1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
( ) 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
CORPORATION NO. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number 201-397-3000
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
_____ _____
At October 31, 1995, 46,968,810 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
2 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
________ ________ ________ ________
Revenue:
Finance revenue $ 46,793 $ 29,446 $127,825 $ 86,847
Capital lease revenue 150,427 123,276 428,097 344,546
Rental revenue on
operating leases (A) 141,800 124,210 411,169 352,906
Equipment sales 10,375 24,987 27,356 96,987
Other revenue, net 46,486 46,449 146,204 125,311
_______ _______ _______ _________
Total Revenue 395,881 348,368 1,140,651 1,006,597
_______ _______ _______ _________
Expenses:
Interest 106,086 68,942 300,891 194,703
Operating and
administrative 116,456 108,858 351,443 311,403
Depreciation on
operating leases 88,328 83,377 259,487 236,288
Cost of equipment
sales 9,896 21,845 25,195 89,133
Provision for credit
losses 20,681 21,975 60,359 71,275
_______ _______ _______ ________
Total Expenses 341,447 304,997 997,375 902,802
_______ _______ _______ ________
Income before income
taxes 54,434 43,371 143,276 103,795
Provision for income
taxes 21,962 18,331 57,810 44,048
________ ________ ________ ________
Net Income $ 32,472 $ 25,040 $ 85,466 $ 59,747
======== ======== ======== ========
(Continued)
3 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
________ ________ ________ _______
Earnings per common
share and common share
equivalent (Note 2):
Earnings Per Share $ .69 $ .53 $ 1.82 $ 1.27
======== ======== ======== ========
Weighted average shares
outstanding (thousands): 47,195 46,890 47,063 46,894
======== ======== ======== ========
(A) Includes $26,174 and $20,225 for the three months ended
September 30, 1995 and 1994, respectively, and $66,398 and
$59,352 for the nine months ended September 30, 1995 and
1994, respectively, from AT&T Corp.("AT&T") and its affiliates.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1995 1994
_____________ ____________
ASSETS:
Cash and cash equivalents $ - $ 54,464
Net investment in finance
receivables 1,681,314 1,452,947
Net investment in capital
leases 5,962,569 5,129,326
Investment in operating
leases, net of accumulated
depreciation of $609,860 in
1995 and $567,398 in 1994 1,034,301 902,525
Deferred charges and other assets 350,913 482,661
___________ __________
Total Assets $ 9,029,097 $ 8,021,923
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes, less
unamortized discount of
$8,774 in 1995 and $4,619 in
1994 $ 2,195,000 $ 2,176,877
Deferred income taxes 589,464 555,287
Income taxes and other payables 500,984 545,270
Payables to AT&T and affiliates 346,677 356,690
Medium- and long-term debt 4,319,594 3,379,581
Commitments and contingencies
____________ __________
Total Liabilities $ 7,951,719 $ 7,013,705
____________ __________
(Continued)
5 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1995 1994
_____________ _____________
Shareowners' Equity (Note 2):
Common stock, one cent par value:
Authorized 100,000,000 shares,
issued and outstanding, 46,968,810
shares in 1995 and 46,962,439 shares
in 1994 $ 470 $ 470
Additional paid-in capital 782,841 782,785
Recourse loans to senior executives (18,971) (19,651)
Foreign currency translation
adjustments (5,130) (2,158)
Retained earnings 318,168 246,772
__________ __________
Total Shareowners' Equity 1,077,378 1,008,218
__________ __________
Total Liabilities and
Shareowners' Equity $ 9,029,097 $ 8,021,923
========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Nine Months
Ended September 30,
1995 1994*
__________ __________
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 85,466 $ 59,747
Noncash items included in income:
Depreciation and amortization 303,412 263,025
Deferred taxes 30,983 48,337
Provision for credit losses 60,359 71,275
Gain on Small Business Administration ("SBA") (7,467) (406)
loan sales, net
Decrease (increase) in deferred charges and
other assets 80,900 (23,102)
(Decrease) increase in income taxes and
other payables (32,583) 11,866
Decrease in payables to AT&T and
affiliates (3,170) (11,219)
___________ ___________
Net Cash Provided by Operating Activities 517,900 419,523
___________ ___________
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of fixed assets, net (6,607) (4,546)
Purchase of businesses and finance asset
portfolios, net of cash acquired (307,527) (382,550)
Financings and lease equipment purchases (3,819,016) (3,468,473)
Principal collections from customers,
net of amounts included in income 2,871,692 2,610,255
Cash proceeds from SBA loan sales 92,047 6,067
Cash proceeds from receivables securitizations 81,475 73,390
___________ ___________
Net Cash Used for Investing Activities $(1,087,936) $(1,165,857)
___________ ___________
(Continued)
7 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For The Nine Months
Ended September 30,
1995 1994*
____________ ___________
CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) Increase in short-term notes, net $ (224,397) $ 501,991
Additions to medium- and long-term debt 1,604,370 1,228,531
Repayments of medium- and long-term debt (906,495) (953,712)
Increase (decrease) in payables to AT&T
and affiliates 56,164 (3,439)
Dividends paid (14,070) (12,643)
_________ _________
Net Cash Provided by Financing
Activities 515,572 760,728
_________ _________
Net (Decrease) increase in Cash and Cash
Equivalents (54,464) 14,394
Cash and Cash Equivalents at Beginning of Period 54,464 -
_________ _________
Cash and Cash Equivalents at End of Period $ 0 $ 14,394
========= =========
Non-Cash Investing and Financing Activities:
In the first nine months of 1995 and 1994, the Company entered into
capital lease obligations of $20,496 and $27,220, respectively, for
equipment that was subleased.
In the first nine months of 1995 and 1994, the Company assumed debt of
$472,952 and $106,945, respectively, in conjunction with business and
portfolio acquisitions.
* Certain 1994 amounts have been restated to conform to the 1995
presentation.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
8 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared by AT&T Capital Corporation and its subsidiaries ("AT&T
Capital" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of
operations, financial position and cash flows for each period shown. The
results for interim periods are not necessarily indicative of financial
results for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1994 and the current
year's previously issued Form 10-Q's.
