UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
Commission File Number 1-11237
AT&T CAPITAL CORPORATION
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number 201-397-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
No voting stock of this registrant is held by any non-affiliates of the
registrant. At July 31, 1997, 90,337,379 shares of the registrant's Common
Stock, par value $.01 per share, were issued and outstanding.
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996* 1997 1996*
-------- -------- -------- --------
Revenues:
Finance revenue $ 54,857 $ 49,712 $109,166 $ 96,963
Capital lease revenue 89,959 160,838 180,706 323,209
Rental revenue on
operating leases (A) 200,328 167,408 397,051 325,486
Revenue from securitizations
and loan sales 21,396 3,108 34,428 10,374
Equipment sales 12,565 29,890 20,740 48,596
Other revenue, net 57,288 49,655 115,231 95,256
------- ------- -------- -------
Total Revenues 436,393 460,611 857,322 899,884
------- ------- -------- -------
Expenses:
Interest 108,852 116,485 214,169 230,072
Operating and
administrative 130,748 126,042 267,031 248,409
Depreciation on
operating leases 133,176 109,550 265,152 211,941
Cost of equipment
sales 11,423 24,618 18,652 40,659
Provision for credit
losses 22,678 23,232 45,957 48,536
------- ------- -------- -------
Total Expenses 406,877 399,927 810,961 779,617
Distributions on Company
-obligated preferred
securities of subsidiary 4,530 - 9,060 -
------- ------- ------- -------
Income before income
taxes 24,986 60,684 37,301 120,267
Provision for income
taxes 9,791 22,905 14,678 45,444
-------- ------- -------- --------
Net Income $ 15,195 $ 37,779 $ 22,623 $ 74,823
======== ======== ======== ========
2
A) Includes $21,187 for the three months ended June 30, 1996
and $44,403 for the six months ended June 30, 1996,
respectively, from AT&T Corp.("AT&T"), Lucent Technologies Inc.
("Lucent") and NCR Corporation ("NCR")(herein, "AT&T/Lucent/NCR"
or the "Former Affiliates").
*Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1997 1996
---------- -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 9,028 $ -
Net investment in finance receivables 2,146,147 2,135,250
Net investment in capital leases 3,560,019 3,648,731
Net investment in operating
leases, net of accumulated
depreciation of $872,024 in
1997 and $777,905 in 1996 1,478,476 1,403,470
Deferred charges and other assets 799,505 788,935
Deferred income taxes 183,922 116,126
--------- ---------
Total Assets $8,177,097 $8,092,512
========= =========
LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes, less unamortized
discounts of $5,720 in 1997 and
$3,112 in 1996 $1,631,155 $1,867,247
Income taxes and other payables 535,987 580,575
Payables to affiliates and
Former Affiliates 46,999 139,706
Medium and long-term debt 5,033,366 4,597,677
--------- ---------
Total Liabilities 7,247,507 7,185,205
--------- ---------
Commitments and contingencies
Preferred Securities:
Company-obligated preferred
securities of subsidiary 200,000 200,000
--------- ---------
Shareowners' Equity:
Common stock, one cent par value:
Authorized 150,000,000 shares,
issued and outstanding, 90,337,379
shares in 1997 and 90,198,571 shares
in 1996 903 902
Additional paid-in capital 636,942 633,676
Recourse loans to senior executives (16,821) (15,697)
Foreign currency translation
adjustments (4,096) (3,502)
Retained earnings 112,662 91,928
--------- ---------
Total Shareowners' Equity 729,590 707,307
--------- ---------
Total Liabilities, Preferred
Securities and Shareowners' Equity $8,177,097 $8,092,512
========== ==========
4
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1997 1996*
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,623 $ 74,823
Noncash items included in income:
Depreciation and amortization 254,793 213,536
Deferred taxes (59,544) (3,117)
Provision for credit losses 45,957 48,536
Revenue from securitizations and loan sales (34,428) (10,374)
Decrease (increase) in deferred charges and
other assets 44,069 (34,345)
(Decrease) increase in income taxes and other
payables (48,839) 4,092
(Decrease) increase in payables to
affiliates and Former Affiliates (27,245) 627
--------- ---------
Net Cash Provided by Operating Activities 197,386 293,778
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Financings and lease equipment purchases (2,903,909) (2,901,826)
Principal collections from customers 1,750,266 2,009,146
Cash proceeds from securitizations and
loan sales 768,945 199,136
--------- ---------
