement and related
exhibits under
the 1993 Leveraged Stock Purchase Plan
(incorporated by
reference to Exhibit 10.15 to 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 Annual Incentive Plan
(incorporated by reference to Exhibit 10.16 to 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 Share Performance
Incentive
Plan (incorporated by reference to Exhibit 10.17 to
the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(o). Restructuring Agreement dated as of March 29, 1993,
among the
Registrant, Old Capital, Old Credit and AT&T
(incorporated by
reference to Exhibit 10.18 to the registrant's
Registration
Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission).
10(p). Credit Agreement dated as of July 11, 1994, among
the
registrant, the Banks listed therein and Morgan
Guaranty
Trust Company of New York, as Agent (three-year
term).
73
76
10(q). Credit Agreement dated as of July 11, 1994, among
the
registrant, the Banks listed therein and Morgan
Guaranty
Trust Company of New York, as Agent (364-day term).
10(r). Form of AT&T Capital Corporation 1993 Employee
Compensation
Adjustment Plan (incorporated by reference to
Exhibit 10.21
to the registrant's Registration Statement on Form
S-1 [No.
33-49605] filed with the Securities and Exchange
Commission).
10(s). Form of AT&T Capital Corporation 1993 Deferred
Compensation
Plan (incorporated by reference to Exhibit 10.22 to
the
registrant's Registration Statement on Form S-1
[No.33-
49605]filed with the Securities and Exchange
Commission).
10(t). Form of AT&T Capital Corporation 1993 Financial
Counseling
Plan (incorporated by reference to Exhibit 10.22 to
the
registrant's Registration Statement on Form S-1
[No.33-49605]
filed with the Securities and Exchange Commission).
10(u). AT&T Capital Corporation 1994 Employee Stock
Purchase Plan
(incorporated by reference to Exhibit 4(c) to the
registrant's Registration Statement on Form S-8
[No. 33-
54315] filed with the Securities and Exchange
Commission).
10(v). Form of Summary Plan Description AT&T Capital
Corporation
Retirement and Savings Plan (including the Form of
Description AT&T Capital Corporation Excess Benefit
Plan).
10(w). AT&T Capital Corporation 1995 Annual Incentive
Plan.
10(x). AT&T Capital Corporation 1995 Senior Executive
Annual
Incentive Plan (incorporated by reference to
Exhibit A
to the registrant's definitive Proxy Statement
dated March
20, 1995 issued in connection with the 1995 Annual
Meeting of
Stockholders).
10(y). Form of Summary Plan Description of AT&T Capital
Corporation
Executive Benefit Plan.
10(z). Form of Summary Plan Description of AT&T Capital
Corporation
Supplemental Executive Retirement Plan.
10(aa).Form of Summary Plan Description of AT&T Capital
Corporation
Compensation Limit Excess Plan.
11. Computation of Earnings Per Share
12. Computation of Ratio of Earnings to Fixed Charges.
21. Subsidiaries of the registrant.
23. Consent of Coopers & Lybrand L.L.P.
74
77
24(a). Powers of Attorney executed by officers and
directors who
signed this report.
24(b). Certificate of Corporate Resolution.
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
75
78
SCHEDULE VIII
AT&T CAPITAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(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
___________________________________________________________________________
1994
Allowance for
Credit Losses:
Lease Financing(1)$102,760 $ 66,306 $ 33,978 $ (6,558)
$128,530
Commercial &
Financial (2) 57,059 14,582 21,567 (2,176)
47,898
___________________________________________________________________________
Total $159,819 $ 80,888 $ 55,545 $ (8,734)
$176,428
===========================================================================
1993
Allowance for
Credit Losses:
Lease Financing(1)$ 87,774 $ 95,034 $ 46,012 $(34,036)
$102,760
Commercial &
Financial (2) 36,187 28,644 13,017 5,245
57,059
__________________________________________________________________________
Total $123,961 $123,678 $ 59,029 $(28,791)
$159,819
==========================================================================
1992
Allowance for
Credit Losses:
Lease Financing(1)$ 74,106 $ 88,577 $ 61,549 $(13,360)
$ 87,774
Commercial &
Financial (2) 19,861 23,138 16,818 10,006
36,187
__________________________________________________________________________
Total $ 93,967 $111,715 $ 78,367 $ (3,354)
$123,961
==========================================================================
(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.
