1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: October 1, 1996
AT&T CAPITAL CORPORATION
A Delaware Commission File I.R.S. Employer
Corporation No. 1-11237 No. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number (201) 397-3000
2
Form 8-K October 1, 1996
Item 1. CHANGES IN CONTROL OF THE REGISTRANT
On October 1, 1996, AT&T Capital Corporation (the "Registrant") consummated
a merger (the "Merger") with Antigua Acquisition Corporation, a Delaware
corporation ("Merger Sub"), pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among the Registrant, AT&T Corp. ("AT&T"), the former
indirect owner of approximately 86% of the Registrant's outstanding common
stock, par value $.01 per share (the "Common Stock"), Hercules Limited, a Cayman
Islands corporation ("Holdings"), and Merger Sub, a majority-owned subsidiary of
Holdings. Pursuant to the Merger Agreement, Merger Sub was merged with and into
the Registrant, with the Registrant continuing its corporate existence under
Delaware law as the surviving corporation (the "Surviving Corporation"). As a
result of the Merger, stockholders of the Registrant have the right to receive
$45 in cash for each outstanding share of the Registrant's Common Stock (other
than shares held by the Registrant or Holdings or any subsidiary of Holdings).
Twenty-seven members of the Registrant's senior management (the "Management
Offerees") were offered the opportunity to participate in the Management Share
Exchange (as defined below). Immediately prior to the effective time of the
Merger, Merger Sub consummated a share exchange (the "Management Share
Exchange") with certain members of the Registrant's management (the "Management
Investors"), including Thomas C. Wajnert, Chairman of the Board and Chief
Executive Officer of the Registrant, and 23 other members of the Registrant's
senior management, in which those Management Investors exchanged an aggregate of
650,441 shares of the Registrant's Common Stock (or approximately $29 million in
value, based on the $45 per share price to which such Management Investors would
have otherwise been entitled in connection with the Merger) for newly issued
shares of Merger Sub's common stock of equal value (which became shares of
Surviving Corporation's common stock upon consummation of the Merger). Of the
three Management Offerees who did not elect to participate in the Management
Share Exchange, two of such persons (both of whom participated in the
Registrant's Corporate Leadership Team) ceased their employment with the
Registrant after the consummation of the Merger.
As a result of the Merger and the Management Share Exchange, all of the
outstanding Common Stock of the Registrant is currently directly or indirectly
owned by (i) the Management Investors and (ii) GRS Holding Company Limited, a
private United Kingdom holding corporation engaged in the U.K. rail leasing
business ("GRSH"), which on a fully diluted basis is approximately 85%
beneficially owned by Nomura International plc ("Nomura"), a wholly owned
subsidiary of The Nomura Securities Co., Ltd., and 9.5% beneficially owned by
Babcock & Brown Holdings Inc., a San Francisco based leasing, asset and project
financing advisory company. The Management Investors own approximately 3.3% of
the Common Stock (or approximately 5.5% on a fully diluted basis), and GRSH
indirectly owns approximately 96.7% of the Common Stock (or approximately 94.5%
on a fully diluted basis).
The total amount of funds required to consummate the Merger (the "Merger
Consideration") was approximately $2,160 million, which amount represents the
sum of the aggregate purchase price for the outstanding shares of the
Registrant's Common Stock and the aggregate amount needed to cash-out the
Registrant's stock options in accordance with the Merger
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Form 8-K October 1, 1996
Agreement. The Merger Consideration was funded by (i) a loan (the "Interim
Loan") from Goldman Sachs Credit Partners L.P. in the amount of approximately
$1,255 million, which loan bears interest at an annual fixed rate of 5.6375%,
matures on October 30, 1996 and was repaid by the Registrant on October 15, 1996
from a portion of the proceeds of offerings of equipment receivable-backed
securities by affiliates of the Registrant (the "Asset Securitization"), and
(ii) equity contributions (collectively, the "Equity Contributions") received
from (a) capital contributions made to Merger Sub by Holdings in the aggregate
amount of $871 million (b) the Management Share Exchange by the Management
Investors of approximately $29 million and (c) the settlement of approximately
$5 million of recourse loans to senior executives. The Interim Loan contains
certain customary representations, warranties, defaults and covenants, including
a restriction on dividend payments by the Registrant, as well as a mandatory
prepayment requirement based on the Registrant's receipt of proceeds from the
Asset Securitization.
Following the effective time of the Merger, the Registrant's Board of
Directors increased from two to six and includes Hiromi Yamaji, Guy Hands, John
Appleton, Jeff Nash and David Banks, all of whom are currently officers,
directors or affiliates of Nomura, and Thomas C. Wajnert, the Chairman of the
Board and Chief Executive Officer of the Registrant. The current intention is
that the Board of Directors of the Registrant will be increased shortly after
the Merger to include a total of eight members, with at least one of the two
additional directors being a person whose principal occupation is related to
Nomura and/or Holdings or certain of their affiliates. Also, within three to six
months after the Merger, the Board of Directors will be further increased to a
total of eleven members, with at least two of the three additional directors
expected to be persons independent of the Registrant, Nomura and Holdings.
The Registrant anticipates that Nomura and certain of its affiliates will
receive customary banking and other fees from the Surviving Corporation from
time to time for services rendered to the Surviving Corporation and its
affiliates, including, without limitation, securitization transactions,
acquisitions, dispositions and other transactions.
A copy of the Registrant's press release dated October 1, 1996 is attached
hereto as Exhibit No. 99 and is incorporated herein by reference.
Item 5. OTHER EVENTS
In anticipation of a $200 million issuance of preferred securities by an
affiliate of the Registrant, which is expected to close by October 31, 1996,
this Form 8-K includes the Registrant's unaudited consolidated financial
statements and related notes at and for the nine months ended September 30,
1996. In addition, unaudited pro forma financial statements and related
explanatory notes reflecting the impact of the Merger and related transactions
have been included under Item 7. Financial Statements and Exhibits of this Form
8-K. The unaudited pro forma consolidated balance sheet is presented assuming
the Merger and the related transactions occurred as of September 30, 1996. The
unaudited pro forma consolidated statements of income reflect the effects of the
Merger and the related transactions as if the Merger and such related
transactions had occurred on January 1, 1995.
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Finance revenue $ 52,393 $ 46,793 $ 149,357 $ 127,825
Capital lease revenue 169,148 150,427 492,357 428,097
Rental revenue on
operating leases (A) 179,894 141,800 505,380 411,169
Equipment sales 24,012 10,375 72,608 27,356
Other revenue, net 45,162 46,486 150,792 146,204
-------- -------- --------- ---------
Total Revenues 470,609 395,881 1,370,494 1,140,651
-------- -------- --------- ---------
Expenses:
Interest 120,288 106,086 350,359 300,891
Operating and
administrative 126,762 116,456 375,172 351,443
Depreciation on
operating leases 117,394 88,328 329,336 259,487
Cost of equipment
sales 21,018 9,896 61,677 25,195
Provision for credit
losses 22,918 20,681 71,454 60,359
-------- -------- --------- ---------
Total Expenses 408,380 341,447 1,187,998 997,375
-------- -------- --------- ---------
Income before income
taxes 62,229 54,434 182,496 143,276
Provision for income
taxes 21,762 21,962 67,206 57,810
-------- -------- --------- ---------
Net Income $ 40,467 $ 32,472 $ 115,290 $ 85,466
======== ======== ========= =========
(Continued)
5
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in Thousands, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
-------- -------- -------- -------
Earnings per common
share and common share
equivalent:
Earnings Per Share $ .85 $ .69 $ 2.43 $ 1.82
======== ======== ======== ========
Weighted average shares
outstanding (thousands): 47,565 47,195 47,497 47,063
======== ======== ======== ========
(A) Includes $22,821 and $26,174 for the three months ended September 30,
1996 and 1995, respectively, and $67,224 and $66,398 for the nine
months ended September 30, 1996 and 1995, respectively, from AT&T
Corp.("AT&T") and its affiliates.
The accompanying notes are an integral part of these consolidated financial
statements.
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30,
1996 December 31,
(Unaudited) 1995
---------- ------------
ASSETS:
Cash and cash equivalents $ 18,574 $ 3,961
Net investment in finance
receivables 2,017,835 1,800,636
Net investment in capital
leases 6,503,112 6,187,131
Investment in operating
leases, net of accumulated
depreciation of $716,763 in
1996 and $642,728 in 1995 1,284,868 1,117,636
Deferred charges and other assets 427,211 431,895
---------- ----------
Total Assets $10,251,600 $ 9,541,259
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes, less
unamortized discount of
$271 in 1996 and $9,698 in
1995 $ 3,021,459 $ 2,212,351
Deferred income taxes 498,927 555,296
Income taxes and other payables 545,467 581,000
Payables to AT&T and affiliates 71,478 360,429
Medium- and long-term debt 4,896,467 4,716,058
Commitments and contingencies
----------- -----------
Total Liabilities $ 9,033,798 $ 8,425,134
----------- -----------
(Continued)
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Dollars in Thousands)
September 30,
1996 December 31,
(Unaudited) 1995
------------- ------------
Shareowners' Equity:
Common stock, one cent par value:
Authorized 100,000,000 shares,
issued and outstanding, 47,097,447
shares in 1996 and 46,968,810 shares
in 1995 $ 471 $ 470
Additional paid-in capital 786,163 783,244
Recourse loans to senior executives (20,923) (20,512)
Foreign currency translation
adjustments (2,804) (2,173)
Retained earnings 454,895 355,096
---------- ----------
Total Shareowners' Equity 1,217,802 1,116,125
---------- ----------
Total Liabilities and
Shareowners' Equity $10,251,600 $ 9,541,259
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Nine Months
Ended September 30,
1996 1995*
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 115,290 $ 85,466
Noncash items included in income:
Depreciation and amortization 344,459 303,412
Deferred taxes (17,034) 30,983
Provision for credit losses 71,454 60,359
Gain on receivables securitizations (5,041) -
Gain on SBA and other loan sales (8,833) (7,467)
(Increase) decrease in deferred charges and
other assets (63,976) 74,293
Decrease in income taxes and
other payables (109,789) (32,583)
Increase (decrease) in payables to AT&T and
affiliates 1,782 (3,170)
----------- -----------
Net Cash Provided by Operating Activities 328,312 511,293
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired - (292,590)
Purchase of finance asset portfolios (148,109) (14,937)
Financings and lease equipment purchases (4,170,561) (3,819,016)
Principal collections from customers,
net of amounts included in income 3,041,912 2,871,692
Cash proceeds from receivables securitizations 128,830 81,475
Cash proceeds from SBA and other loan sales 119,890 92,047
----------- -----------
Net Cash Used for Investing Activities $(1,028,038) $(1,081,329)
----------- -----------
(Continued)
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For The Nine Months
Ended September 30,
1996 1995*
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease)in short-term notes, net $ 790,842 $ (224,397)
Additions to medium and long-term debt 1,288,102 1,604,370
Repayments of medium and long-term debt (1,101,718) (906,495)
(Decrease) increase in payables to AT&T
and affiliates (247,397) 56,164
Dividends paid (15,490) (14,070)
--------- ---------
Net Cash Provided by Financing
Activities 714,339 515,572
--------- ---------
Net Increase (decrease) in Cash and Cash
Equivalents 14,613 (54,464)
Cash and Cash Equivalents at Beginning of Period 3,961 54,464
--------- ---------
Cash and Cash Equivalents at End of Period $ 18,574 $ 0
========= =========
Non-Cash Investing and Financing Activities:
In the first nine months of 1996 and 1995, the Company entered into capital
lease obligations of $24,456 and $20,496, respectively, for equipment that was
subleased.
In the first nine months of 1996 and 1995, the Company assumed debt of $3,384
and $472,952, respectively, in conjunction with acquisitions.
* Certain 1995 amounts have been restated to conform to the 1996
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
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Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by AT&T Capital Corporation and its subsidiaries ("AT&T Capital" or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations, financial position and cash flows for each period
shown. The results for interim periods are not necessarily indicative of
financial results for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and the current year's previously
issued Form 10-Qs.
2. Shareowners' Equity
On April 19, 1996 and July 19, 1996, the Company's Board of Directors
declared dividends of $.11 per share. The dividends were paid on May 31, 1996
and August 30, 1996, respectively, to shareowners of record as of the close of
business on May 10, 1996 and August 9, 1996, respectively.
3. Recent Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. It allows companies to
choose either 1) a fair value method of valuing stock-based compensation plans
which will affect reported net income, or 2) to continue to follow the existing
accounting rules for stock option accounting but disclose what the impacts would
have been had the fair value method been adopted. The Company adopted the
disclosure alternative which requires annual disclosure of the pro forma net
income and earnings per share amounts assuming the fair value method was adopted
on January 1, 1995. As a result, the adoption of this standard did not have any
impact on the Company's consolidated financial statements.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer
of financial assets be initially measured at fair value, if practical. It
11
Form 8-K October 1, 1996
also requires that servicing assets and other retained interests in the
transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on their
relative fair values at the date of the transfer. This statement is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and application is prospective.
Management does not expect the adoption of this standard to have a material
impact on the Company's consolidated financial statements.
4. Recent Events
On September 20, 1995, AT&T announced a plan to pursue the public or
private sale of its remaining 86% interest in AT&T Capital. On such date, AT&T
also announced a plan to separate (the "Separation") into three publicly-held
stand-alone global businesses (AT&T, Lucent Technologies Inc. ("Lucent") and NCR
Corporation ("NCR"). In connection with the Separation, AT&T spun-off its entire
remaining equity interest in Lucent to AT&T shareowners on September 30, 1996.
The Separation is targeted by AT&T to be completed by the end of 1996, subject
to certain conditions. For a more detailed discussion of AT&T's restructuring
plans see Note 16 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
In the second quarter of 1996, the Company executed an Operating Agreement
with each of Lucent and NCR, and entered into letter agreements with Lucent and
NCR regarding the applicability to Lucent and NCR of specified provisions of the
License Agreement and the Intercompany Agreement between the Company and AT&T.
The full texts of such Operating Agreements and letter agreements with Lucent
and NCR have been filed with the SEC.
The Company has paid a sales assistance fee ("SAF") to Lucent, which fee is
related to the volume of the Company's Lucent-related business. Under the terms
of its Operating Agreement with the Company, Lucent is prohibited from accepting
a SAF from any other provider of leasing services. In early 1996, following
Lucent's request, the Company agreed to pay a substantial increase in the SAF
for 1995, both as an absolute amount and as a percentage of volumes attributable
to Lucent. After giving effect to the increase, the SAF paid by the Company to
Lucent for 1995 was approximately double the 1994 fee. The Company and Lucent
recently agreed to a modified formula for calculating the SAF for the remaining
years of the term of Lucent's Operating Agreement (retroactive to January 1,
1996). The revised formula is expected to result in aggregate annual SAF which
are approximately double the amounts that would have been paid if the pre-1995
formula had been maintained.
On June 5, 1996, AT&T Capital entered into an Agreement and Plan of Merger
("the Merger Agreement") dated as of June 5, 1996, with AT&T, Hercules Limited
("Hercules") and Antigua Acquisition Corporation ("Antigua"). Hercules is owned
by Hercules Holdings (UK) Limited, which in turn is a wholly-owned subsidiary of
GRS Holding Company, Ltd., a U.K. rail leasing business.
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Form 8-K October 1, 1996
On September 30, 1996 the Company, pursuant to a Gross Profit Tax Deferral
Interest Free Loan Agreement (the "GPTD Agreement") between the Company and
AT&T, made a payment of $247.4 million to AT&T for full repayment of such loans.
The GPTD Agreement required the Company to repay such loans immediately prior to
the Company no longer being a member of AT&T's consolidated group for federal
income tax purposes. Also on September 30, 1996, pursuant to the Merger
Agreement, the Company made a $35.0 million payment to AT&T in exchange for AT&T
assuming all tax liabilities associated with Federal and combined state taxes
for periods prior to the consummation of the merger ("the Merger").
5. Subsequent Events
On October 1, 1996, the Merger was consummated and AT&T Capital's
shareowners received the rights to $45 in cash for each outstanding share of the
Company's common stock. The total purchase price for the Company's outstanding
shares and stock options was approximately $2,160 million. Upon consummation of
the Merger, Merger Sub, a wholly-owned subsidiary of Hercules, was merged with
and into the Company. In the future, it is expected that the Company will
increase its utilization of lease and loan receivable securitizations as a
source of debt financing. For the pro forma impacts of the Merger, refer to Item
7. Financial Statements and Exhibits included in this Form 8-K.
The Merger and the related transactions had a significant impact on the
Company's financial position and results of operations. Had the Merger and
related transactions occurred on September 30, 1996, the Company's total assets,
debt, total liabilities and shareowners' equity would have been $8.1 billion,
$6.6 billion, $7.4 billion and $.7 billion, respectively, and the net income for
the three and nine months ended September 30, 1996 would have been $86.0 million
and $160.8 million, respectively. Such related transactions include: (i) Tax
Deconsolidation from AT&T, as defined in the Company's 1995 Annual Report on
Form 10-K, (ii) effects of an Internal Revenue Service Code of 1986, Section
338(h)(10) election, (iii) deferred tax effects relating to the Merger and the
Section 338(h)(10) election and similar elections under certain state and local
laws, (iv) the $3.1 billion (Portfolio Assets of $3.4 billion, less residuals
not securitized) securitization of lease and loan receivables (which includes
$.3 billion of receivables previously sold and recently repurchased by the
Company) which occurred on October 15, 1996, (v) the purchase of outstanding
common stock pursuant to the Merger Agreement, and (vi) the issuance of
short-term notes and the incurrence of liabilities for payments under certain
benefit plans, other payments to certain employees and for Merger related
transaction costs.
The consolidated financial statements reflect, and the future consolidated
financial statements of the Company will reflect, the historical cost of the
Company's assets and liabilities. Adjustments to the Company's consolidated
financial statements to reflect the fair value
13
Form 8-K October 1, 1996
of the Company's assets and liabilities as of the merger date ("push down"
accounting) will not be reflected due to the existence of substantial publicly
traded debt of the Company.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro Forma Financial Information
(1) Unaudited Pro Forma Consolidated Balance Sheet as of September
30, 1996
(2) Unaudited Pro Forma Consolidated Statement of Income for the
twelve months ended December 31, 1995
(3) Unaudited Pro Forma Consolidated Statement of Income for the nine
months ended September 30, 1996
(c) Exhibits
2 Certificate of Merger, filed October 1, 1996.
3(i) Restated Certificate of Incorporation of AT&T Capital Corporation,
filed September 27, 1996.
(ii) AT&T Capital Corporation Amended and Restated By-Laws,
dated October 1, 1996.
99 AT&T Capital Corporation Press Release issued October 1, 1996.
14
Form 8-K October 1, 1996
AT&T Capital Corporation and Subsidiaries
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet and
statements of income of AT&T Capital Corporation ("Capital" or the "Company")
are based on the historical Consolidated Financial Statements of AT&T Capital
Corporation and Subsidiaries at September 30, 1996 and for the nine months then
ended and for the year ended December 31, 1995. On June 5, 1996, the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement"). The
Merger was consummated on October 1, 1996 (the "Merger"). The pro forma
consolidated balance sheet is presented assuming the Merger and the related
transactions (Tax Deconsolidation from AT&T, as defined in the Company's 1995
Annual Report on Form 10-K, effects of an Internal Revenue Code of 1986, Section
338(h)(10) election, deferred tax effects relating to the Merger and the Section
338(h)(10) election and similar elections under certain state and local laws,
issuance of $200 million preferred securities of a consolidated entity, a $3.1
billion (Portfolio Assets of $3.4 billion, less residuals not securitized)
initial securitization of lease and loan receivables (which includes $.3 billion
of receivables previously sold and recently repurchased by the Company), the
purchase of outstanding common stock pursuant to the Merger Agreement, the
issuance of short-term notes to fund both payments under certain benefit plans
and other payments to certain employees and Merger related transaction costs)
occurred as of September 30, 1996. The pro forma consolidated statements of
income reflect the effects of the Merger and the related transactions (Tax
Deconsolidation from AT&T, an anticipated increase in the Company's borrowing
costs, issuance of the above-mentioned preferred securities of a consolidated
entity, the reduction in revenues and expenses associated with the
above-mentioned securitization, the termination of certain contracts and
agreements between the Company and AT&T which will increase operating and
administrative expenses, and other increases in operating and administrative
expenses) as if the Merger and such related transactions had occurred on January
1, 1995.
The pro forma consolidated financial statements reflect, and the future
consolidated financial statements of the Company will reflect, the historical
cost of the Company's assets and liabilities. Adjustments to the Company's
consolidated financial statements to reflect the fair value of the Company's
assets and liabilities as of the Merger date ("push down" accounting) will not
be made due to the existence of substantial publicly traded debt of the Company.
The following pro forma financial information is unaudited and should be
read in conjunction with the accompanying notes thereto and with the
Consolidated Financial Statements included in the Company's 1995 Annual Report
on Form 10-K, second quarter 1996 Quarterly Report on Form 10-Q and the
consolidated financial statements included in Item 5 - Other Events included in
this Form 8-K. The pro forma financial information is not necessarily indicative
of either the financial position or the results of operations that would have
been achieved had the Merger and the related transactions actually occurred on
the dates referred to above, nor is it necessarily indicative of the results of
future operations, because such unaudited pro forma financial information is
based on estimates of financial effects that may prove to be inaccurate over
time.
15
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, PRO FORMA
1996(1) ADJUSTMENTS(2) PRO FORMA
---------- -------------- ---------
ASSETS:
Cash and cash equivalents $ 18,574 $ 18,574
Net investment in finance
receivables 2,017,835 $ (108,300)(7) 1,909,535
Net investment in capital
leases 6,503,112 (2,725,900)(7) 3,777,212
Net investment in operating
leases, net of accumulated
depreciation 1,284,868 1,284,868
Deferred charges and other assets 427,211 167,150 (3) 860,861
266,500 (7)
Receivable from AT&T - 280,000 (3) 280,000
----------- ------------ ----------
Total Assets $10,251,600 $(2,120,550) $8,131,050
=========== ============ ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes $ 3,021,459 $ (200,000)(4) 1,514,859
60,800 (5)
11,300 (6)
(1,378,700)(7)
Deferred income taxes 498,927 (498,927)(3) -
Income taxes and other payables 545,467 263,500 (3) 756,467
(32,700)(5)
(19,800)(7)
Payables to AT&T and affiliates 71,478 71,478
Medium and long-term debt 4,896,467 4,896,467
Commitments and contingencies
---------- -------- ----------
Total Liabilities $ 9,033,798 (1,794,527) $7,239,271
Company-obligated preferred
securities of subsidiary $200,000 (4) $200,000
(Continued)
16
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Continued)
September 30, PRO FORMA
1996 (1) ADJUSTMENTS(2) PRO FORMA
----------- -------------- ---------
Shareowners' Equity:
Common stock $ 471 $ 429 (7) $ 900
Additional paid-in capital 786,163 682,577 (3) 624,206
(844,534)(7)
Recourse loans to senior executives (20,923) 5,500 (7) (15,423)
Foreign currency translation
adjustments (2,804) (2,804)
Retained earnings 454,895 (28,100)(5) 84,900
(11,300)(6)
(330,595)(7)
---------- ---------- ---------
Total Shareowners' Equity 1,217,802 (526,023) 691,779
---------- ---------- ---------
Total Liabilities and
Shareowners' Equity $10,251,600 $(2,120,550) $8,131,050
========== =========== =========
The accompanying explanatory notes are an integral part of this pro forma
consolidated balance sheet.
17
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
At September 30, 1996
(Dollars in Thousands)
(1) The historical balance sheet at September 30, 1996 reflects the issuance of
short-term notes to (a) repay the $247.4 million interest-free loans AT&T Corp.
("AT&T") made to the Company pursuant to the Gross Profit Tax Deferral Interest
Free Loan Agreement and (b) fund the payment of $35.0 million to AT&T in
exchange for AT&T assuming all tax liabilities associated with Federal and
combined state taxes for periods prior to the Merger.
(2) The pro forma consolidated balance sheet reflects a significant
securitization of lease and loan receivables effected on October 15, 1996 in
connection with the financing of the Merger but does not reflect the Company's
proposed future strategy of increasing the periodic securitization of lease and
loan receivables as a funding source subsequent to the Merger. The amount of
lease and loan receivables currently anticipated to be securitized annually is
expected to be approximately 30% of annual financing volumes.
(3) Reflects the election under Section 338(h)(10) of the Internal Revenue
Service Code and similar elections under certain state and local laws. Under
these elections the Merger is deemed to be an asset sale for tax purposes
resulting in the Company being able to reflect its assets and liabilities at
fair value for tax purposes (i.e. a step-up in basis), and the excess Merger
consideration over book basis is tax deductible over time. Such an adjustment
substantially eliminates existing deferred tax liabilities at the Merger date
and creates a net deferred tax asset. The pro forma tax adjustment is calculated
using an assumed combined Federal and state statutory income tax rate of
approximately 39.0%.
In addition, AT&T has agreed to reimburse the Company for lost tax depreciation
in the amount of approximately $280 million. The lost tax depreciation resulted
from the Section 338 (h)(10) election and the related deemed sale of assets for
tax purposes. This amount is offset by an increase in the Company's current tax
liability. The Company is also entitled to a tax deduction for the cash-out of
the Company's stock options by Hercules. The tax benefit of such payment is
reflected as a reduction to the Company's current tax liability of $16.5
million.
(4) Reflects the issuance of $200 million preferred securities of a consolidated
entity of the Company assuming that (i) the securities are perpetual in nature,
and (ii) the net cash proceeds are used to repay short-term notes. This
transaction is expected to occur by October 31, 1996.
(5) Reflects the issuance of short-term notes to fund the accelerated payout and
additional amounts due under the Company's Share Performance Incentive Plan
("SPIP"), payments to certain officers of the Company to waive certain of their
rights under the Company's Leadership Severance Plan and certain other
termination and other payments and the related tax effect at the assumed
combined Federal and state statutory income tax rate of 39.55%.
18
Form 8-K October 1, 1996
(6) Reflects the issuance of short-term notes to fund the Company's Merger
transaction costs of approximately $11.3 million.
(7) Reflects the $3.1 billion asset securitization of lease and loan receivables
which occurred on October 15, 1996, the purchase of Company common stock, and
the issuance of new common stock. The pro forma balance sheet reflects the
associated: (i)reduction in the net investment in finance receivables and
capital leases to reflect the assets sold, (ii) an increase in deferred charges
and other assets reflecting the reclassification of equipment residual values
associated with the assets sold and establishment of a cash collateral account,
(iii) a net reduction of short-term notes reflecting the cash proceeds received
from the asset securitization net of the amount required to purchase Company
common stock, (iv) a net decrease in income taxes and other payables to adjust
securitization-related reserves, (vi) an increase in common stock to reflect the
new capitalization structure of the Company, (vii) the reduction of additional
paid in capital resulting from the retirement of common stock acquired, net of
the effects of the Section 338(h)(10) election under the I.R.S. Code and the
deferred tax effects relating to the Merger and such election, (viii) the
reduction of recourse loans to senior executives to reflect the settlement of
such loans, and (ix) the reduction of retained earnings to reflect the
retirement of the Company common stock. Included in this asset securitization is
a $24.0 million payment to Nomura for services provided and expenses incurred
($3.0 million of which was paid to Babcock & Brown) in connection with this
securitization.
Proceeds of $1,255 million received under an Interim Loan together with the
equity contribution relating to the Merger (approximately $860 million), were
used to purchase outstanding common stock of the Company. The Interim Loan was
repaid using a portion of the proceeds of the October 15, 1996 initial
securitization.
19
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, except per share amounts)
For the Year
Ended
December 31, Pro Forma
1995 Adjustments(1) Pro Forma
------------ ----------- ---------
Revenues:
Finance revenue $ 174,523 $ (13,500)(4)$ 161,023
Capital lease revenue 586,141 (304,400)(4) 281,741
Rental revenue on operating
leases 560,964 560,964
Equipment sales 48,724 48,724
Other revenue, net 206,683 15,300 (4) 247,083
25,100 (5)
--------- --------- ---------
Total Revenues 1,577,035 (277,500) 1,299,535
--------- --------- ---------
Expenses:
Interest 411,040 7,400 (2) 347,840
(70,600)(3)
Operating and
administrative 473,663 5,900 (6) 479,563
Depreciation on operating
leases 354,509 354,509
Cost of equipment sales 43,370 43,370
Provision for credit
losses 86,214 86,214
--------- --------- ---------
Total Expenses 1,368,796 (57,300) 1,311,496
--------- --------- ---------
Company-obligated preferred
securities of subsidiary 18,000 (7) 18,000
Income (Loss) before income taxes 208,239 (238,200) (29,961)
Provision (benefit) for income taxes 80,684 (94,208)(8) (13,524)
--------- -------- ----------
Net Income (Loss) $ 127,555 $(143,992) $ (16,437)
========= ========= ==========
Primary earnings (loss) per share $ .60 $ (0.18)
--------- ----------
Number of shares (000's) (9) 212,319 90,000
--------- ----------
Fully diluted earnings (loss) per
share $ .60 $ (0.18)
--------- ----------
Number of shares (000's) (9) 213,548 92,158
--------- ----------
The accompanying explanatory notes are an integral part of this pro forma
consolidated income statement
20
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Dollars in Thousands)
(1) The unaudited pro forma consolidated statement of income for the year ended
December 31, 1995 does not reflect the Company's proposed future strategy of
increasing the periodic securitization of lease and loan receivables as a
funding source subsequent to the Merger. The amount of lease and loan
receivables currently anticipated to be securitized annually is expected to be
30% of annual financing volumes. In addition, the pro forma consolidated
statement of income does not reflect nonrecurring items such as (i) the $84.9
million after-tax gain associated with the $3.1 billion securitization of lease
and loan receivables, which occurred on October 15, 1996, (ii) the $28.1 million
after-tax expense relating to accelerated payout of the Company's SPIP related
to the Merger and other payments to certain officers of the Company, and (iii)
the $11.3 million after-tax expense relating to the Company's Merger related and
other transaction costs. See Notes 5, 6, and 7 to the pro forma consolidated
balance sheet.
Since the recurring effects of securitizing lease and loan receivables as well
as the underlying assumptions can be material, the following 1995 pro forma
adjustments and pro forma net income would have resulted assuming (i) the gain
relating to the October 15, 1996 asset securitization is included in the results
of operations, (ii) various levels of such asset securitization, and (iii) other
securitization and other pro forma assumptions have been adjusted for such
change in securitization levels, but otherwise remain constant:
For the Year
Ended
December 31, Pro Forma
1995 Adjustments Pro Forma
----------- ----------- ----------
Net income, pro forma
adjustments and the pro
forma net income as shown
in the pro forma consolidated
statement of income for the
year ended December 31, 1995 $127,555 $(143,992) $(16,437)
======= ========= =======
Securitization sensitivity (in
$250 million increments), including
the non-recurring gain:
$3,057 million $127,555 $ (59,100) $ 68,455
$2,807 million $127,555 $ (57,900) $ 69,655
$2,557 million $127,555 $ (56,400) $ 71,155
$2,307 million $127,555 $ (54,800) $ 72,755
$2,057 million $127,555 $ (53,200) $ 74,355
$1,807 million $127,555 $ (51,600) $ 75,955
21 Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Dollars in Thousands)
(Continued)
(2) The Merger will likely increase the Company's borrowing costs. While it is
difficult to predict the response of investors to the Company's medium and
long-term note and commercial paper programs and, therefore, it is difficult to
quantify such effect of the Merger with reasonable accuracy, the Company has
estimated an increase in borrowing costs of 20 basis points relating to its
commercial paper program and 25 basis points relative to its medium and
long-term debt issuances. The increase in interest expense was calculated using
the 1995 average commercial paper balance outstanding and the 1995 issuances of
medium and long-term debt multiplied by the respective incremental interest
costs. To illustrate the Company's sensitivity to interest rates, had the
increase in such borrowing costs been 10 basis points lower or higher than the
above mentioned respective increases, the Company's interest expense adjustment
would have been $4.1 million or $10.7 million, respectively.
(3) Reflects the net reduction of interest expense as a result of the following
items, as adjusted for the increased borrowing costs as a result of the Merger.
See (2) above.
Interest Expense
Item Increase (Decrease)
- -------------------------------------------- -------------------
- - Net proceeds from the proposed $3.1 billion
asset securitization of lease and loan
receivables and the issuance of preferred
securities net of amounts used to purchase
outstanding Company common stock $ (94,000)
- - Repayment of the interest free loans AT&T
made to the Company pursuant to the Gross
Profit Tax Deferral Interest Free Loan
Agreement* 14,600
- - Securitization reserves recorded at
present value 2,400
- - Payment to AT&T to assume all tax
liabilities of Federal and combined state
taxes for periods prior to the Merger 2,100
- - Fund the accelerated payout and additional
amounts due under the Company's SPIP
and other payments 3,600
- - Merger related and other transaction
costs 700
---------
22
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Dollars in Thousands)
(Continued)
Net reduction in interest expense $ (70,600)
=========
* The amount is calculated using the 1995 average outstanding interest-free
loan balance.
(4) Reflects the net reduction in the Company's capital lease and finance
revenue as a result of the securitization. In addition, the Company will
recognize the interest income on the cash collateral account as well as the
excess spread amount (since it was recorded at its present value) both of which
are associated with such securitization.
(5) Reflects the recognition of the expected servicing fees associated with
servicing the securitized lease and loan receivables.
(6) Reflects the incremental recurring costs in the Company's operating and
administrative expenses, including services for telecommunications, certain
information processing, travel, human resource, real estate, express mail and
insurance services as a result of the Company no longer being entitled to the
discounts applicable to AT&T and its subsidiaries or received directly from
AT&T. In addition, the amount includes annual fees of $3.0 million that will be
paid to Nomura.
(7) Reflects dividends to be paid on preferred securities issued by a
consolidated entity of the Company.
(8) Reflects the tax effect of the foregoing estimated adjustments at the
assumed combined Federal and state statutory income tax rate of 39.55%.
(9) The number of shares used for the historical earnings per share was restated
to reflect the 4.5 to 1 stock split. The number of shares outstanding following
the Merger was 90 million.
23
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, except per share amounts)
For the Nine
Months Ended
September 30, Pro Forma
1996 Adjustments(1)Pro Forma
------------ ----------- ---------
Revenues:
Finance revenue $ 149,357 $ (7,300)(4) $142,057
Capital lease revenue 492,357 (165,200)(4) 327,157
Rental revenue on operating
leases 505,380 505,380
Equipment sales 72,608 72,608
Other revenue, net 150,792 8,300 (4) 172,692
13,600 (5)
---------- ---------- ---------
Total Revenues 1,370,494 (150,600) 1,219,894
---------- ---------- ---------
Expenses:
Interest 350,359 9,900 (2) 309,059
(51,200)(3)
Operating and
administrative 375,172 4,400 (6) 379,572
Depreciation on operating
leases 329,336 329,336
Cost of equipment
sales 61,677 61,677
Provision for credit
losses 71,454 71,454
--------- --------- ----------
Total Expenses 1,187,998 (36,900) 1,151,098
--------- --------- ---------
Company-obligated preferred
securities of subsidiary - 13,500 (7) 13,500
Income (Loss) before income taxes 182,496 (127,200) 55,296
Provision (benefit) for income taxes 67,206 (50,308)(8) 16,898
-------- --------- ---------
Net Income (Loss) $115,290 $(76,892) $ 38,398
======== ========= =========
Primary Earnings Per Share $ .54 $ 0.43
-------- ---------
Number of shares (000's) (9) 213,737 90,000
-------- ---------
Fully diluted earnings per share $ .54 $ 0.42
-------- ---------
Number of shares (000's) (9) 214,020 92,158
-------- ---------
The accompanying explanatory notes are an integral part of this pro forma
consolidated income statement.
24
Form 8-K October 1, 1996
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended September 30, 1996
(Dollars in Thousands)
(1) The unaudited pro forma consolidated statement of income for the nine months
ended September 30, 1996 does not reflect the effects of the Company's proposed
future strategy of increasing the periodic securitization of lease and loan
receivables as a funding source subsequent to the Merger. The amount of lease
and loan receivables currently anticipated to be securitized annually is
expected to be 30% of annual financing volume. In addition, the September 30,
1996 pro forma consolidated income statement does not reflect non-recurring
items. See Note 1 to the pro forma consolidated income statement for the year
ended December 31, 1995 and Notes 5, 6, and 7 to the pro forma consolidated
balance sheet.
Since the recurring effects of securitizing lease and loan receivables as well
as the underlying assumptions can be material, Note 1 to the pro forma
consolidated income statement for the year ended December 31, 1995 illustrates
such sensitivity. In addition, the impacts of the October 15, 1996 initial
securitization on the historical financial statements decreases over time as the
balance of the securitized lease and loan receivables outstanding amortizes. For
example, the reduction to finance and capital lease revenue for the nine months
ended September 30, 1996 was less than three quarters of what the reduction was
for the year ended 1995.
(2) The Merger will likely increase the Company's borrowing costs. While it is
difficult to predict the response of investors to the Company's medium and
long-term note and commercial paper programs and, therefore, it is difficult to
quantify the effect of such Merger with reasonable accuracy, the Company has
estimated an increase in borrowing costs of 20 basis points relating to its
commercial paper program and 25 basis points relative to its medium and long
term debt issuances. The increase in interest expense was calculated using the
1996 average commercial paper balance outstanding and the 1995 full year and the
year-to-date September 30, 1996 issuances of medium and long-term debt
multiplied by the respective incremental interest costs. To illustrate the
Company's sensitivity to interest rates, had the increase in such borrowing
costs been 10 basis points lower or higher than the above mentioned respective
increases, the Company's interest expense adjustment would have been $5.7
million or $14.1 million, respectively.
(3) Reflects the net reduction of interest expense as a result of the following
items, as adjusted for the increased borrowing costs as a result of the Merger.
See (2) above.
Interest Expense
Item Increase (Decrease)
- -------------------------------------------- -------------------
- - Net proceeds from the proposed $3.1 billion
asset securitization of lease and loan
receivables and the issuance of preferred
securities net of amounts used to
purchase outstanding Company common stock $ (67,700)
25
Form 8-K October 1, 1996
- - Repayment of the interest free loans
AT&T made to the Company pursuant to
the Gross Profit Tax Deferral Interest
Free Loan Agreement* 10,600
- - Securitization reserves recorded at
present value 1,300
- - Payment to AT&T to assume all tax
liabilities of Federal and combined state
taxes for periods prior to the Merger 1,500
- - Fund the accelerated payout and additional
amounts due under the Company's SPIP and
other payments 2,600
- - Merger related and other transaction
costs 500
---------
Net reduction in interest expense $ (51,200)
=========
* The amount is calculated using the 1996 average outstanding
interest-free loan balance.
(4) Reflects the reduction in the Company's capital lease and finance revenue as
a result of the securitization. In addition, the Company will recognize the
interest income on the cash collateral account as well as the excess spread
amount (since it was recorded at its present value) both of which are associated
with such securitization.
(5) Reflects the recognition of the expected servicing fees associated with
servicing the securitized lease and loan receivables.
(6) Reflects the incremental recurring costs in the Company's operating and
administrative expenses, including services for telecommunications, certain
information processing, travel, human resource, real estate, express mail and
insurance services as a result of the Company no longer being entitled to the
discounts applicable to AT&T and its subsidiaries or received directly from
AT&T. In addition, the amount includes annual fees of $3.0 million that will be
paid to Nomura.
(7) Reflects dividends to be paid on preferred securities issued by a
consolidated entity of the Company.
(8) Reflects the tax effect of the foregoing estimated adjustments at the
assumed combined Federal and state statutory income tax rate of 39.55%.
(9) The number of shares used for the historical earnings per share was restated
to reflect the 4.5 to 1 stock split. The number of shares outstanding following
the Merger was 90 million.
26
Form 8-K October 1, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T CAPITAL CORPORATION
/s/ Edward M. Dwyer
-----------------------
By: Edward M. Dwyer
Senior Vice President and
Chief Financial Officer
October 15, 1996
27
Form 8-K October 1, 1996
EXHIBIT INDEX
Exhibit No.
2 Certificate of Merger, filed October 1, 1996.
3(i) Restated Certificate of Incorporation of AT&T Capital
Corporation, filed September 27, 1996.
(ii) AT&T Capital Corporation Amended and Restated By-Laws,
dated October 1, 1996.
99 AT&T Capital Corporation Press Release issued October 1, 1996.