<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
Commission File Number 1-11237
AT&T CAPITAL CORPORATION
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number 201-397-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
At June 30, 1996, 46,993,337 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
<PAGE>2 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenue:
Finance revenue $ 49,712 $ 42,247 $ 96,963 $ 81,032
Capital lease revenue 160,838 142,237 323,209 277,669
Rental revenue on
operating leases (A) 167,408 136,408 325,486 269,369
Equipment sales 29,890 9,049 48,596 16,982
Other revenue, net 52,763 52,015 105,630 99,718
------- ------- ------- -------
Total Revenue 460,611 381,956 899,884 744,770
------- ------- ------- -------
Expenses:
Interest 116,485 100,806 230,072 194,804
Operating and
administrative 126,042 121,505 248,409 234,987
Depreciation on
operating leases 109,550 85,907 211,941 171,160
Cost of equipment
sales 24,618 8,247 40,659 15,299
Provision for credit
losses 23,232 18,624 48,536 39,678
------- ------- ------- -------
Total Expenses 399,927 335,089 779,617 655,928
------- ------- ------- -------
Income before income
taxes 60,684 46,867 120,267 88,842
Provision for income
taxes 22,905 18,955 45,444 35,848
-------- -------- -------- --------
Net Income $ 37,779 $27,912 $ 74,823 $ 52,994
======== ======== ======== ========
(Continued)
<PAGE>3 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
-------- -------- -------- -------
Earnings per common
share and common share
equivalent (Note 2):
Earnings Per Share $ .80 $ .59 $ 1.58 $ 1.13
======== ======== ======== ========
Weighted average shares
outstanding (thousands): 47,494 47,027 47,485 47,014
======== ======== ======== ========
(A) Includes $21,187 and $19,544 for the three months ended June 30, 1996
and 1995, respectively, and $44,403 and $40,224 for the six months
ended June 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.
<PAGE>4 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
1996 December 31,
(Unaudited) 1995
----------- ------------
ASSETS:
Cash and cash equivalents $ 148,128 $ 3,961
Net investment in finance
receivables 2,001,762 1,800,636
Net investment in capital
leases 6,269,739 6,187,131
Investment in operating
leases, net of accumulated
depreciation of $700,990 in
1996 and $642,728 in 1995 1,267,801 1,117,636
Deferred charges and other assets 409,757 431,895
----------- ----------
Total Assets $10,097,187 $ 9,541,259
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes, less
unamortized discount of
$5,046 in 1996 and $9,698 in
1995 $ 2,233,152 $ 2,212,351
Deferred income taxes 549,157 555,296
Income taxes and other payables 581,590 581,000
Payables to AT&T and affiliates 294,980 360,429
Medium- and long-term debt 5,258,033 4,716,058
Commitments and contingencies
----------- -----------
Total Liabilities $ 8,916,912 $ 8,425,134
----------- -----------
(Continued)
<PAGE>5 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Dollars in Thousands)
June 30,
1996 December 31,
(Unaudited) 1995
----------- ------------
Shareowners' Equity (Note 2):
Common stock, one cent par value:
Authorized 100,000,000 shares,
issued and outstanding, 46,993,337
shares in 1996 and 46,968,810 shares
in 1995 $ 470 $ 470
Additional paid-in capital 783,908 783,244
Recourse loans to senior executives (20,790) (20,512)
Foreign currency translation
adjustments (2,908) (2,173)
Retained earnings 419,595 355,096
---------- ----------
Total Shareowners' Equity 1,180,275 1,116,125
---------- ----------
Total Liabilities and
Shareowners' Equity $10,097,187 $ 9,541,259
========== ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>6 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1996 1995*
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 74,823 $ 52,994
Noncash items included in income:
Depreciation and amortization 213,536 198,217
Deferred taxes (3,117) 36,398
Provision for credit losses 48,536 39,678
Gain on receivables securitizations (5,041) -
Gain on SBA and other loan sales (5,927) (4,577)
(Increase) decrease in deferred charges and
other assets (34,345) 32,226
Increase (decrease) in income taxes and
other payables 4,092 (10,066)
Increase (decrease) in payables to AT&T and
affiliates 627 (2,539)
----------- -----------
Net Cash Provided by Operating Activities 293,184 342,331
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired - (292,590)
Purchase of finance asset portfolios - (14,937)
Financings and lease equipment purchases (2,901,826) (2,544,010)
Principal collections from customers,
net of amounts included in income 2,009,740 2,110,425
Cash proceeds from receivables securitizations 120,432 71,539
Cash proceeds from SBA and other loan sales 78,704 58,747
----------- -----------
Net Cash Used for Investing Activities $ (692,950) $ (610,826)
----------- -----------
(Continued)
<PAGE>7 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1996 1995*
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease)in short-term notes, net $ 20,801 $ (621,993)
Additions to medium and long-term debt 1,281,350 1,252,605
Repayments of medium and long-term debt (729,641) (458,093)
(Decrease) increase in payables to AT&T
and affiliates (18,253) 64,882
Dividends paid (10,324) (9,381)
--------- ---------
Net Cash Provided by Financing
Activities 543,933 228,020
--------- ---------
Net Increase (decrease) in Cash and Cash
Equivalents 144,167 (40,475)
Cash and Cash Equivalents at Beginning of Period 3,961 54,464
--------- ---------
Cash and Cash Equivalents at End of Period $ 148,128 $ 13,989
========= =========
Non-Cash Investing and Financing Activities:
In the first six months of 1996 and 1995, the Company entered into capital
lease obligations of $20,503 and $8,613, respectively, for equipment that was
subleased.
In the first six months of 1996 and 1995, the Company assumed debt of $0
and $435,430, 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.
<PAGE>8 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared by AT&T Capital Corporation and its subsidiaries ("AT&T Capital" or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results of operations, financial position and cash flows
for each period shown. The results for interim periods are not necessarily
indicative of financial results for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
audited Consolidated Financial Statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
the current year's previously issued Form 10-Q.
2. Shareowners' Equity and Earnings Per Share
The computation of earnings per common share and common share equivalents
is based upon the weighted average number of common shares outstanding plus
common share equivalents arising from the effect of dilutive stock options
using the treasury stock method. Fully dilutive earnings per common share and
common share equivalents are not presented since dilution is less than 3%.
On 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 are payable 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 also requires that servicing
assets and other retained interests in the
<PAGE>9 FORM 10-Q
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. 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 and their potential impacts on the
Company, 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 Technologies Inc.("Lucent") and NCR Corporation ("NCR"), and
entered into letter agreements with each of Lucent and NCR regarding the
applicability to each of 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 are
filed as Exhibits to this Quarterly Report on Form 10-Q. 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.) The Company is negotiating with the
Business Communications Systems unit of Lucent to put in place a formal
arrangement with respect to the SAF for the balance of the initial term of the
Operating Agreement. The current proposal being discussed would result in SAF
payments being calculated in accordance with a formula generally comparable to
the formula utilized to calculate the SAF paid in 1995. The SAF payment paid in
1995 was substantially higher than the SAF payments made in earlier years.
On June 5, 1996, AT&T Capital Corporation 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").
Upon consummation of the merger, AT&T Capital's shareowners will receive $45 in
cash for each outstanding share of the company's common stock. The total
purchase price for the outstanding shares and stock options will be
approximately $2.2 billion. It is expected that the merger, which is subject to
customary closing conditions, including regulatory approvals, will be
consummated in late September. Certain costs associated with the consummation of
the merger will be charged to the statement of operations upon the closing. For
the pro forma impacts of the merger refer to Item 5. Other Information in this
Form 10-Q.
<PAGE>10 FORM 10-Q
AT&T, the company's 86-percent shareowner, is a party to and has executed
the Merger Agreement. Also, wholly-owned subsidiaries of AT&T that directly own
such 86-percent interest have executed a written consent to the merger, thereby
assuring shareowner approval of the transaction.
Hercules is owned by a leasing consortium comprised of GRS Holding Company,
Ltd., owner of a U.K. rail leasing company and Babcock & Brown, a San
Francisco-based leasing, asset and project financing advisory firm. Upon
consummation of the merger, Antigua, a wholly-owned subsidiary of Hercules, will
be merged with and into the Company. The Company will continue to be led by AT&T
Capital's current management team, with no significant changes in business
strategies or operations planned, however, the Company's financing strategy with
respect to the utilization of securitizations will change. For further
discussion regarding the strategy for utilizing securitizations prospectively,
see Item 5. Other Information.
Financing for the merger is being arranged by the U.K.-based Nomura
International plc, a wholly-owned subsidiary of the Nomura Securities Co., Ltd.
Nomura International plc has irrevocably and unconditionally agreed to
underwrite or purchase securities of the consortium entities sufficient to allow
the consortium entities to provide financing to Hercules so that it can meet all
of its obligations under the Merger Agreement.
The merger has been approved by AT&T Capital's board of directors and a
special committee of the board composed entirely of independent directors.
<PAGE>11 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In September 1995, AT&T announced plans to sell its controlling interest in
the Company to either the public or to another company. On June 5, 1996, AT&T
Capital Corporation 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"). Upon consummation of the
merger, AT&T Capital's shareowners will receive $45 in cash for each outstanding
share of the company's common stock. The total purchase price for the
outstanding shares and stock options will be approximately $2.2 billion. It is
expected that the merger, which is subject to customary closing conditions,
including regulatory approvals, will be consummated in late September. Certain
costs associated with the consummation of the merger will be charged to the
statement of operations upon the closing. For a more detailed discussion of the
merger and its related impacts on the Company, see Note 4 to the unaudited
consolidated financial statements and Item 5. Other Information.
RESULTS OF OPERATIONS
Three months ended June 30, 1996 versus June 30, 1995
Unless otherwise indicated, all period to period comparisons represent
balances or activity at or for the three months ended June 30, 1996 versus June
30, 1995, respectively.
Net income of $37.8 million increased 35.4% from $27.9 million. Earnings
per share of $.80 increased 35.6% from $.59. These increases were generated
principally through increased portfolio revenues resulting from a higher level
of average net portfolio assets, increased computer trading activity and a lower
effective income tax rate. This activity was partially offset by increased
interest expense, operating and administrative ("O&A") expenses and provision
for credit losses all of which were associated with a higher level of portfolio
assets.
Finance revenue of $49.7 million increased $7.5 million, or 17.7%. A 20.4%
increase in the average net finance receivables contributed $8.6 million of the
increase, while the decline in average yield from 10.45% to 10.21% offset this
increase by $1.1 million. The growth in the portfolio was primarily due to an
increase in the large-ticket structured finance and small-ticket portfolios. The
decline in yield is largely due to lower yields in the Small Business
Administration ("SBA") portfolio as well as lower levels of higher yielding
assets in certain small-ticket portfolios.
Capital lease revenue of $160.8 million increased $18.6 million , or 13.1%.
This increase was due primarily to an 11.2% increase in the average net capital
lease portfolio. The growth in the portfolio was primarily in the small-ticket
leasing portfolios and non-U.S. businesses. The average yield increased to
10.43% from 10.17%. The improved yield was primarily due to increased levels of
higher yielding assets in certain small-ticket and automotive portfolios.
<PAGE>12 FORM 10-Q
Rental revenue on operating leases of $167.4 million increased 22.7% and
depreciation expense on operating leases of $109.5 million increased 27.5%.
Rental revenue less associated depreciation ("operating lease margin") was $57.9
million, or 34.6% of rental revenue, compared with $50.5 million, or 37.0% of
rental revenue. The decreased operating lease margin percent relates primarily
to increased depreciation on certain computer-related assets and lower
utilization in the short-term rental testing and diagnostic equipment portfolio.
Net interest margin (finance revenue, capital lease revenue and rental
revenue, less depreciation on operating leases and interest expense) of $151.9
million or 6.54% of average net portfolio assets decreased slightly from 6.57%.
While total portfolio yields were relatively flat, the net interest margin
percentage was adversely impacted by the increase in the debt to equity ratio
(to 6.35 times from 5.95 times) partially offset by a decrease in the average
cost of debt (from 6.66% to 6.46%).
Revenue from sales of equipment of $29.9 million increased from $9.0
million. Similarly, cost of equipment sales of $24.6 million increased from $8.2
million. Revenue from sales of equipment less associated cost of equipment sales
("equipment sales margin") was $5.3 million, or 17.6% of revenue from sales of
equipment compared to $.8 million, or 8.9%. The increased equipment sales and
equipment sales margin was primarily due to a heightened demand for mainframes,
as well as trading activity in a higher margin mid-range computer business which
was acquired in June 1995.
Average borrowings outstanding of $7.2 billion increased 19.2%, or $1.2
billion. This increase was due to growth in the portfolio assets and an
increased debt to equity ratio. The increased debt to equity ratio was impacted
by the Company's decision to defer its quarterly securitization in anticipation
of the merger-related securitization. For further discussion regarding the
strategy for utilizing securitizations prospectively, see Item 5. Other
Information. Interest expense of $116.5 million increased 15.6%, or $15.7
million. Higher average borrowing contributed $19.3 million of the increase and
was partially offset by $3.6 million due to a decline in the average cost of
debt.
O&A expenses of $126.0 million increased 3.7% from $121.5 million. This
increase was due to increased costs associated with managing a higher level of
assets, including the mid-range computer business acquired in June 1995.
The provision for credit losses of $23.2 million increased 24.7% from $18.6
million. See "Credit Quality" below for a discussion of the provision for credit
losses.
The Company's effective income tax rate decreased to 37.74% from 40.44%.
The decrease in the overall effective income tax rate was due to several factors
including a lower impact of foreign taxes, a decrease in the effect of non-tax
deductible goodwill and other factors.
The Company's non-AT&T businesses continue to make improved contributions.
Non-AT&T businesses represented 67.2%, 62.7% and 27.8% of total assets, revenues
and net income, respectively, all increasing from 65.4%, 57.9% and 12.0%,
respectively. The increase in the net income percentage was due primarily to
growth in certain small-ticket and automobile portfolios.
<PAGE>13 FORM 10-Q
Six months ended June 30, 1996 versus June 30, 1995
Unless otherwise indicated, all period to period comparisons represent
balances or activity at or for the six months ended June 30, 1996 versus June
30, 1995, respectively.
Net income of $74.8 million increased 41.2% from $53.0 million. Earnings
per share of $1.58 increased 39.8% from $1.13. These increases were generated
principally through increased portfolio revenues resulting from a higher level
of average net portfolio assets, increased computer trading activity, a gain on
a first quarter 1996 securitization of lease receivables and a lower effective
income tax rate. This activity was partially offset by increased interest
expense, O&A expenses and provision for credit losses all of which were
associated with a higher level of portfolio assets.
Finance revenue of $97.0 million increased 19.7% from $81.0 million. The
20% increase in the average net finance receivables accounted for this increase.
The growth in the portfolio was primarily due to the increase in the
large-ticket structured finance and small-ticket portfolios. The overall average
yield for the comparable periods was relatively unchanged.
Capital lease revenue of $323.2 million increased 16.4% from $277.7
million. The 14.0% increase in the average net capital lease portfolio
contributed $38.7 million of the increase while an increased average yield of
10.41% from 10.19% contributed the remaining $6.8 million. The growth in the
portfolio was primarily in the small-ticket leasing portfolios and non-U.S.
businesses. The improved yield was primarily due to increased levels of higher
yielding assets in certain small-ticket and automotive portfolios.
Revenue on operating leases of $325.5 million increased 20.8% and
depreciation expense on operating leases of $211.9 million increased 23.8%.
Operating lease margin was $113.5 million, or 34.9% of rental revenue compared
with $98.2 million, or 36.5% of rental revenue. The decreased operating lease
margin percent relates primarily to increased depreciation on certain
computer-related assets and certain small-ticket portfolios.
Net interest margin of $303.6 million or 6.55% of average net portfolio
assets decreased slightly from 6.59%. While total portfolio yields were
relatively unchanged, the net interest margin percentage was adversely impacted
by the increase in the debt to equity ratio partially offset by a decrease in
the average cost of debt (from 6.52% to 6.49%).
Revenue from sales of equipment of $48.6 million increased from $17.0
million. Similarly, cost of equipment sales of $40.7 million increased from
$15.3 million. Equipment sales margin of $7.9 million, or 16.3% of revenue from
sales of equipment increased from $1.7 million, or 9.9%. The increased equipment
sales and equipment sales margin was primarily due to a heightened demand for
mainframes, as well as trading activity in a higher margin mid-range computer
business which was acquired in June 1995.
Other revenue increased 5.9% to $105.6 million from $99.7 million. This
increase resulted primarily from a $5.0 million pre-tax gain relating to a
securitization of $75.2 million of lease receivables in the first quarter of
1996. No lease receivables were securitized during the first
<PAGE>14 FORM 10-Q
half of 1995. For a discussion regarding the strategy for utilizing
securitizations prospectively, see Item 5. Other Information.
Average borrowings outstanding of $7.1 billion increased 18.7%, or $1.1
billion. This increase was primarily due to growth in the portfolio assets and
an increased debt to equity ratio. Interest expense of $230.1 million increased
18.1%, or $35.3 million. Higher average borrowing contributed $36.5 million of
the increase and was partially offset by $1.2 million due to a decline in the
average cost of debt.
O&A expenses of $248.4 million increased 5.7% from $235.0 million. This
increase was due to increased costs associated with managing a higher level of
assets, including the mid-range computer business acquired in June 1995. At June
30, 1996, annualized O&A expenses to period end total assets decreased to 4.92%
from 5.38%. This decrease was attributable to some of the Company's businesses
more fully utilizing their infrastructure, increased operating efficiencies and
increased total assets.
The provision for credit losses of $48.5 million increased 22.3% to $39.7
million. See "Credit Quality" below for a discussion of the provision for credit
losses.
The Company's effective income tax rate of 37.79% decreased from 40.35%.
The decrease in the overall effective tax rate was due to several factors,
including a lower impact of both state and foreign taxes, a decrease in the
effect of non-tax deductible goodwill and other factors.
Non-AT&T businesses represented 67.2%, 61.8% and 28.4% of the total assets,
revenues and net income, respectively, all increasing from 65.4%, 56.7% and
5.6%, respectively. The increase in the net income percentage was due to growth
in certain small-ticket, automobile and large-ticket specialty and structured
finance portfolios, as well as a securitization of lease receivables in the
first quarter of 1996. Without such securitization, the non-AT&T businesses
would have contributed 25% of the total net income.
CREDIT QUALITY
The active management of credit losses is an important element of the
Company's business. The Company seeks to minimize its credit risk through
diversification of its portfolio assets by customer, industry segment,
geographic location and maturity. The Company's financing activities have been
spread across a wide range of equipment types (e.g., telecommunications, general
equipment (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.
<PAGE>15 FORM 10-Q
The following chart (dollars in millions) reflects the Company's portfolio
credit performance indicators:
At At
June 30, December 31,
1996 1995 1995
- ---------------------------------------------------------------------------
Allowance for credit losses $238.6 $202.7 $223.2
Nonaccrual assets $150.3 $107.5 $118.5
Net charge-offs*/Portfolio assets .55% .60% .50%
Allowance for credit losses/Portfolio assets 2.44% 2.38% 2.39%
Nonaccrual assets/Portfolio assets 1.54% 1.26% 1.27%
Delinquency (two months or greater) 1.99% 1.16% 1.46%
(*) Net charge-offs are based upon the twelve months ended June 30, 1996 and
1995 and December 31, 1995.
At or for the three and six months ended June 30, 1996, the dollar amount
of nonaccrual assets, net charge-offs and delinquencies increased from the
comparable prior year periods. These increases as well as a higher level of
portfolio assets resulted in the higher provision for credit losses. The higher
dollar amounts of nonaccrual assets, net charge-offs and delinquencies are due
primarily to growth in portfolio assets and, to a lesser extent, a large
delinquent financing in the Company's structured finance portfolio and increased
retail industry-related accounts.
The Company maintains an allowance for credit losses at a level management
believes is adequate to cover estimated losses in the portfolio based on a
review of historical loss experience, a detailed analysis of delinquencies and
problem portfolio assets, and an assessment of probable losses in the portfolio,
as a whole, given its diversification. Management also takes into consideration
the potential impact of existing and anticipated economic conditions.
FINANCIAL CONDITION
Net portfolio assets increased $.4 billion to $9.5 billion at June 30, 1996
compared to December 31, 1995. Essentially all of the 1996 growth was internally
generated. A significant portion of the growth was generated from U.S.
businesses, primarily in small-ticket portfolios. In addition, the growth was
slightly offset by a $75.2 million securitization of lease receivables as well
as the sale of SBA and other loans. Both the composition of the portfolio assets
by financing product as well as by type of equipment remained relatively
consistent with December 31, 1995.
<PAGE>16 FORM 10-Q
At June 30, 1996, the total portfolio assets managed by the Company on
behalf of others (including assets formerly owned by the Company which have been
previously securitized) was $2.2 billion, approximately the same as at December
31, 1995. The addition of lease receivables securitized in the first quarter was
offset by the normal run-off. Of the total assets managed by the Company on
behalf of others, 71.0% at June 30, 1996 and 68.0% at December 31, 1995 were
assets managed on behalf of AT&T and its affiliates.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates a substantial portion of its funds to support the
Company's operations from lease and rental receipts, but is also highly
dependent upon external financing, including the issuance of commercial paper
and medium and long-term debt in public markets and, to a lesser extent,
privately placed asset-backed financings (or securitizations) and foreign bank
lines of credit. In connection with the announcement of the June 5, 1996 merger
agreement (see Note 4 to the unaudited consolidated financial statements and
Item 5. Other Information), the Company's four rating agencies took the
following actions: Standard & Poor's placed the Company's senior medium and
long-term debt and commercial paper, currently rated A and A-1, on CreditWatch
with negative implications; Duff & Phelps Credit Rating Co. placed the Company's
senior medium and long-term debt and commercial paper, currently rated A and
D-1, under Rating Watch - Down; Fitch Investor Services, which began rating the
Company's commercial paper in May, 1996 has put the Company's F-1 rating on
FitchAlert with negative implications. Moody's Investors Service ("Moody's") has
downgraded the Company's senior medium and long-term debt and commercial paper
to Baa3 from A-3 and P-3 from P-1, respectively, and remain under Review.
However, Moody's has said that the ratings of the Company's senior medium and
long-term debt and commercial paper maturing prior to the close of the announced
Merger were confirmed at A-3 and P-1, respectively.
In the first half 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. In the first half of 1995, the
Company issued commercial paper of $11.7 billion and made repayments of $12.3
billion and issued medium and long-term debt of $1.3 billion and repaid $.5
billion.
During the six months ended June 30, 1996 and 1995, principal collections
from customers, proceeds from securitized receivables and proceeds from SBA and
other loan sales of $2.2 billion were received. These receipts were primarily
used for finance receivables and lease equipment purchases (including purchases
of finance asset portfolios and businesses in 1995) of $2.9 billion in the first
half of 1996 and 1995.
On May 31, 1996, the Company paid a dividend of eleven cents per share to
shareowners of record as of May 10, 1996. In addition, on July 19, 1996, the
Company's Board of Directors declared a second quarter dividend of eleven cents
per share. The dividend will be payable on August 30, 1996 to shareowners of
record at close of business on August 9, 1996.
In September 1995, the Company registered with the SEC $3.0 billion of debt
securities (including medium-term notes) and warrants to purchase debt
<PAGE>17 FORM 10-Q
securities, currency warrants, index warrants and interest rate warrants. At
June 30, 1996, $2.3 billion of medium-term debt was outstanding under such debt
registration.
In June 1996, the Company renewed the 364 day component of its back-up
credit facility, representing $1.5 billion of the total $2.0 billion, for six
months. This facility, negotiated with a consortium of 34 lending institutions,
supports the commercial paper issued by the Company. At June 30, 1996, this
facility was unused. The Company also has available local lines of credit to
meet local funding requirements in Europe, the Asia/Pacific Region and Canada of
approximately $1.0 billion, of which approximately $.6 billion was unused at
June 30, 1996.
The Company has, from time to time, borrowed funds directly from AT&T,
including on an interest-free basis pursuant to tax agreements. These
interest-free loans amounted to $248.9 million at June 30, 1996. These sources
of funds would not be available and outstanding loans would need to be repaid if
the Company were to cease being a member of AT&T's consolidated group for
federal income tax purposes as will happen upon the consummation of the Merger.
See Note 4 to the unaudited consolidated financial statements and Item 5. Other
Information. Management believes the Company has sufficient financial resources
to repay these loans.
The Company anticipates obtaining necessary external financing through
issuances of commercial paper and medium and long-term notes, available lines of
credit for certain foreign operations and asset-backed financings (or
securitizations). The Company's proposed future strategy is to increase the
utilization of securitizing lease and loan receivables as a funding source
subsequent to the Merger. The amount of lease receivables currently anticipated
to be securitized annually is expected to range between $1.5 billion and $2.5
billion. See Item 5. Other Information.
Future financing is contemplated to be arranged as necessary to meet the
Company's capital and other requirements with the timing of issue, principal
amount and form depending on the Company's needs and prevailing market and
general economic conditions.
The Company considers its current financial resources, together with the
debt facilities referred to above and estimated future cash flows from its
portfolio assets, to be adequate to fund the Company's future growth and
operating requirements.
ASSET AND LIABILITY MANAGEMENT
AT&T Capital's asset and liability management process takes a coordinated
approach to the management of interest rate and foreign currency risks. The
Company's overall strategy is to match the 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, 1995.
At June 30, 1996, the total notional amount of the Company's interest rate
and currency swaps was $1.5 billion and $.6 billion, respectively, as
<PAGE>18 FORM 10-Q
compared to $2.2 billion and $.3 billion, respectively, as of December 31, 1995.
The U.S. dollar equivalent of the Company's foreign currency forward exchange
contracts was $.7 billion at June 30, 1996 and December 31, 1995.
There were no past due amounts or reserves for credit losses at June 30,
1996 related to derivative transactions. The Company has never experienced a
credit related charge-off associated with derivative transactions.
RECENT PRONOUNCEMENTS
See Note 3 to the unaudited consolidated financial statements.
RECENT EVENTS
See Note 4 to the unaudited consolidated financial statements.
<PAGE>19 FORM 10-Q
AT&T Capital Corporation and Subsidiaries
Part II - Other Information
Item 5. Other Information
PRO FORMA FINANCIAL INFORMATION
The following 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 June 30, 1996 and for the six 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"). It is expected that the Merger
Agreement, which is subject to customary closing conditions, including
regulatory approvals, will be consummated in late September (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, as
amended, (the "Code") Section 338(h)(10) election, deferred tax effects relating
to the Merger and the Section 338(h)(10) election, issuance of preferred equity
securities of a consolidated entity, a proposed $2,750 million (Portfolio Assets
of $3,011.1 million, less residuals not securitized) initial securitization of
lease and loan receivables, 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) had occurred as of June 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 preferred equity securities of a
consolidated entity, the reduction in revenue 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 and second quarter 1996 Quarterly Report on Form 10-Q. 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.
<PAGE>20 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
June 30, PRO FORMA
1996 ADJUSTMENTS(1) PRO FORMA
------- -------------- ---------
ASSETS:
Cash and cash equivalents $ 148,128 $ 148,128
Net investment in finance
receivables 2,001,762 $ (106,700)(8) 1,895,062
Net investment in capital
leases 6,269,739 (2,814,100)(8) 3,455,639
Net investment in operating
leases, net of accumulated
depreciation 1,267,801 1,267,801
Deferred charges and other assets 409,757 182,600 (4) 793,557
201,200 (8)
----------- ------------ ----------
Total Assets $10,097,187 $(2,537,000) $7,560,187
========== ============ ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes $ 2,233,152 $ 248,900 (2)$ 852,052
35,000 (3)
(200,000)(5)
66,000 (6)
22,000 (7)
(1,553,000)(8)
Deferred income taxes 549,157 (514,157)(4) -
(35,000)(3)
Income taxes and other payables 581,590 (38,700)(6) 542,890
Payables to AT&T and affiliates 294,980 (248,900)(2) 46,080
Medium and long-term debt 5,258,033 5,258,033
Commitments and contingencies
--------- ---------- ---------
Total Liabilities $ 8,916,912 $(2,217,857) $6,699,055
Minority interest - preferred stock $200,000 (5) $200,000
(Continued)
<PAGE>21 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
(Continued)
June 30, PRO FORMA
1996 ADJUSTMENTS(1) PRO FORMA
-------- -------------- ---------
Shareowners' Equity:
Common stock $ 470 $ (280)(8)$ 190
Additional paid-in capital 783,908 696,757 (4) 593,140
(887,525)(8)
Recourse loans to senior executives (20,790) (20,790)
Foreign currency translation
adjustments (2,908) (2,908)
Retained earnings 419,595 (27,300)(6) 91,500
(22,000)(7)
(278,795)(8)
---------- ---------- ---------
Total Shareowners' Equity 1,180,275 (519,143) 661,132
---------- ---------- ---------
Total Liabilities and
Shareowners' Equity $10,097,187 $(2,537,000) $7,560,187
========== =========== =========
The accompanying explanatory notes are an integral part of this pro forma
consolidated balance sheet.
<PAGE>22 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEET
At June 30, 1996
(Dollars in Thousands)
(1) The pro forma consolidated balance sheet reflects a significant
securitization of lease and loan receivables anticipated to be effected 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 range between $1,500 to $2,500 million.
(2) Reflects the issuance of short-term notes to repay the interest-free
loans AT&T Corp. ("AT&T") made to the Company pursuant to the Gross Profit
Tax Deferral Interest Free Loan Agreement.
(3) Reflects the issuance of short-term notes to 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.
(4) Reflects the election under Section 338(h)(10) of the Code, and similar
elections under state and local laws, if applicable. 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. 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 39.55%.
(5) Reflects the issuance of preferred equity securities of a consolidated
entity of the Company assuming (i) it is perpetual in nature, (ii) the net cash
proceeds are used to repay short-term notes, and (iii) the estimated costs of
such issuance are netted against the gross proceeds. This transaction is
expected to occur shortly after the Merger date.
(6) Reflects the issuance of short-term notes to fund the accelerated payout of
the Company's Share Performance Incentive Plan ("SPIP") relating to the Merger
and other payments to certain officers of the Company to waive certain of their
rights under the Company's Leadership Severance Plan and the related tax effect
at the assumed combined Federal and state statutory income tax rate of 39.55%.
<PAGE>23 FORM 10-Q
(7) Reflects the issuance of short-term notes to fund the Company's Merger
transaction costs of approximately $11 million, as well as, certain fees for and
transaction costs of Nomura International plc ("Nomura") and Babcock & Brown
aggregating approximately $11 million.
(8) Reflects a proposed $2,750 million initial securitization of lease and loan
receivables expected to occur at or about the time of the closing date of the
Merger. The securitization assumes (i) the sale of $2,750 million (Portfolio
Assets of $3,011.1 million, less $261.1 million of residuals not securitized) of
lease and loan receivables, (ii) the establishment of a cash collateral account
to act as a credit enhancement and related reserve, (iii) the reversal of the
allowance for credit losses of $90.3 million, (iv) the generation of an
after-tax gain of $91.5 million, (v) approximately $22.0 million in transaction
costs, and (vi) a combined Federal and state statutory income tax rate of
39.55%.
Proceeds of the proposed initial securitization, together with the equity
contribution relating to the Merger (approximately $816.4 million), will be used
to purchase outstanding common stock of the Company and repay short-term notes.
In the event that the proposed initial securitization does not occur on the
Merger date, the Company has a committed bridge financing facility to enable it
to purchase outstanding common stock.
<PAGE>24 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
For the Year
Ended
December 31, Pro Forma
1995 Adjustments(1) Pro Forma
------- ----------- ---------
Revenues:
Finance revenue $ 174,523 $ (13,200)(4)$ 161,323
Capital lease revenue 586,141 (316,900)(4) 269,241
Rental revenue on operating
leases 560,964 560,964
Equipment sales 48,724 48,724
Other revenue, net 206,683 22,700 (5) 229,383
--------- --------- ---------
Total Revenues 1,577,035 (307,400) 1,269,635
--------- --------- ---------
Expenses:
Interest 411,040 (83,800)(3) 337,240
10,000 (2)
Operating and
administrative 473,663 7,400 (6) 481,063
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 (66,400) 1,302,396
--------- --------- ---------
Minority interest - preferred equity
securities 18,000 (7) 18,000
Income (Loss)before income taxes 208,239 (259,000) (50,761)
Provision (benefit) for income taxes 80,684 (102,316)(8) (21,632)
--------- -------- ----------
Net Income (Loss) $ 127,555 $(156,684) $ (29,129)
========= ========= ==========
Primary earnings (loss) per share $ 2.70 $ (1.53)
--------- ----------
Number of shares (000's) (9) 47,182 19,000
--------- ----------
Fully diluted earnings (loss) per
share $ 2.69 $ (1.53)
--------- ----------
Number of shares (000's) (9) 47,455 19,000
--------- ----------
The accompanying explanatory notes are an integral part of this pro forma
consolidated income statement.
<PAGE>25 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Dollars in Thousands)
(1) The 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 range between $1,500 and
$2,500 million. In addition, the pro forma consolidated statement of income does
not reflect nonrecurring items such as (i) the $91.5 million after-tax gain
associated with the proposed $2,750 million initial securitization of lease and
loan receivables, effected in connection with the Merger, (ii) the $27.3 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 $22.0 million after-tax expense relating to the Company's Merger related and
other transaction costs. See Notes 6, 7, and 8 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
on the proposed initial securitization is included in the results of operations,
(ii) various levels of securitization, and (iii) other securitization
assumptions 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 $(156,684) $(29,129)
======= ========= =======
Securitization sensitivity, including the non recurring gain:
$2,750 million $127,555 $ (65,200) $ 62,355
$2,500 million $127,555 $ (67,600) $ 59,955
$2,250 million $127,555 $ (70,000) $ 57,555
$2,000 million $127,555 $ (72,300) $ 55,255
$1,750 million $127,555 $ (74,700) $ 52,855
$1,500 million $127,555 $ (77,100) $ 50,455
<PAGE>26 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE 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 in 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 30 basis points. 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 incremental interest costs. To illustrate the Company's sensitivity to
interest rates, had the increase in borrowing costs been 20 or 40 basis points
the Company's interest expense adjustment would have been $6.7 million or $13.4
million, respectively.
(3) Reflects the net reduction in the Company's short-term note 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 $2,750 million
initial securitization of lease and loan
receivables and the issuance of preferred
equity securities net of amounts used to
purchase outstanding company stock $(106,100)
- - Repay the interest free loans AT&T made to
the Company pursuant to the Gross Profit
Tax Deferral Interest Free Loan Agreement* 14,900
- - 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 of the
Company's SPIP relating to the
Merger and other payments to certain
officers of the Company 4,000
- - Merger related and other transaction
costs 1,300
--------
Net reduction in interest expense $ (83,800)
=========
* The amount is calculated using the 1995 average outstanding interest-free
loan balance.
<PAGE>27 FORM 10-Q
(4) Reflects the reduction in the Company's capital lease and finance revenue as
a result of the securitization of $2,750 million of lease and loan receivables.
(5) Reflects the recognition of the expected servicing fees associated with
servicing the securitized lease and loan receivables.
(6) Reflects the incremental and 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 accorded to AT&T and its subsidiaries or received directly from AT&T.
In addition, annual fees of $3.0 million and $.3 million will be paid to Nomura
and Babcock & Brown, respectively.
(7) Reflects dividends to be paid on preferred equity 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 source for the number of shares used for the historical earnings per
share was the Company's 1995 Annual Report on Form 10-K. The number of shares
used to calculate the pro forma loss per share reflects the shares expected to
be outstanding following the Merger (approximately 19 million).
<PAGE>28 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
For the six
months ended
June 30, Pro Forma
1996 Adjustments(1) Pro Forma
------- ----------- ---------
Revenues:
Finance revenue $ 96,963 $ (4,800)(4) $ 92,163
Capital lease revenue 323,209 (114,600)(4) 208,609
Rental revenue on operating
leases 325,486 325,486
Equipment sales 48,596 48,596
Other revenue, net 105,630 8,000 (5) 113,630
-------- ---------- --------
Total Revenues 899,884 (111,400) 788,484
-------- ---------- --------
Expenses:
Interest 230,072 (39,100)(3) 198,972
8,000 (2)
Operating and
administrative 248,409 3,700 (6) 252,109
Depreciation on operating
leases 211,941 211,941
Cost of equipment
sales 40,659 40,659
Provision for credit
losses 48,536 48,536
------- --------- ---------
Total Expenses 779,617 (27,400) 752,217
-------- --------- --------
Minority interest - preferred
equity securities 9,000 (7) 9,000
Income (Loss) before income taxes 120,267 (93,000) 27,267
Provision (benefit) for income taxes 45,444 (36,089)(8) 9,355
------- -------- --------
Net Income (Loss) $ 74,823 $(56,911) $ 17,912
======= ======== ========
Primary Earnings Per Share $ 1.58 $ 0.94
-------- ---------
Number of shares (000's) (9) 47,485 19,000
-------- ---------
Fully diluted earnings per share $ 1.57 $ 0.94
-------- ---------
Number of shares (000's) (9) 47,560 19,000
-------- ---------
The accompanying explanatory notes are an integral part of this pro forma
consolidated income statement.
<PAGE>29 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
EXPLANATORY NOTES TO THE PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 30, 1996
(Dollars in Thousands)
(1) The pro forma consolidated statement of income for the six months ended June
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
range between $1,500 and $2,500 million. In addition, the June 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 6, 7, and 8 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 proposed initial
securitization on the historical financial statements decrease 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 six months
ended June 30, 1996 was less than half 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 in 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 30 basis points. 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 June 30, 1996 issuances
of medium and long-term debt multiplied by the incremental interest costs. To
illustrate the Company's sensitivity to interest rates, had the increase in
borrowing costs been 20 or 40 basis points the Company's interest expense
adjustment would have been $5.3 million or $10.7 million, respectively.
(3) Reflects the net reduction in the Company's short-term notes 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 $2,750 million
initial securitization of lease and loan
receivables and the issuance of preferred
equity securities net of amounts
used to purchase outstanding company stock $ (49,600)
- - Repay the interest free loans AT&T made to the Company pursuant to the Gross
Profit Tax Deferral Interest Free Loan
Agreement* 7,100
<PAGE>30 FORM 10-Q
- - Payment to AT&T to assume all tax
liabilities of Federal and combined state
taxes for periods prior to the Merger 1,000
- - Fund the accelerated payout of the
Company's SPIP relating to the
Merger and other payments to certain
officers of the Company 1,800
- - Merger related and other transaction
costs 600
---------
Net reduction in interest expense $ (39,100)
=========
* 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 securitizing $2,750 million of lease and loan receivables.
(5) Reflects the recognition of the expected servicing fees associated with the
securitized lease and loan receivables.
(6) Reflects the incremental costs in the Company's operating and administrative
expenses, including services for telecommunications, computer 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
accorded to AT&T and its subsidiaries or received directly from AT&T. In
addition, annual fees of $3.0 million and $.3 million will be paid to Nomura and
Babcock & Brown, respectively.
(7) Reflects dividends to be paid on preferred equity 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 source for the number of shares used for the historical earnings per
share was the Company's 1995 Annual Report on Form 10-K. The number of shares
used to calculate the pro forma earnings per share reflects the shares expected
to be outstanding following the Merger (approximately 19 million).
<PAGE>31 FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
11 Computation of Primary and Fully Diluted Earnings Per
Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Current reports on Form 8-K:
Report on Form 8-K, dated June 5, 1996, was filed pursuant to
Item 5.
Report on Form 8-K, dated April 12, 1996, was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits).
Report on Form 8-K, dated April 30, 1996, was filed pursuant to
Item 5.
<PAGE>32 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
July 31, 1996
Ramon Oliu, Jr.
Controller
Chief Accounting Officer
<PAGE>33 FORM 10-Q
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
------
11 Computation of Primary and Fully Diluted Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE>1
EXHIBIT 11
FORM 10-Q for the Quarter
Ended June 30, 1996
File No. 1-11237
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(In Thousands, except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
------- ------- ------- -------
Net income $37,779 $27,912 $74,823 $52,994
======= ======= ======= =======
Primary Earnings Per Share:
Weighted average number of
shares outstanding 46,985 46,944 46,979 46,943
Net effect of dilutive
stock options (based on the
treasury stock method using
average market price) 509 83 506 71
------- ------- ------- -------
Total 47,494 47,027 47,485 47,014
======= ======= ======= =======
Primary Earnings:
Per Share $ .80 $ .59 $ 1.58 $ 1.13
======= ======= ======= =======
Fully Diluted Earnings
Per Share:
Weighted average
number of shares
outstanding 46,985 46,944 46,979 46,943
Net effect of dilutive
stock options (based on
the treasury stock method
using the greater of the
average market price or
quarter end price) 586 103 581 107
------- ------- ------- -------
Total 47,571 47,047 47,560 47,050
======= ======= ======= =======
Fully diluted earnings
per share $ .79 $ .59 $ 1.57 $ 1.13
======= ======= ======= =======
* This calculation is submitted in accordance with Regulation S-K item 601(b)
11 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3%.
<PAGE>1
EXHIBIT 12
FORM 10-Q for the Quarter
Ended June 30, 1996
File No. 1-11237
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES*
(Dollars in Thousands)
(Unaudited)
For the
Six Months Ended
June 30, 1996
----------------
Earnings from continuing operations:
Income before income taxes $120,267
Add: Fixed charges included in income before taxes 233,613
--------
Total earnings from continuing operations, as adjusted 353,880
--------
Total fixed charges* $233,613
========
Ratio of earnings to fixed charges 1.51
========
* Fixed charges include interest on indebtedness and the portion of rentals
representative of the interest factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
AT&T Capital Corporation
Financial Data Schedule
(in thousands, except per share amounts)
(unaudited)
This schedule contains summary financial information primarily extracted
from AT&T Capital Corporation's unaudited consolidated income statement
and balance sheet for and at the six months ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 148,128
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 238,553
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 700,990
<TOTAL-ASSETS> 10,097,187
<CURRENT-LIABILITIES> 0
<BONDS> 5,258,033
0
0
<COMMON> 470
<OTHER-SE> 1,179,805
<TOTAL-LIABILITY-AND-EQUITY> 10,097,187
<SALES> 48,596
<TOTAL-REVENUES> 899,884
<CGS> 40,659
<TOTAL-COSTS> 252,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,536
<INTEREST-EXPENSE> 230,072
<INCOME-PRETAX> 120,267
<INCOME-TAX> 45,444
<INCOME-CONTINUING> 74,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,823
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.57
</TABLE>