2. Shareowners' Equity and Earnings Per Share
The computation of earnings per common share and common share
equivalent is based upon the weighted average number of common shares
outstanding plus common share equivalents arising from the effect of
dilutive stock options using the treasury stock method. Fully dilutive
earnings per common share and common share equivalents are not presented
since dilution is less than 3%.
On February 28, 1995, May 31, 1995, and August 31, 1995 the Company
paid a dividend of $.10 per share to shareowners of record as of February
10, 1995, May 10, 1995, and August 10, 1995, respectively. In addition,
on October 20, 1995 the Company's board of directors declared a third
quarter dividend of $.11 per share. The dividend is payable November 30,
1995 to shareowners of record as of the close of business on November 10,
1995.
3. Acquisitions
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, and Benelux (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 assets of approximately $540
million at the time of acquisition. The acquisition was accounted for by
the purchase method and the total cash paid (net of cash acquired) was
approximately $74 million. In addition, on June 30, 1995, the Company
acquired two relatively small businesses, a United States mid-range
computer asset business with approximately $180 million in assets and an
Australian equipment finance company with approximately $40 million in
assets. These acquisitions did not materially impact net income for the
three or nine months ended September 30, 1995.
9 FORM 10-Q
4. Recent Pronouncements
The Company adopted Statements of Financial Accounting Standards
("SFAS") No. 114 ("Accounting by Creditors for Impairment of a Loan") and
No. 118 ("Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures") in the first quarter of 1995. These
standards require that impaired loans be measured based on the present
value of expected cash flows, discounted at the loan's effective interest
rate or, the loans observable market price or, the fair value of the
collateral if the loan is collateral dependent, as well as certain related
disclosures. The adoption of these statements did not have a material
effect on the consolidated financial statements of the Company.
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of". This statement establishes the
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This standard is effective for financial statements for
fiscal years beginning after December 15, 1995, which for the Company
would be 1996. Based upon management's review, the adoption of SFAS No.
121 is not expected to have a material impact on the Company's financial
position and results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This standard is effective for fiscal years
beginning after December 15, 1995 and will allow companies to chose either
1)a fair value method of valuing stock-based compensation plans which will
affect reported net income, or 2) to continue to follow the existing
accounting rules for stock option accounting but disclose what the impacts
would have been had the new standard been adopted. The Company will most
likely choose the disclosure option of this standard which would require
disclosing the pro forma net income and earnings per share amounts
assuming the fair value method was adopted on January 1, 1995. As a
result, management does not expect the adoption of this standard to have
any impact on the Company's consolidated financial statements.
10 FORM 10-Q
5. Recent Events
On September 20, 1995, AT&T announced plans to separate itself into
three publicly-held, stand-alone global businesses that will be focused on
the following businesses: i) communication services, ii) communications
systems and technology, and iii) computers (the "AT&T Plan"). The AT&T
Plan also includes the disposition of its remaining 86 percent interest in
the Company to the general public or another company. AT&T expects the
AT&T Plan, including the sale of its interest in the Company, to be
completed by the end of 1996.
On October 3, 1995, the Company's Board of Directors (the "Board")
held a special meeting to consider AT&T's announced plans to sell its
remaining interest in the Company to the general public or another
company. At that meeting, the Company's Board authorized management to
examine possible public and private sale alternatives. The Board also
created a Special Committee of the Company's four outside directors to act
upon such matters as may arise in the course of considering alternative
ways to maximize shareowner value and in which there may be a conflict
between the interests of AT&T and those of the Company or its minority
shareowners and to make recommendations thereon to the Company's Board or
shareowners. Additionally, the Board engaged the investment banking firm
of Goldman, Sachs & Co. and the law firm of Sullivan & Cromwell to act as
advisors to the Company.
The Operating Agreement between AT&T and the Company (pursuant to
which the Company serves as AT&T's preferred provider of financing
services and has certain related and other rights and privileges in
connection with the financing of AT&T equipment to AT&T's customers) will
remain in place with respect to AT&T. In addition, consistent with the
terms of the Operating Agreement, if AT&T were to spin-off or sell in a
public offering any of its significant equipment businesses (as
contemplated in AT&T's aforementioned announcement), comparable operating
agreements would be put in place with the spun-off or new companies. AT&T
is currently assessing the impact that the AT&T Plan will have on its
operations. According to AT&T, the AT&T Plan is expected to reduce
strategic conflicts. While the Company is not able to evaluate if the
AT&T Plan will affect AT&T's equipment sales, any resulting change in the
level of equipment sales by AT&T's communications systems and technology
business could have a corresponding impact on the Company's future
financing volumes associated with such sales.
The planned change in the Company's ownership could, as described
below, have certain significant effects on the Company.
11 FORM 10-Q
Tax Deconsolidation
The Company is currently a member of AT&T's consolidated federal
income tax group. If AT&T's ownership in the Company's common stock drops
below 80%, the Company would cease to be a member of AT&T's consolidated
federal income tax group ("Tax Deconsolidation"). In light of the
announcement made by AT&T, it is likely that AT&T's ownership in the
Company will decrease below 80% by the end of 1996.
Many financings by the Company of products manufactured by AT&T or
its affiliates (the "AT&T Entities") involve the purchase of such
products by the Company and the contemporaneous lease of such products to
third parties. While the Company is a member of AT&T's consolidated
federal income tax group, the payment of taxes associated with certain
transactions which qualify as true leases for tax purposes is generally
deferred until the products are depreciated or sold outside the
consolidated federal income tax group (the amount of such taxes so
deferred is herein referred to as "Gross Profit Tax Deferral"). If AT&T
and the Company are subject to a Tax Deconsolidation, purchases thereafter
of such products by the Company from the AT&T Entities would generate
current taxable income for the AT&T Entities resulting in a liability of
the AT&T Entities to pay federal income taxes on such taxable income.
