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 March 31, 1998
( ) 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 973-397-3000
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 April 30, 1998, 90,337,379 shares of the registrant's Common
Stock, par value $.01 per share, were issued and outstanding to Newcourt Credit
Group USA Inc.
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
ASSETS:
Cash and cash equivalents $ 46,248 $ 8,317
Assets held for sale and inventory 439,921 478,213
Net investment in finance receivables 2,483,020 2,343,604
Net investment in capital leases 2,921,695 3,288,141
Net investment in operating
leases, net of accumulated
depreciation of $845,211
in 1998 and $772,437 in 1997 1,617,105 1,593,582
Deferred charges and other assets 739,728 832,892
Receivable from Affiliates (a) 720,742 --
Deferred income taxes 230,899 231,146
---------- ----------
Total Assets $9,199,358 $8,775,895
========== ==========
LIABILITIES, PREFERRED SECURITIES AND SHAREOWNERS' EQUITY:
LIABILITIES:
Short-term notes, less unamortized
discounts of $7,476 in 1998 and
$14,357 in 1997 $2,174,180 $1,868,585
Income taxes and other payables 520,636 714,122
Medium- and long-term debt 5,540,503 5,249,409
Commitments and contingencies
---------- ----------
Total Liabilities 8,235,319 7,832,116
---------- ----------
PREFERRED SECURITIES:
Company-obligated preferred
securities of subsidiary 200,000 200,000
(continued)
2
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
SHAREOWNERS'EQUITY:
Common stock, one cent par value:
Authorized 150,000,000 shares,
issued and outstanding, 90,337,379
shares in 1998 and 1997 903 903
Additional paid-in capital 651,552 651,552
Recourse loans to senior executives -- (15,471)
Foreign currency translation
adjustments (6,501) (4,032)
Retained earnings 118,085 110,827
----------- -----------
Total Shareowners' Equity 764,039 743,779
----------- -----------
Total Liabilities, Preferred Securities
and Shareowners' Equity $ 9,199,358 $ 8,775,895
=========== ===========
(a) At March 31, 1998 "Affiliates" as defined herein are Newcourt Credit Group
Inc. and Newcourt Credit Group USA Inc.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
For the three months
ended March 31,
1998 1997
--------- ---------
REVENUES:
Finance revenue $ 59,444 $ 54,309
Capital lease revenue 83,509 90,747
Rental revenue on operating
leases 217,977 196,723
Revenue from securitizations
and loan sales 17,416 13,032
Equipment sales 6,406 8,176
Other revenue, net 56,185 57,943
--------- ---------
Total Revenues 440,937 420,930
--------- ---------
EXPENSES:
Interest 115,212 105,318
Operating and administrative 135,868 136,284
Depreciation on operating leases 142,063 131,976
Cost of equipment sales 6,160 7,228
Provision for credit losses 25,258 23,279
--------- ---------
Total Expenses 424,561 404,085
--------- ---------
Distributions on Company-obligated
preferred securities of subsidiary 4,530 4,530
--------- ---------
Income before income taxes 11,846 12,315
Provision for income taxes 4,588 4,887
--------- ---------
NET INCOME 7,258 7,428
========= =========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign Currency translation adjustment,
net of tax benefit of $1,560 in 1998 and
$268 in 1997 (2,469) (407)
--------- ---------
Total other comprehensive loss (2,469) (407)
--------- ---------
COMPREHENSIVE INCOME $ 4,789 $ 7,021
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the three months
ended March 31,
1998 1997*
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,258 $ 7,428
Noncash items included in income:
Depreciation and amortization 154,985 146,202
Deferred taxes (7,212) (49,888)
Provision for credit losses 25,258 23,279
Revenue from securitizations and loan sales (17,416) (13,032)
Decrease in deferred charges and
other assets (79,576) (1,021)
Increase (decrease) in assets held for sale
and inventory 32,878 (12,559)
Increase (decrease) in income taxes and other
payables 17,585 (88,765)
Decrease in payables to
AT&T/Lucent/NCR (the "Former Affiliates") -- (27,033)
----------- -----------
Net cash provided (used) by Operating Activities 133,760 (15,389)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance asset portfolios (40,284) --
Financings and lease equipment purchases (1,204,182) (1,423,801)
Principal collections from customers,
net of amounts included in income 712,365 906,803
Cash proceeds from securitizations and
loan sales 399,160 421,667
Loans made to Affiliates (720,742) --
Proceeds from sale of subsidiary 14,283 --
----------- -----------
Net cash used for Investing Activities $ (839,400) $ (95,331)
----------- -----------
(Continued)
5
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For the three months
ended March 31,
1998 1997*
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term notes, net $ 305,595 $ (74,409)
Additions to medium- and long-term debt 1,373,465 1,247,973
Repayments of medium- and long-term debt (950,960) (1,040,413)
Proceeds from repayment of recourse
loans to senior executives 15,471 --
----------- -----------
Net cash provided by Financing
Activities 743,571 133,151
----------- -----------
Net Increase in Cash and Cash Equivalents 37,931 22,431
Cash and Cash Equivalents at beginning of period 8,317 --
----------- -----------
Cash and Cash Equivalents at end of period $ 46,248 $ 22,431
=========== ===========
Non-Cash Investing and Financing Activities:
In the first three months of 1998 and 1997, the Company entered into
capital lease obligations of $68,025 and $1,693, respectively, for equipment
that was subleased.
*Certain amounts have been reclassified to conform to the 1998
presentation.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
FORM 10-Q
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, 1997.
2. Recent Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 a company's 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. The Company will adopt this standard in its 1998 annual financial
statements. Comparative information for earlier years will be restated.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Post Retirement Benefits". SFAS No. 132 revises
employer's disclosures about pension and other post retirement benefit plans but
does not change the measurement or recognition of those plans. The Statement
standardizes the disclosure requirements to the extent practicable, requires
additional information changes in the benefit obligations and fair value of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. The Company will adopt this standard in
its 1998 annual financial statements. Comparative information for earlier years
will be restated, if readily available.
7
3. 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 (dollars
in thousands).
AT&T Capital Leasing Services, Inc. For the three months ended
March 31,
--------------------------
(unaudited)
1998 1997
---- ----
Total revenues $ 38,317 $ 36,120
Interest expense 11,874 10,494
Operating and administrative expenses 17,604 20,617
Provision for credit losses 9,699 14,581
Loss before taxes (2,608) (10,315)
Net Income (loss)(a) 1,214 (3,121)
March 31, December 31,
1998 1997
(unaudited)
----------- ------------
Total assets 854,235 786,895
Total debt 746,562 675,420
Total liabilities 808,757 742,633
Total shareowner's equity $ 45,478 $ 44,262
AT&T Capital Services Corporation For the three months ended
March 31,
--------------------------
(unaudited)
1998 1997
---- ----
Total revenues $ 27,821 $ 29,845
Interest expense 1,843 1,618
Operating and administrative expenses 10,610 12,505
Provision for credit losses -- 337
Income before taxes 1,664 646
Net income 989 353
March 31, December 31,
1998 1997
(unaudited)
----------- ------------
Total assets 151,216 147,182
Total debt 115,797 108,794
Total liabilities 136,845 133,800
Total shareowner's equity $ 14,371 $ 13,382
(a) 1998 Net Income and 1997 Net Loss includes a $3.8 million and $7.2 million
tax benefit, respectively, on a $9.9 million and $18.2 million tax loss,
respectively, which includes equity investment revenue not taxable to AT&T
Capital Leasing Services, Inc. The 1997 Net Loss has been restated to reflect
this benefit.
8
4. Securitizations
During the first quarter of 1998, the Company securitized approximately
$345.5 million of capital leases and loan receivables through a private conduit
facility. The Company retained an interest in the underlying cash flows. The
fair value of such retained interest was calculated using a fair market discount
rate of like cash flows of approximately 7.5%.
5. Receivable from Affilitate
The Company has interest bearing intercompany receivables from
Newcourt Credit Group Inc., an Ontario, Canada corporation ("Newcourt") and
Newcourt Credit Group USA Inc., a wholly-owned subsidiary of Newcourt,
aggregating $720.7 million at March 31, 1998. The net interest income
associated with the intercompany receivables was not material for the three
months ended March 31, 1998.
6. Restructuring Charges
At year end, the Company recorded a reserve pursuant to a restructuring
plan. The following is a roll forward of such reserve (in thousands) and number
of employees to be terminated.
At December 31, Activity through At March 31,
1997 March 31, 1998 1998
-------------------- -------------------- -----------------
Severence and benefits
related cost $32,920 $13,918 $19,002
Facility closing costs 2,173 1,760 413
-------------------- -------------------- -----------------
Total $35,093 $15,678 $19,415
-------------------- -------------------- -----------------
Approximate number of
employees to be terminated 200 100 100
-------------------- -------------------- -----------------
As of March 31, 1998, the Company has terminated approximately half of the
employees identified and believes the remaining reserve is adequate to cover the
costs to complete the plan of restructure. With regard to this plan, there has
been no adjustment to the reserve estimate on the estimated number of employees
to be terminated. In addition to the Company's restructure plan, the Company's
headcount decreased by approximately 350 during the first quarter of 1998
primarily due to redundancies in certain functions, resulting from the Newcourt
Acquisition (as defined below).
7. 1998 Sale of the Company and Related Transactions
On January 12, 1998, Newcourt consummated the purchase (the "Newcourt
Acquisition") of all of the outstanding shares of common stock of AT&T Capital,
pursuant to a Stock Purchase Agreement dated as of November 17, 1997 among the
Company, Newcourt, Hercules Holdings (Cayman) Limited and certain management
stockholders. In connection with the Newcourt Acquisition, the Company received
$15.5 million in settlement of recourse loans to senior executives. Also, in
connection with the Newcourt Acquisition, all of the outstanding shares of
common stock of AT&T Capital were transferred to Newcourt Holdings USA, Inc.,
a wholly-owned subsidiary of Newcourt, and are owned indirectly by Newcourt.
For further discussion regarding the Newcourt Acquisition, see Note 1 to the
Audited Consolidated Financial Statements included in the Company's 1997
Annual Report filed on Form 10-K.
9
On March 31, 1998 Newcourt Holdings USA, Inc. merged with and into
Newcourt Credit Group USA Inc., a wholly-owned subsidiary of Newcourt, with
Newcourt Credit Group USA Inc. being the surviving entity. Effective thereafter,
the surviving entity, including the Company, will file a consolidated tax return
for Federal income tax purposes.
Also on March 31, 1998, AT&T Capital Canada, Inc. (a wholly-owned
subsidiary of the Company), was sold at book value to Newcourt resulting in no
gain or loss. The total amount of assets sold at March 31, 1998 was $252.2
million.
On April 1, 1998, substantially all of the operations of the Company's
European businesses were sold to Newcourt. The assets were sold at book value,
and, therefore, no gain or loss resulted from such sale. The total amount of
assets relating to these businesses totaled $803.4 million at March 31, 1998.
10
Form 10-Q
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 and uncertainties include, among others, those described
under "Risk Factors" included in Item 7 of the Company's 1997 Annual Report on
Form 10-K, many of which are beyond the control of AT&T Capital Corporation
("AT&T Capital" or the "Company"). 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.
1998 SALE OF THE COMPANY AND RELATED TRANSACTIONS
On January 12, 1998, Newcourt Credit Group Inc., an Ontario corporation
("Newcourt"), consummated the purchase (the "Newcourt Acquisition") of all of
the outstanding shares of common stock of AT&T Capital, pursuant to a Stock
Purchase Agreement dated as of November 17, 1997 among AT&T Capital, Newcourt,
Hercules Holdings (Cayman) Limited and certain management stockholders. In
connection with the Newcourt Acquisition, all of the outstanding shares of
common stock of the Company were transferred to Newcourt Holdings USA, Inc., a
wholly-owned subsidiary of Newcourt, and are owned indirectly by Newcourt. For
further discussion regarding the Newcourt Acquisition, see Note 1 to the Audited
Consolidated Financial Statements included in the Company's 1997 Annual Report
filed on Form 10-K.
On March 31, 1998 Newcourt Holdings USA, Inc. merged with and into
Newcourt Credit Group USA Inc., a wholly-owned subsidiary of Newcourt ("Newcourt
USA"), with Newcourt USA being the surviving entity. Effective
thereafter, the surviving entity, including the Company, will file a
consolidated tax return for Federal income tax purposes.
Also on March 31, 1998, AT&T Capital Canada Inc. (a wholly-owned
subsidiary of the Company), was sold at book value to Newcourt resulting in no
gain or loss. The total amount of assets sold at March 31, 1998 was $252.2
million.
On April 1, substantially all of the operations of the Company's European
businesses were sold to Newcourt. The assets were sold at book value and,
therefore, no gain or loss resulted from such sale. The total amount of assets
relating to these businesses totaled $803.4 million at March 31, 1998.
11
RESULTS OF OPERATIONS
Unless otherwise indicated, all period to period comparisons represent activity
or balances at or for the three months ended March 31, 1998 versus March 31,
1997.
Net Income
For the three months
ended March 31,
1998 1997
--------------------
(dollars in millions)
Net Income $7.3 $7.4
Net income was relatively flat quarter over quarter. Increased
securitization revenue, finance revenue and operating lease margin was offset by
a decrease in capital lease revenue and an increase in interest expense.
Key financial operating statistics
The following table sets forth certain key financial operating statistics
of the Company's operations:
For the three months
ended March 31,
1998 1997
--------------------
(dollars in millions)
Finance revenue $59.4 $ 54.3
Capital lease revenue 83.5 90.7
Operating lease margin 76.0 64.8
----- -----
Net portfolio revenue 218.9 209.8
less: interest expense 115.2 105.3
----- -----
Net interest margin (a) 103.7 104.5
Average net portfolio assets $7,309.1 $7,241.8
Net interest margin percentage (a) 5.67% 5.79%
Finance receivables-average yield 9.91% 10.07%
Capital leases-average yield 10.21% 9.89%
Operating lease margin percentage 34.83% 32.91%
Total portfolio-average yield 11.98% 11.59%
Debt/equity plus Preferred
Securities 8.00x 7.21x
a) Net interest margin is comprised of net portfolio revenue (finance revenue,
capital lease revenue and operating lease margin) less interest expense. Net
interest margin percentage equals the net interest margin divided by the
respective average net portfolio assets.
Finance revenue
Finance revenue increased $5.1 million or 9.5%. An 11.2% increase in
average net finance receivables to $2.4 billion accounted for $6.1 million of
the increase, while the decrease in the average yield partially offset
12
this increase by $1.0 million. The growth in the portfolio was due primarily to
increases in the asset based lending and SBA loan portfolios. The reduction in
average yield related to an increase in floating rate transactions in a lower
interest rate environment and an increase in nonearning accounts. See "Credit
Quality" for a discussion of these accounts.
Capital lease revenue
Capital lease revenue decreased $7.2 million or 8.0%. A 10.9% decrease in
the average net capital lease portfolio to $3.3 billion was responsible for
approximately $9.8 million of the decrease. The decrease in the average
portfolio was due primarily to the sale of the Company's North American fleet
automotive portfolio to a third party and certain assets of the Canadian
business unit to Newcourt which was slightly offset by increases in the
small and middle ticket portfolios. The slight increase in the average
yield of 32 basis points partially offset the decrease in revenue by
$2.6 million.
Operating lease margin
Rental revenue on operating leases of $218.0 million increased $21.3
million, or 10.8%. Depreciation expense on operating leases of $142.1 million
increased $10.1 million, or 7.6%. The revenue increase was generated by the
Company's enterprise server, telecommunications and international portfolios,
partially offset by the sale of the North American fleet automotive portfolio at
the end of 1997. The 192 basis point increase in operating lease margin
percentage to 34.83% resulted primarily from a higher proportion of renewal
revenue and an increase in small ticket, higher margin transactions.
Net interest margin
Net interest margin of $103.7 million was 5.67% of average net portfolio
assets compared with $104.5 million, or 5.79%. Net interest margin was
relatively flat, decreasing by $0.8 million, due to higher portfolio revenue
offset by higher interest expense associated with carrying a higher level of
debt. Average net portfolio assets of $7,309.1 million were $67.3 million, or
0.9% higher causing an increase in portfolio revenue of approximately $6.5
million. A slight increase in the overall portfolio yield to 11.98% from 11.59%,
increased revenue by approximately $2.6 million. The interest expense associated
with carrying a higher level of debt reduced the margin by approximately $7.8
million. The higher cost of debt added $2.1 million to the interest expense.
13
Non-portfolio revenue
The following table summarizes the components of non-portfolio revenue
which includes revenue from securitizations and loan sales, equipment sales, and
other net revenue. In addition, equipment sales margin (equipment sales less
cost of equipment sales) and the equipment sales margin percentage (equipment
sales margin divided by equipment sales) are presented.
For the three months
ended March 31,
1998 1997
-------------------
(dollars in millions)
Revenue from securitizations
and loan sales $ 17.4 $13.0
Equipment sales 6.4 8.2
Cost of equipment sales (6.2) (7.2)
------ -----
Equipment sales margin $ 0.2 $ 1.0
Equipment sales margin
percentage 3.8% 11.6%
Other revenue, net $ 56.2 $57.9
Total non-portfolio revenue $ 80.0 $79.1
Revenue from securitizations and loan sales
Revenue from securitizations and loan sales, including SBA loans, increased
$4.4 million. Securitization revenue increased $4.1 million due to an increased
spread between the average yield and the discount rate. Loan sales revenue
increased $0.3 million.
Expenses
Interest expense
For the three months
ended March 31,
1998 1997
-------------------
(dollars in millions)
Interest expense $115.2 $105.3
Average borrowings outstanding $7,428.8 $6,914.6
Average cost of debt 6.20% 6.09%
Interest expense increased $9.9 million, or 9.4%. As discussed in the net
interest margin section above, a $7.8 million increase in interest expense
resulted from carrying a higher level of debt and a higher average cost of debt
contributed $2.1 million. The increase in the average borrowings outstanding was
largely due to borrowings made by the Company on behalf of Newcourt USA.
The increase in the average cost of debt is attributable to the higher 1997
year-end rates associated with debt incepted in the fourth quarter of 1997 and
remaining outstanding during the first quarter of 1998 and from a wider spread
on the issuance of commercial paper in the first quarter of 1998. For the first
quarterof 1998, the Company issued medium- and long-term debt at an average rate
of 5.99%, compared to debt maturing having a slightly higher average rate
of 6.08%.
14
Distributions on Company-obligated preferred securities
During the first quarters of 1998 and 1997, $4.5 million of scheduled
distributions were paid to the Company-obligated preferred securities holders.
Operating and Administrative (O&A) Expenses
For the three months
ended March 31,
1998 1997
--------------------
(dollars in millions)
O&A expenses $135.9 $136.3
Total period-end owned and
managed assets $14,396.5 $12,943.0
O&A/period-end total owned and
managed assets 3.78% 4.21%
The decrease in O&A expense of 0.3% was due primarily to an approximate 10%
reduction in headcount and other related expenses offset, in part, by an
increase in severance related expenses of $3.6 million and a cash out of vested
stock options of $10.1 million in connection with the Newcourt Acquisition. The
increase in total owned and managed assets of 11.2% at March 31, 1998 from March
31, 1997 and the improvement in the O&A ratio resulted from an increase in owned
assets of $1.2 billion. See "Financial Condition" below for a discussion
regarding asset growth.
Provision for credit losses
See "Credit Quality" below for a discussion of the provision for credit
losses.
Provision for income taxes
For the three months
ended March 31,
1998 1997
------------------
(dollars in millions)
Provision for income taxes $ 4.6 $ 4.9
Effective income tax rate 38.7% 39.7%
The decrease in the 1998 effective rates resulted from a lower overall
provision for state taxes and lower non-deductible expenses, somewhat offset by
higher foreign taxes.
15
CREDIT QUALITY
The following table reflects the Company's key portfolio credit performance
indicators. Portfolio assets include the investment in finance receivables,
capital leases and operating leases.
At or for the At or for the
three months ended year ended
March 31, December 31,
1998 1997 1997
--------------------------- ---------------------------
(dollars in millions) (dollars in millions)
Portfolio assets
(gross of allowance) $7,196.4 $7,162.9 $7,403.9
Provision for credit losses $25.3 $23.3 $114.3
Allowance for credit losses $174.6 $163.8 $178.6
Allowance for credit
losses/portfolio assets 2.43% 2.29% 2.41%
Allowance for credit losses/non-
accrual assets 0.83x 1.02x 1.06x
Non-accrual assets $211.0 $160.2 $168.7
Non-accrual assets/portfolio assets 2.93% 2.24% 2.28%
Net charge-offs/portfolio assets 0.58% 1.17% 0.56%
Delinquency(a)-owned assets 3.42% 3.24% 3.08%
Delinquency(a)-owned and securitized 3.22% 2.76% 2.62%
a) Delinquencies of two months or greater.
The increase in the ratio of the allowance for credit losses to portfolio
assets is reflective of the increase in delinquencies as well as the increase in
non-accrual assets.
The increase in the March 31, 1998 delinquencies of owned assets and owned
and securitized assets, is due to the sale of the Company's North American fleet
automotive portfolio, which had traditionally maintained a lower delinquency,
coupled with the sale of certain assets of the Company's Canadian business unit
at March 31, 1998 to Newcourt in which the Company retained certain delinquent
accounts. The Company's securitizations include current receivables, those
transactions that are not more than 60 days past due. Therefore, the
delinquency -owned assets reflects a higher proportion of delinquent receivables
as compared to the level of delinquency in the owned and securitized portfolio.
The increase in non-accrual assets to portfolio assets at March 31, 1998
is primarily due to two project finance transactions totaling $32.1 million,
suspended from income recognition in March, 1998.
FINANCIAL CONDITION
Sale of Businesses
During the first quarter of 1998, the Company sold AT&T Capital Canada
Inc. (a wholly-owned subsidiary of the Company) to Newcourt at book value.
Additionally, the Company continues to pursue the sale of its U.S. consumer
automotive business. The carrying value of these assets have been reduced to
fair value and are classified as Assets held for sale and inventory on the
balance sheet.
16
Net portfolio assets
The following table reflects components of the Company's net portfolio
assets.
At: At:
March 31, December 31,
1998 1997
-----------------------------
(dollars in millions)
Net investment in finance receivables (a) $ 2,483.0 $2,343.6
Net investment in capital leases (a) 2,921.7 3,288.1
Net investment in operating leases (b) 1,617.1 1,593.6
--------- --------
Net owned portfolio assets (net of allowance) 7,021.8 7,225.3
Managed assets 5,197.1 5,136.3
Net investment in total owned and
managed assets $12,218.9 $12,361.6
a) Generally represents the sum of the (i) the gross receivable, (ii) the
associated unearned income, (iii) the unguaranteed residual value (for
capital leases only), less (iv) the allowance for credit losses.
b) Generally represents the historical cost of the equipment less the
associated accumulated depreciation.
Net owned portfolio assets decreased $203.5 million or 2.8% during the
first quarter of 1998. Operating leases increased $23.5 million, or 1.5% during
the first quarter of 1998, primarily due to growth in the Company's enterprise
server portfolio. The net investment in finance receivables increased $139.4
million, or 6.0% during the first quarter of 1998, due primarily to an increase
in the asset based lending and SBA loan portfolios. The 11.1% reduction in
capital leases from December 31, 1997, is primarily due to the sale of certain
assets of the Company's Canadian business unit to Newcourt.
The Company's international assets (excluding cross border transactions)
represented 21.4% of total assets, down slightly from 24.6% at the end of 1997.
The sale of certain assets of the Canadian business unit impacted such
reduction.
LIQUIDITY AND CAPITAL RESOURCES
In response to the announcement of the Newcourt Acquisition, "S&P", Fitch,
and Moody's affirmed the Company's ratings and Duff & Phelps has upgraded the
Company's medium- and long-term debt and commercial paper ratings. The Company's
senior medium- and long-term debt and commercial paper are currently rated as
follows:
- -----------------------------------------------------------------------------------------
Rating Agency medium- and long-term debt commercial paper
- -----------------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co.
("Duff & Phelps") A- D-1-
Fitch Investor Services
("Fitch") BBB F-2
Moody's Investors Services
("Moody's") Baa3 P-3
Standard & Poors ("S&P") BBB A-2
17
Cash flows
The table below includes key cash flows provided by and used for operating,
investing and financing activities.
For the three months
ended March 31,
1998 1997
--------------------
(dollars in millions)
Net Cash provided (used) by Operating Activities: $ 133.8 $ (15.4)
Investing Activities:
Increase in receivables from Affiliates (720.7) --
Principal collections from customers 712.4 906.8
Cash used for financings and lease
equipment purchases(a) (1,204.2) (1,423.8)
Cash proceeds from securitizations and loan
sales 399.2 421.7
Purchase of Finance asset portfolios (40.3) --
Proceeds from sale of subsidiary 14.3 --
Financing Activities:
Net proceeds (repayments) from issuance of
short-term notes (b) 305.6 (74.4)
Proceeds from the issuance of medium- and
long-term debt 1,373.5 1,248.0
Repayments of medium- and long-term debt (951.0) (1,040.4)
Proceeds from repayment of recourse loans
to senior executives 15.5 --
(a) Includes purchases of finance asset portfolios and businesses.
(b) Short-term notes include primarily commercial paper.
On February 20, 1998, the Company entered into an agreement whereby the
Company guarantees certain indebtedness and liquidity facilities of Newcourt and
Newcourt Credit Group USA Inc. (the "Newcourt Guarantee"). This debt is used by
Newcourt for general operating purposes. As of March 31, 1998, the Company's
guarantee of such debt was US$1.2 billion (C$1.7 billion).
Also, as a result of the Newcourt Acquisition, the Company renegotiated its
existing back-up facility in April, 1998 to support Newcourt's and the Company's
existing commercial paper programs and for general corporate purposes. The
Company increased its US facility to $2.3 billion with $1.535 billion having a
term of 364 days and $.765 billion having a term of 5 years (the "US facility").
In addition, Newcourt renegotiated a Canadian facility of C$1.2 billion with a
term of 364 days (the "Canadian facility"). The US facility is guaranteed by
Newcourt and Newcourt Credit Group USA Inc., and ranks pari passu with the
Canadian facility. The Canadian facility is guaranteed by the Company and
Newcourt Credit Group USA Inc. and ranks pari passu with the US facility. At
April 30, 1998 these facilities were unused. Under the most restrictive
provision of the Company's back-up facilities, the Company is required to
maintain an interest coverage ratio (the ratio of consolidated earnings before
interest and taxes, as defined, to consolidated interest expense) of 1.25 times.
The Company is in compliance with this and all other covenants of the
facilities. To meet local funding requirements, the Company's foreign operations
have total committed available lines of credit of approximately $340.1
18
million, of which approximately $93.7 million were unused at March 31, 1998.
These facilities are generally renewed annually.
During January 1997, the SEC declared effective a Company debt
registration statement of $4.0 billion. Subsequent to December 31, 1997, the
Company completed the full utilization of such debt available under the
registration statement.
In March 1998, the Company filed with the SEC a registration statement for
$5.0 billion in debt securities and warrants on Form S-3. In April 1998, a joint
registration statement (Form S-3/F-9) was filed with the SEC to register the
Company's $5.0 billion debt securities, currency warrants, index warrants and
interest rate warrants along with a guarantee by Newcourt for the payment of
principal, premium, if any, and interest, if any. Such guarantee will be an
unsecured obligation of Newcourt and will rank pari passu with all other
unsecured and unsubordinated indebtedness of Newcourt. This registration
statement was declared effective in May of 1998.
The Company considers its current financial resources, together with the
borrowings referred to above and estimated future cash flows, to be adequate to
fund the Company's planned future growth and operating requirements.
ASSET AND LIABILITY MANAGEMENT
The Company'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 the Company's use of derivatives to mitigate risk, see the
Company's 1997 Annual Report on Form 10-K.
The total notional amount of the Company's interest rate swaps was
$2,884.2 million and $2,287.0 million at March 31, 1998 and December 31, 1997,
respectively. The total notional amount of the Company's currency swaps was
$157.7 million and $240.1 million at March 31, 1998 and December 31, 1997,
respectively. The U.S. dollar equivalent of the Company's foreign currency
forward exchange contracts was $1,561.2 million and $1,511.5 million at March
31, 1998 and December 31, 1997, respectively.
Derivative credit risk
The notional amount of derivative contracts does not represent direct
credit exposure. Rather, credit exposure may be defined as the market value of
the derivative contract and the ability of the counterparty to perform its
payment obligation under the agreement. The majority of the Company's interest
rate swaps require the Company to pay a fixed rate and receive a floating rate.
Therefore, this risk is reduced in a declining interest rate environment as the
Company is generally in a payable position and is increased in a rising interest
rate environment as the Company is generally in a receivable position. The
Company seeks to control the credit risk of its interest rate swap agreements
through credit approvals, exposure limits and monitoring procedures. All swap
agreements are with major money center banks and intermediaries rated investment
grade by national rating agencies
19
with the majority of the Company's counterparties being rated "AA" or better.
The Company monitors its derivative positions using techniques including
market value, sensitivity analysis and a value at risk model. The value at risk
tests discussed below for exposure to interest rate and currency rate exposures
are based on a variance/co-variance model using a three-month horizon and a 95%
confidence level. The model assumes that financial returns are normally
distributed. The value at risk model takes into account correlations and
diversification across market factors, including currencies and interest rates.
Estimates of volatility and correlations of market factors are drawn from the
Reuters/JP Morgan RiskMetrics dataset as of March 31, 1998.
Based on the Company's overall interest rate exposure at March 31, 1998,
including derivatives and other interest rate sensitive instruments, a near-term
change in interest rates, within a 95% confidence level based on historical
interest rate movements, would not materially affect the consolidated financial
position on a fair value basis, results of operations or cash flows of the
Company.
Based on the Company's overall currency rate exposure at March 31, 1998,
including derivatives and other foreign currency sensitive instruments, a
near-term change in currency rates, within a 95% confidence level based on
historical currency rate movements, would not materially affect the consolidated
financial position on a fair value basis, results of operations or cash flows of
the Company.
There were no past due amounts or reserves for credit losses at March 31,
1998, related to derivative transactions. The Company has never experienced a
credit related charge-off associated with derivative transactions.
20
FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
10(a). Form of Guarantee dated as of April 1, 1998 made by
Newcourt Credit Group Inc. relating to the Notes.
10(b). Form of Guarantee dated as of April 1, 1998 made by
Newcourt Credit Group Inc. relating to the Warrants.
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 March 9, 1998 was filed pursuant to
Item 5 (Other Events).
Report on Form 8-K, dated March 4, 1998 was filed pursuant to
Item 4 (Changes in Registrant's Certifying Accountants).
Report on Form 8-K, dated February 20, 1998 was filed pursuant
to Item 5 (Other Events).
Report on Form 8-K, dated February 9, 1998 was filed pursuant to
Item 5 (Other Events).
Report on Form 8-K, dated January 12, 1998 was filed pursuant to
Item 1 (Changes in Control of the Registrant) and Item 5 (Other
Events).
Report on Form 8-K, dated January 5, 1998 was filed pursuant to
Item 5 (Other Events).
Report on Form 8-K/A, dated March 17, 1998 was filed amending
the Report on Form 8-K dated January 12, 1998.
Report on Form 8-K/A, dated February 18, 1998 was filed amending
the Report on Form 8-K dated February 9, 1998.
Report on Form 8-K/A, dated February 11, 1998 was filed amending
the Report on Form 8-K dated November 19, 1997.
21
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AT&T CAPITAL CORPORATION
DANIEL A. JAUERNIG
------------------
May 14, 1998 Daniel A. Jauernig
Group President and
Chief Financial Officer
22
FORM 10-Q
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
10(a). Form of Guarantee dated as of April 1, 1998 made by Newcourt Credit
Group Inc. relating to the Notes.
10(b). Form of Guarantee dated as of April 1, 1998 made by Newcourt Credit
Group Inc. relating to the Warrants.
12. Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
23