76
79
REPORT OF INDEPENDENT AUDITORS
______________________________
Our report on the consolidated financial statements of AT&T
Capital
Corporation and Subsidiaries is included on page 68 of this Form
10-K. In
connection with our audits of such financial statements, we have
also
audited the related financial statement schedule listed as an
exhibit on
page 71 of this Form 10-K.
In our opinion, the financial statement schedule 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.
As discussed in our report referred to above, the Company changed
its
method of accounting for income taxes in 1993.
COOPERS & LYBRAND
L.L.P.
1301 Avenue of the Americas
New York, New York
January 26, 1995
77
80
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
Thomas C.
Wajnert
By_____________________________
Thomas C.
Wajnert,
March 15, 1995 (Chairman and 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:
T. C. Wajnert Chairman and Chief
Executive Officer
Principal Financial Officer:
E. M. Dwyer Senior Vice President,
Chief Financial Officer
and Treasurer
Thomas C.
Wajnert
By
_________________________
Principal Accounting Officer: (Thomas C.
Wajnert,
Attorney-in-fact* and
on his own
behalf as
R. Oliu, Jr. Vice President, Controller Director and a
Principal
and Chief Accounting Officer Executive
Officer).
Directors:
T. C. Wajnert
J. P. Clancey
J. P. Kelly March 15, 1995
G. M. Lowrie
A. J. Mandl
R. A. McGinn
J. J. Melone
R. W. Miller * by power of
attorney
S. L. Prendergast
B. Walker, Jr.
78
81
EXHIBIT INDEX
Exhibit
Number
3(a). Restated Certificate of Incorporation of the
registrant
(incorporated by reference to Exhibit 3.1 to the
registrant's
Registration Statement on Form S-1 [No. 33-49605],
filed with
the Securities and Exchange Commission).
3(b). Amended and Restated By-laws of the registrant
dated as of
October 21, 1994.
4(a). Indenture dated as of July 1, 1993 between the
registrant
and Chemical Bank, Trustee (the
"Indenture")(incorporated
by reference to Exhibit 4A to 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 (incorporated by reference to Exhibit
4A-2 to 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.
10(a). Operating Agreement between the registrant and AT&T
dated as
of June 25, 1993 (incorporated by reference to
exhibit 10.1
to the registrant's Registration Statement on Form
S-1 [No.
33-49605] filed with the Securities and Exchange
Commission).
10(b). Intercompany Agreement between the registrant and
AT&T dated
as of June 25, 1993 (incorporated by reference to
Exhibit
10.2 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(c). License Agreement between the registrant and AT&T
dated as of
June 25, 1993 (incorporated by reference to Exhibit
10.3 to
the registrant's Registration Statement on Form S-1
[No. 33-
49605] filed with the Securities and Exchange
Commission).
10(d). Registration Rights Agreement between the
registrant and AT&T
dated as of June 25, 1993 (incorporated by
reference to
Exhibit 10.4 to the registrant's Registration
Statement on
Form S-1 [No. 33-49605] filed with the Securities
and
Exchange Commission).
79
82
10(e). Tax Agreements between the registrant and AT&T
dated as of
June 25, 1993 (incorporated by reference to Exhibit
10.5 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(f). AT&T Capital Corporation 1993 Long Term Incentive
Plan
(incorporated by reference to Exhibit 10.9 to the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(g). Form of Stock Option Agreement under the 1993 Long
Term
Incentive Plan (incorporated by reference to
Exhibit 10.10 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(h). Form of Restricted Stock Agreement under the 1993
Long Term
Incentive Plan (incorporated by reference to
Exhibit 10.11 to
the registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(i). Form of Director's Stock Option Agreement under the
1993 Long
Term Incentive Plan (incorporated by reference to
Exhibit
10.12 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(j). Form of Director's Restricted Stock Award under the
1993 Long
Term Incentive Plan (incorporated by reference to
Exhibit
10.13 to the registrant's Registration Statement on
Form S-1
[No. 33-49605] filed with the Securities and
Exchange
Commission).
10(k). AT&T Capital Corporation 1993 Leveraged Stock
Purchase Plan
(incorporated by reference to Exhibit 10.14 to the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
10(l). Form of Stock Purchase Agreement and related
exhibits under
the 1993 Leveraged Stock Purchase Plan
(incorporated by
reference to Exhibit 10.15 to 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 Annual Incentive Plan
(incorporated by reference to Exhibit 10.16 to 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 Share Performance
Incentive
Plan (incorporated by reference to Exhibit 10.17 to
the
registrant's Registration Statement on Form S-1
[No.
33-49605] filed with the Securities and Exchange
Commission).
80
83
10(o). Restructuring Agreement dated as of March 29, 1993,
among the
Registrant, Old Capital, Old Credit and AT&T
(incorporated by
reference to Exhibit 10.18 to the registrant's
Registration
Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission).
10(p). Credit Agreement dated as of July 11, 1994, among
the
registrant, the Banks listed therein and Morgan
Guaranty
Trust Company of New York, as Agent (three-year
term).
10(q). Credit Agreement dated as of July 11, 1994, among
the
registrant, the Banks listed therein and Morgan
Guaranty
Trust Company of New York, as Agent (364-day term).
10(r). Form of AT&T Capital Corporation 1993 Employee
Compensation
Adjustment Plan (incorporated by reference to
Exhibit 10.21
to the registrant's Registration Statement on Form
S-1 [No.
33-49605] filed with the Securities and Exchange
Commission).
10(s). Form of AT&T Capital Corporation 1993 Deferred
Compensation
Plan (incorporated by reference to Exhibit 10.22 to
the
registrant's Registration Statement on Form S-1
[No.33-
49605]filed with the Securities and Exchange
Commission).
10(t). Form of AT&T Capital Corporation 1993 Financial
Counseling
Plan (incorporated by reference to Exhibit 10.22 to
the
registrant's Registration Statement on Form S-1
[No.33-49605]
filed with the Securities and Exchange Commission).
10(u). AT&T Capital Corporation 1994 Employee Stock
Purchase Plan
(incorporated by reference to Exhibit 4(c) to the
registrant's Registration Statement on Form S-8
[No. 33-
54315] filed with the Securities and Exchange
Commission).
10(v). Form of Summary Plan Description of AT&T Capital
Corporation
Retirement and Savings Plan (including the Form of
Description of AT&T Capital Corporation Excess
Benefit Plan).
10(w). AT&T Capital Corporation 1995 Annual Incentive
Plan.
10(x). AT&T Capital Corporation 1995 Senior Executive
Annual
Incentive Plan (incorporated by reference to
Exhibit A
to the registrant's definitive Proxy Statement
dated March
20, 1995 issued in connection with the 1995 Annual
Meeting of
Stockholders).
10(y). Form of Summary Plan Description of AT&T Capital
Corporation
Executive Benefit Plan.
81
84
10(z). Form of Summary Plan Description of AT&T Capital
Corporation
Supplemental Executive Retirement Plan.
10(aa).Form of Summary Plan Description of AT&T Capital
Corporation
Compensation Limit Excess Plan.
11. Computation of Earnings Per Share
12. Computation of Ratio of Earnings to Fixed Charges.
21. Subsidiaries of the registrant.
23. Consent of Coopers & Lybrand L.L.P.
24(a). Powers of Attorney executed by officers and
directors who
signed this report.
24(b). Certificate of Corporate Resolution.
27. Financial Data Schedule
82