AT&T and the Company are parties to a Gross Profit Tax Deferral
Interest Free Loan Agreement which provides that AT&T will from time
to time extend interest free loans to the Company equal to the amount of
the Gross Profit Tax Deferral. The Company is obligated to repay interest
free loans at such time as AT&T is required to make an income tax payment
on the deferred income. Upon Tax Deconsolidation, the Company would no
longer receive such loans, which have constituted a competitive advantage
to the Company in financing AT&T products. In addition, the Company would
be required to repay all such outstanding loans upon Tax Deconsolidation.
The aggregate outstanding principal amount of such interest free loans was
$248.9 million at September 30, 1995. The Company has sufficient cash and
credit resources to repay such loans in the event of a Tax
Deconsolidation. If a Tax Deconsolidation had occurred on September 30,
1995, and the Company had replaced such interest free loans with interest
bearing debt, the Company's net income would thereafter be reduced
annually by approximately $8.5 million. This estimate assumes that the
Company (i) refinanced the interest free loans at current market interest
rates (which are subject to continual change) and (ii) no part of such
increased borrowing cost was passed on to customers.
12 FORM 10-Q
License Agreement
Pursuant to a License Agreement (the "License") with the Company,
AT&T has licensed to the Company and certain of its subsidiaries certain
trade names and service marks, including but not limited to the AT&T
Capital Corporation, AT&T Credit Corporation, AT&T Systems Leasing and
AT&T Automotive Services names. The License provides that if AT&T ceases
to own more than 50% of the voting stock of the Company (as contemplated
by AT&T's September 20, 1995 announcement), AT&T may require (upon one
year's notice and generally at AT&T's expense) the Company (i.e., AT&T
Capital Corporation) to discontinue the use of the "AT&T" name as part of
its corporate name. The Company's subsidiaries may, notwithstanding such
event, continue to use the other AT&T licensed names and service marks
pursuant to the License (e.g., as part of such subsidiaries' corporate
names and for marketing purposes), subject to extensive restrictions on
the use thereof in connection with the issuance of securities and
incurrence of indebtedness.
Intercompany Agreement
AT&T has agreed in the Intercompany Agreement to own, directly or
indirectly, at least 20% of the aggregate number of shares of the
Company's common stock until August 4, 1998. In its September 20, 1995
press release, AT&T indicated its intent to sell the remainder of its
interest in the Company by the end of 1996, subject to obtaining a
modification to the existing Intercompany Agreement. AT&T has previously
advised the Company that it has no plans to modify the Intercompany
Agreement without the approval of a majority of the Company's independent
directors.
Borrowing Performance
The Company believes that because of its relationship with AT&T it
has generally enjoyed borrowing cost savings of approximately 10 basis
points. If the Company ceases to be a subsidiary of AT&T, there is no
assurance that this cost savings would continue. Any actual impact on
borrowing costs would be affected by many factors including the identity
of the purchaser or purchasers of AT&T's interest and whether AT&T's
interest is sold in the public market or to one or more other companies.
Compensation and Benefit Plans
Under the Company's Share Performance Incentive Plan, as amended
("SPIP"), approximately 120 employees are eligible to receive cash awards
at the end of five, 3-year performance periods. The first such period
terminates on June 30, 1996, with each of the other performance periods
ending on the annual anniversary of such date through and including June
30, 2000. If AT&T reduces its voting interest in the Company, certain
provisions of the SPIP trigger the possible acceleration of certain of
these cash awards for any pending periods.
Upon the consummation of a transaction that has or will have the
effect of the common stock of the Company no longer being publicly traded
("Private Sale"), Maximum Payouts (as defined in the SPIP) will be paid to
the participants. If it is assumed that a Private Sale occurs by year-end
1996 the Company estimates that it would incur a one-time charge to net
income between $7 and $15 million.
13 FORM 10-Q
Alternatively, if a Private Sale does not occur, but AT&T otherwise
reduces its voting interest in the Company below 50%, a "Disaffiliation
Event" (which is defined generally as a decrease in AT&T's voting interest
in the Company below 50% coupled with the withdrawal by AT&T of the
Company's rights under the License to use the "AT&T" name for certain
corporate purposes) could occur. If a Disaffiliation Event were to occur,
the awards under the SPIP (which are generally based on the performance of
the Company's stock price and dividend yield relative to the interest rate
on 3-year treasury notes and the total return on the stock of a specified
peer group of financial services companies) for the performance periods in
process would be accelerated and payable immediately to participants.
While the Company does not know with certainty if and when a
Disaffiliation Event will occur and what the relative performance of the
Company's stock as measured against the peer group would be as of the date
of such Disaffiliation Event, if it is assumed that a Disaffiliation Event
occurs by year-end 1996 and that only the then pending performance periods
are accelerated as provided in the SPIP, the Company estimates that it
would incur a possible one-time charge to net income between $0 and $15
million.
14 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
In January 1995, AT&T Capital Corporation ("AT&T Capital" or the
"Company") acquired CFH Leasing International located in the United
Kingdom, Germany, France, Italy and Benelux. 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 Company also acquired two relatively small businesses on June 30,
1995, a United States mid-range computer asset business with approximately
$180 million in assets and an Australian equipment finance company with
approximately $40 million in assets. These acquisitions did not
materially impact net income for the three or nine months ended September
30, 1995.
On September 20, 1995, AT&T Corp. ("AT&T") announced its plans to sell its
remaining ownership interest in the Company. For a more detailed
discussion of such plans, see the Recent Events section below.
RESULTS OF OPERATIONS
Three months ended September 30, 1995
Net income for the quarter ended September 30, 1995, was $32.5 million, an
increase of $7.4 million, or 29.7% compared with the third quarter of
1994. Earnings per share for the third quarter of 1995 were $.69, a 30.2%
increase over the $.53 reported for the same period in 1994. The
respective increases in net income and earnings per share resulted
principally from increased portfolio revenue supported by an increase in
average portfolio assets and a lower provision for credit losses,
partially offset by higher interest expense and operating and
administrative costs.
Finance revenue of $46.8 million increased $17.3 million, or 58.9%,
for the third quarter of 1995 compared with the same period of 1994,
reflecting a 38.5% increase in the average net finance receivable
portfolio as well as higher average yields for the third quarter of 1995
compared with the same period in 1994.
15 FORM 10-Q
Capital lease revenue of $150.4 million increased $27.2 million, or
22.0%, for the three months ended September 30, 1995, compared with the
same period in 1994. This reflects a 23.7% increase in the average net
capital lease portfolio during the third quarter of 1995 compared with the
third quarter of 1994. This increase was slightly offset by a decline in
the average yields in certain small-ticket equipment leasing portfolios.
Rental revenue on operating leases of $141.8 million for the third
quarter of 1995 increased $17.6 million, or 14.2%, compared with the same
period in 1994. Depreciation expense on operating leases of $88.3 million
increased $5.0 million, or 5.9%, for the comparable periods. Rental
revenue less associated depreciation ("operating lease margin") for the
third quarter of 1995 was $53.5 million, or 37.7% of rental revenue,
compared with $40.8 million, or 32.9% of rental revenue for the third
quarter of 1994. The increased operating lease margin in 1995 relates
primarily to a higher level of renewed leases in the Company's small-ticket
telecommunications equipment portfolio, higher margins in the
short-term leases in the automobile portfolio and testing and diagnostic
equipment portfolio, as well as reduced levels of lower yielding mainframe
business.
Net interest margin (finance revenue, capital lease revenue and
rental revenue, less depreciation on operating leases and interest
expense) of $144.6 million was 6.78% of average net portfolio assets for
the third quarter of 1995. This compares with the net interest margin of
$124.6 million, which was 7.36% of average net portfolio assets for the
third quarter of 1994. The quarter over quarter decrease in net interest
margin is due largely to an increase in the Company's borrowing costs, ,
and an increase in the company's debt to equity ratio (debt to equity was
6.07 times and 5.27 times at September 30, 1995 and 1994, respectively) as
well as a change in portfolio mix. As interest rates change, product
pricing is generally adjusted to reflect the Company's higher or lower
cost of borrowing. However, the pricing in connection with some small-ticket
portfolios tends to lag and may not be commensurate with the change
in the Company's borrowing costs. The effects of which are reflected in
the overall margin of the portfolio. As a result, the Company had
experienced some margin compression in certain small-ticket equipment
leasing portfolios due to the frequency and steepness of the Federal
Reserve Board's rate increases in 1994 and early 1995, the effects of
which are reflected in the overall margin of the portfolio.
16 FORM 10-Q
The following table shows (in millions of dollars) the non-AT&T
assets, revenue and net income and the respective percentages to total
assets, revenue and net income. The non-AT&T assets, revenue and net
income excludes the leasing of AT&T equipment to customers of AT&T and
leasing to AT&T, its affiliates and its employees.
Three Months Ended
September 30,
1995 1994
$ % $ %
Assets 5,877.2 65.1 4,401.1 59.8
Revenue 237.1 59.9 193.8 55.6
Net Income 10.5 32.2 .9 3.6
The non-AT&T net income in 1995 and 1994 was unfavorably impacted by
start-ups and acquisitions in non-AT&T businesses, particularly due to the
Company's international expansion. In spite of this, the profitability of
the non-AT&T businesses has improved significantly.
Revenue from equipment sales of $10.4 million decreased $14.6
million, or 58.5%, for the three months ended September 30, 1995, compared
with the same period in 1994. Cost of equipment sales of $9.9 million
decreased $11.9 million, or 54.7%, for the comparable periods. Equipment
sales revenue less associated cost of equipment sold ("equipment sales
margin") was $.5 million, or 4.6% of equipment sales revenue for the third
quarter of 1995. Equipment sales margin for the third quarter of 1994 was
$3.1 million, or 12.6%, of equipment sales revenue. The decreased margin
quarter over quarter resulted from a third quarter 1994 transaction which
carried an unusually high margin. In 1995, the opportunities for
equipment sales have continued to decrease due to increased competitive
pressures in the computer mainframe market as additional technological
alternatives have become available.
Other revenue of $46.5 million was relatively flat for the quarter
ended September 30, 1995 when compared to $46.4 million for the same
period in 1994.
Growth in the Company's portfolio assets, including the previously
mentioned acquisitions, caused the average borrowings outstanding to
increase by 31.5%, or $1.5 billion, to $6.4 billion. The Company's
interest expense increased $37.1 million, or 53.9%, to $106.1 million for
the quarter ended September 30, 1995, compared with the same period in
1994. The increase in average borrowings caused interest expense to
increase by approximately $21.7 million, of which approximately $7.0
million is related to additional borrowings brought about by an increase
in average debt to equity. Debt to equity increased to 6.07 times at
September 30, 1995 compared with 5.27 times at September 30, 1994 as the
Company continues to deploy the initial public offering proceeds and reach
its target debt to equity ratio of 6.25 times. Higher average interest
rates for the three months ended September 30, 1995, compared with the
same period in 1994, caused interest expense to increase by $15.4 million.
The Company's average interest rate on borrowings was 6.66% for the three
months ended September 30, 1995, compared with 5.69% for the quarter ended
September 30, 1994. The Company's increased cost of borrowing is
reflective of the Federal Reserve Board's interest rate increases during
1994 and early 1995. The impact of these rate increases has become more
evident as the Company replaces maturing debt with today's relatively
17 FORM 10-Q
higher rate debt. As interest rates change, product pricing is generally
adjusted to reflect the Company's higher or lower cost of borrowing. See
previous discussion on net interest margin.
Operating and administrative costs of $116.5 million for the three
months ended September 30, 1995, increased $7.6 million, or 7.0%, compared
with the same period in 1994. International expansion, including
the acquisition of CFH Leasing International and the Company's start-up
businesses in Australia and Mexico, and the domestic mid-range computer
acquisition, contributed $5.6 million or 73.9% of the total increase.
The Company's effective tax rate was 40.3% and 42.3% for the third
quarter of 1995 and 1994, respectively. The decrease is due primarily to
additional state tax provisions in 1994 and lower levels of non-tax
deductible goodwill in 1995.
Nine months ended September 30, 1995
Net income for the nine months ended September 30, 1995, was $85.5
million, an increase of $25.7 million, or 43.0% compared with the first
nine months of 1994. Earnings per share for the first nine months of 1995
were $1.82, a 43.3% increase over the $1.27 reported for the same period
in 1994. The growth in net income and earnings per share for the nine
months ended September 30, 1995, compared with the same period of 1994 was
due primarily to increased portfolio revenue supported by growth in
average portfolio assets, strong secondary market activity and a lower
provision for credit losses. Higher interest expense and operating and
administrative costs partially offset the positive variances.
Finance revenue of $127.8 million increased $41.0 million, or 47.2%,
in the first nine months of 1995 compared with the same period of 1994,
reflecting a 33.1% increase in the average net finance receivable
portfolio as well as higher average yields for the first nine months of
1995 compared with the same period in 1994.
Capital lease revenue of $428.1 million increased $83.6 million, or
24.2%, in the nine months ended September 30, 1995, compared with the same
period in 1994. This is reflective of a 24.3% increase in the average net
capital lease portfolio during the first nine months of 1995 compared with
the same period of 1994.
Year-to-date September 30, 1995 rental revenue on operating leases of
$411.2 million increased $58.3 million, or 16.5%, compared with the same
period of 1994. Depreciation expense on operating leases of $259.5
million increased $23.2 million, or 9.8%, for the comparable periods.
Operating lease margin for the first nine months of 1995 was $151.7
million, or 36.9% of rental revenue, compared with $116.6 million, or
33.0% for the comparable period of 1994. The increased operating lease
margin in 1995 relates primarily to a higher level of renewed leases in
the Company's small-ticket telecommunications equipment portfolio, higher
margins in the short-term leases in the automobile portfolio and testing
and diagnostic equipment portfolio as well as reduced levels of lower
yielding mainframe business.
18 FORM 10-Q
Net interest margin of $406.7 million was 6.65% of average net
portfolio assets for the first nine months of 1995. This compares with
net interest margin of $353.3 million, or 7.22% of average net portfolio
assets for the first nine months of 1994. The decrease in net interest
margin for the first nine months of 1995 was due primarily to an increase
in the Company's borrowing costs, nine months ended September 30, 1995
versus the comparable period in 1994, and an increase in the Company's
average debt to equity ratio as well as a change in portfolio mix. As
interest rates change, product pricing is generally adjusted to reflect
the Company's higher or lower cost of borrowing. However, the pricing in
connection with some small-ticket portfolios tends to lag and may not be
commensurate with the change in the Company's borrowing costs. As a
result, the Company has experienced some margin compression in certain
small-ticket equipment leasing portfolios due to the frequency and
steepness of the Federal Reserve Board's rate increases in 1994 and early
1995. The Company's net interest margin has increased slightly when
compared with six months ended June 30, 1995 margin of 6.59%.
The following table shows (in millions of dollars) the non-AT&T
assets, revenue and net income (loss) and the respective percentages to
total assets, revenue and net income.
Nine Months Ended
September 30,
1995 1994
$ % $ %
Assets 5,877.2 65.1 4,401.1 59.8
Revenue 659.2 57.8 564.7 56.1
Net Income 13.4 15.7 (8.4) (14.1)
The non-AT&T net income in 1995 and net loss in 1994 was unfavorably
impacted by start-ups and acquisitions in non-AT&T businesses,
particularly due to the Company's international expansion. In spite of
this, the profitability of non-AT&T businesses has improved significantly.
Revenue from equipment sales of $27.4 million decreased $69.6
million, or 71.8%, for the nine months ended September 30, 1995, compared
with the same period in 1994, while cost of equipment sales of $25.2
million decreased $63.9 million, or 71.7%, for the comparable prior year
period. Equipment sales margin was $2.2 million, or 7.9% of equipment
sales revenue for the first nine months of 1995. Equipment sales margin
for the first nine months of 1994 was $7.9 million, or 8.1%, of equipment
sales revenue. As previously discussed, the opportunities for this type
of activity have continued to decrease due to increased competitive
pressures in the computer mainframe market as additional technological
alternatives have become available.
Other revenue of $146.2 million grew $20.9 million, or 16.7%, in the
nine months ended September 30, 1995, compared with the nine months ended
September 30, 1994. The increase is primarily due to increased revenue of
$7.9 million largely related to higher levels of SBA loans sold in the
secondary market, higher remarketing gains on the sale of leased and off-lease
equipment of $7.2 million, and increased fee income of $2.0 million.
19 FORM 10-Q
The Company's mainframe portfolio and related residual amounts
continue to trend downward in 1995. 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.
Growth in the Company's portfolio assets, including the previously
mentioned acquisitions caused the average borrowings outstanding to
increase by 30.4%, or $1.4 billion, to $6.1 billion. The Company's
interest expense increased $106.2 million, or 54.5%, to $300.9 million for
the nine months ended September 30, 1995, compared with the same period in
1994. The increase in average borrowings caused interest expense to
increase by approximately $59.2 million, of which approximately $5.5
million is related to additional borrowings brought about by an increase
in the Company's average debt to equity. Higher average interest rates
for the nine months ended September 30, 1995, compared with the same
period in 1994, caused interest expense to increase by $47.0 million. The
Company's average interest rate on borrowings was 6.59% for the nine
months ended September 30, 1995, compared with 5.56% for the nine months
ended September 30, 1994. The Company's increased year over year cost of
borrowing is reflective of the Federal Reserve Board's interest rate
increases during 1994 and early 1995. The impact of these rate increases
is more evident as the Company replaces maturing debt with today's
relatively higher rate debt. As interest rates change, product pricing is
generally adjusted to reflect the Company's higher or lower cost of
borrowing. See previous discussion on net interest margin.
Operating and administrative costs of $351.4 million for the nine
months ended September 30, 1995, increased $40.0 million, or 12.9%,
compared with the same period in 1994. International expansion, including
the acquisition of CFH Leasing International and the Company's start-up
businesses in Australia and Mexico and the domestic mid-range computer
acquisition, contributed $14.3 million to the increase. Also contributing
to the increase were higher costs associated with managing a higher level
of portfolio assets. For the first nine months of 1995, annualized
operating and administrative costs to total assets as of September 30,
1995 was 5.19% compared with 5.65% for the first nine months of 1994. For
the year ended December 31, 1994, operating and administrative costs to
total year-end assets was 5.33%.
The Company's effective tax rate was 40.3% and 42.4% for the first
nine months of 1995 and 1994, respectively. The decrease is primarily due
to lower levels of non-tax deductible goodwill in 1995.
CREDIT QUALITY
The active management of credit losses is an important element of
the Company's business. The Company seeks to minimize its credit risk
through diversification of its portfolio assets by customer, industry
segment, geographic location and maturity. The Company's financing
activities have been spread across a wide range of equipment segments
(e.g., telecommunications, general equipment, data center and other data
processing, transportation and real estate) and a large number of
customers located throughout the United States and, to a lesser extent,
abroad.
20 FORM 10-Q
Portfolio credit performance indicators have continued to be
favorable in 1995. Delinquency and charge-off levels during 1995 were
lower than that of 1994. The lower levels of charge-offs and delinquency
were reflected in the decrease in the Company's provision for credit
losses of $10.9 million, or 15.3% compared with the first nine months of
1994, and $1.3 million, or 5.9% compared with the third quarter of 1994.
At At
September 30, December 31,
1995 1994 1994
Allowance for credit losses $214,711 $194,454 $176,428
Nonaccrual assets $101,895 $129,546 $120,494
Net charge-offs*/Portfolio
assets .57% .79% .73%
Allowance credit losses/
Portfolio assets 2.41% 2.69% 2.30%
Nonaccrual assets/Portfolio
assets 1.15% 1.79% 1.57%
Delinquency (two months or
greater) 1.31% 1.75% 1.49%
(*) Net charge-offs are based upon the twelve months ended September 30,
1995 and 1994.
The Company maintains its allowance for credit losses based on a
review of historical loss experience, a detailed analysis of
delinquencies and problem portfolio assets, and an assessment of probable
losses in the portfolio as a whole given its diversification. Management
also takes into consideration the potential impact of existing and
anticipated economic conditions.
FINANCIAL CONDITION
Net portfolio assets were $8.7 billion, an increase of $1.2 billion,
or 15.9%, at September 30, 1995 compared with December 31, 1994. As a
result of the previously mentioned acquisitions, the Company's
international assets (excluding cross border transactions) at September
30, 1995 grew to 17.7% of total assets, up from 10.9% at December 31, 1994
and unchanged from the June 30, 1995 level.
The net investment in finance receivables increased by $228.4
million, or 15.7% to $1.7 billion at September 30, 1995 compared with
December 31, 1994 primarily due to the acquisition of CFH Leasing
International, increased loans related to transportation equipment and
growth in the SBA lending portfolio.
The net investment in capital leases of $6.0 billion increased by
$833.2 million, or 16.2%, at September 30, 1995 compared with December 31,
1994. This increase was primarily due to the acquisition of CFH Leasing
International and growth in the Company's small-ticket equipment
portfolio.
The net investment in operating leases of $1.0 billion at September
30, 1995 increased by $131.8 million, or 14.6%, compared with December 31,
1994. The increase is primarily due to growth in the automobile
21 FORM 10-Q
lease portfolio, small-ticket equipment portfolio, transportation
equipment business, and international businesses including the acquisition
of CFH Leasing International.
At September 30, 1995, the total portfolio assets managed by the
Company on behalf of others was $2.3 billion compared with $2.7 billion at
December 31, 1994. The decrease in portfolio assets managed is primarily
attributable to lower securitized assets managed due to normal run-off of
the receivable stream. Of the total assets managed by the Company on
behalf of others, 64.5% at September 30, 1995 and 55.9% at December 31,
1994, were assets managed on behalf of AT&T and its affiliates.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates a substantial portion of its funds to support
the Company's operations from lease and rental receipts, but is also
highly dependent upon external financing, including the issuance of
commercial paper and medium-and long-term notes in public markets and, to
a lesser extent, privately placed asset-backed financings (or
securitizations). Standard & Poor's, Moody's Investors Service, and Duff
& Phelps Credit Rating Co. have rated the Company's senior medium- and
long-term debt A, A3 and A, respectively, and have rated the Company's
commercial paper A-1, P-1 and D-1, respectively. In connection with the
previously mentioned September 20, 1995 announcement by AT&T, the
Company's senior medium- and long-term debt and commercial paper ratings
were placed on Credit Watch by Standard & Poor's and under Review by
Moody's Investors Service. Duff & Phelps Credit Rating Co. affirmed the
Company's senior medium- and long-term debt and commercial paper ratings.
In the first nine months of 1995, the Company issued commercial
paper of $18.8 billion and made commercial paper repayments of $19.0
billion, and issued medium- and long-term debt of $1.6 billion and repaid
medium- and long-term debt of $906.5 million. In the first nine months of
1994, the Company issued commercial paper of $21.8 billion, and made
commercial paper repayments of $21.2 billion and issued medium- and long-term
debt of $1.2 billion and made medium- and long-term debt repayments
of $1.0 billion.
During the nine month periods ended September 30, 1995 and 1994,
principal collections from customers of $2.9 billion and $2.6 billion,
respectively, were received. These receipts were primarily used for
financings and lease equipment purchases, and purchases of businesses and
finance asset portfolios totaling $4.1 billion and $3.9 billion in the
first nine months of 1995 and 1994, respectively.
In conjunction with business acquisitions, the Company assumed
approximately $436 million and $107 million of debt, in the first nine
months of 1995 and 1994, respectively. Approximately $397 million of such
assumed debt was outstanding at September 30, 1995.
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 August 31, 1995 the Company paid a dividend
of ten cents per share to shareowners of record as of August 10, 1995. In
addition, on October 20, 1995, the Company's board of directors declared a
22 FORM 10-Q
third quarter dividend of $.11 per share, up 10% from the $.10 per share
paid in the prior quarter. The dividend will be payable on November 30,
1995 to shareowners of record as of the close of business on November 10,
1995. This is the Company's second dividend increase since its initial
public offering in 1993.
In September 1995, the Company registered with the Securities and
Exchange Commission ("SEC") an additional $3.0 billion of debt securities
(including medium-term notes) and warrants to purchase debt securities,
currency warrants, index warrants and interest rate warrants. Borrowing
under this shelf registration commenced in October 1995. At September 30,
1995 $4.0 billion of medium-term debt was outstanding under all other SEC
debt registrations.
On June 30, 1995, the Company reestablished credit facilities of $2.0
billion. These facilities, negotiated with a consortium of 35 lending
institutions, support the commercial paper issued by the Company. At
September 30, 1995 these facilities were unused. The Company also has
available local lines of credit to meet local funding requirements in Hong
Kong, Canada, Europe, Australia, and Mexico of approximately $946 million,
of which approximately $528 million was unused at September 30, 1995.
The Company has, from time to time, on an interest-free basis,
borrowed funds directly from AT&T pursuant to tax agreements. These
interest-free loans amounted to $248.9 million at September 30, 1995. As
discussed in more detail in the Recent Events section below, these sources
of funds would not be available and outstanding loans would need to be
repaid if the Company were to cease being a member of AT&T's consolidated
group for federal income tax purposes.
Future financing is contemplated to be arranged 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 and prevailing
market and general economic conditions.
The Company anticipates obtaining necessary external financing
through issuances of commercial paper and medium-term notes, available
lines of credit for certain foreign operations and privately placed
asset-backed financings (or securitizations).
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 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
cash 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 describes certain key elements of this process, including AT&T
23 FORM 10-Q
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 generally
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 has and expects to enter into more foreign exchange
contracts and currency swaps through the end of 1995, primarily as a
result of the previously discussed January 1995 acquisition of CFH
Leasing International.
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 continuing interplay between liquidity,
capital, portfolio characteristics, and economic and market conditions
24 FORM 10-Q
which determines the changing mix of medium-term notes, commercial paper
and swaps (or other derivatives) used to manage interest rate risk.
At September 30, 1995 and December 31, 1994 the total notional
amount of the Company's interest rate and currency swaps was $2.7 billion
and $2.9 billion, respectively. The U.S. dollar equivalent of the
Company's foreign currency forward exchange contracts was $598.8 million
at September 30, 1995, compared with $318.1 million at December 31, 1994.
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 obligations 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 with an
investment grade rating by nationally recognized statistical rating
organizations, 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
September 30, 1995 related to derivative transactions. The Company has
never experienced a credit related charge-off associated with derivative
transactions.
RECENT PRONOUNCEMENTS
The Company adopted Statements of Financial Accounting Standards
("SFAS") No. 114 ("Accounting by Creditors for Impairment of a Loan") and
No. 118 ("Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures") in the first quarter of 1995. These
standards require that impaired loans be measured based on the present
value of expected cash flows, discounted at the loan's effective interest
rate or, the loans observable market price or, the fair value of the
collateral if the loan is collateral dependent, as well as certain related
disclosures. The adoption of these statements did not have a material
effect on the consolidated financial statements of the Company.
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of". This statement establishes the
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This standard is effective for financial statements for
fiscal years beginning after December 15, 1995, which for the Company
would be 1996. Based upon management's review, the adoption of SFAS No.
121 is not expected to have a material impact on the Company's financial
position and results of operations.
25 FORM 10-Q
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This standard is effective for fiscal years
beginning after December 15, 1995 and will allow companies to chose either
1) a fair value method of valuing stock-based compensation plans which
will affect reported net income, or 2) to continue to follow the existing
accounting rules for stock option accounting but disclose what the impacts
would have been had the new standard been adopted. The Company will most
likely choose the disclosure option of this standard which would require
disclosing the pro forma net income and earnings per share amounts
assuming the fair value method was adopted on January 1, 1995. As a
result, management does not expect the adoption of this standard to have
any impact on the Company's consolidated financial statements.
RECENT EVENTS
On September 20, 1995, AT&T announced plans to separate itself into
three publicly-held, stand-alone global businesses that will be focused on
the following businesses: i) communication services, ii) communications
systems and technology, and iii) computers (the "AT&T Plan"). The AT&T
Plan also includes the disposition of its remaining 86 percent interest in
the Company to the general public or another company. AT&T expects the
AT&T Plan, including the sale of its interest in the Company, to be
completed by the end of 1996.
On October 3, 1995, the Company's Board of Directors (the "Board")
held a special meeting to consider AT&T's announced plans to sell its
remaining interest in the Company to the general public or another
company. At that meeting, the Company's Board authorized management to
examine possible public and private sale alternatives. The Board also
created a Special Committee of the Company's four outside directors to act
upon such matters as may arise in the course of considering alternative
ways to maximize shareowner value and in which there may be a conflict
between the interests of AT&T and those of the Company or its minority
shareowners and to make recommendations thereon to the Company's Board or
shareowners. Additionally, the Board engaged the investment banking firm
of Goldman, Sachs & Co. and the law firm of Sullivan & Cromwell to act as
advisors to the Company.
The Operating Agreement between AT&T and the Company (pursuant to
which the Company serves as AT&T's preferred provider of financing
services and has certain related and other rights and privileges in
connection with the financing of AT&T equipment to AT&T's customers) will
remain in place with respect to AT&T. In addition, consistent with the
terms of the Operating Agreement, if AT&T were to spin-off or sell in a
public offering any of its significant equipment businesses (as
contemplated in AT&T's aforementioned announcement), comparable operating
agreements would be put in place with the spun-off or new companies.
AT&T is currently assessing the impact that the AT&T Plan will have on its
operations. According to AT&T, the AT&T Plan is expected to reduce
strategic conflicts. While the Company is not able to evaluate
PAGE>26 FORM 10-Q
if the AT&T Plan will affect AT&T's equipment sales, any resulting change
in the level of equipment sales by AT&T's communications systems and
technology business could have a corresponding impact on the Company's
future financing volumes associated with such sales.
The planned change in the Company's ownership could, as described
below, have certain significant effects on the Company.
Tax Deconsolidation
The Company is currently a member of AT&T's consolidated federal
income tax group. If AT&T's ownership in the Company's common stock drops
below 80%, the Company would cease to be a member of AT&T's consolidated
federal income tax group ("Tax Deconsolidation"). In light of the
announcement made by AT&T, it is likely that AT&T's ownership in the
Company will decrease below 80% by the end of 1996.
Many financings by the Company of products manufactured by AT&T or
its affiliates (the "AT&T Entities") involve the purchase of such
products by the Company and the contemporaneous lease of such products to
third parties. While the Company is a member of AT&T's consolidated
federal income tax group, the payment of taxes associated with certain
transactions which qualify as true leases for tax purposes is generally
deferred until the products are depreciated or sold outside the
consolidated federal income tax group (the amount of such taxes so
deferred is herein referred to as "Gross Profit Tax Deferral"). If AT&T
and the Company are subject to a Tax Deconsolidation, purchases thereafter
of such products by the Company from the AT&T Entities would generate
current taxable income for the AT&T Entities resulting in a liability of
the AT&T Entities to pay federal income taxes on such taxable income.
AT&T and the Company are parties to a Gross Profit Tax Deferral
Interest Free Loan Agreement which provides that AT&T will from time
to time extend interest free loans to the Company equal to the amount of
the Gross Profit Tax Deferral. The Company is obligated to repay interest
free loans at such time as AT&T is required to make an income tax payment
on the deferred income. Upon Tax Deconsolidation, the Company would no
longer receive such loans, which have constituted a competitive advantage
to the Company in financing AT&T products. In addition, the Company would
be required to repay all such outstanding loans upon Tax Deconsolidation.
The aggregate outstanding principal amount of such interest free loans was
$248.9 million at September 30, 1995. The Company has sufficient cash and
credit resources to repay such loans in the event of a Tax
Deconsolidation. If a Tax Deconsolidation had occurred on September 30,
1995, and the Company had replaced such interest free loans with interest
bearing debt, the Company's net income would thereafter be reduced
annually by approximately $8.5 million. This estimate assumes that the
Company (i) refinanced the interest free loans at current market interest
rates (which are subject to continual change) and (ii) no part of such
increased borrowing cost was passed on to customers.
27 FORM 10-Q
License Agreement
Pursuant to a License Agreement (the "License") with the Company,
AT&T has licensed to the Company and certain of its subsidiaries certain
trade names and service marks, including but not limited to the AT&T
Capital Corporation, AT&T Credit Corporation, AT&T Systems Leasing and
AT&T Automotive Services names. The License provides that if AT&T ceases
to own more than 50% of the voting stock of the Company (as contemplated
by AT&T's September 20, 1995 announcement), AT&T may require (upon one
year's notice and generally at AT&T's expense) the Company (i.e., AT&T
Capital Corporation) to discontinue the use of the "AT&T" name as part of
its corporate name. The Company's subsidiaries may, notwithstanding such
event, continue to use the other AT&T licensed names and service marks
pursuant to the License (e.g., as part of such subsidiaries' corporate
names and for marketing purposes), subject to extensive restrictions on
the use thereof in connection with the issuance of securities and
incurrence of indebtedness.
Intercompany Agreement
AT&T has agreed in the Intercompany Agreement to own, directly or
indirectly, at least 20% of the aggregate number of shares of the
Company's common stock until August 4, 1998. In its September 20, 1995
press release, AT&T indicated its intent to sell the remainder of its
interest in the Company by the end of 1996, subject to obtaining a
modification to the existing Intercompany Agreement. AT&T has previously
advised the Company that it has no plans to modify the Intercompany
Agreement without the approval of a majority of the Company's independent
directors.
Borrowing Performance
The Company believes that because of its relationship with AT&T it
has generally enjoyed borrowing cost savings of approximately 10 basis
points. If the Company ceases to be a subsidiary of AT&T, there is no
assurance that this cost savings would continue. Any actual impact on
borrowing costs would be affected by many factors including the identity
of the purchaser or purchasers of AT&T's interest and whether AT&T's
interest is sold in the public market or to one or more other companies.
Compensation and Benefit Plans
Under the Company's Share Performance Incentive Plan, as amended
("SPIP"), approximately 120 employees are eligible to receive cash awards
at the end of five, 3-year performance periods. The first such period
terminates on June 30, 1996, with each of the other performance periods
ending on the annual anniversary of such date through and including June
30, 2000. If AT&T reduces its voting interest in the Company, certain
provisions of the SPIP trigger the possible acceleration of certain of
these cash awards for any pending periods.
28 FORM 10-Q
Upon the consummation of a transaction that has or will have the
effect of the common stock of the Company no longer being publicly traded
("Private Sale"), Maximum Payouts (as defined in the SPIP) will be paid to
the participants. If it is assumed that a Private Sale occurs by year-end
1996, the Company estimates that it would incur a one-time charge to net
income between $7 and $15 million.
Alternatively, if a Private Sale does not occur, but AT&T otherwise
reduces its voting interest in the Company below 50%, a "Disaffiliation
Event" (which is defined generally as a decrease in AT&T's voting interest
in the Company below 50% coupled with the withdrawal by AT&T of the
Company's rights under the License to use the "AT&T" name for certain
corporate purposes) could occur. If a Disaffiliation Event were to occur,
the awards under the SPIP (which are generally based on the performance of
the Company's stock price and dividend yield relative to the interest rate
on 3-year treasury notes and the total return on the stock of a specified
peer group of financial services companies) for the performance periods in
process would be accelerated and payable immediately to participants.
While the Company does not know with certainty if and when a
Disaffiliation Event will occur and what the relative performance of the
Company's stock as measured against the peer group would be as of the date
of such Disaffiliation Event , if it is assumed that a Disaffiliation
Event occurs by year-end 1996 and that only the then pending performance
periods are accelerated as provided in the SPIP, the Company estimates
that it would incur a possible one-time charge to net income between $0
and $15 million.
29 FORM 10-Q
AT&T Capital Corporation and Subsidiaries
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
11 Computation of Primary and Fully Diluted Earnings Per
Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K dated October 11, 1995 was filed pursuant
to Item 5 (Other Events).
30 FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AT&T CAPITAL CORPORATION
November 8, 1995
Ramon Oliu, Jr.
Controller
Chief Accounting Officer
31 FORM 10-Q
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
______
11 Computation of Primary and Fully Diluted Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule