UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1995
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
non-affiliates as of February 29, 1996 was approximately $261,750,143. For
purposes of the foregoing calculation only, all directors and officers of the
registrant have been deemed affiliates. As of February 29, 1996, there were
46,975,583 shares of the registrant's common stock $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement dated March 19, 1996 issued
in connection with the 1995 annual meeting of shareholders (Part III).
TABLE OF CONTENTS
PART I
Item Description Page
1. Business 1
2. Properties 18
3. Legal Proceedings 18
4. Submission of Matters to a Vote of Security-Holders 18
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
8. Financial Statements and Supplementary Data 41
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 85
PART III
10. Directors and Executive Officers of the Registrant 85
11. Executive Compensation 86
12. Security Ownership of Certain Beneficial Owners and
Management 86
13. Certain Relationships and Related Transactions 87
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 87
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) ("Old Capital"), a wholly owned subsidiary of AT&T Corp. ("AT&T"),
and its subsidiaries, including AT&T Credit Holdings, Inc. (formerly known as
AT&T Credit Corporation) ("Old Credit"), a wholly owned subsidiary of Old
Capital that commenced operations in 1985. In a restructuring that occurred on
March 31, 1993 (the "Restructuring"), Old Capital and Old Credit transferred
substantially all of 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 direct, full and
unconditional guarantees of all existing indebtedness outstanding as of March
31, 1993 for borrowed money incurred, assumed or guaranteed by Old Capital
entitled to the benefit of a Support Agreement between AT&T and Old Capital (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 (see Note 7 to the Consolidated
Financial Statements).
An initial public stock offering combined with a management stock offering
totaling approximately 14% of the Company's stock ("IPO") occurred on August 4,
1993 (see Note 8 to the Consolidated Financial Statements). As a result of the
IPO, approximately 86% of the outstanding common stock of the Company is owned
indirectly by AT&T (through Old Capital and Old Credit.)
In connection with the IPO, 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 IPO for a period of five years.
Provisions for management by the Company of certain portfolios owned by AT&T
(for a fee), 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.
1
The License Agreement defines the Company's rights to use certain AT&T service
marks and trade names, and to use "AT&T" and "NCR" 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 anniversary of the date of the IPO.
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. For a discussion of AT&T's restructuring plans and their
potential impacts on these agreements, see Note 16 to the Consolidated Financial
Statements.
On September 20, 1995, AT&T announced a plan to pursue the public or
private sale of its remaining 86% interest in AT&T Capital. As noted in AT&T's
1995 Annual Report on Form 10-K, AT&T has stated that it cannot predict the
timing or terms of any such transaction. On such date, AT&T also announced a
plan to separate (the "Separation") into three publicly-held stand-alone global
businesses that will each be focused on serving certain core businesses:
communication services, communications systems and technology, and
transaction-intensive computing. The Separation is targeted by AT&T to be
completed by the end of 1996, but remains subject to a number of conditions. For
a more detailed discussion of AT&T's restructuring plans and their potential
impacts on the Company, see Note 16 to the Consolidated Financial Statements.
2
DESCRIPTION OF THE BUSINESS
AT&T Capital is a full-service, diversified equipment leasing and finance
company that operates in the United States, Europe, Canada, the Asia/Pacific
Region, Mexico and South America. The Company is one of the largest equipment
leasing and finance companies in the United States based on the aggregate value
of equipment leased or financed.
The Company, through its various subsidiaries, leases and finances
equipment manufactured and distributed by numerous vendors, including AT&T and
its affiliates, principally Lucent Technologies Inc. ("Lucent") and NCR
Corporation ("NCR"). In addition, the Company provides equipment leasing and
financing and related services directly to end-user customers. The Company's
customers include large global companies, small and mid-size businesses and
federal, state and local governments and their agencies.
AT&T Capital leases and finances a wide variety of equipment including
telecommunications equipment (such as private branch exchanges, telephone
systems and voice processing units), information technology (such as personal
computers, retail point-of-sale systems, and automatic teller machines), general
office, manufacturing and medical equipment ("General Equipment"), and
transportation equipment (primarily vehicles), and also finances real estate
(including real estate related loans in the Company's Small Business
Administration ("SBA") lending and franchise finance businesses). The Company is
the largest lessor of telecommunications equipment in the United States.
At December 31, 1995, the Company's net portfolio assets (net investment in
finance receivables, capital leases and operating leases), which aggregated $9.1
billion, were diversified across various types of financed equipment:
telecommunications equipment 23%; information technology 23%; General Equipment
28%; and transportation equipment 19%; as well as real estate 7%.
The Company leases and finances such equipment through a variety of
financing and related products and services, including capital leases, operating
leases, inventory financing and other secured working capital loans for
equipment dealers and distributors, SBA lending, asset based loans and equipment
management and remarketing services. In addition, the Company offers its
customers certain equipment rental and administration services.
AT&T Capital's portfolio assets are diversified among a large customer
base, as well as numerous industries and geographic regions. The Company has one
of the largest customer bases in the commercial equipment leasing and finance
market with approximately 500,000 customers. At December 31, 1995, the Company's
99 largest customers (after AT&T and its affiliates) accounted for approximately
21% of the Company's net portfolio assets, and no single customer (with the
exception of AT&T and its affiliates) accounted for more than 1% of such net
portfolio assets.
3
Although the Company operates principally in the United States, the Company
began operations in the United Kingdom in 1991 and in Canada in 1992.
In 1994, the Company acquired 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. This unit 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. Later in 1994,
the Company opened offices in Mexico and Australia.
In January 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, and the Netherlands. This European network of leasing operations
provides financial services to equipment manufacturers and vendors. It served
approximately 4,600 customers and had approximately $540 million in assets at
the time of acquisition. In June 1995, the Company also acquired an Australian
equipment finance company with approximately $40 million in assets. In the third
quarter of 1995, the Company entered into a joint venture with Banco Frances, a
leading Argentine commercial bank, to operate an equipment leasing operation in
Argentina.
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 acquisitions or joint ventures.
A significant part of the Company's total United States assets, revenues
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 leased information technology equipment and vehicles.
4
The following table shows the respective percentages of the assets,
revenues and net income (loss) related to United States and foreign operations
attributable to (i) leasing and financing services provided by the Company to
customers of AT&T, (ii) transactions involving AT&T as end-user and (iii) the
Company's non-AT&T business, in each case at or for the years ended December 31,
1995, 1994 and 1993. The net income (loss) shown below were calculated based
upon what the Company believes to be a reasonable allocation of interest, income
taxes and certain corporate overhead expenses.
- --------------------------------------------------------------------------------
At or for the year ended
December 31, 1995
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 29.4 0.1 29.5 32.3 0.4 32.7 67.2 0.7 67.9
AT&T as
End-User 5.3 - 5.3 8.3 - 8.3 8.2 - 8.2
Non-AT&T
Business 47.8 17.4 65.2 46.3 12.7 59.0 27.0 (3.1) 23.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Total 82.5 17.5 100.0 86.9 13.1 100.0 102.4 (2.4) 100.0
- ---------------------------------------------------------------------------
At or for the year ended
December 31, 1994
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 34.3 0.3 34.6 33.1 0.3 33.4 83.9 (1.4) 82.5
AT&T as
End-User 6.8 - 6.8 9.5 - 9.5 8.5 - 8.5
Non-AT&T
Business 48.0 10.6 58.6 47.8 9.3 57.1 11.8 (2.8) 9.0
----- ----- ----- ----- ----- ----- ----- ----- ----
Total 89.1 10.9 100.0 90.4 9.6 100.0 104.2 (4.2) 100.0
- --------------------------------------------------------------------------
5
At or for the year ended
December 31, 1993
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total*
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 38.1 0.3 38.4 31.1 0.2 31.3 99.8 (1.7) 98.1
AT&T as
End-User 9.5 - 9.5 14.9 - 14.9 20.8 - 20.8
Non-AT&T
Business 46.1 6.0 52.1 47.8 6.0 53.8 (6.9) (12.0) (18.9)
----- ----- ----- ----- ----- ----- ------ ----- ------
Total 93.7 6.3 100.0 93.8 6.2 100.0 113.7 (13.7) 100.0
- ---------------------------------------------------------------------------
*The customers of AT&T, AT&T as end-user and non-AT&T business net income
(loss) before cumulative effect of the 1993 accounting change and impact of
the tax rate change was 89.0%, 20.2% and (9.2%), respectively. For a
description of the 1993 accounting change and impact of the tax rate
change, see Note 10 to the Consolidated Financial Statements.
The Company intends to continue its strategy of expanding its non-AT&T
businesses, while at the same time enhancing its relationship with AT&T and its
affiliates. Because the growth in revenues generated by the Company's non-AT&T
businesses can be expected to lag behind the incurrence of expenses necessary to
expand and operate such businesses, the Company anticipates that the percentage
of its total net income and revenues attributable to non-AT&T businesses may
vary from year to year depending upon the stage of development of these non-AT&T
businesses.
The 1995 increases in the non-AT&T business assets and revenues (as a % of
total Company) were generated almost equally from U.S. and foreign operations.
The significant increase realized from U.S. non-AT&T related net income was
primarily generated from the Company's large-ticket specialty and structured
finance activities, SBA loan sales and growth in the automobile portfolio. Net
losses from foreign non-AT&T businesses somewhat offset the strong U.S. results.
The securitization of certain non-AT&T portfolio assets positively affected
net income of the non-AT&T businesses in all years presented; however, the
Company decreased the amount of securitizations each year from 1993 to 1995.
Partly as a result of the reduction in securitized assets, the portion of the
Company's non-AT&T net income attributable to securitization has decreased by
88.7% from 1993 to 1995 (see Note 6 to the Consolidated Financial Statements).
Marketing and Business Activities
The Company offers a wide range of financial products and services to its
customers through two principal marketing channels. The first, which the Company
refers to as "Global Vendor Finance", provides leasing and
6
financing services, together with related services, to customers of its
equipment vendor clients (i.e., manufacturers, dealers and distributors) with
which the Company has an ongoing marketing relationship. With the second
approach, "Direct Customer Finance", the Company provides leasing and financing
services, together with related services, directly to its small, mid-size and
large business customers.
GLOBAL VENDOR FINANCE
The Company's vendor finance marketing activities commenced in 1985 when
the Company's predecessor (Old Credit) was organized to provide financing and
related support to equipment customers of AT&T. Since then, the Company has
established on-going relationships with other select manufacturers and
distributors that seek to increase equipment sales, gain customer loyalty,
enhance their control over the marketing life cycle of their products through
the use of customized financing programs, and leave the management of credit
risk to AT&T Capital. The Company offers its vendor clients one of the most
extensive global financing networks in the equipment leasing and finance
industry.
AT&T and Affiliates
AT&T is the Company's original and largest vendor client. Historically, the
Company has financed (for AT&T's customers) a large volume of AT&T's
telecommunications and information technology equipment. Since AT&T's 1991
merger with NCR, the Company has financed an increasing percentage of NCR's
information technology and related equipment.
In the first quarter of 1996, AT&T's telecommunications manufacturing and
marketing businesses were transferred to Lucent, currently a wholly-owned
subsidiary of AT&T. AT&T intends to distribute to its shareholders by the end of
1996 all its interest in Lucent, which will be preceded by a public offering of
less than 20% of Lucent's shares. AT&T has also announced plans to separate NCR
from AT&T by the end of 1996.
During the year ended December 31, 1995, the Company generated $1.1 billion
of financing volume from AT&T and affiliate related vendor finance activities.
Of such financing volume, 86% was related to the AT&T businesses that will
comprise Lucent and 14% was related to the NCR business.
To facilitate the financing of sales of AT&T (including NCR and Lucent)
equipment, the Company has connected its data and telecommunications systems
with those of AT&T's sales and marketing offices and maintains personnel and
equipment at AT&T sales and marketing sites. The Company uses these linkages,
personnel and equipment in conjunction with its competitive strengths (e.g.,
credit scoring capabilities) and its personnel and equipment based at its own
sites to provide high volume processing capabilities that enable the Company to
serve large numbers of customers in an efficient and timely basis. In addition,
these linkages permit AT&T to invoice the Company electronically for certain
types of telecommunications and information technology equipment and permit the
Company to pay invoices electronically.
7
Other Vendor Clients
In serving AT&T's vendor finance needs over the past decade, the Company
has gained core competencies in vendor program development and administration,
credit analysis, equipment residual management, sales support, and high volume
small-ticket processing. The Company has leveraged these skills in developing
similar vendor finance programs for other large manufacturers and distributors.
Some of the many leading global vendors that are clients of the Company, include
Hyster Company, Tandem Computer, Abbott Laboratories, Gestetner Holdings, and
Canon Inc. The Company's non-AT&T global vendor activities are strategically
focused on four equipment markets: (i) computer technology; (ii) medical; (iii)
material handling and manufacturing; and (iv) document imaging and printing.
The Company has enhanced its relationships with vendor clients by
providing: a variety of customer financing products; sales aid services,
including the training of vendor personnel and point-of-sale support; private
label programs, in which the Company provides financing to the vendor's
customers under the vendor's name; customer operations support and interfaces;
alternate channel programs (distribution channels not involving the vendor's
direct sales force); inventory financing; and support for value-added retailers
or distributors (retailers or distributors that modify products and re-sell
them). AT&T Capital's management believes its ability to identify creditworthy
accounts represents a strategic competitive resource to vendors seeking to
increase sales without increasing their personnel costs. In addition, the
Company's high volume processing capabilities, relationship-based transaction
skills and residual assessment, equipment management and marketing expertise
provide vendors with competitive pricing and enhanced customer account control
after sales close.
During the year ended December 31, 1995, the Company generated $1.6 billion
of financing volume from its non-AT&T Global Vendor Finance activities.
DIRECT CUSTOMER FINANCE
The Company's Direct Customer Finance activities are a logical extension of
its Global Vendor Finance activities. The Company's Global Vendor Finance
activities have laid the foundation for what management believes is one of the
largest customer bases in the commercial equipment leasing and finance market
with approximately 500,000 customers. This customer base provides the Company
with the opportunity to offer these customers additional financing and equipment
management services.
Commercial Finance and Leasing
The Company leverages its large customer base, sophisticated transaction
structuring skills, and high volume transaction processing capabilities to
provide niche financial services directly to business customers (including AT&T
and its employees). AT&T Capital targets small and medium-size companies in the
United States with a wide range of
8
products including SBA loans, asset based loans, franchise financing, and other
financing products (such as pre-approved credit lines). In addition, the Company
serves large commercial customers by providing highly structured transactions
and project financing solutions.
For the year ended December 31, 1995, the Company generated $1.0 billion of
financing volumes from its commercial financing and leasing activities.
Specialized Equipment Financing and Services
The Company's specialized equipment knowledge and effective equipment
management competencies have been integral to its success in executing its
Global Vendor Finance and Direct Customer Finance strategies. Building on its
equipment knowledge and management skills, the Company has identified related
growth opportunities in managing and financing specialized equipment for
customers.
The Company's specialized equipment financing activities have been
concentrated in vehicle and computer leasing markets. The Company's equipment
management services have included procurement, tracking, deployment and
remarketing of equipment. AT&T Capital has principally focused its specialized
equipment management and remarketing services in the following markets: (i)
vehicle and high technology equipment leasing and financing; (ii) vehicle fleet
management; and (iii) high technology equipment rental and related services.
For the year ended December 31, 1995, the Company generated $.9 billion of
financing volumes from its specialized financing activities.
The following table shows approximate financing volumes and total assets
for each of the AT&T and other global vendor marketing channels and the
commercial finance and leasing and specialized equipment financing services
direct customer marketing channels as a percentage of total Company financing
volumes for the year ended December 31, 1995 and total Company assets as of
December 31, 1995.
- --------------------------------------------------------------------------------
Financing Total
Volume Assets
--------- ------
Global Vendor
AT&T & Affiliates 24% 29%
Other Vendor Clients 34% 27%
Direct Customer
Commercial
Finance & Leasing 22% 23%
Specialized Equipment
Financing Services 20% 21%
- --------------------------------------------------------------------------------
9
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 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
(see Notes 10 and 16 to the Consolidated Financial Statements).
As long as the Company is a part of the AT&T consolidated federal income
tax group, the payment of federal income taxes 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, the outstanding balance of which totaled $249.8 million as
of December 31, 1995, 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
periodic 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 1995, 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.
10
AT&T announced on September 20, 1995 plans to pursue a sale of its remaining
86% interest in the Company to the general public or another company. In light
of AT&T's announcement, it is possible that a Tax Deconsolidation will occur by
the end of 1996.
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 types (e.g., telecommunications, General Equipment,
information technology, transportation and real estate) and a large number of
customers located throughout the United States, and to a lesser extent, in
foreign countries.
The following table shows the components of the Company's allowance for
credit losses related to (i) lease financing (capital leases and rentals
receivable on operating leases) from United States operations, (ii) finance
receivables from United States operations and (iii) lease financing and finance
receivables from foreign operations; collectively "finance assets". In addition,
other key credit quality indicators, by loan type, are also provided. The
breakdown of the allowance for credit losses at each year-end reflects
management's estimate of credit losses and may not be indicative of actual
future charge-offs by loan classification.
(Dollars in Thousands)
1995 1994* 1993* 1992* 1991*
- ---------------------------------------------------------------------------
Balance at beginning
of year:
- - Lease Financing-U.S. $113,735 $ 95,196 $ 86,086 $ 74,019 $ 57,578
- - Finance Receivables-U.S. 46,637 56,974 36,139 19,861 17,791
- - Foreign 16,056 7,649 1,736 87 -
- ---------------------------------------------------------------------------
Total 176,428 159,819 123,961 93,967 75,369
- ---------------------------------------------------------------------------
Additions Charged
to Operations:
- - Lease Financing-U.S. 66,505 62,447 91,605 87,156 100,445
- - Finance Receivables-U.S. 15,167 13,488 28,604 23,090 8,190
- - Foreign 4,542 4,953 3,469 1,469 -
- ---------------------------------------------------------------------------
Total 86,214 80,888 123,678 111,715 108,635
- ---------------------------------------------------------------------------
Charge-offs:
- Lease Financing-U.S. 48,834 47,585 61,233 76,462 76,422
- Finance Receivables-U.S. 10,446 22,908 14,135 18,183 15,466
- Foreign 5,595 3,024 284 125 -
- ---------------------------------------------------------------------------
Subtotal 64,875 73,517 75,652 94,770 91,888
11
1995 1994* 1993* 1992* 1991*
- ---------------------------------------------------------------------------
Recoveries:
- Lease Financing-U.S. 13,944 14,666 15,505 14,913 8,261
- Finance Receivables-U.S. 1,403 1,561 1,118 1,365 1,672
- Foreign 2,758 1,745 - 125 -
- ---------------------------------------------------------------------------
Subtotal 18,105 17,972 16,623 16,403 9,933
- ---------------------------------------------------------------------------
Net Charge-offs:
- - Lease Financing-U.S. 34,890 32,919 45,728 61,549 68,161
- - Finance Receivables-U.S. 9,043 21,347 13,017 16,818 13,794
- - Foreign 2,837 1,279 284 - -
- ---------------------------------------------------------------------------
Total 46,770 55,545 59,029 78,367 81,955
- ---------------------------------------------------------------------------
Transfers and Other (a):
- - Lease Financing-U.S. (684) (10,989) (36,767) (13,540) (15,843)
- - Finance Receivables-U.S. (154) (2,478) 5,248 10,006 7,674
- - Foreign 8,186 4,733 2,728 180 87
- ---------------------------------------------------------------------------
Total 7,348 (8,734) (28,791) (3,354) (8,082)
- ---------------------------------------------------------------------------
Balance at end of year:
- - Lease Financing-U.S. 144,666 113,735 95,196 86,086 74,019
- - Finance Receivables-U.S. 52,607 46,637 56,974 36,139 19,861
- - Foreign 25,947 16,056 7,649 1,736 87
- ---------------------------------------------------------------------------
Total $223,220 $ 176,428 $159,819 $123,961 $ 93,967
===========================================================================
Percentage of loan types to total finance assets:
- - Lease Financing-U.S. 62.2% 67.9% 70.6% 73.3% 73.4%
- - Finance Receivables-U.S. 20.8% 21.5% 23.1% 24.9% 26.4%
- - Foreign 17.0% 10.6% 6.3% 1.8% 0.2%
===========================================================================
Ratio of Net Charge-offs
during the year to
average finance assets:
outstanding during the year:
- Lease Financing 0.73% 0.78% 1.27% 1.94% 2.35%
- Finance Receivables 0.58% 1.69% 1.13% 1.53% 1.34%
- Foreign 0.24% 0.22% 0.15% - -
===========================================================================
Nonaccrual assets $118,484 $120,494 $160,574 $151,562 $85,381
===========================================================================
* Amounts have been reclassified to conform to the 1995 presentation.
12
(a) Primarily includes transfers out of allowance for credit losses related to
receivables securitized, transfers in of reserves related to businesses
acquired and reclassifications.
The ratio of net charge-offs to average Finance Receivables increased in
1994 compared with 1993, while the allowance for credit losses decreased in 1994
compared with 1993 due to reserves established for specific assets (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.
The following table reflects the Company's portfolio credit performance
indicators. Portfolio Assets include the investment in finance receivables,
capital leases and operating leases.
Year Ending December 31 1995 1994 1993
- ---------------------------------------------------------------------------
Allowance for credit losses $223.2 $176.4 $159.8
Nonaccrual assets $118.5 $120.5 $160.6
Net charge-offs/Portfolio assets 0.50% 0.73% 0.95%
Allowance for credit losses/Portfolio assets 2.39% 2.30% 2.56%
Nonaccrual assets/Portfolio assets 1.27% 1.57% 2.58%
Delinquency (two months or greater) 1.46% 1.49% 2.41%
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 1995
on nonaccrual assets had these assets been earning at the original contractual
rate amounted to approximately $9.3 million. Revenue actually recognized in 1995
for assets in nonaccrual status at December 31, 1995 amounted to approximately
$6.0 million.
Pursuant to agreements with the Company, AT&T has agreed to repurchase or
guarantee certain finance assets that go into default. Finance assets subject to
such provisions were $238.8 million, $243.0 million, and $321.0 million at
December 31, 1995, 1994 and 1993, respectively. The Company believes that the
Company's total allowance for credit losses is adequate 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.
Lease terms that are modified in the normal course of business, for which
additional consideration is received or insignificant concessions are made, are
accounted for as changes in a provision for a lease in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases". The
amount of impaired loans at December 31, 1995 is not material (see Note 4 to the
Consolidated Financial Statements).
13
Residual Value Realization
The establishment and realization of residual values on leases are also
important elements of the Company's business. The Company's residual management
capabilities include its equipment remarketing skills, its in-house equipment
refurbishment facilities and its knowledge of developing technologies, products
and obsolescence trends. These competencies are used in setting residual values
upon the acquisition and leasing of the equipment based on the estimated value
of the equipment at the end of the lease term. These estimates are determined by
the Company from, among other things, studies prepared by the Company,
professional appraisals, historical experience and industry data, market
information on sales of used equipment, end-of-lease customer behavior and
estimated obsolescence trends.
The Company strategically manages its portfolio to ensure a broad
diversification of residual risk by equipment type and lease expiration. The
Company's risk management department, in conjunction with equipment experts in
the Company's business units, regularly reviews residual values, and if they
have declined, adjustments are made that result in an immediate charge to income
for capital leases and adjustments to depreciation expense for operating leases
over the shorter of the useful life of the asset or the remaining term of the
lease. (On an aggregate basis, the Company historically has realized proceeds
from the sale of equipment during the lease term and at lease termination in
excess of the Company's recorded residual values). There can be no assurance,
however, that such results will be realized in future years. The Company
recognizes, in total revenue, amounts in excess of recorded residuals over the
re-lease, or upon the sale or other disposition by the Company of leased
equipment.
14
The Company actively manages its residuals by working with lessees and
vendors 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 industries, particularly the information technology
industries, for obsolescence trends. The Company utilizes its equipment
management (including equipment remarketing), engineering and other technical
expertise to help manage its residual positions.
The following table shows projected residual expirations, as an approximate
percentage of aggregate recorded residuals as of December 31, 1995, by equipment
type for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 and the
years thereafter:
Equipment Type 1996 1997 1998 1999 2000+ Totals
---- ---- ---- ---- ----- ------
Telecommunications 5% 7% 7% 7% 8% 34%
Information Technology 8% 7% 6% 2% 1% 24%
Transportation 3% 4% 4% 2% 8% 21%
General equipment & other 3% 4% 4% 4% 6% 21%
Real Estate 0% 0% 0% 0% 0% 0%
--- --- --- --- --- ----
Total 19% 22% 21% 15% 23% 100%
15
Competition and Related Matters
The equipment leasing and finance industry is highly competitive.
Participants in the industry compete through price (including the ability to
control costs), risk management, innovation and customer service. Principal cost
factors include the cost of funds, the cost of selling to or obtaining new
end-user customers and vendors, and the cost of managing portfolios (including,
for example, billing, collection, credit risk management, and residual
management). Adequate risk management is required to achieve satisfactory
returns on investment and to provide appropriate pricing of financing products.
The Company believes that innovation is necessary to compete in the industry,
involving specialization in certain types of equipment, financial structuring
for larger transactions, utilization of alternative channels of distribution and
optimization of tax treatment between owner and user. In addition, end-users of
equipment generally desire transactions to be simple, flexible and
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 end-users' available cash
resources to purchase equipment that the Company may otherwise finance. Many of
the competitors of the Company are large companies that have substantial
capital, technological and marketing resources; some of these competitors are
significantly larger than the Company and have access to debt at a lower cost
than the Company.
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, 1995. The Company does not expect material increases in this
penetration rate, and there can be no assurance that the existing rate will be
maintained. The Company has a lower penetration rate (approximately 24% for the
year ended December 31, 1995) with respect to sales of NCR's products (data
processing and related products, including personal computers, retail
point-of-sale computers, and automatic teller machines) relative to its
penetration rates for telecommunications product
16
sales; however, such penetration rate increased from 1994. 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 relatively short
period of time. Because the markets for financing these products are highly
competitive and substantially different from the markets for financing
telecommunications equipment in the United States, there can be no assurance
that the penetration rates in these product areas will increase.
In addition to competition within the leasing and financing industry,
competition experienced in 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 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.
In addition, the Regional Bell Operating Companies (the "RBOCs"), which
have historically been prohibited from manufacturing telecommunications
equipment by the terms of the Modified Final Judgment entered into in connection
with the divestiture of the RBOCs by AT&T in 1984, will be permitted to
manufacture such equipment and compete with Lucent, subject to satisfying
certain conditions, pursuant to telecommunications legislation recently enacted
by Congress. It is possible that one or more of the RBOCs may decide to
manufacture telecommunications equipment or form alliances with other
manufacturers. Either of such developments could result in increased competition
for Lucent, reduce the RBOCs' purchases of equipment from Lucent, and
consequently, adversely impact the Company's financing volumes.
While the Company is not able to fully predict whether Lucent's and NCR's
planned separation from AT&T and the cessation of their use of the "AT&T" brand
name will affect their equipment sales, any resulting change in the level of
equipment sales by Lucent and NCR would likely have a corresponding impact on
the Company's future financing volumes associated with such sales.
Employees
AT&T Capital has approximately 2850 employees as of February 1, 1996, each
of whom is referred to within the Company as a "member". Titles are not used
internally. In general, members function using a team approach, with business
generally conducted on a collaborative rather than 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.
17
ITEM 2. PROPERTIES
The Company's properties consist primarily of administrative offices,
warehouses for the storage and refurbishment of equipment and a number of
geographically dispersed sales offices. The Company has its headquarters in
Morristown, New Jersey, with its principal domestic offices and warehouses
located in Morristown and Parsippany, New Jersey; Framingham, Massachusetts;
Bloomfield Hills, Michigan; Towson, Maryland; and Dallas, Texas. The Company's
principal international offices are in London, England; Toronto, Canada; Hong
Kong; Sydney, Australia; and Mexico City, Mexico. All these offices and
warehouses are leased (some being subleased from AT&T or one of its affiliates),
except for one building (of approximately 9,000 square feet) in Framingham,
Massachusetts, owned by a subsidiary of the Company. This building is designed
as office space and storage and is 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 were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
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.
18
Quarter Ended Quarterly Stock Prices Dividends
declared
per share
High Low
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
March 31, 1995 $27.250 $21.625 $0.10
June 30, 1995 $27.750 $24.000 $0.10
September 30, 1995 $38.625 $27.125 $0.10
December 31, 1995 $40.375 $35.750 $0.11
(b) Holders
As of February 29, 1996, there were 827 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, 1995, 1994,
1993, 1992, 1991 and 1990, as well as the Balance Sheet Data and Other Data at
December 31, 1995, 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 and
1986, as well as the Balance Sheet Data and Other Data at December 31, 1990,
1989, 1988, 1987 and 1986, 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 and 1986, 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.
19
For the years ended December 31,
(Dollars in thousands, 1995 1994 1993 1992 1991
except per share amounts) ---- ---- ---- ---- ----
Results of Operations Data:
Total revenue $1,577,035 $1,384,079 $1,359,589 $1,265,526 $1,160,150
Interest expense 411,040 271,812 236,335 252,545 275,650
Operating and
administrative
expenses 473,663 427,187 381,515 359,689 298,833
Provision for credit
losses 86,214 80,888 123,678 111,715 108,635
Income before income
taxes, extraordinary
loss and cumulative
effect on prior years
of accounting change 208,239 173,614 138,040 114,875 82,559
Income before extra-
ordinary loss, cumu-
lative effect on prior
years of accounting
change and impact of
tax rate change 127,555 100,336 83,911 73,572 54,199
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) 127,555 100,336 68,596 73,572 54,199
Earnings per share (1) 2.70 2.14 1.60 1.83 1.35
Earnings per share
before tax charges
(1), (2) 2.70 2.14 1.95 1.83 1.35
Dividends paid 19,231 17,338 4,216 49,632 55,512
Dividends per
share (6) $ 0.41 $ 0.37 $ 0.09 $ - $ -
Return on average
equity 12.1% 10.5% 8.5% 11.4% 10.7%
Return on average
assets 1.5% 1.4% 1.1% 1.3% 1.1%
Return on average equity
before tax charges (2) 12.1% 10.5% 10.3% 11.4% 10.7%
Return on average assets
before tax charges (2) 1.5% 1.4% 1.4% 1.3% 1.1%
- ---------------------------------------------------------------------------
Balance Sheet Data, at December 31:
Total assets $9,541,259 $8,021,923 $6,409,726 $5,895,429 $5,197,245
Total debt(3) 6,928,409 5,556,458 4,262,405 4,089,483 3,594,247
Total liabilities 8,425,134 7,013,705 5,485,283 5,158,808 4,647,979
Total shareowners'
equity $1,116,125 $1,008,218 $ 924,443 $ 736,621 $ 549,266
20
For the years ended December 31,
(Dollars in thousands, 1990 1989 1988 1987 1986
except per share amounts) ---- ---- ---- ---- ----
Results of Operations Data:
Total revenue $ 881,183 $ 466,508 $ 319,029 $ 259,716 $ 191,284
Interest expense 262,646 177,474 130,913 93,275 67,145
Operating and
administrative
expenses 193,882 118,430 90,528 76,752 55,211
Provision for credit
losses 75,508 32,222 19,135 39,227 28,049
Income before income
taxes, extraordinary
loss and cumulative
effect on prior years
of accounting change 70,891 59,346 47,306 40,269 38,816
Income before extra-
ordinary loss, cumu-
lative effect on prior
years of accounting
change and impact of
tax rate change 47,755 44,416 30,756 26,147 22,659
Extraordinary loss - - - - (1,157)
Cumulative effect on
prior years of
accounting change (1) - - - - -
Impact of 1993 tax rate
change (1) - - - - -
Net income (1) 47,755 44,416 30,756 26,147 21,502
Earnings per share (1) 1.19 1.10 0.76 0.65 0.53
Earnings per share
before tax charges
(1), (2) 1.19 1.10 0.76 0.65 0.53
Dividends paid 34,423 17,746 28,192 24,674 15,195
Dividends
per share (6) $ - $ - $ - $ - $ -
Return on average
equity 11.0% 12.7% 11.5% 11.8% 13.0%
Return on average
assets 1.1% 1.4% 1.2% 1.3% 1.7%
Return on average equity
before tax charges (2) 11.0% 12.7% 11.5% 11.8% 13.0%
Return on average assets
before tax charges (2) 1.1% 1.4% 1.2% 1.3% 1.7%
- ---------------------------------------------------------------------------
Balance Sheet Data, at December 31:
Total assets $4,722,694 $3,836,799 $2,715,592 $2,324,695 $1,552,847
Total debt(3) 3,312,421 2,742,843 1,692,556 1,640,879 1,019,970
Total liabilities 4,257,186 3,435,792 2,417,280 2,074,198 1,360,870
Total shareowners'
equity $ 465,508 $ 401,007 $ 298,312 $ 250,497 $ 191,977
21
At or for the years ended December 31,
(Dollars in thousands, 1995 1994 1993 1992 1991
except per share amounts) ---- ---- ---- ---- ----
Other Data:
Net portfolio assets
of the Company $9,105,403 $7,484,798 $6,076,805 $5,600,741 $4,956,830
Allowance for credit
losses 223,220 176,428 159,819 123,961 93,967
Assets of others
managed by the
Company 2,214,502 2,659,526 2,795,663 1,374,354 649,014
Volume of equipment
financed (4) $4,567,000 $4,251,000 $3,467,000 $3,253,000 $2,453,000
Ratio of earnings to
fixed charges (5) 1.50 1.62 1.57 1.44 1.29
Ratio of total debt to
shareowners' equity 6.22 5.51 4.61 5.55 6.54
Ratio of allowance for
credit losses to net
charge-offs 4.77 3.18 2.71 1.58 1.15
Ratio of net charge-
offs to portfolio
assets 0.50% 0.73% 0.95% 1.37% 1.62%
Ratio of allowance for
credit losses to
portfolio assets 2.39% 2.30% 2.56% 2.17% 1.86%
At or for the years ended December 31,
1990 1989 1988 1987 1986
------ ------ ------ ------ ------
Other Data:
Net portfolio assets
of the Company $4,513,280 $3,228,609 $2,529,834 $2,094,593 $1,440,626
Allowance for credit
losses 75,369 37,868 42,733 52,695 29,015
Assets of others
managed by the
Company 313,981 102,003 18,529 - -
Volume of equipment
financed (4) $2,300,000 $1,729,000 $1,489,000 $1,409,000 $1,101,000
Ratio of earnings to
fixed charges (5) 1.26 1.33 1.36 1.43 1.58
Ratio of total debt to
shareowners' equity 7.12 6.84 5.67 6.55 5.31
Ratio of allowance for
credit losses to net
charge-offs 1.62 1.02 1.47 3.04 3.71
Ratio of net charge-
offs to portfolio assets 1.01% 1.13% 1.13% 0.81% 0.53%
Ratio of allowance for
credit losses to
portfolio assets 1.64% 1.16% 1.66% 2.45% 1.97%
22
(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 $248.9
million, $214.1 million, $188.6 million, $193.1 million, $206.6 million, $239.6
million, $232.6 million, $244.5 million, $209.0 million and $134.1 million at
December 31, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987 and 1986,
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) Prior to July 28, 1993, AT&T owned 100% of the Company's stock and
therefore, dividends per share is not meaningful.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 20, 1995, AT&T Corp. ("AT&T") announced a plan to pursue the
public or private sale of its remaining 86% interest in AT&T Capital. As noted
in AT&T's 1995 Annual Report on Form 10-K, AT&T has stated that it cannot
predict the timing or terms of any such transaction. On such date, AT&T also
announced a plan to separate (the "Separation") into three publicly-held
stand-alone global businesses. The Separation is targeted by AT&T to be
completed by the end of 1996, but remains subject to a number of conditions. For
a more detailed discussion of AT&T's restructuring plans and their potential
impacts on the Company, see Note 16 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
1995 versus 1994
Net income for the year ended December 31, 1995, was $127.6 million, an
increase of $27.2 million, or 27.1%, compared with 1994. Earnings per share were
$2.70, a 26.2% increase over the $2.14 reported in 1994. The respective
increases in net income and earnings per share were generated principally
through increased portfolio revenues resulting from a higher level of average
net portfolio assets, strong secondary market activity and a favorable credit
environment. Higher interest expense and operating and administrative expenses,
associated with administering a higher level of assets, partially offset the
increased revenues.
Finance revenue of $174.5 million increased $53.7 million, or 44.5%, for
1995 compared with 1994 while the average net finance receivable portfolio
increased $396.2 million, or 32.0%, to $1,633.9 million for 1995. The increased
level of average net finance receivables accounted for $38.7 million of the
finance revenue increase. The increase in average yield to 10.68% in 1995 from
9.76% in 1994 contributed the remaining $15.0 million. The improved yield is
primarily due to the increased level of higher yielding products in the
Company's large-ticket specialty and structured finance portfolios and the
Company's Small Business Administration ("SBA") portfolio.
Capital lease revenue of $586.1 million increased $108.3 million, or 22.7%,
for 1995, compared with 1994. This increase was due to a 22.8% increase in the
average net capital lease portfolio to $5,690.1 million. The acquisition of the
vendor leasing and finance companies of Banco Central Hispano and certain of its
affiliates ("CFH Leasing International") was the largest contributor to the
increase in the capital lease portfolio. The overall yield of 10.3% was
unchanged from the prior year. Although certain of the Company's non-U.S.
businesses achieved improved yields over the prior year, certain small-ticket
leasing portfolios experienced decreased yields in 1995.
24
Rental revenue on operating leases of $561.0 million increased $85.6
million, or 18.0%, for 1995, compared with 1994. Depreciation on operating
leases of $354.5 million increased $40.9 million, or 13.1% for 1995, compared
with 1994. Rental revenue less associated depreciation ("operating lease
margin") was $206.5 million, or 36.8% of rental revenue for 1995, compared
with $161.8 million, or 34.0%, for 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
testing and diagnostic equipment portfolio and the automobile portfolio, as
well as a reduced level of lower yielding mainframe computer assets.
Net interest margin (finance revenue, capital lease revenue and rental
revenue on operating leases, less depreciation on operating leases and interest
expense) of $556.1 million was 6.69% of average net portfolio assets for the
year ended December 31, 1995. This compares with a net interest margin of $488.7
million, or 7.29%, of average net portfolio assets for the year ended December
31, 1994. The decrease in net interest margin was due to an increase in the
Company's average cost of debt, partially offset by higher yields on the
Company's net portfolio assets, and an increase in the Company's debt to equity
ratio. For 1995, the average cost of debt was 6.60%, compared to 5.65% in 1994
while the total portfolio yield increased to 11.64% in 1995 from 11.34% in 1994.
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 Company's debt to equity ratio
was 6.22 in 1995 versus 5.51 in 1994.
Revenue from sales of equipment of $48.7 million in 1995 decreased
substantially from $126.6 million in 1994. Similarly, cost of equipment sales of
$43.4 million in 1995 decreased from $117.0 million in 1994. The Company is
experiencing lower equipment sales generally due to a shift in customer behavior
away from the purchase of mainframe computers. Equipment sales revenue less
associated cost of equipment sales ("equipment sales margin") was $5.4 million,
or 11.0% of equipment sales revenue for the year ended December 31, 1995.
Equipment sales margin for the year ended December 31, 1994, was $9.6 million,
or 7.6% of equipment sales revenue. The equipment sales margin for 1995 was
favorably impacted by increased trading in the higher margin mid-range computer
area, a relatively new market for the Company.
25
Other revenue of $206.7 million increased $23.2 million, or 12.7%, in 1995,
compared with 1994. Other revenue consists mainly of sales of leased and
off-lease equipment, gains on receivables securitized and SBA loan sales,
portfolio servicing fees and other fee related revenue (see Note 6 to the
Consolidated Financial Statements). The increase in other revenue was primarily
generated from higher remarketing gains of $10.5 million from sales of leased
and off-lease equipment, higher gains on the sale of SBA loans of $9.0 million
and increased other fee related revenue of $5.2 million. These increases were
somewhat offset by a decrease of $8.9 million in securitization gains, as well
as lower portfolio servicing fees of $3.6 million due to a lower managed asset
base.
In the fourth quarter of 1995 and 1994, respectively, the Company
securitized $74.8 million and $259.1 million of lease receivables resulting in
gains of $5.9 million and $14.8 million. The gain on receivables securitized as
a percent of the assets securitized (the "spread") was 7.8% in 1995 and 5.7% in
1994. The improvement in the securitization spread is due primarily to a lower
discount rate used in the 1995 securitization as a result of a lower interest
rate environment.
Under the terms of this and previous years' 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, the Company's maximum exposure under limited
recourse provisions granted to the purchasers of all securitized lease
receivables would have been $254.8 million and $353.1 million at December 31,
1995 and 1994, respectively. In addition, the Company provides such purchasers
with billing and collection and other services with respect to such securitized
receivables.
At December 31, 1995, total assets managed by the Company on behalf of
others were $2.2 billion compared with $2.7 billion at December 31, 1994. The
decrease in the level of assets managed is attributable to normal run-off
coupled with lower securitization activity. The total assets managed on behalf
of AT&T and its affiliates represented 68.0% and 55.9% of the total assets
managed at December 31, 1995 and 1994, respectively.
26
The following table shows the respective percentages of the assets,
revenues and net income (loss) related to United States and foreign operations
attributable to (i) leasing and financing services provided by the Company to
customers of AT&T , (ii) transactions involving AT&T as end-user and (iii) the
Company's non-AT&T business, in each case at or for the years ended December 31,
1995, 1994 and 1993. The net income (loss) shown below was calculated based upon
what the Company believes to be a reasonable allocation of interest, income
taxes and certain corporate overhead expenses.
- --------------------------------------------------------------------------------
At or for the year ended
December 31, 1995
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 29.4 0.1 29.5 32.3 0.4 32.7 67.2 0.7 67.9
AT&T as
End-User 5.3 - 5.3 8.3 - 8.3 8.2 - 8.2
Non-AT&T
Business 47.8 17.4 65.2 46.3 12.7 59.0 27.0 (3.1) 23.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Total 82.5 17.5 100.0 86.9 13.1 100.0 102.4 (2.4) 100.0
- ---------------------------------------------------------------------------
At or for the year ended
December 31, 1994
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 34.3 0.3 34.6 33.1 0.3 33.4 83.9 (1.4) 82.5
AT&T as
End-User 6.8 - 6.8 9.5 - 9.5 8.5 - 8.5
Non-AT&T
Business 48.0 10.6 58.6 47.8 9.3 57.1 11.8 (2.8) 9.0
----- ----- ----- ----- ----- ----- ----- ----- ----
Total 89.1 10.9 100.0 90.4 9.6 100.0 104.2 (4.2) 100.0
- --------------------------------------------------------------------------
27
At or for the year ended
December 31, 1993
Assets Revenues Net Income (Loss)
-------------------- --------------------- ---------------------
U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total*
% % % % % % % % %
- ---------------------------------------------------------------------------
Customers
of AT&T 38.1 0.3 38.4 31.1 0.2 31.3 99.8 (1.7) 98.1
AT&T as
End-User 9.5 - 9.5 14.9 - 14.9 20.8 - 20.8
Non-AT&T
Business 46.1 6.0 52.1 47.8 6.0 53.8 (6.9) (12.0) (18.9)
----- ----- ----- ----- ----- ----- ------ ----- ------
Total 93.7 6.3 100.0 93.8 6.2 100.0 113.7 (13.7) 100.0
- --------------------------------------------------------------------------
*The customers of AT&T, AT&T as end-user and non-AT&T business net income
(loss) before cumulative effect of the 1993 accounting change and impact of the
tax rate change was 89.0%, 20.2% and (9.2%), respectively. For a description of
the 1993 change and impact of the tax rate change, see Note 10 to the
Consolidated Financial Statements.
The Company intends to continue its strategy of expanding its non-AT&T
businesses, while at the same time enhancing its relationship with AT&T and its
affiliates. Because the growth in revenues generated by the Company's non-AT&T
businesses can be expected to lag behind the incurrence of expenses necessary to
expand and operate such businesses, the Company anticipates that the percentage
of its total net income and revenues attributable to non-AT&T businesses may
vary from year to year depending upon the stage of development of these non-AT&T
businesses.
The increases in the non-AT&T 1995 assets and revenues (as a % of total
Company) were generated almost equally from U.S. and foreign operations. The
significant increase realized from U.S. non-AT&T related net income was
primarily generated from the Company's large-ticket specialty and structured
finance activities, SBA loan sales and growth in the automobile portfolio. Net
losses from foreign non-AT&T businesses somewhat offset the strong U.S. results.
The securitization of certain non-AT&T portfolio assets positively affected
the net income of the non-AT&T businesses in all years presented; however, the
Company decreased the amount of securitizations each year from 1993 to 1995.
Partly as a result of the reduction in securitized assets, the portion of the
Company's non-AT&T net income attributable to securitization has decreased by
88.7% from 1993 to 1995 (see Note 6 to the Consolidated Financial Statements).
28
Growth in the Company's portfolio assets primarily caused the average
borrowings outstanding to increase by 29.5%, or $1.4 billion, to $6.2 billion,
while the Company's interest expense increased 51.2%, or $139.2 million, to
$411.0 million for 1995, compared with the prior year. The Company's 1995 debt
to equity ratio increased to 6.22 from 5.51. The increase in average borrowings
caused interest expense to increase by approximately $80.1 million. A higher
average cost of debt in 1995 (versus 1994) increased interest expense by $59.1
million. The Company's average 1995 interest rate on borrowings was 6.60% as
compared to 5.65% in 1994. The increase in the Company's 1995 average cost of
debt is a function of the Company issuing new debt at higher average rates than
the debt that matured during 1995. During 1995, the Company issued approximately
$2.9 billion of medium and long-term debt with an average interest rate of 7.2%.
The Company had $1.8 billion of medium and long-term debt with an average
interest rate of 5.9% mature in 1995. In addition, the Company's average
interest rate on commercial paper increased to 5.3% in 1995, up from 4.3% in
1994.
Operating and administrative expenses of $473.7 million increased $46.5
million, or 10.9%, in 1995, compared with 1994. This increase includes $27.0
million of expenses associated with the start-up of certain non-AT&T businesses,
acquisitions and international expansion. In addition, higher expenses were
incurred associated with managing a higher level of portfolio assets. For 1995,
operating and administrative expenses to total year-end assets decreased to
4.96% compared with 5.33% for 1994. This decrease can be attributed to some of
the Company's businesses (including recent start-up businesses) more fully
utilizing their infrastructure, increased operating efficiencies and increases
in assets financed. The Company's goal is to reach 4.5% or lower within the next
few years.
The effective income tax rate was 38.7% and 42.2% for 1995 and 1994,
respectively. The decline in the effective tax rate for 1995, compared with
1994, resulted from several factors including a lower level of non-tax
deductible goodwill and various other decreases.
See "Credit Quality" below for a discussion of the provision for credit
losses.
29
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 ("SFAS") No. 109, "Accounting for Income Taxes", 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 yield rates earned on the average 1994
portfolio compared with rates earned on the average 1993 portfolio. This was
consistent with the Company's slightly lower average cost of debt (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,
was due to international acquisitions and expansion. The growth in capital lease
revenue resulted from a higher level of assets (including an AT&T mainframe
computer 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 was consistent with the Company's slightly
lower cost of debt. However, the Company experienced some margin compression in
certain equipment leasing portfolios as pricing in connection with some
portfolios is less reactive to interest rate movements.
30
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 1994, compared with
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 on
operating leases by $75.3 million and $51.2 million, respectively. While U.S.
rental revenue and depreciation decreased, rental revenue and depreciation
related to the Company's international operations increased $13.0 million and
$10.8 million, respectively, for 1994 compared with 1993. 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, 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.
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 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 reflected the 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 experienced increased competition in 1994.
Other revenue of $183.5 million decreased $13.0 million, or 6.6%, in 1994,
compared with 1993. The decrease in other revenue was primarily due to lower
securitization gains of $36.7 million and lower service fee revenue of $10.2
million. The decreases were partially offset by increased gains on sales of
leased and off-lease equipment of $26.8 million.
31
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 was primarily
attributable to a higher discount rate used in the 1994 securitization due to
the higher interest rate environment.
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.
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
for 1994, compared with 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. The Company's average interest rate on borrowings was 5.65% for 1994,
compared with 5.68% for 1993. The increase in borrowing costs was reflected in
new borrowings made by the Company.
Operating and administrative expenses of $427.2 million increased $45.7
million, or 12.0%, in 1994, compared with 1993. The increase was primarily
attributable to expenses of approximately $30.0 million associated with the
start-up of certain non-AT&T businesses, acquisitions and international
expansion as well as expenses of $10.9 million associated with the Company's new
benefit and incentive plans. Also contributing to the increase were higher
expenses associated with managing a higher level of portfolio assets. For 1994,
operating and administrative expenses to total year-end assets decreased to
5.33% compared with 5.95% for 1993. This decrease was attributed to some of the
Company's start-up businesses more fully utilizing their infrastructure,
increased operating efficiencies and timing of assets financed.
32
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.
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 types (e.g., telecommunications, general
equipment (consists of general office, manufacturing and medical equipment),
information technology and transportation) and real estate and a large number of
customers located throughout the United States and, to a lesser extent, abroad.
33
As reflected below, the Company's portfolio credit performance indicators
have continued to be favorable in 1995.
At or for the year ended December 31:
(dollars in millions) 1995 1994 1993
- ---------------------------------------------------------------------------
Allowance for credit losses $223.2 $176.4 $159.8
Nonaccrual assets $118.5 $120.5 $160.6
Net charge-offs/Portfolio assets .50% .73% .95%
Allowance for credit losses/Portfolio assets 2.39% 2.30% 2.56%
Nonaccrual assets/Portfolio assets 1.27% 1.57% 2.58%
Delinquency (two months or greater) 1.46% 1.49% 2.41%
The Company maintains an allowance for credit losses at a level management
believes is adequate to cover estimated losses in the portfolio based on a
review of historical loss experience, a detailed analysis of delinquencies and
problem portfolio assets, and an assessment of probable losses in the portfolio
as a whole given its diversification. Management also takes into consideration
the potential impact of existing and anticipated economic conditions.
FINANCIAL CONDITION
Net portfolio assets (investment in finance receivables, capital leases and
operating leases, net of reserves) increased by $1.6 billion, or 21.7%, at
December 31, 1995, to $9.1 billion compared with December 31, 1994, principally
due to growth in the capital lease portfolio.
In January 1995, the Company acquired CFH Leasing International which has
locations in the United Kingdom, Germany, France, Italy, Belgium and the
Netherlands. 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 in the second
quarter of 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.
As a result of the above mentioned international acquisitions, the
Company's international assets (excluding cross border transactions) at December
31, 1995, grew to 17.5% of total assets, up from 10.9% at December 31, 1994.
The net investment in finance receivables increased by $.3 billion, or
23.9% to $1.8 billion at December 31, 1995 compared with December 31, 1994
primarily due to increased loans related to transportation equipment, the
acquisition of CFH Leasing International and growth in the SBA lending
portfolio.
34
The net investment in capital leases increased by $1.1 billion, or 20.6% at
December 31, 1995, to $6.2 billion 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 portfolios.
The net investment in operating leases increased by $.2 billion, or 23.8%,
at December 31, 1995, to $1.1 billion compared with the prior year. The increase
was primarily due to growth in the automobile portfolio, small-ticket equipment
portfolios and international businesses including the acquisition of CFH Leasing
International.
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.
35
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 debt in public markets and, to a lesser extent,
privately placed asset-backed financings (or securitizations) and foreign bank
lines of credit. 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 restructuring 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.
Funds required to support the Company's operations during 1995, 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 and long-term debt. The Company estimates that, under
existing lease and loan terms, gross cash receipts of approximately $9.7 billion
may be generated in the future.
In 1995, the Company issued commercial paper of $28.0 billion, issued
medium and long-term notes of $2.9 billion and made commercial paper repayments
of $28.2 billion and repaid medium and long-term debt of $1.8 billion. In 1994,
the Company issued commercial paper of $29.0 billion and made commercial paper
repayments of $28.4 billion, and issued medium and long-term debt of $2.1
billion and repaid medium and long-term debt of $1.4 billion.
During 1995 and 1994, principal collections from customers and proceeds
from securitized receivables and SBA loan sales of approximately $4.1 billion
and $3.9 billion, respectively, were received. These receipts were primarily
used for financing portfolio assets (including purchases of finance asset
portfolios and businesses) of approximately $5.8 billion in 1995, and $5.5
billion in 1994.
In conjunction with acquisitions, in 1995 and 1994 the Company assumed
$473.0 million and $106.9 million of debt respectively, of which $53.6 million
was outstanding at December 31, 1995.
36
During 1995 and 1994, the Securities and Exchange Commission ("SEC")
declared effective debt registration statements (which allow the Company to
issue debt to the public) of $3.0 billion and $2.5 billion, respectively. As of
December 31, 1995, all of the debt associated with the 1994 registration
statement was issued and $2.0 billion was available for issuance under the
Company's 1995 debt registration.
In the second quarter of 1995, the Company re-established 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 December
31, 1995, these facilities were unused. In addition, the Company's foreign
operations have short-term bank lines of credit of approximately $1.0 billion,
of which $.6 billion was unused at December 31, 1995.
The Company has, from time to time, borrowed funds on an interest free
basis directly from AT&T pursuant to a Gross Profit Tax Deferral Interest Free
Loan Agreement. The aggregate outstanding principal balance of such interest
free loans was $248.9 million at December 31, 1995. As discussed in more detail
in Note 16 to the Consolidated Financial Statements, the Company is obligated to
repay such loans 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 and long-term debt and available lines
of credit for certain foreign operations, and to a lesser extent 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.
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 19, 1996, the Company's Board of Directors declared a
quarterly dividend of eleven cents per share. The dividend is payable on
February 29, 1996, to shareowners of record as of February 9, 1996.
37
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 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 Capital's use of derivatives to manage risk.
Match Funding
The Company generally matches the duration and maturity structure of its
liabilities to that of its portfolio assets. The Company routinely projects the
expected future cash flows related to its current portfolio assets. Based on
these projections, the Company is able to match the maturity and duration of its
debt with that of its assets. The cash flow projections incorporate assumptions
about customer behavior such as prepayments, refinancings and charge-offs. The
assumptions are based on historical experience with the Company's individual
markets and customers and are continually monitored and updated as markets and
customer behaviors change, to reflect current customer preferences, competitive
market conditions, portfolio growth rates and portfolio mix.
Interest Rate Risk and Currency Exchange Risk
The Company actively manages interest rate risk to protect the Company's
margins on existing transactions. Interest rate risk is the risk of earnings
volatility attributable to changes in interest rates. The Company routinely
analyzes its portfolio assets and strives to match floating rate assets with
floating rate debt and fixed rate assets with fixed rate debt. The Company
generally achieves a matched position through issuances of commercial paper and
medium and long-term debt, as well as through the use of interest rate swaps.
The Company does not speculate on interest rates, but rather seeks to mitigate
the possible impact of interest rate fluctuations encountered through the normal
course of business. This is a continual process due to prepayments,
refinancings, nonaccrual leases and loans, as well as other portfolio dynamics,
and therefore, interest rate risk can be significantly limited but never fully
eliminated. Additionally, the Company enters into foreign exchange contracts and
participates in the currency swap market to mitigate its exposure to assets and
liabilities denominated in foreign currencies and to meet local funding
requirements.
The Company has and expects to continue to enter into foreign exchange
contracts and currency swaps in 1996 as a result of its international
operations.
38
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 and long-term debt, on which it pays a fixed rate, or
issues floating rate debt and utilizes interest rate swaps, on which it
generally pays a fixed rate and receives a floating rate, the Company's interest
rate risk position can be equally well managed. However, it is the interplay
between liquidity, capital, portfolio characteristics, and economic and market
conditions which will determine the final mix of medium and long-term debt,
commercial paper and swaps (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.
As of December 31, 1995 the total notional amount of the Company's interest
rate and currency swaps was $2.2 billion and $.3 billion, respectively, as
compared to $2.7 billion and $.2 billion, respectively, as of December 31, 1994.
The U.S. dollar equivalent of the Company's foreign currency forward exchange
contracts was $658.8 million and $318.1 million at the end of 1995 and 1994,
respectively.
Derivative Credit Risk
The notional amount of derivative contracts does not represent direct
credit exposure. Rather, credit exposure may be defined as the market value of
the derivative contract and the ability of the counterparty to perform its
payment obligation under the agreement. The majority of the Company's interest
rate swaps require 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
investment grade 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, 1995, related to derivative transactions. The Company has never experienced
a credit related charge-off associated with derivative transactions.
Debt to Equity
The Company's ratio of total debt to equity at December 31, 1995 was 6.22
compared to 5.51 at December 31, 1994. This increase is consistent with the
Company's trend toward its current target leverage of approximately 6.25.
39
RECENT PRONOUNCEMENTS
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", and No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". These standards
require that impaired loans be measured based on the present value of expected
cash flows, discounted at the loan's effective interest rate, or the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent, as well as requiring certain related disclosures. The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements.
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not have a material
impact on the Company's consolidated financial statements.
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 choose either 1) a fair value
method of valuing stock-based compensation plans which will affect reported net
income, or 2) to continue following 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 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, the adoption of this standard will not impact the Company's results
of operations, financial position or cash flows.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
At December 31, 1995 1994
(Dollars in Thousands)
- -------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 3,961 $ 54,464
Net investment in finance
receivables 1,800,636 1,452,947
Net investment in capital leases 6,187,131 5,129,326
Net investment in operating leases, net of
accumulated depreciation of $642,728 in
1995 and $567,398 in 1994 1,117,636 902,525
Deferred charges and other assets 431,895 482,661
- ---------------------------------------------------------------------------
Total Assets 9,541,259 8,021,923
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY:
LIABILITIES:
Short-term notes, less unamortized discounts
of $9,698 in 1995 and $4,619 in 1994 2,212,351 2,176,877
Deferred income taxes 555,296 555,287
Income taxes and other payables 581,000 545,270
Payables to AT&T and affiliates 360,429 356,690
Medium and long-term debt 4,716,058 3,379,581
Commitments and contingencies
- ---------------------------------------------------------------------------
Total Liabilities $8,425,134 $7,013,705
- ---------------------------------------------------------------------------
(Continued on next page)
41
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
- -------------------------------------------------------------------------------
At December 31, 1995 1994
(Dollars in Thousands)
- -------------------------------------------------------------------------------
SHAREOWNERS' EQUITY:
Common stock, one cent par value:
Authorized 100,000,000 shares, issued and
outstanding, 46,968,810 shares in 1995 and
46,962,439 in 1994 $ 470 $ 470
Additional paid-in capital 783,244 782,785
Recourse loans to senior executives (20,512) (19,651)
Foreign currency translation adjustments (2,173) (2,158)
Retained earnings 355,096 246,772
- -------------------------------------------------------------------------------
Total Shareowners' Equity 1,116,125 1,008,218
- -------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $9,541,259 $8,021,923
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
(Dollars in Thousands, except per share amounts)
- ---------------------------------------------------------------------------
REVENUES:
Finance revenue $ 174,523 $ 120,800 $ 107,436
Capital lease revenue 586,141 477,875 391,985
Rental revenue on operating leases
(includes $86,651 in 1995,
$79,573 in 1994 and $158,592 in
1993 from AT&T and affiliates) 560,964 475,375 502,132
Equipment sales 48,724 126,567 161,529
Other revenue, net 206,683 183,462 196,507
- ---------------------------------------------------------------------------
Total Revenues 1,577,035 1,384,079 1,359,589
- ---------------------------------------------------------------------------
EXPENSES:
Interest (includes $21,602 in 1993
to AT&T and affiliates) 411,040 271,812 236,335
Operating and administrative (includes
$25,532 in 1995, $24,729 in 1994 and
$44,775 in 1993 to AT&T and affiliates) 473,663 427,187 381,515
Depreciation on operating leases 354,509 313,583 334,191
Cost of equipment sales 43,370 116,995 145,830
Provision for credit losses 86,214 80,888 123,678
- ---------------------------------------------------------------------------
Total Expenses 1,368,796 1,210,465 1,221,549
- ---------------------------------------------------------------------------
Income before income taxes and cumulative
effect on prior years of accounting change 208,239 173,614 138,040
Provision for income taxes 80,684 73,278 66,530
- ---------------------------------------------------------------------------
Income before cumulative effect on prior
years of accounting change 127,555 100,336 71,510
Cumulative effect on prior years of
accounting change - - (2,914)
- ---------------------------------------------------------------------------
NET INCOME $ 127,555 $ 100,336 $ 68,596
- ---------------------------------------------------------------------------
(Continued on next page)
43
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
- ---------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
(Dollars in Thousands, except per share amounts)
- ---------------------------------------------------------------------------
Earnings per common share and common share equivalent:
Income before cumulative effect on
prior years of accounting change $ 2.70 $ 2.14 $ 1.67
Cumulative effect on prior years of
accounting change - - (.07)
- ---------------------------------------------------------------------------
Net Income Per Share $ 2.70 $ 2.14 $ 1.60
- ---------------------------------------------------------------------------
Weighted average shares
outstanding (thousands): 47,182 46,906 43,002
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
- --------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
(Dollars in Thousands)
- --------------------------------------------------------------------------
Common stock
Balance at beginning of year $ 470 $ 469 $ 403
Stock issuances:
Public offering - - 58
Pension and benefit plans - 1 8
- --------------------------------------------------------------------------
Balance at end of year 470 470 469
- --------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning of year 782,785 780,591 638,371
Capital contributions - - 9,106
Stock issuances, net:
Public offering - - 114,482
Pension and benefit plans 459 2,194 18,632
- --------------------------------------------------------------------------
Balance at end of year 783,244 782,785 780,591
- --------------------------------------------------------------------------
Recourse loans to senior executives
Balance at beginning of year (19,651) (17,788) -
Loans made (2,613) (2,760) (17,788)
Loans repaid 1,752 897 -
- --------------------------------------------------------------------------
Balance at end of year (20,512) (19,651) (17,788)
- --------------------------------------------------------------------------
Foreign currency translation adjustments
Balance at beginning of year (2,158) (2,603) (1,547)
Unrealized translation gain (loss) (15) 445 (1,056)
- --------------------------------------------------------------------------
Balance at end of year (2,173) (2,158) (2,603)
- --------------------------------------------------------------------------
Retained earnings
Balance at beginning of year 246,772 163,774 99,394
Net income 127,555 100,336 68,596
Cash dividends paid (19,231) (17,338) (4,216)
- --------------------------------------------------------------------------
Balance at end of year 355,096 246,772 163,774
- --------------------------------------------------------------------------
Total Shareowners' Equity $1,116,125 $1,008,218 $924,443
- --------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
45
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994* 1993*
(Dollars in Thousands)
- ---------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 127,555 $ 100,336 $ 68,596
Noncash items included in income:
Depreciation and amortization 412,044 353,954 384,933
Deferred taxes (2,772) 106,384 43,419
Provision for credit losses 86,214 80,888 123,678
Gain on receivables
securitizations (5,866) (14,799) (51,496)
Gain on SBA loan sales (10,508) (1,512) (1,192)
Cumulative effect on prior years
of accounting change - - 2,914
Decrease (increase) in deferred
charges and other assets 34,614 (124,305) 12,640
Increase in income taxes
and other payables 50,362 3,068 72,451
Decrease in payables to
AT&T and affiliates (3,509) (10,257) (1,340)
- ---------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 688,134 493,757 654,603
- ---------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of fixed
assets, net (8,018) (6,622) (6,555)
Purchase of businesses, net of cash
acquired (294,472) (234,375) -
Purchase of finance asset portfolios (19,769) (217,939) (100,589)
Financings and lease equipment
purchases (5,467,773) (5,031,041) (5,027,031)
Principal collections from
customers, net of amounts
included in income 3,855,592 3,553,620 3,612,043
Cash proceeds from receivables
securitizations 134,316 286,821 572,348
Cash proceeds from SBA loan sales 157,160 19,585 10,684
- --------------------------------------------------------------------------
Net Cash Used for Investing
Activities $(1,642,964) $(1,629,951) $ (939,100)
- ---------------------------------------------------------------------------
(Continued on next page)
46
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
- ---------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994* 1993*
(Dollars in Thousands)
- ---------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term
notes, net $ (207,045) $ 523,370 $ (355,463)
Additions to medium and
long-term debt 2,905,920 2,142,993 1,161,638
Repayments of medium and
long-term debt (1,828,426) (1,448,470) (632,563)
Increase (decrease) in payables to
AT&T and affiliates 53,109 (9,897) 9
Dividends paid (19,231) (17,338) (4,216)
Proceeds from sale of common stock, net - - 115,092
- ---------------------------------------------------------------------------
Net Cash Provided by Financing
Activities 904,327 1,190,658 284,497
- ---------------------------------------------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents (50,503) 54,464 -
Cash and Cash Equivalents at
Beginning of Period 54,464 - -
- ---------------------------------------------------------------------------
Cash and Cash Equivalents at
End of Period $ 3,961 $ 54,464 $ -
- ---------------------------------------------------------------------------
Interest paid, including discount on commercial paper, was $365,473,
$253,960 and $247,565 during 1995, 1994 and 1993, respectively.
Net income taxes paid (received) were $27,781, $55,712 and $(22,972) during
1995, 1994 and 1993, respectively.
Noncash Investing and Financing Activities:
In 1995, 1994 and 1993, the Company entered into capital lease obligations
of $105,215, $41,442 and $25,259, respectively, for equipment that was
subleased. In 1995 and 1994, the Company assumed debt in conjunction with
acquisitions of $472,952 and $106,945, respectively. 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 1995
presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
1. THE COMPANY
For a discussion regarding the potential impacts of AT&T Corp.'s ("AT&T")
announcement to sell its 86% interest in AT&T Capital Corporation ("AT&T
Capital" or the "Company"), see Note 16.
Background
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) ("Old Capital"), a wholly owned subsidiary of
AT&T, and its subsidiaries, including AT&T Credit Holdings, Inc. (formerly known
as AT&T Credit Corporation) ("Old Credit"), a wholly owned subsidiary of Old
Capital that commenced operations in 1985. In a restructuring that occurred on
March 31, 1993 (the "Restructuring"), Old Capital and Old Credit transferred
substantially all of 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 direct, full and
unconditional guarantees of all existing indebtedness outstanding as of March
31, 1993, for borrowed money incurred, assumed or guaranteed by Old Capital
entitled to the benefit of a Support Agreement between AT&T and Old Capital,
including the debt of Old Capital assumed by the Company in the Restructuring.
Debt issued by the Company subsequent to March 31, 1993, however, is not
guaranteed or supported by AT&T (see Note 7).
An initial public stock offering combined with a management stock offering
totaling approximately 14% of the Company's stock occurred on August 4, 1993
(see Note 8). As a result of the stock offerings, approximately 86% 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.
48
DESCRIPTION OF THE BUSINESS
The Company is a full-service, diversified equipment leasing and finance
company that operates predominantly in the United States; however, it also has
operations in Europe, Canada, the Asia/Pacific Region, Mexico and South America.
The Company operates primarily in one business segment - equipment leasing and
financing. This segment represents more than 90% of consolidated revenues, net
income and total assets. The Company leases and finances equipment manufactured
and distributed by AT&T and its affiliates and numerous other companies. The
Company also provides inventory financing for equipment dealers and
distributors, Small Business Administration ("SBA")lending, and equipment
management and remarketing services. In addition, the Company offers its
customers high-technology equipment rental and certain other equipment
administration services.
At December 31, 1995, AT&T Capital's portfolio assets were comprised of
telecommunications equipment totaling 23%, general equipment (consists of
general office, manufacturing and medical equipment) aggregating 28%,
information technology equipment of 23%, transportation equipment of 19% and
real estate of 7%.
AT&T Capital's portfolio assets are diversified among a large customer
base, as well as numerous industries and geographic regions. The Company's
customers are diversified across many industries including manufacturing,
services, communications and retail, as well as many small and mid-size business
customers and federal, state and local governments and their agencies. At
December 31, 1995, the Company's 99 largest customers (after AT&T and its
affiliates - see Note 12) accounted for approximately 21% of the Company's net
portfolio assets, and no customer (with the exception of AT&T and its
affiliates) accounted for more than 1% of such net portfolio assets.
Other than AT&T and its affiliates (including Lucent Technologies Inc.
("Lucent") and NCR Corporation ("NCR")), as of December 31, 1995, management is
not aware of any significant concentration of business transacted with a
particular customer, supplier or lender that could severely impact the Company's
operations. Also, the Company does not have a concentration regarding the types
of financing products or available sources of debt, labor or services, or
licenses or other rights that could severely impact its operations.
49
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported. Actual results
could differ from those estimates. Significant areas in which estimates are used
include residual values, allowance for credit losses and contingencies.
Revenue Recognition for Finance Receivables and Capital Leases
For loans and other financing contracts ("Finance Receivables"), revenue is
recognized over the life of the contract using the interest method.
For leases classified as Capital Leases, the difference between (i) the sum
of the minimum lease payments due and the estimated unguaranteed residual values
and (ii) the asset purchase price paid by the Company is initially recorded as
unearned income. The difference is subsequently amortized over the life of the
lease contract and recognized as revenue, using the interest method.
Accrual of income on portfolio assets is generally suspended when a loan or
a lease becomes contractually delinquent for 90 days or more (or earlier if
deemed necessary). Accrual is resumed when the receivable becomes contractually
current and management believes there is no longer any significant probability
of loss.
50
Investment in Operating Leases
Equipment under Operating Leases is generally depreciated over the
estimated useful life of the asset. During the term of the related lease, annual
depreciation is generally calculated on a straight-line basis based on the
estimated residual values at the end of the respective lease terms. Rental
revenue is recognized on a straight-line basis over the related lease terms.
Estimated Unguaranteed Residual Values
Estimated unguaranteed residual values are established upon acquisition and
leasing of the equipment based upon the estimated value of the equipment at the
end of the lease term. They are determined on the basis of studies prepared by
the Company, professional appraisals, historical experience and industry data.
Although it is reasonably possible that a change in the unguaranteed residual
values could occur in the near term, the Company actively manages its residual
values by working with lessees and vendors during the lease term to encourage
lessees to extend their leases or upgrade and enhance their leased equipment.
Residual values are reviewed by the Company at least annually. Declines in
residual values for capital leases are recognized as an immediate charge to
income. Declines in residual values for operating leases are recognized as
adjustments to depreciation expense 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 estimated by management
considering delinquencies and problem assets, an assessment of overall risks and
evaluation of probable losses in the portfolio given its diversification, and a
review of historical loss experience. Although currently deemed adequate by
management, it is reasonably possible that a change in the estimate could occur
in the near term as a result of changes in the above mentioned factors. The
Company's reserve policy is based on an analysis of the aging of the Company's
portfolio, a review of all non-accrual receivables and leases, and prior
collection experience. An account is charged off when analysis indicates that
the account is uncollectible. Additionally, Company policy generally requires
the "at risk" portion (the amount of the receivable not covered by estimated
equipment or other collateral value) of accounts 180 days past due to be
reserved for or charged off.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
51
Other Assets
The cost of property and equipment is depreciated on a straight-line basis
over their estimated useful lives, which generally range from three to
twenty-five years. Leasehold improvements are amortized over the lesser of the
term of the related lease or the estimated useful lives of the related assets on
a straight-line basis.
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets on the date of acquisition, and is amortized as a
charge against income on a straight-line basis generally over three to twenty
year periods. Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value.
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 the net interest to be
received or paid as an adjustment to interest expense. In the event of an early
termination of a swap contract, the gain or loss on a swap accounted for as a
hedge is amortized over the remaining life of the related transaction. The
Company does not enter into speculative swaps; however, if the underlying
transaction associated with a swap accounted for as a hedge is terminated early,
the swap is then considered speculative. The gain or loss on a speculative swap
is recognized immediately.
The Company enters into foreign exchange contracts as a hedge against
assets and liabilities denominated in foreign currencies. Gains and losses are
recognized on the contracts and offset foreign exchange gains or losses on the
related assets and liabilities.
Foreign Currency Translation
The financial statements of the Company's foreign operations are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation", the resulting translation
adjustments are recorded as a separate component of shareowners' equity. A
transaction gain or loss realized upon settlement of a foreign currency
transaction generally is included in determining net income for the period in
which the transaction is settled.
52
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.
Impairment of Long-Lived Assets
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not have a material
impact on the Company's consolidated financial statements.
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, Belgium
and the Netherlands. CFH Leasing International provides financial services to
equipment manufacturers and vendors and had approximately $540 million in assets
at the time of acquisition. In addition, on June 30, 1995, the Company acquired
two relatively small businesses, a United States mid-range computer asset
business with approximately $180 million in assets and an Australian equipment
finance company with approximately $40 million in assets. The above acquisitions
were accounted for under the purchase method and the total cash paid, net of
cash acquired, for all of the above was $294.5 million. In addition, the Company
assumed certain existing debt associated with these acquisitions. The results of
operations are included in the income statement of the Company from the
respective acquisition dates.
Unaudited pro forma revenues, net income and earnings per share would have
been approximately $1,457.4 million, $111.4 million and $2.37, respectively, for
the year ended December 31, 1994 had the acquisitions occurred on January 1,
1994. The pro forma amounts for the year ended December 31, 1995 would not
differ materially from the actual amounts reported if the acquisitions had
occurred on January 1, 1995. The pro forma information is based on various
assumptions and is not necessarily indicative of results of operations that
would have been reported had the acquisitions been completed at the date
mentioned above. The associated goodwill is amortized over periods not to exceed
15 years.
53
4. NET INVESTMENT IN FINANCE RECEIVABLES AND CAPITAL LEASES
Finance receivables and capital leases consisted of the following:
Finance
Receivables Capital Leases
At December 31, 1995 1994 1995 1994
- ---------------------------------------------------------------------------
Receivables $1,959,004 $1,634,454 $6,846,834 $5,712,848
Estimated unguaranteed
residual values - - 734,140 606,207
Unearned income (104,170) (133,620) (1,230,418) (1,066,457)
Allowance for credit losses (54,198) (47,887) (163,425) (123,272)
- ---------------------------------------------------------------------------
Net investment $1,800,636 $1,452,947 $6,187,131 $5,129,326
- ---------------------------------------------------------------------------
The schedule of maturities at December 31, 1995 for the finance receivables
and capital leases is as follows:
Finance Capital
Receivables Leases
- ---------------------------------------------------------------------------
1996 $ 553,021 $2,618,921
1997 314,683 1,929,454
1998 229,225 1,195,209
1999 198,687 638,032
2000 209,451 253,268
2001 and thereafter 453,937 211,950
- ---------------------------------------------------------------------------
Total $1,959,004 $6,846,834
- ---------------------------------------------------------------------------
AT&T has agreed to repurchase or guarantee certain finance receivables and
capital leases that go into default. At December 31, 1995 and 1994, $123,600 and
$155,312, respectively, of the Company's net investment in finance receivables
contained such recourse provisions. At December 31, 1995 and 1994, $115,233 and
$87,716, respectively, of the Company's net investment in capital leases
contained such provisions.
54
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", and No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". These standards
require that impaired loans be measured based on the present value of expected
cash flows, discounted at the loan's effective interest rate or, the loan's
observable market price or, the fair value of the collateral if the loan is
collateral dependent, as well as requiring certain related disclosures. The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements. The amount of impaired loans at December 31,
1995 is not material.
5. NET INVESTMENT IN OPERATING LEASES
The following is a summary of equipment under operating leases at December
31, 1995 and 1994, including equipment on lease to AT&T affiliates (see Note
12):
At December 31, 1995 1994
- ---------------------------------------------------------------------------
Original equipment cost:
Information technology $ 628,857 $ 571,504
Telecommunications 378,426 366,259
Transportation 456,575 304,936
General equipment and other 254,984 204,153
- ---------------------------------------------------------------------------
1,718,842 1,446,852
Less: Accumulated depreciation (642,728) (567,398)
Rentals receivable, net 41,522 23,071
- ---------------------------------------------------------------------------
Net investment in operating leases $1,117,636 $ 902,525
- ---------------------------------------------------------------------------
Minimum future rentals to be received on noncancelable operating leases as
of December 31, 1995, are as follows:
1996 $428,862
1997 248,915
1998 116,810
1999 46,974
2000 23,541
2001 and thereafter 8,857
- --------------------------------------------------------------------------
Total minimum future rentals $873,959
- ---------------------------------------------------------------------------
55
6. OTHER REVENUE
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
Other revenue consisted of the following:
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------
Net gain on sale of leased and off-lease
equipment $ 86,987 $ 76,453 $ 49,653
Gain on receivables securitizations 5,866* 14,799* 51,496*
Portfolio servicing fees 23,584 27,203 37,363
Other fee related revenue 44,105 38,871 40,290
Gain on SBA loan sales 10,508 1,512 1,192
Other portfolio related revenue 35,633 24,624 16,513
- ---------------------------------------------------------------------------
Total other revenue $206,683 $183,462 $196,507
- ---------------------------------------------------------------------------
* $5,866, $14,799 and $39,106 relates to securitizations in the fourth
quarter of 1995, 1994 and 1993, respectively; and $12,390 relates to a
securitization in the first quarter of 1993.
For the years ended December 31, 1995, 1994 and 1993, the Company
securitized portions of its capital lease portfolio amounting to $74,795,
$259,061 and $561,943, with proceeds received of $86,762, $287,550 and $648,887,
respectively. Included in other assets at December 31, 1995, is $61,490 of sales
proceeds withheld by the purchasers on the 1995 and prior years'
securitizations. This holdback, which acts as a credit enhancement for the
purchasers, is repaid to the Company over the life of the securitized
receivables. The securitization agreements provide for limited recourse to the
Company for any uncollectible amounts. 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. At December 31, 1995 and 1994, $559,010 and $853,003,
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 $254,787 at
December 31, 1995 and $353,143 at December 31, 1994. The Company has recorded a
liability for the amount that it expects to reimburse the purchasers.
On a periodic basis, the Company sells the guaranteed portion of SBA loans
in the secondary market. The gain on these sales is 1) decreased by an
adjustment to reduce the carrying value of the retained unguaranteed portion of
the loan to its fair value and 2) adjusted for any excess servicing fees to be
received.
56
7. DEBT
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
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, 1995 and 1994. Interest rates ranged from 5.48% to 5.83%
and 5.0% to 6.0% at December 31, 1995 and 1994, respectively. The discount
amortized on commercial paper, which reflects the cost of such debt, amounted to
$94,029, $69,341 and $64,790 in 1995, 1994 and 1993, respectively.
To support the commercial paper issued, the Company has revolving credit
facilities totaling $2.0 billion, all of which were available at December 31,
1995 and 1994. The majority of these facilities are renewed annually and contain
certain restrictive financial covenants. The Company is in compliance with all
covenants of these facilities. In addition, certain of the Company's foreign
operations have short-term bank lines of credit of approximately $1.0 billion,
of which approximately $638.0 million was unused at December 31, 1995. These
facilities are generally renewed annually. Facility fees paid for the revolving
and foreign credit arrangements were not material in 1995 or 1994.
57
Data with respect to short-term notes (principally commercial paper) are as
follows:
1995 1994 1993
- ---------------------------------------------------------------------------
End of year balance, net $2,212,351 $2,176,877 $1,546,562
Weighted average interest
rate at December 31, 5.9% 5.8% 3.3%
Highest month-end balance $2,212,351 $2,176,877 $2,067,592
Average month-end balance (a) $1,921,298 $1,741,872 $1,313,312
Weighted average interest rate (b) 5.3% 4.3% 3.3%
- ---------------------------------------------------------------------------
(a) The average month-end balance was computed by dividing the total of the
outstanding month-end balances by the number of months.
(b) The weighted average interest rate during the year is calculated by
dividing the interest charged for the year by the average month-end
balance.
Medium and Long-term Debt
Medium and long-term debt outstanding at December 31, 1995 and 1994,
consisted of the following:
Maturities 1995 1994
- ---------------------------------------------------------------------------
4.12% - 5.99% Medium-term notes 1995 - 1999 $ 716,900 $ 938,625
6.00% - 6.99% Medium-term notes 1995 - 2000 1,466,025 970,900
7.00% - 9.15% Medium-term notes 1995 - 2005 1,043,825 326,795
Floating rate Medium-term notes
Interest periodically reprices
based on various indices. As of
December 31, 1995 and 1994, the
average interest rate ranged from
4.93%-5.74% and 5.79%-6.20%,
respectively. 1995 - 1997 1,129,500 980,000
Other long-term debt 1995 - 2001 359,808 163,261
- ---------------------------------------------------------------------------
Total medium and long-term debt $4,716,058 $3,379,581
- ---------------------------------------------------------------------------
58
The Company's medium and long-term debt matures as follows:
1996 $2,168,515
1997 1,401,476
1998 794,821
1999 163,169
2000 69,003
2001 and thereafter 119,074
- ---------------------------------------------------------------------------
Total $4,716,058
- ---------------------------------------------------------------------------
To reduce exposure to interest rate movements, the Company enters into
interest rate swap agreements (see Note 13). The weighted average interest rate
on average total debt outstanding, including the effect of these swaps, was
6.60% and 5.65% for the years ended December 31, 1995 and 1994, respectively.
During 1995 and 1994, the Securities and Exchange Commission ("SEC")
declared effective debt registration statements (which allow the Company to
issue debt to the public) of $3.0 billion and $2.5 billion, respectively. As of
December 31, 1995, all of the debt associated with the 1994 registration
statement was issued and $2.0 billion was available for issuance under the
Company's 1995 debt registration.
As a result of the Restructuring (see Note 1), medium and long-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, 1995 and
1994, the amount of such guaranteed debt was $319,200 and $747,895,
respectively. In addition, as a result of the Restructuring, AT&T guaranteed the
Company's recourse exposure of securitizations at March 31, 1993 (see Note 6)
which amounted to $88,302 and $212,199 at December 31, 1995 and 1994,
respectively.
8. SHAREOWNERS' EQUITY AND EARNINGS PER SHARE
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
During 1995, the Company's Board of Directors declared dividends totaling
$.41 per share. In addition, on January 19, 1996, the Company's Board of
Directors declared a quarterly dividend of $.11 per share to shareowners of
record on February 9, 1996. The dividend is payable on February 29, 1996.
On June 28, 1993, the Company affected 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.
59
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% 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, 1995 and 1994:
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 (Commercial Paper and Other Short-term Notes)
The carrying amount is a reasonable estimate of fair value for commercial
paper. Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of other short-term
notes.
Gross Profit Tax Deferral Payable to AT&T
The fair value of the gross profit tax deferral is estimated by discounting
the expected future cash flows using the Company's current cost of debt. Based
on the AT&T announcement (see Note 16), this amount for 1995 has been calculated
based on the assumption that the amount will be repaid by December 31, 1996.
60
Medium and Long-term Debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Interest Rate and Currency Swap Agreements
The fair value of interest rate and currency swaps is estimated by
discounting the expected future cash flows using 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 obtained from dealers 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 table summarizes the carrying and fair values of on-balance
sheet instruments (as determined using the methods described above):
December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 3,961 $ 3,961 $ 54,464 $ 54,464
Net investment in finance
receivables (Note 4) 1,800,636 1,844,617 1,452,947 1,432,070
Liabilities:
Short-term notes (Note 7) 2,212,351 2,212,403 2,176,877 2,176,877
Gross profit tax deferral
payable to AT&T (Note 10) 248,902 237,845 214,066 184,238
Medium and long-term debt
(Note 7) $4,716,058 $4,844,594 $3,379,581 $3,319,101
- ---------------------------------------------------------------------------
61
The following tables summarize the carrying and fair values of off-balance
sheet financial instruments (as determined using methods described above):
- --------------------------------------------------------------------------
December 31, 1995
- ---------------------------------------------------------------------------
Carrying Amount Fair Value
Receivable Payable Receivable Payable
- ---------------------------------------------------------------------------
Interest rate swap agreements $ 3,681 $(1,477) $ 2,234 $(53,359)
Currency swap agreements 278 (1,185) 7,066 (8,235)
Foreign currency forward
exchange contracts $13,104 $ (814) $(3,036) $ (2,227)
- ---------------------------------------------------------------------------
December 31, 1994
- ---------------------------------------------------------------------------
Carrying Amount Fair Value
Receivable Payable Receivable Payable
- ---------------------------------------------------------------------------
Interest rate swap agreements $ 2,048 $(1,541) $57,033 $ (4,726)
Currency swap agreements 290 (444) 11,200 (2,338)
Foreign currency forward
exchange contracts $ 6,036 $(2,710) $2,852 $ (6,088)
- ---------------------------------------------------------------------------
Matching maturities of its portfolio assets and debt is a key component of
the financial strategy used by the Company to manage interest rate risk. Based
on unaudited calculations performed by the Company, the increased fair value of
the Company's debt has been offset by the increased fair value of the Company's
portfolio assets at December 31, 1995. Likewise, at December 31, 1994, the
decreased fair value of the Company's debt was offset by the decreased fair
value of the Company's portfolio assets. The fair value of the Company's lease
portfolio is not a required disclosure under SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments" and, therefore, only the fair value of the
finance receivable portfolio has been disclosed.
Hedging the net cash inflows from foreign denominated assets is a key
component of the financial strategy used by the Company to manage its exposure
to foreign currency fluctuations. Based on unaudited calculations performed by
the Company, the decreased fair value of the Company's forward exchange
contracts is generally offset by an increase in the fair value of the Company's
foreign denominated assets.
The Company has unused revolving credit facilities totaling $2.0 billion
and approximately $638 million of unused foreign credit facilities. The fair
value of the credit facilities is based upon fees currently paid for similar
arrangements which are not material (see Note 7).
62
At December 31, 1995 and 1994, 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 $254,787 and $353,143,
respectively. The Company has recorded a liability for the amount that it
expects to reimburse the purchasers (see Note 6).
10. INCOME TAXES
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
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 for 1995. 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 $248,902 and
$214,066 at December 31, 1995 and 1994, respectively. The average balance
outstanding for such loans was $245,869, $213,172 and $200,835 for the years
ending December 31, 1995, 1994 and 1993, respectively. These amounts are repaid
to AT&T as the temporary differences that generated the deferrals reverse. As
discussed in Note 16, the Company is obligated to repay such loans if the
Company were to cease being a member of AT&T's consolidated group for federal
income tax purposes. Management is of the opinion that the Company has
sufficient cash and credit resources to repay such loans if the Company were to
cease being a member of AT&T's consolidated group for federal income tax
purposes.
At December 31, 1995 and 1994, taxes currently payable to AT&T and third
parties were $30,589, and taxes currently receivable from AT&T and third parties
were $23,286, respectively.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes", 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 connection with such
adoption, 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. Unless the U.S.
Congress changes tax rates, the Company does not expect SFAS No. 109 to affect
net income materially in future periods. 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.
63
The provision (benefit) for income taxes consisted of the following:
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------
Current:
Federal $59,252 $(13,494) $(8,948)
State and local 13,415 (23,150) 31,448
Foreign 10,789 3,538 611
- --------------------------------------------------------------------------
Total current portion 83,456 (33,106) 23,111
- ---------------------------------------------------------------------------
Deferred:
Federal (5,460) 72,729 67,101
State and local 205 33,655 (23,682)
Foreign 2,483 - -
- ---------------------------------------------------------------------------
Total deferred portion (2,772) 106,384 43,419
- ---------------------------------------------------------------------------
Total provision for income taxes $80,684 $ 73,278 $66,530
- ---------------------------------------------------------------------------
The Company recorded tax credits of $10,850 and $3,446 in 1995 and 1994,
respectively. No tax credits were recorded in 1993.
64
Deferred income tax (liabilities) assets are composed of the following:
At December 31,
1995 1994
- --------------------------------------------------------------------------
Gross deferred income tax liabilities:
Lease related differences $(692,442) $(607,085)
Other (51,618) (89,463)
- --------------------------------------------------------------------------
Gross deferred income tax liabilities (744,060) (696,548)
- --------------------------------------------------------------------------
Gross deferred income tax assets:
Allowance for credit losses 124,186 101,591
Pensions 11,718 8,052
State and foreign net operating losses 17,926 18,802
Other 39,982 17,293
- --------------------------------------------------------------------------
Gross deferred income tax assets 193,812 145,738
- --------------------------------------------------------------------------
Valuation allowance (5,048) (4,477)
- --------------------------------------------------------------------------
Net deferred income tax liabilities $(555,296) $(555,287)
- --------------------------------------------------------------------------
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 $290,098 related to various state
jurisdictions expire in the following years:
1996 $ 16,054
1997 20,593
1998 25,026
1999 51,130
2000 61,289
2001 and thereafter 116,006
- ---------------------------------------------------------------------------
Total $290,098
- ---------------------------------------------------------------------------
65
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal
income tax effect 4.2 3.9 3.7
Impact of federal tax rate increase on prior years
deferred taxes - - 8.4
Tax exempt income (1.6) (1.7) (0.8)
Goodwill 0.5 1.2 0.8
Other 0.6 3.8 1.1
- ---------------------------------------------------------------------------
Effective tax rate 38.7% 42.2% 48.2%
- ---------------------------------------------------------------------------
The Company has no available AMT credit carryforwards at December 31, 1995
to reduce future federal income taxes payable.
For the years ended December 31, 1995, 1994 and 1993, the consolidated
income (loss) before income taxes and cumulative effect of accounting change by
domestic and foreign source was $210,296 and $(2,057), $177,662 and $(4,048),
and $153,010 and $(14,970), respectively.
11. PENSION AND BENEFIT PLANS
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
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.
66
Under a defined contribution plan, the amount of future pension benefits is
based solely on the amount contributed and the returns earned on those amounts.
The RSP has a profit sharing component (including a cash or deferred
arrangement) under Section 401(k) of the Internal Revenue Code and a money
purchase component. The Company's annual contribution under the profit sharing
component, which is discretionary above 5%, is expected to equal approximately
9% of employee pay (i.e., aggregate base salaries and annual incentives of
participants in the RSP). In addition, the Company matches an amount equal to
66-2/3% of the first 6% of compensation that each employee contributes to the
RSP under Section 401(k). RSP participants can select from a variety of funds
within the RSP to invest their allotments. The Company recorded $14,367 and
$13,525 of pension expense in 1995 and 1994, respectively, related to the RSP.
In addition, in 1995 and 1994 the Company recorded pension expense of $2,431 and
$1,366, respectively, 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 enable employees of the Company to
contribute a percentage of their salary to provide for postretirement income.
The Company recorded $1,412 and $1,034 of pension expense in 1995 and 1994,
respectively, related to the various international plans.
Prior to 1994, many 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 in 1993. In addition,
the Company recorded expenses of $6,312 in 1993 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. Components of net periodic pension cost for the years ended December
31, were:
1995 1994
- ------------------------------------------------------------------------
Service cost - benefits earned $ 456 $ 575
Interest cost on projected benefit obligation 450 427
Amortization 365 374
- ------------------------------------------------------------------------
Net periodic pension cost $1,271 $1,376
- ------------------------------------------------------------------------
67
The funded status of the plans at December 31 was:
1995 1994
- ------------------------------------------------------------------------
Accumulated benefit obligations:
Vested benefit obligation $1,495 $1,119
Non-vested benefit obligation 5,471 2,578
Total 6,966 3,697
Additional benefits on estimated future salary 1,434 1,176
Total projected benefit obligation 8,400 4,873
Plan assets at fair value - -
Unfunded projected benefit obligation 8,400 4,873
Unrecognized prior service cost 4,845 4,391
Unrecognized net loss (gain) 945 (894)
Unrecognized transition obligation - -
Additional liability 4,458 2,387
Accrued pension liability recorded $7,068 $3,763
- ------------------------------------------------------------------------
At December 31, 1995 and 1994, respectively, the projected benefit
obligation was determined using assumed discount rates of 7.0% and 8.75% and
assumed long-term rates of increase in future compensation levels of 4.5% or
5.5%, depending on the plan. The decrease in the discount rate caused the
obligation to increase. To illustrate, had the 1995 rate been 8.0% (1.0%
higher), the 1995 total projected benefit obligation would have been lower by
$1.2 million.
Share Performance Incentive Plan
The Company's Share Performance Incentive Plan, as amended ("SPIP"), is
designed to provide the opportunity for cash incentive awards to key employees
at the end of five three-year performance periods. The first such period
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.
These incentive awards are generally based on the performance of the Company's
stock price and dividend yield relative to (1) the share performance of a select
benchmark group of financial services companies, and (2) the interest rate on
three-year treasury notes at the beginning of such performance period. The
estimated compensation expense relating to the SPIP is charged against income
over the respective performance periods.
68
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 restricted 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.
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 offering price ($26.875 per share). The options are
exercisable during the period from August 4, 1996, through August 4, 2003.
Options canceled during 1995 and 1994 were 102,852 and 54,895, respectively. No
options were canceled in 1993. Pursuant to the terms of the LSPP, no further
purchases of stock, Company loans or option grants will be made under the LSPP
subsequent to December 31, 1993.
69
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 or purchase under the LTIP
is 2,000,000. Similar to the LSPP, eligible employees purchasing stock under the
LTIP 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
7.92% 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
Changes in 1995:
Options exercised (16,978) $21.50-$26.15
Options canceled (79,605) $21.50-$26.15
Options granted 345,036 $21.50-$47.03
- ---------------------------------------------------------------------------
Options outstanding at December 31, 1995 1,351,822 $21.50-$47.03
- ---------------------------------------------------------------------------
Options exercisable at December 31, 1995 59,157 $21.50-$26.56
Options exercisable at December 31, 1994 7,264 $21.50-$26.13
- ---------------------------------------------------------------------------
70
In addition, the Company has awarded restricted stock under the LTIP to
certain employees in consideration of services rendered. During 1995, 1994 and
1993, respectively, restricted stock awards of 19,967, 17,801 and 15,306 were
made to employees under the LTIP.
As of December 31, 1995 and 1994, respectively, 405,106 and 735,936 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
1995 and 1994, 27,965 and 13,484 shares were purchased by employees at prices
ranging from $22.05 to $36.00 and $19.02 to $21.83 per share, respectively. At
December 31, 1995, there were 458,551 shares available for offering under the
ESPP.
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 choose either 1) a fair value
method of valuing stock-based compensation plans which will affect reported net
income, or 2) to continue following 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 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, the adoption of this standard will not impact the Company's results
of operations, financial position or cash flows.
Severance Plans
In 1995, the Company's Compensation Committee and Board of Directors
approved broad-based plans that provide for benefits to members upon certain
terminations of employment. Such benefits are calculated using annual base pay
and annual incentive awards as well as other factors. No accrual for these
benefits have been reflected in the consolidated financial statement because the
amount cannot be reasonably estimated. In addition, no estimate can be made of
the impact of such benefits to the Company's financial position or operating
results resulting from a plan of force reduction, if any, associated with the
sale of the Company (see Note 16).
71
12. RELATED-PARTY TRANSACTIONS
For a discussion regarding the potential impacts of AT&T's announcement to
sell its 86% interest in the Company, see Note 16.
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:
1996 $ 5,465
1997 3,293
1998 96
1999 11
2000 11
2001 and thereafter 4
- --------------------------------------------------------------------------
Total $ 8,880
- --------------------------------------------------------------------------
Rental expense under existing leases with AT&T and affiliates amounted to
$5,494, $4,101 and $7,998, in 1995, 1994 and 1993, 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 $20,038 in 1995, $20,628 in 1994 and
$32,320 in 1993.
At December 31, 1995, 1994 and 1993, the Company was the lessor to AT&T of
equipment comprising $176,369, $268,616 and $145,812 of capital leases and
$220,507, $204,647 and $376,970 of equipment under operating leases,
respectively. Revenue related to these leases was $105,787, $108,808 and
$170,788 in 1995, 1994 and 1993, respectively.
The Company also had an interest bearing intercompany debt payable to AT&T
and affiliates of $18,265 at December 31, 1995 and an interest bearing
intercompany note receivable from AT&T and affiliates of $40,105 at December 31,
1994 (see Note 7). The net interest income and expense associated with
intercompany borrowing were not material in 1995, 1994 or 1993. Additionally,
the Company had interest free loans related to tax agreements from AT&T at
December 31, 1995 and 1994, respectively, of $248,902 and $214,066 (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 a basis consistent with
past practice. The Company and AT&T have also entered into an Intercompany
Agreement whereunder, among other things, the Company manages and administers,
for a fee, certain lease portfolios, including the Lease Finance Assets of Old
Capital and Old Credit which were not transferred to the Company (see Note 1).
During 1995, 1994 and 1993, the Company recognized service fee revenue of
$7,608, $8,551 and $18,361, respectively, for such services.
72
The Company is also party to Operating and License Agreements with AT&T.
See Note 16 for a discussion of these agreements and the related potential
impacts of AT&T's announcement to sell its 86% interest in the Company.
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, 1995 and 1994, in management's opinion, there was no
significant risk of loss in the event of nonperformance of the counterparties to
derivative contracts. There were no past due amounts, nor were there any
reserves for credit losses on derivatives as of December 31, 1995, 1994 and
1993. Generally, the Company does not require collateral or other security to
support financial instruments with credit risk. The Company has never
experienced a credit related charge-off associated with derivative transactions.
Information is provided below for each significant derivative product type.
The derivatives, with which the Company is involved, are primarily interest rate
swaps, currency swaps, and foreign currency forward exchange contracts.
Interest Rate and Currency Swaps
The Company enters into interest rate and foreign currency swap agreements
with major money center banks and intermediaries located in major financial
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.
Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount. Generic swaps' notional amounts generally do not change for
the life of the contract. Amortizing and accreting swaps' notional amounts
generally change based upon a predetermined amortization or accretion schedule.
Currency swaps generally involve the exchange of both principal and interest
payments in distinct currencies.
73
The notional amounts shown below for interest rate swaps represent an
agreed upon amount on which calculations of amounts to be exchanged are based
and for currency swaps also represent the U.S. equivalent of an amount
exchanged. Notional amounts do not represent the Company's exposure. Rather, the
Company's exposure is limited to the current fair value of the contracts with a
positive fair value at the reporting date (see Note 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 1995 and 1994, is summarized as follows:
Generic Amortizing Generic
Pay Pay Pay Currency
Notional Amounts Fixed Fixed Floating Swaps Total
- ---------------------------------------------------------------------------
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
Additions 124,339 373,435 240,000 151,631 889,405
Maturities/
amortization (350,000) (406,365) (175,000) (108,455) (1,039,820)
Terminations (225,000) (59,400) - - (284,400)
- --------------------------------------------------------------------------
December 31, 1995 $1,121,139 $ 872,643 $240,000 $264,993 $2,498,775
- --------------------------------------------------------------------------
The schedule of maturities at December 31, 1995 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 $1,121,139 $872,643 $240,000 $264,993 $2,498,775
Weighted average
pay rate 6.34% 6.21% 5.73% 7.06% 6.31%
Weighted average
receive rate 5.83% 5.96% 5.80% 5.87% 5.88%
- ---------------------------------------------------------------------------
74
Generic Amortizing Generic
Pay Pay Pay Currency
Fixed Fixed Floating Swaps Total
- ---------------------------------------------------------------------------
1996 Maturities $534,321 $447,136 $240,000 $ 93,655 $1,315,112
Weighted average
pay rate 5.54% 5.86% 5.73% 6.31% 5.74%
Weighted average
receive rate 5.80% 5.95% 5.80% 5.87% 5.86%
1997 Maturities $ 94,329 $242,069 - $ 85,549 $ 421,947
Weighted average
pay rate 5.85% 6.37% - 7.41% 6.46%
Weighted average
receive rate 5.75% 5.96% - 5.87% 5.90%
1998 Maturities $255,818 $ 91,841 - $ 61,615 $ 409,274
Weighted average
pay rate 6.80% 6.79% - 7.57% 6.91%
Weighted average
receive rate 5.87% 6.06% - 5.87% 5.91%
1999 Maturities $201,680 $ 44,538 - $ 19,836 $ 266,054
Weighted average
pay rate 8.00% 6.70% - 7.67% 7.76%
Weighted average
receive rate 5.87% 5.98% - 5.87% 5.89%
2000 Maturities $ 3,491 $ 22,806 - $ 4,338 $ 30,635
Weighted average
pay rate 6.56% 6.35% - 6.57% 6.41%
Weighted average
receive rate 5.93% 5.87% - 5.87% 5.88%
2001-2017 Maturities $ 31,500 $ 24,253 - - $ 55,753
Weighted average
pay rate 7.01% 7.75% - - 7.33%
Weighted average
receive rate 5.87% 5.87% - - 5.87%
- ---------------------------------------------------------------------------
Foreign Currency Forward Exchange Contracts
The Company enters into foreign currency forward exchange contracts to
manage foreign exchange risk. The U.S. dollar equivalent of such contracts was
$658,808 and $318,054 at December 31, 1995 and 1994, respectively. The Company
enters into these contracts to hedge the cash flows associated with foreign
currency denominated assets. The term of these contracts is rarely more than
three years. The purpose of the Company's foreign currency hedging activities is
to protect the Company from the risk that the eventual dollar net cash inflows
resulting from these assets will be adversely affected by changes in exchange
rates.
75
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, 1995, 1994 and 1993 was
$17,258, $14,202 and $9,626, respectively. Rental expense associated with
sublease rentals on operating leases for 1995, 1994 and 1993, was $165, $115 and
$419, respectively. Minimum annual rental commitments at December 31, 1995,
under these operating lease agreements are as follows:
1996 $11,318
1997 8,900
1998 2,964
1999 2,441
2000 1,332
2001 and thereafter 2,431
- ---------------------------------------------------------------------------
Total $29,386
- ---------------------------------------------------------------------------
The total of minimum rentals to be received in the future under
noncancelable subleases related to operating leases as of December 31, 1995, was
$11,841. The total of minimum rentals to be received in the future under
noncancelable subleases related to capital leases (recorded as debt) as of
December 31, 1995, was $109,290.
In the normal course of business, the Company is subject to certain
lawsuits and other claims. Such matters are subject to many uncertainties and
the outcomes are not predictable with assurance. Consequently, the ultimate
monetary liability or financial impact with respect to these matters at December
31, 1995 cannot be ascertained. While these matters could impact the operating
results, management believes that after final disposition, any monetary
liability or financial impact to the Company would not be material to the
consolidated financial statements.
14. FOREIGN OPERATIONS
The following data on other geographic areas pertain to operations that are
located outside the U.S. (primarily Europe, Canada, the Asia/ Pacific Region,
Mexico and South America). Net income (loss) includes certain allocated
operating expenses and interest expense. Revenues between geographic areas are
not material.
76
A summary of the Company's operations by geographic area is presented
below:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
Total Revenues:
United States $1,370,672 $1,250,591 $1,274,615
Foreign 206,363 133,488 84,974
- --------------------------------------------------------------------------
Total $1,577,035 $1,384,079 $1,359,589
- --------------------------------------------------------------------------
Net Income (Loss):
United States $ 130,587 $ 104,558 $ 78,024
Foreign (3,032) (4,222) (9,428)
- --------------------------------------------------------------------------
Total $ 127,555 $ 100,336 $ 68,596
- --------------------------------------------------------------------------
At December 31, 1995 1994 1993
- --------------------------------------------------------------------------
Total Assets:
United States $7,868,941 $7,148,737 $6,002,857
Foreign 1,672,318 873,186 406,869
- --------------------------------------------------------------------------
Total $9,541,259 $8,021,923 $6,409,726
- --------------------------------------------------------------------------
15. QUARTERLY DATA (Unaudited)
Quarters First Second Third Fourth Total
1995
Total revenues $362,814 $381,956 $395,881 $436,384 $1,577,035
Interest expense 93,998 100,806 106,086 110,150 411,040
Net income 25,083 27,912 32,472 42,088 127,555
Earnings per share 0.53 0.59 0.69 0.89 2.70
Stock price per share
high 27.250 27.750 38.625 40.375 -
low 21.625 24.000 27.125 35.750 -
Dividends declared $ 0.10 $ 0.10 $ 0.10 $ 0.11 $ 0.41
Quarters First Second Third Fourth Total
1994
Total revenues $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 -
Dividends declared $ 0.09 $ 0.09 $ 0.09 $ 0.10 $ 0.37
- ---------------------------------------------------------------------------
77
Net income and earnings per share in the fourth quarters of 1995 and 1994,
reflected certain securitization transactions (see Note 6).
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.
16. AT&T SALE OF THE COMPANY (See Note 1)
On September 20, 1995, AT&T announced a plan to pursue the public or
private sale of its remaining 86% interest in AT&T Capital. As noted in AT&T's
1995 Annual Report on Form 10-K, AT&T has stated that it cannot predict the
timing or terms of any such transaction. On such date, AT&T also announced a
plan to separate (the "Separation") into three publicly-held stand-alone global
businesses that will each be focused on serving certain core businesses:
communication services (to be carried on by the new AT&T), communications
systems and technology (to be carried on by the newly formed Lucent Technologies
Inc. ("Lucent")), and transaction-intensive computing (to be carried on by NCR
Corporation ("NCR")). The Separation is to be accomplished via spin-offs of
Lucent and NCR to AT&T's shareholders, which in the case of Lucent will be
preceded by a public offering of less than 20% of its shares. The Separation is
targeted by AT&T to be completed by the end of 1996, but remains subject to a
number of conditions.
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.
Notwithstanding the Separation, 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 equipment marketed by AT&T to its customers)
will remain in place with respect to AT&T, the initial term of which expires in
August 2000. In addition, consistent with the terms of the Operating Agreement,
comparable Operating Agreements are being put in place with NCR and Lucent, the
initial terms of which expire in August 2000. While the Company is not able to
evaluate if the Separation will affect AT&T's, Lucent's or NCR's equipment
sales, any resulting change in the level of equipment sales by AT&T, Lucent and
NCR would likely have a corresponding impact on the Company's future financing
volumes associated with such sales.
78
In addition, the Regional Bell Operating Companies (the "RBOCs"), which
have historically been prohibited from manufacturing telecommunications
equipment by the terms of the Modified Final Judgment entered into in connection
with the divestiture of the RBOCs by AT&T in 1984, will be permitted to
manufacture such equipment and compete with Lucent, subject to satisfying
certain conditions, pursuant to telecommunications legislation recently enacted
by Congress. It is possible that one or more of the RBOCs may decide to
manufacture telecommunications equipment or form alliances with other
manufacturers. Either of such developments could result in increased competition
for Lucent, reduce the RBOCs' purchases of equipment from Lucent, and,
consequently, adversely impact the Company's financing volumes.
The planned change in the Company's ownership could, as described below,
have certain significant effects on the Company.
Tax Deconsolidation (see Note 10)
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
expected 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 or
operating 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").
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 such interest free loans upon Tax
Deconsolidation. 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. The aggregate outstanding principal amount of such
interest free loans was $248.9 million at December 31, 1995. In management's
opinion, the Company has sufficient cash and credit resources to repay such
loans in the event of a Tax Deconsolidation. Based on unaudited calculations
performed by the Company, if a Tax Deconsolidation had occurred on December 31,
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 $8.3 million. This estimate assumes that the Company refinanced
the interest free loans at current market interest rates (which are subject to
continual change).
79
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
to discontinue the use of the "AT&T" name as part of its corporate name. The
Company's subsidiaries may, notwithstanding such event, continue to use the
other AT&T licensed names (including NCR) and service marks pursuant to the
License (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 (see Note 7)
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.
80
Compensation and Benefit Plans (see Note 11)
Awards under the Company's SPIP are generally based on the performance of
the Company's stock price and dividend yield relative to the interest rate on
three-year treasury notes and the total return on the stock of a specified peer
group of financial services companies over three-year performance periods. 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
performance periods pending at such time.
The SPIP has been amended, subject to shareholder approval, to provide that
upon the consummation of a change in control transaction resulting in the common
stock of the Company no longer being publicly traded ("Private Sale"), Maximum
Payouts (as defined in the SPIP) associated with the pending and completed
performance periods, 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 possible 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%, 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 a
"Disaffiliation Event" would occur. If a Disaffiliation Event were to occur,
awards for the pending performance periods would be accelerated and payable
immediately to participants as an interim payout based upon performance through
the date of such Disaffiliation Event, and the performance period would
continue. 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 benchmark 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 charge to net income between $0 and $15 million.
In addition, the Company's compensation and benefit plans have various
provisions associated with the sale of AT&T's interest in the Company, including
the empowerment of the Compensation Committee of the Company's Board to
accelerate vesting rights or repurchase stock options on behalf of the Company.
Such actions of the Compensation Committee could have a material impact upon the
Company's consolidated financial statements. However, due to the uncertainties
and range of possible sale structures, the Company cannot estimate with
certainty the impact AT&T's sale of its interest in the Company would have on
its consolidated financial statements.
81
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.
82
The financial statements have been audited by Coopers & 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
83
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, 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 25, 1996
84
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 19, 1996 (the "Proxy Statement") to be filed within 120 days after the end
of the Company's fiscal year ended December 31, 1995, 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, 52, 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, 48, 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.
85
Charles D. Van Sickle, 53, 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, 39, has served as Senior Vice President and Chief
Financial Officer of the Company since October, 1995. From July 1994 to October
1995, Mr. Dwyer was Senior Vice President, Chief Financial Officer and
Treasurer. 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, 46, 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, 52, 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.
86
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 41
Consolidated Statements of Income 43
Consolidated Statements of Changes
in Shareowners' Equity 45
Consolidated Statements of Cash Flows 46
Notes to the Consolidated Financial
Statements 48
Report of Management 82
Report of Independent Auditors 84
(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 is
incorporated by reference to Exhibit 3.1 of 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 is incorporated by reference to Exhibit 3(b) of the
registrant's Annual Report on Form 10K [No. 1-11237] for the year
ended December 31, 1994, filed with the Securities and Exchange
Commission.
87
4(a). Indenture dated as of July 1, 1993 between the registrant and
Chemical Bank, Trustee (the "Indenture") is incorporated by
reference to Exhibit 4A of the registrant's Registration Statement
on Form S-3 [No. 33-49671] filed with the Securities and Exchange
Commission.
4(b). First Indenture Supplement dated as of June 24, 1994, to the
Indenture is incorporated by reference to Exhibit 4A-2 of the
registrant's Registration Statement on Form S-3 [No.33-54359]
filed with the Securities and Exchange Commission.
4(c). Instruments other than described above in 4(a) and 4(b) that
define the rights of holders of long-term debt of the registrant
and all of its consolidated subsidiaries, are omitted pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby
agrees to furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
10(a). Operating Agreement between the registrant and AT&T dated as of
June 25, 1993 is incorporated by reference to exhibit 10.1 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(b). First Amendment to Operating Agreement between the registrant
and AT&T dated January 5, 1995.
10(c). Intercompany Agreement between the registrant and AT&T dated as of
June 25, 1993 is incorporated by reference to Exhibit 10.2 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(d). License Agreement between the registrant and AT&T dated as of June
25, 1993 is incorporated by reference to Exhibit 10.3 of the
registrant's Registration Statement on Form S-1 [No. 33- 49605]
filed with the Securities and Exchange Commission.
10(e). Registration Rights Agreement between the registrant and AT&T
dated as of June 25, 1993 is incorporated by reference to Exhibit
10.4 of the registrant's Registration Statement on Form S-1 [No.
33-49605] filed with the Securities and Exchange Commission.
10(f). Tax Agreements between the registrant and AT&T dated as of June
25, 1993 is incorporated by reference to Exhibit 10.5 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(g). AT&T Capital Corporation 1993 Long Term Incentive Plan is
incorporated by reference to Exhibit 10.9 of the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
88
10(h). Form of Stock Option Agreement under the 1993 Long Term Incentive
Plan is incorporated by reference to Exhibit 10.10 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(i). Form of Restricted Stock Agreement under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.11 of
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 Stock Option Agreement under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.12 of
the registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(k). Form of Director's Restricted Stock Award under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.13 of
the registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(l). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan is
incorporated by reference to Exhibit 10.14 of the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
10(m). Form of Stock Purchase Agreement and related exhibits under the
1993 Leveraged Stock Purchase Plan is incorporated by reference to
Exhibit 10.15 of the registrant's Registration Statement on Form
S-1 [No. 33-49605] filed with the Securities and Exchange
Commission.
10(n). AT&T Capital Corporation 1993 Share Performance Incentive Plan is
incorporated by reference to Exhibit 10.17 on the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
10(o). Amendment Number 1 to the 1993 Share Performance Incentive
Plan dated November 14, 1995.
10(p). Restructuring Agreement dated as of March 29, 1993, among the
Registrant, Old Capital, Old Credit and AT&T is incorporated by
reference to Exhibit 10.18 of the registrant's Registration
Statement on Form S-1 [No. 33-49605] filed with the Securities and
Exchange Commission.
10(q). Credit Agreement dated as of June 30, 1995, among the registrant,
the Banks listed therein and Morgan Guaranty Trust Company of New
York, as Agent (five-year term).
89
10(r). Credit Agreement dated as of June 30, 1995, among the registrant,
the Banks listed therein and Morgan Guaranty Trust Company of New
York, as Agent (364-day term).
10(s). AT&T Capital Corporation 1993 Employee Compensation Adjustment
Plan is incorporated by reference to Exhibit 10.21 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(t). AT&T Capital Corporation 1993 Deferred Compensation
Plan as amended on October 21, 1994.
10(u). AT&T Capital Corporation 1993 Financial Counseling Plan is
incorporated by reference to Exhibit 10.22 of the registrant's
Registration Statement on Form S-1 [No.33-49605] filed with the
Securities and Exchange Commission.
10(v). AT&T Capital Corporation 1994 Employee Stock Purchase Plan is
incorporated by reference to Exhibit 4(c) of the registrant's
Registration Statement on Form S-8 [No. 33- 54315] filed with the
Securities and Exchange Commission.
10(w). AT&T Capital Corporation 1995 Annual Incentive Plan is
incorporated by reference to Exhibit 10(w) of the registrant's
Annual Report on Form 10K [No. 1-11237] for the year ended
December 31, 1994, filed with the Securities and Exchange
Commission.
10(x). AT&T Capital Corporation 1995 Senior Executive Annual Incentive
Plan is incorporated by reference to Exhibit A of the registrant's
definitive Proxy Statement dated March 20, 1995 issued in
connection with the 1995 Annual Meeting of Stockholders.
10(y). AT&T Capital Corporation Executive Benefit Plan as amended
and restated effective as of December 4, 1995.
10(z). AT&T Capital Corporation Supplemental Executive Retirement
Plan effective January 1, 1994.
10(aa).AT&T Capital Corporation Compensation Limit Excess Plan
effective January 1, 1995.
10(ab).Amendment to the AT&T Capital Corporation Compensation Limit
Excess Plan dated October 1, 1995.
10(ac).AT&T Capital Corporation Leadership Severance Plan
effective October 2, 1995.
10(ad).The Agreement between the registrant and AT&T dated
January 5, 1996.
90
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
(b) Reports on Form 8-K:
Report on Form 8K dated October 11, 1995 was filed pursuant to Item
5 (Other Events).
91
SCHEDULE VIII
AT&T CAPITAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(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
- ---------------------------------------------------------------------------
1995
Allowance for
Credit Losses:
U.S.:
Lease Financing(1)$113,735 $ 66,505 $ 34,890 $ (684) $144,666
Finance
Receivables(2) 46,637 15,167 9,043 (154) 52,607
Foreign 16,056 4,542 2,837 8,186 25,947
- --------------------------------------------------------------------------
Total $176,428 $ 86,214 $ 46,770 $ 7,348 $223,220
==========================================================================
1994*
Allowance for
Credit Losses:
U.S.:
Lease Financing(1)$ 95,196 $ 62,447 $ 32,919 $(10,989) $113,735
Finance
Receivables(2) 56,974 13,488 21,347 (2,478) 46,637
Foreign 7,649 4,953 1,279 4,733 16,056
- ---------------------------------------------------------------------------
Total $159,819 $ 80,888 $ 55,545 $ (8,734) $176,428
===========================================================================
1993*
Allowance for
Credit Losses:
U.S.:
Lease Financing(1)$ 86,086 $ 91,605 $ 45,728 $(36,767) $ 95,196
Finance
Receivables(2) 36,139 28,604 13,017 5,248 56,974
Foreign 1,736 3,469 284 2,728 7,649
- --------------------------------------------------------------------------
Total $123,961 $123,678 $ 59,029 $(28,791) $159,819
==========================================================================
(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.
*Amounts have been reclassified to conform to the 1995 presentation.
92
REPORT OF INDEPENDENT AUDITORS
------------------------------
Our report on the consolidated financial statements of AT&T Capital Corporation
and Subsidiaries is included on page 84 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 87 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 25, 1996
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AT&T CAPITAL CORPORATION
By Thomas C. Wajnert
-------------------------
Thomas C. Wajnert,
March 6, 1996 (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
By Thomas C. Wajnert
----------------------------
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 6, 1996
G. M. Lowrie
W. B. Marx, Jr.
R. A. McGinn
J. J. Melone
R. W. Miller * by power of attorney
S. L. Prendergast
B. Walker, Jr.
M. J. Wasser
94
EXHIBIT INDEX
Exhibit Number
3(a). Restated Certificate of Incorporation of the registrant is
incorporated by reference to Exhibit 3.1 of 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 is incorporated by reference to Exhibit 3(b) of the
registrant's Annual Report on Form 10K [No. 1-11237] for the year
ended December 31, 1994, filed with the Securities and Exchange
Commission.
4(a). Indenture dated as of July 1, 1993 between the registrant and
Chemical Bank, Trustee (the "Indenture") is incorporated by
reference to Exhibit 4A of the registrant's Registration Statement
on Form S-3 [No. 33-49671] filed with the Securities and Exchange
Commission.
4(b). First Indenture Supplement dated as of June 24, 1994, to the
Indenture is incorporated by reference to Exhibit 4A-2 of the
registrant's Registration Statement on Form S-3 [No.33-54359]
filed with the Securities and Exchange Commission.
4(c). Instruments other than described above in 4(a) and 4(b) that
define the rights of holders of long-term debt of the registrant
and all of its consolidated subsidiaries, are omitted pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby
agrees to furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
10(a). Operating Agreement between the registrant and AT&T dated as of
June 25, 1993 is incorporated by reference to exhibit 10.1 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(b). First Amendment to Operating Agreement between the registrant
and AT&T dated January 5, 1995.
10(c). Intercompany Agreement between the registrant and AT&T dated as of
June 25, 1993 is incorporated by reference to Exhibit 10.2 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(d). License Agreement between the registrant and AT&T dated as of June
25, 1993 is incorporated by reference to Exhibit 10.3 of the
registrant's Registration Statement on Form S-1 [No. 33- 49605]
filed with the Securities and Exchange Commission.
95
10(e). Registration Rights Agreement between the registrant and AT&T
dated as of June 25, 1993 is incorporated by reference to Exhibit
10.4 of the registrant's Registration Statement on Form S-1 [No.
33-49605] filed with the Securities and Exchange Commission.
10(f). Tax Agreements between the registrant and AT&T dated as of June
25, 1993 is incorporated by reference to Exhibit 10.5 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(g). AT&T Capital Corporation 1993 Long Term Incentive Plan is
incorporated by reference to Exhibit 10.9 of the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
10(h). Form of Stock Option Agreement under the 1993 Long Term Incentive
Plan is incorporated by reference to Exhibit 10.10 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(i). Form of Restricted Stock Agreement under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.11 of
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 Stock Option Agreement under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.12 of
the registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(k). Form of Director's Restricted Stock Award under the 1993 Long Term
Incentive Plan is incorporated by reference to Exhibit 10.13 of
the registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(l). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan is
incorporated by reference to Exhibit 10.14 of the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
10(m). Form of Stock Purchase Agreement and related exhibits under the
1993 Leveraged Stock Purchase Plan is incorporated by reference to
Exhibit 10.15 of the registrant's Registration Statement on Form
S-1 [No. 33-49605] filed with the Securities and Exchange
Commission.
10(n). AT&T Capital Corporation 1993 Share Performance Incentive Plan is
incorporated by reference to Exhibit 10.17 on the registrant's
Registration Statement on Form S-1 [No. 33-49605] filed with the
Securities and Exchange Commission.
96
10(o). Amendment Number 1 to the 1993 Share Performance Incentive
Plan dated November 14, 1995.
10(p). Restructuring Agreement dated as of March 29, 1993, among the
Registrant, Old Capital, Old Credit and AT&T is incorporated by
reference to Exhibit 10.18 of the registrant's Registration
Statement on Form S-1 [No. 33-49605] filed with the Securities and
Exchange Commission.
10(q). Credit Agreement dated as of June 30, 1995, among the registrant,
the Banks listed therein and Morgan Guaranty Trust Company of New
York, as Agent (five-year term).
10(r). Credit Agreement dated as of June 30, 1995, among the registrant,
the Banks listed therein and Morgan Guaranty Trust Company of New
York, as Agent (364-day term).
10(s). AT&T Capital Corporation 1993 Employee Compensation Adjustment
Plan is incorporated by reference to Exhibit 10.21 of the
registrant's Registration Statement on Form S-1 [No. 33-49605]
filed with the Securities and Exchange Commission.
10(t). AT&T Capital Corporation 1993 Deferred Compensation
Plan as amended on October 21, 1994.
10(u). AT&T Capital Corporation 1993 Financial Counseling Plan is
incorporated by reference to Exhibit 10.22 of the registrant's
Registration Statement on Form S-1 [No.33-49605] filed with the
Securities and Exchange Commission.
10(v). AT&T Capital Corporation 1994 Employee Stock Purchase Plan is
incorporated by reference to Exhibit 4(c) of the registrant's
Registration Statement on Form S-8 [No. 33- 54315] filed with the
Securities and Exchange Commission.
10(w). AT&T Capital Corporation 1995 Annual Incentive Plan is
incorporated by reference to Exhibit 10(w) of the registrant's
Annual Report on Form 10K [No. 1-11237] for the year ended
December 31, 1994, filed with the Securities and Exchange
Commission.
10(x). AT&T Capital Corporation 1995 Senior Executive Annual Incentive
Plan is incorporated by reference to Exhibit A of the registrant's
definitive Proxy Statement dated March 20, 1995 issued in
connection with the 1995 Annual Meeting of Stockholders.
10(y). AT&T Capital Corporation Executive Benefit Plan as amended
and restated effective as of December 4, 1995.
10(z). AT&T Capital Corporation Supplemental Executive Retirement
Plan effective January 1, 1994.
10(aa).AT&T Capital Corporation Compensation Limit Excess Plan
effective January 1, 1995.
97
10(ab).Amendment to the AT&T Capital Corporation Compensation Limit
Excess Plan dated October 1, 1995.
10(ac).AT&T Capital Corporation Leadership Severance Plan
effective October 2, 1995.
10(ad).The Agreement between the registrant and AT&T dated
January 5, 1996.
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
98