Net Cash Used for Investing Activities $ (384,698) $ (693,544)
--------- ---------
(Continued)
5
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1997 1996*
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term notes, net $ (236,092) $ 20,801
Additions to medium and long-term debt 1,848,471 1,281,350
Repayments of medium and long-term debt (1,416,039) ( 729,641)
Decrease in payables to Former Affiliates - (18,253)
Dividends paid - (10,324)
--------- ---------
Net Cash Provided by Financing Activities 196,340 543,933
--------- ---------
Net Increase in Cash and Cash
Equivalents 9,028 144,167
Cash and Cash Equivalents at Beginning of Period 0 3,961
---------- ----------
Cash and Cash Equivalents at End of Period $ 9,028 $ 148,128
========== ==========
In the first six months of 1997 and 1996, the Company entered into capital lease
obligations of $3,256 and $20,503, respectively, for equipment that was
subleased.
* Certain 1996 amounts have been restated to conform to the 1997
presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE 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, reflect 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, 1996.
2. 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 (the "FASB") 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 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 was effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996 and application is prospective. In December 1996, SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" was issued. Management does not expect the adoption of either standard
to have a material impact on the Company's consolidated financial statements.
7
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129, which is applicable to all entities,
requires disclosure of information about the liquidation preference of preferred
stock, redeemable stock, and certain other disclosures. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997
which for the Company will be 1997. Management does not expect that the adoption
of SFAS No. 129 will have any impact on the consolidated financial statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires total comprehensive income to be reported in a
financial statement. Comprehensive income is defined as the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for
financial statements for periods ending after December 15, 1997 which for the
Company will be 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes a new model for
segment reporting. The Statement requires reporting of financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. It also
requires reporting of certain information about products and services,
geographic areas of operation, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997 which for
the Company will be 1998. Comparative information for earlier years will be
restated.
3. Derivative Disclosure
For a discussion regarding the Company's derivatives and related accounting
policies, see Notes 2, 11, and 15 to the Consolidated Financial Statements
included in the Company's 1996 Annual Report filed on Form 10-K. In addition,
the following information is provided pursuant to the SEC's Financial Reporting
Release No. 48 issued in 1997, the purpose of which is to enhance disclosures
regarding derivatives and other financial instruments.
Foreign Currency Forward Exchange Contracts
The Company enters into foreign currency forward exchange contracts to manage
foreign exchange risk (primarily British pounds and Canadian dollars). In the
event of an early termination, sale or extinguishment of such a contract is
determined to be a hedge, the gain or loss shall continue to be deferred over
the remaining term of the contract. The exchange of the principal amount under
the foreign currency forward exchange contracts is reflected in the statement
of cash flows in the "short-term notes, net" amount since the underlying amount
is generally commercial paper.
Interest Rate Swaps and Currency Swaps
Interest rate swaps and the interest component of the currency swaps generally
include the exchange of interest payments without the exchange of underlying
principal amounts. The difference between the two interest payments is recorded
as an adjustment to interest expense and is reflected in the statement of cash
flows in the "net income" amount. The exchange of the principal amount under the
currency swap is reflected in the statement of cash flows in the
"short-term notes, net" amount since the underlying amount is generally
commercial paper.
8
4. Subsidiary Debentures
The table below shows summarized consolidated financial information for
AT&T Capital Leasing Services, Inc. and AT&T Capital Services Corporation, both
wholly owned subsidiaries of the Company. The Company has guaranteed, on a
subordinated basis, payment on debentures issued by these subsidiaries.
AT&T Capital Leasing Services, Inc. For the six months ended
June 30,
(Dollars in Thousands)
(unaudited)
1997 1996
---- ----
Total revenues $ 75,929 $117,241
Interest expense 21,156 38,528
Operating and administrative expenses 41,492 41,531
Provision for credit losses 24,051 21,371
Income (loss) before taxes (12,196) 14,724
Net (loss) income ( 7,335) 8,864
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
Total assets $668,373 $628,943
Total debt 558,749 507,180
Total liabilities 629,268 597,203
Total shareowner's equity 39,105 31,742
AT&T Capital Services Corporation For the six months ended
June 30,
(Dollars in Thousands)
(unaudited)
1997 1996
---- -----
Total revenues $ 58,809 $ 50,809
Interest expense 3,395 2,321
Operating and administrative expenses 23,517 20,883
Provision for credit losses 591 -
Income before taxes 2,344 5,753
Net income 1,356 3,415
June 30, December 31,
1997 1996
-------- -----------
(unaudited)
Total assets $150,913 $161,232
Total debt 112,269 116,545
Total liabilities 135,176 145,565
Total shareowner's equity 15,737 15,667
9
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
When included in this Quarterly Report on Form 10-Q, the words, "will",
"should", "expects", "intends", "anticipates", "estimates" and similar
expressions, among others, identify forward looking statements for purposes of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"). Such statements, which include statements contained in this
Item 2, inherently are subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those set forth in such
statements. Such risks, many of which are beyond the control of AT&T Capital
Corporation (the "Company"), and uncertainties include, among others, those
described under "Risk Factors" included in Item 7 of the Company's 1996 Annual
Report on Form 10-K. These forward looking statements are made only as of the
date of this Quarterly Report on Form 10-Q. The Company expressly disclaims any
obligation or undertaking to release any update or revision to any forward
looking statement contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
RESULTS OF OPERATIONS
Three months ended June 30, 1997 vs. June 30, 1996
Unless otherwise indicated, all period to period comparisons represent
activity or balances at or for the three months ended June 30, 1997 versus June
30, 1996.
Net income of $15.2 million decreased $22.6 million, or 59.8%. Second
quarter 1997 net income was lower due to the decreased level of capital lease
revenue as a result of the recent increased level of securitization activity,
higher interest expense associated with higher leverage, a lower level of
sales of off-lease equipment, and distributions on Preferred Securities (as
defined herein). The securitization of $3.1 billion of assets in the fourth
quarter of 1996, higher leverage and the distributions on Preferred Securities
resulting from the Company's recapitalization in connection with its merger in
the fourth quarter of 1996 (the "Merger"), reduced net income by approximately
$30-$35 million. Somewhat offsetting these factors were increases in revenue
from securitizations and loan sales, operating lease margin and other revenue.
In light of the Company's significant securitization during the fourth
quarter of 1996, coupled with the Company's post-Merger recapitalization,
management expects 1997 quarterly income results to continue to be significantly
less than the comparable 1996 periods. However, management expects 1997 earnings
performance to continue to improve as the Company more fully transitions to
its new financing strategy of securitizing one-third of its annual volumes.
10
Finance revenue of $54.8 million increased $5.1 million, or 10.4%. An 11.0%
increase in the average net finance receivables accounted for $5.5 million of
the increase, while the decrease in the average yield to 10.15% from 10.21%
offset this increase by $0.4 million. Increases in the finance receivables
portfolio were generated primarily through growth in the large-ticket structured
finance and small-ticket portfolios. The decline in yield was experienced by
many of the Company's businesses and relates to increased competitive pressures
and the mix of the assets recently securitized (see below for a discussion of
the impact of securitizations on yields). In addition, a few large nonearning
accounts are also depressing the overall yield. See "Credit Quality" for a
discussion of these accounts.
Capital lease revenue of $90.0 million decreased $70.9 million, or 44.1%,
due primarily to a 42.4% decrease in the average net capital lease portfolio.
The decrease in the average portfolio was primarily due to the $3.0 billion
securitization in the fourth quarter of 1996 involving primarily capital leases.
The overall yield on capital leases decreased from 10.4% to 10.0%. The reduction
in yields occurred for several reasons including the effects of securitizing
higher yielding assets, run-off of relatively higher yielding leases and
competitive pressures. The Company's securitizations have generally included
small-ticket products having higher yields and margins as compared to larger
ticket products. Therefore, as securitizations occur, the proportion of these
higher yielding products in the Company's owned portfolio is reduced causing a
decrease in yields. Higher yields are not necessarily associated with higher
profitability, since these assets commonly carry higher credit provisions and
servicing costs.
Rental revenue on operating leases of $200.3 million increased $32.9
million, or 19.7%. Depreciation expense on operating leases of $133.2 million
increased $23.6 million, or 21.6%. Rental revenue less associated depreciation
("operating lease margin") was $67.2 million, or 33.5% of rental revenue,
compared with $57.9 million, or 34.6% of rental revenue for the comparable prior
year period. The decreased operating lease margin relates primarily to increased
depreciation on certain telecommunications equipment in lease renewal coupled
with a slightly lower utilization rate of testing and diagnostic equipment.
Net interest margin (finance revenue, capital lease revenue and rental
revenue, less depreciation on operating leases and interest expense) ("margin")
was $103.1 million or 5.73% of average net portfolio assets. This compares with
a margin of $151.9 million or 6.54% for the same period last year. The reduced
margin of $48.8 million is due to lower portfolio revenue and higher interest
expense resulting from higher leverage associated with the Company's post-Merger
recapitalization, offset by lower interest expense associated with carrying a
lower level of portfolio assets. Average net portfolio assets of $7.2 billion
were $2.2 billion lower than the comparative prior year quarter resulting in a
decrease in portfolio revenue of approximately $61.6 million. A slight increase
in the overall portfolio yield to 11.79% from 11.50%, due to a shift in the mix
toward operating leases, offset the decrease in revenue by approximately $5.2
million. The Company's post-Merger recapitalization includes higher debt
relative to assets, and the interest expense associated with carrying such
11
higher relative debt reduced the second quarter's margin by approximately $21.0
million. The lower level of debt associated with a smaller asset base decreased
interest expense by $28.6 million.
Revenue from sales of equipment of $12.6 million decreased 58.0% from $29.9
million. Similarly, cost of equipment sales of $11.4 million decreased from
$24.6 million. Equipment sales revenue less associated cost of equipment sales
("equipment sales margin") was $1.1 million, or 9.1% of equipment sales revenue
this quarter and $5.3 million, or 17.6% in the prior year quarter. The drop in
both equipment sales revenue and margin highlights the unusually strong results
attained in the previous year's second quarter. During 1996, equipment sales and
margin were bolstered by strong demand for mainframes and emerging technology
equipment. Volume and profitability from equipment sales tend to follow customer
behavior and generally are difficult to predict.
Securitization and loan sales revenue increased $18.3 million to $21.4
million. Higher securitization revenue accounted for $14.8 million of the
increase, with the remaining increase of $3.5 million attributable to higher
loan sales revenue. Higher securitization and loan sales revenue was generated
through the sale of $317.3 million of loans and leases in the second quarter of
1997 compared with $33.1 million in 1996.
Other revenue of $57.3 million increased $7.6 million, or 15.4%. Service
revenue more than doubled, up from $4.0 million to $10.1 million in 1997,
reflecting a higher managed asset base. Fee income of $5.3 million grew from the
$2.8 million earned in the prior year as a result of providing software
development services. Somewhat offsetting these improvements was a $4.2 million
decrease in gain on asset sales of $20.4 million primarily as a result of
decreases in the automotive business due to competitive pressures.
Average borrowings outstanding of $6.8 billion decreased 5.9%, or $.4
billion. This decrease was primarily due to a decrease in asset volume as a
result of increased securitization activity. Interest expense of $108.9 million
decreased 6.6%, or $7.6 million. The higher relative proportion of debt to
assets contributed approximately $21.0 million in higher interest, which was
more than offset by the approximately $28.6 million reduction to interest
primarily resulting from carrying fewer assets. The Company's average cost of
debt of 6.41% was slightly down from 6.46% in the prior year. The Company
issued medium and long term debt in the second quarter at an average rate of
6.51%, compared to debt maturing at an average rate of 6.3%.
Operating and administrative ("O&A") expenses of $130.7 million increased
$4.7 million, or 3.7%. Higher expenses are predominantly due to managing a
higher level of owned and managed assets. As a percentage of owned and managed
assets, second quarter annualized O&A expenses were 4.03% and 4.11% at June 30,
1997 and 1996, respectively. The Company's goal is to reduce this ratio to 3.5%
in a few years. (Please refer to the first paragraph of Management's Discussion
and Analysis of Financial Condition and Results of Operations, "Forward Looking
Statements" for a discussion of the risks inherent in forward looking
statements.)
See "Credit Quality" below for a discussion of the provision for credit
losses.
12
The accompanying consolidated statement of income for the current period
includes $4.5 million of quarterly distributions paid on trust originated,
Company-obligated preferred securities of subsidiary. These distributions relate
to $200 million of preferred securities issued in connection with the
recapitalization associated with the Merger (the "Preferred Securities").
The effective income tax rates were 39.2% and 37.7% for the second quarters
of 1997 and 1996, respectively. The increase in the overall rate is due to
higher effective state and foreign tax rates.
The Company has continued to expand its non-AT&T/Lucent/NCR business. For
the second quarter of 1997, non-AT&T/Lucent/NCR businesses represented 74.0%,
65.2% and 8.9% of the Company's total assets, revenues and net income,
respectively. That compares to 67.2%, 62.7% and 27.8%, of the Company's total
assets, revenues and net income, respectively, for the second quarter of 1996.
The decrease in non-AT&T/Lucent/NCR net income is consistent with lower
portfolio revenue generated from lower average net portfolio assets (as a result
of the $3.1 billion securitization in the fourth quarter of 1996), increased
costs incurred in connection with the foreign businesses (largely
non-AT&T/Lucent/NCR) and lower relative securitization gains compared to
AT&T/Lucent/NCR related gains. The Company anticipates ongoing
securitization activity equal to approximately one-third of the Company's total
annual financing volumes. As a result, the assets, revenues and net
income/(loss) of the non-AT&T/Lucent/NCR business will vary depending upon the
mix of assets securitized. (Please refer to the first paragraph of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Forward Looking Statements" for a discussion of the risks inherent in forward
looking statements.)
13
Six months ended June 30, 1997 versus June 30, 1996
Unless otherwise indicated, all period to period comparisons represent
balances or activity at or for the six months ended June 30, 1997 versus June
30, 1996, respectively.
Net income of $22.6 million decreased 69.8% from $74.8 million. Net income
was lower due to the decreased level of capital lease revenue as a result of the
recent increased level of securitization activity, higher interest expense
associated with higher leverage and distributions on Preferred Securities. The
impact of securitizing $3.1 billion of assets in the fourth quarter of 1996,
higher leverage and the distributions on Preferred Securities resulting from the
Company's recapitalization in connection with the Merger, reduced net income by
approximately $65-$75 million. Somewhat offsetting these factors were increases
in revenue from securitizations and loan sales, other revenue and operating
lease margin.
Finance revenue of $109.2 million increased 12.6% from $97.0 million. The
14.5% increase in average net finance receivables accounted for $14.0 million of
the increase. A slightly lower yield of 10.09% from 10.26% offset $1.8 million
of the increase. The growth in the portfolio was primarily due to the increase
in the large-ticket structured finance and small-ticket portfolios. The
reduction in yield is due to the same factors described in the three months
ended June 30, 1997 discussion.
Capital lease revenue of $180.7 million decreased 44.1% from $323.2 million
due primarily to a 41.3% decrease in the average net capital lease portfolio.
The decrease in the average portfolio was principally due to the $3.0 billion
securitization in the fourth quarter of 1996 involving primarily capital leases.
Revenue on operating leases of $397.1 million increased 22.0% and
depreciation expense on operating leases of $265.2 million increased 25.1%.
Operating lease margin was $131.9 million, or 33.2% of rental revenue compared
with $113.5 million, or 34.9% of rental revenue. Refer to the three month
discussion of operating lease revenue for a discussion of the variance.
Net interest margin of $207.6 million or 5.74% of average net portfolio
assets decreased from $303.6 million or 6.55% in the prior year. The reduced
margin of $96.0 million is due to lower portfolio revenue, higher relative
interest expense associated with the Company's post-Merger capitalization
structure, offset by lower interest expense associated with carrying a lower
level of portfolio assets. Average net portfolio assets of $7.2 billion were
$2.0 billion lower than the comparative prior year generating lower portfolio
revenue of approximately $117.3 million. A slight increase in the overall
portfolio yield of 11.66% from 11.51%, due to a shift in the mix toward
operating leases, offset the revenue drop by approximately $5.4 million. The
Company's post-Merger recapitalization resulted in higher leverage. The interest
expense associated with carrying such higher relative debt reduced the margin by
approximately $42.0 million. The lower level of debt associated with a smaller
asset base decreased interest expense by $57.9 million.
Revenue from sales of equipment of $20.7 million decreased 57.3% from $48.6
million. Similarly, cost of equipment sales of $18.6 million decreased 54.1%
from $40.7 million. Equipment sales margin of $2.1 million, or 10.1% of revenue
from sales of equipment decreased from $7.9
14
million, or 16.3%. Refer to the three month discussion of results for a
discussion of lower equipment sales revenue and margin.
Securitization and loan sales revenue increased $24.1 million to $34.4
million. Higher securitization revenue accounted for $19.0 million of the
increase, with the remaining increase of $5.1 million attributable to higher
loan sales revenue. Higher securitization and loan sales revenue was generated
through the sale of $708.6 million of loans and leases in the six months ended
June 30, 1997 compared to $130.9 million for the prior year.
Other revenue increased 21.0% to $115.2 million from $95.3 million. Service
revenue more than doubled from $8.5 million to $19.8 million. Fee income of
$10.3 million increased $5.1 million from $5.2 million. Refer to the three month
discussion of other revenue for explanation of these increases.
Average borrowings outstanding of $6.7 billion decreased 5.2%, or $.4
billion. This decrease was primarily due to a smaller asset base as a result of
increased securitization activity. Interest expense of $214.2 million decreased
6.9%, or $15.9 million. The higher relative proportion of debt to assets
contributed $42.0 million in higher interest, which was more than offset by the
$57.9 million reduction to interest resulting from carrying fewer assets.
O&A expenses of $267.0 million increased 7.5% from $248.4 million. This
increase was due to increased costs associated with managing a higher level of
assets. Total owned and managed assets of $13.0 billion grew 5.8% from the $12.3
billion reported at June 30, 1996. As a percent of owned and managed assets,
annualized O&A expenses of 4.12% were up slightly from 4.05% at June 30, 1996.
In addition to servicing a larger portfolio, certain technology systems
investments and costs relating to the Company's separation from AT&T have
contributed to the increase in the O&A ratio.
See "Credit Quality" below for a discussion of the provision for credit
losses.
The accompanying consolidated statement of income for the current period
includes $9.1 million of distributions paid on $200 million of Preferred
Securities.
The Company's effective income tax rate of 39.3% increased from 37.8%. Refer
to the three month discussion for the explanation of the increase.
Non-AT&T/Lucent/NCR businesses represented 74.0%, 63.9% and (30.9%) of the
total assets, revenues and net income, respectively. That compares to 67.2%,
61.8% and 28.4%, respectively. The 1997 non-AT&T/Lucent/NCR net loss is
consistent with lower portfolio revenue generated from lower average net
portfolio assets (as a result of the $3.1 billion securitization in the fourth
quarter of 1996), increased costs incurred in connection with the foreign
businesses (largely non-AT&T/Lucent/NCR) and lower relative securitization
gains compared to AT&T/Lucent/NCR related gains. Refer to the three month
discussion for a description of certain factors affecting the
non-AT&T/Lucent/NCR results.
CREDIT QUALITY
15
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 (such as 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.
The following chart (dollars in millions) reflects the Company's portfolio
credit performance indicators:
At At
June 30, December 31,
1997 1996 1996
- ---------------------------------------------------------------------------
Allowance for credit losses $155.6 $238.6 $169.0
Allowance for credit losses/Portfolio assets 2.12% 2.44% 2.30%
Non-accrual assets $150.2 $150.3 $135.1
Non-accrual assets/Portfolio assets 2.05% 1.54% 1.84%
Net charge-offs*/Portfolio assets 1.08% .55% 1.17%
Delinquency-owned assets
(two months or greater) 2.77% 1.99% 2.56%
Delinquency-owned and securitized assets
(two months or greater) 2.49% 2.09% 2.18%
(*) Net charge-offs are based upon the twelve months ended June 30, 1997 and
1996 and December 31, 1996.
The 1997 second quarter provision for credit losses of $22.7 million
decreased $.5 million, or 2.4% compared to the second quarter of 1996. For the
first half of 1997, the provision for credit losses of $46.0 million reflects a
5.3% decrease over the prior years. These decreases are consistent with the
decrease in small-ticket assets as a result of continuing securitization
activity. Generally, the relative provisions recorded on medium and large-ticket
transactions are lower than small-ticket assets.
The increase in the ratio of net charge-offs/portfolio assets over the
second quarter of 1996 is reflective of an $11.2 million write-off of a
large financing taken in the third quarter of 1996.
The decrease in the allowance for credit losses and related ratio is due to
the decrease in portfolio assets and the portfolio shift away from small-ticket
assets.
The increase in nonaccrual assets to portfolio assets over June 30, 1996 is
primarily due to a $27.1 million project finance transaction.
The increase in the delinquencies since year-end and June 30, 1996 of both
owned and owned and managed assets, is primarily due to the project finance
transaction discussed above.
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
16
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 remained flat at $7.2 billion at June 30, 1997 compared
to December 31, 1996. In the first half of 1997, the Company securitized $453.5
million of capital leases and $165.3 million of finance receivables. Capital
leases decreased $88.7 million, which reflects the impact of the securitization
offset, in part, by new capital lease originations. Finance receivable
originations in the first half of 1997 offset the effect of securitizations,
keeping finance receivables flat at $2.1 billion. The increase of $75.0 million
in operating leases to $1.5 billion was experienced by many of the Company's
businesses.
The total owned and managed portfolio assets at June 30, 1997 of $13.0
billion increased slightly from $12.9 at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 1997, the Company issued short-term debt of $24.6
billion and repaid $24.8 billion (principally commercial paper) and issued
medium and long-term debt of $1.8 billion and repaid $1.4 billion. In the first
six months of 1996, the Company issued commercial paper of $12.6 billion and
made repayments of $12.6 billion and issued medium and long-term debt of $1.3
billion and repaid $.7 billion.
During the six month periods ended June 30, 1997 and 1996, principal
collections from customers, proceeds from securitized receivables and loan sales
aggregating $2.5 billion and $2.2 billion were received, respectively. These
receipts were primarily used for finance receivables and lease equipment
purchases of $2.9 billion in the first half of 1997 and 1996.
The Company maintains a back-up credit facility of $1.8 billion. This
facility, negotiated with a consortium of 25 lending institutions, supports its
commercial paper. At June 30, 1997, this facility was unused. Under the most
restrictive provision of the Company's back-up facility, the Company is required
to maintain a minimum consolidated tangible net worth (based on a formula that
includes a portion of current net income) of $558.2 million at June 30, 1997.
The Company is in compliance with this and all other covenants of the agreement.
As of June 30, 1997, the Company has $2.2 billion of debt securities available
for issuance under an effective registration statement. To meet local
funding requirements, the Company's foreign operations have available lines of
credit of approximately $297.2 million, of which approximately $58.0 million was
available at June 30, 1997.
Net cash provided by operating activities for the first half of 1997 was
$197.4 million as compared to net cash provided of $293.8 million in the similar
prior-year period. The change in the level of cash associated with operating
activities is a function of lower net income (as previously discussed) and a
reduction in the Company's payables.
Future financing is contemplated to be arranged as necessary to meet the
Company's capital and other requirements with the timing of issue,
17
principal amount and form depending on the Company's needs and prevailing market
and general economic conditions.
The Company considers its current financial resources, together with the
debt facilities referred to above and estimated future cash flows, to be
adequate to fund the Company's future growth and operating requirements.
The Company's ratio of debt to equity plus Preferred Securities was 7.17 at
June 30, 1997 similar to the December 31, 1996 ratio of 7.13.
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 duration and average cash flows of
its borrowings with the duration and average cash flows of its portfolio assets,
as well as the currency denominations of its borrowings with those of its
portfolio assets, in a manner intended to reduce the Company's interest rate and
foreign currency exposure. For a description of certain key elements of this
process, including AT&T Capital's use of derivatives to mitigate risk, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
At June 30, 1997, the total notional amount of the Company's interest rate
and currency swaps was $2.1 billion and $.6 billion, respectively, as compared
to $1.4 billion and $.3 billion, respectively, as of December 31, 1996. The U.S.
dollar equivalent of the Company's foreign currency forward exchange contracts
was $1.1 billion and $.9 billion at June 30, 1997 and December 31, 1996,
respectively.
There were no past due amounts or reserves for credit losses at June 30,
1997 related to derivative transactions. The Company has never experienced a
credit related charge-off associated with derivative transactions.
RECENT PRONOUNCEMENTS
See Note 2 to the unaudited consolidated financial statements. financial
statements.
18
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
10 (a) Letter Agreement dated as of May 30, 1997 between
and among registrant, Thomas C. Wajnert, and Nomura
International plc covering the resignation of Thomas
C. Wajnert from the position of Chief Executive
Officer.
10 (b) Employment Agreement dated as of May 30, 1997
between the registrant and David F. Banks.
12. Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) Current reports on Form 8-K:
Report on Form 8-K, dated May 30, 1997, was filed pursuant
to Item 5 (Other Events).
Report on Form 8-K, dated May 12, 1997, was filed pursuant
to Item 5 (Other Events).
19
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/ RAMON OLIU, JR.
---------------------------
August 13, 1997 Ramon Oliu, Jr.
Senior Vice President and
Chief Financial Officer
20
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
10 (a) Letter Agreement dated as of May 30, 1997 between and among
registrant, Thomas C. Wajnert, and Nomura International plc
covering the resignation of Thomas C. Wajnert from the position
of Chief Executive Officer.
10 (b) Employment Agreement dated as of May 30, 1997 between the registrant
and David F. Banks.
12. Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule