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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: November 1, 1996
AT&T CAPITAL CORPORATION
A Delaware Commission File I.R.S. Employer
Corporation No. 1-11237 No. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number (201) 397-3000
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Item 5. Other Events
In connection with the AT&T Capital Corporation (the 'Company') Registration
Statement on Form S-3 (File No. 33-61003) filed on October 19, 1995 in
connection with the registration of $3.0 billion Debt Securities and Warrants to
Purchase Debt Securities, Currency Warrants, Index Warrants and Interest Rate
Warrants, the Company is filing the following updated disclosure material that
was included in the Registration Statement on Form S-3 (File No. 333-11243)
filed by Capita Preferred Trust (which is sponsored by the Company) and Capita
Preferred Funding L.P. (the general partner of which is the Company) on October
15, 1996 with respect to the registration of Trust Originated Preferred
Securities (the "Registration Statement").
The following terms used in the excerpt to the Registration Statement set
forth below are defined as follows in such Registration Statement.
"Holdings" - Hercules Limited, a recently formed Caymen Island Corporation.
"Merger" - A merger consummated on October 1, 1996, with the Company and
Merger Sub pursuant to the Merger Agreement.
"Merger Agreement" - Agreement and Plan of Merger among AT&T, Holdings and
Merger Sub.
"Merger Sub" - Antigua Acquisition Corporation, a recently formed Delaware
Corporation
"Management Investors" - Certain members of the Company's management.
"GRSH" - GRS Holding Company Limited, a private United Kingdom holding
corporation engaged in the U.K. rail leasing business.
"S&P" - Standard & Poor's Ratings Group, a division of McGraw-Hill.
"Moody's" - Moody's Investors Service, Inc.
The following documents have been filed by the Company with the Securities
and Exchange Commission and should be read in connection with the following
excerpt from the Registration Statement:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K");
2. The Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1996 and June 30, 1996; and
3. The Company's Current Reports on Form 8-K dated April 12, 1996,
April 30, 1996, June 6, 1996, August 20, 1996 and October 1, 1996.
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RISK FACTORS
RISKS RELATED TO EXPECTED PLANS INVOLVING THE COMPANY
SECURITIZATION PROGRAM. The Company's current business plan incorporates
future securitization transactions as a key part of the Company's financing to
manage the Company's leverage ratio and to transfer credit risk. The Company
will continue to manage the securitized assets following their sale. To the
extent that the actual level of securitization deviates significantly from the
Company's current target level of securitization (currently planned at
approximately 30% of the financing volume originated in each year), there could
be a material adverse effect on the Company's results of operations and any such
significant deviation may affect the credit ratings assigned to the short-term
or long-term debt of the Company.
LEVERAGE AND DEBT SERVICE. As a result of the Merger and related
transactions, there has been a significant increase in the Company's ratio of
consolidated indebtedness to shareowners' equity. As of September 30, 1996, on a
pro forma basis for the Merger and related transactions, the Company's ratio of
consolidated indebtedness to shareowners' equity plus Company-obligated
preferred securities issued in this offering would have been 7.19x. The
increased debt-to-equity ratio will be a factor in the analyses of the Company
applied by statistical rating organizations. Any future downgrades in the credit
ratings of the Company's short-term or long-term debt would increase the
Company's cost of borrowing, limit its access to the commercial paper market
(the Company's traditional funding source) and reduce its competitiveness,
particularly if any such rating is in a generic rating category that signifies
that the relevant debt of the Company is less than investment grade, and certain
ratings downgrades below 'BB+' by S&P or below 'Ba1' by Moody's could result in
the termination of one or more of the License Agreements with AT&T, Lucent and
NCR. See 'Relationship with AT&T Entities -- Operating and Certain Other
Agreements with AT&T Entities' below. Any such downgrading could have a material
adverse effect on the Company.
CHANGES IN RELATIONSHIP WITH AT&T ENTITIES
REVENUES AND NET INCOME ATTRIBUTABLE TO AT&T ENTITIES. A substantial
portion of the Company's revenues and a substantial majority of its net income
are attributable to the financing provided by the Company to customers of AT&T,
Lucent and NCR (the 'Customers of the AT&T Entities') with respect to products
manufactured or distributed by them (the 'AT&T Entities Products') and, to a
lesser extent, to transactions where the AT&T Entities or their employees are
customers of the Company (the 'AT&T Entities as End-User'), primarily with
respect to the lease of information technology and other equipment or vehicles
to them as end-users and to the administration and management of certain leased
assets on behalf of AT&T. The Company's commercial relationships with the AT&T
Entities are currently governed by certain important agreements described below
and in 'Relationship with AT&T Entities.'
For the nine months ended September 30, 1996, approximately 30.5% and 59.7%
(or $418.4 million and $68.8 million) of the Company's total revenues and net
income, respectively, were attributable to lease and other financing provided by
the Company to the Customers of the AT&T Entities with respect to the AT&T
Entities Products. An additional approximately 7.2% and 7.6% (or $99.2 million
and $8.8 million) of total revenues and net income, respectively, for the nine
months ended September 30, 1996 were attributable to transactions with the AT&T
Entities as End-Users. The Company's non-AT&T Entities related business
generated 62.3% and 32.7% (or $852.9 million and $37.7 million) of total
revenues and net income, respectively, for the nine months ended September 30,
1996
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(approximately 30.9% of net income for the period without giving effect to a
securitization of lease receivables effected by the Company in the first quarter
of 1996).
In 1995, approximately 32.7% and 67.9% (or $516.2 million and $86.6
million) of the Company's total revenues and net income, respectively, were
attributable to lease and other financing provided by the Company to the
Customers of the AT&T Entities with respect to the AT&T Entities Products. An
additional approximately 8.3% and 8.2% (or $130.6 million and $10.5 million) of
total revenues and net income, respectively, in 1995 were attributable to
transactions with the AT&T Entities as End-Users. In 1995, the Company's
non-AT&T Entities related business generated approximately 59.0% and 23.9% (or
$930.2 million and $30.5 million) of total revenues and net income,
respectively. The foregoing net income amounts were calculated based upon an
allocation of interest, income taxes and certain corporate overhead expenses
that the Company believes to be reasonable. See 'Business of the
Company -- General.'
Accordingly, while the proportion of the Company's total revenues and net
income from non-AT&T Entities related business has grown over the last several
years, a substantial portion of the Company's total revenues, and a substantial
majority of the Company's net income, have been generated by the Company's
relationship with the AT&T Entities. A substantial majority of such revenues and
substantially all such net income have been attributable to transactions with
customers of Lucent and its subsidiaries (and the business related to these
transactions have been generally among the most profitable for the Company). A
significant decrease in the portion of the sales of the AT&T Entities Products
(the 'AT&T Entities Product Sales') that are financed by the Company, or in the
absolute amount of the AT&T Entities Product Sales (in either case, particularly
with respect to Lucent), or in the amount of transactions effected by the
Company with the AT&T Entities as End-User (particularly with respect to AT&T)
would have a material adverse effect on the Company's results of operations and
financial condition.
OPERATING AND CERTAIN OTHER AGREEMENTS WITH AT&T ENTITIES. The initial
terms of each of the Operating Agreements (pursuant to which, among other
things, the Company serves as preferred provider of financing services and has
certain related and other rights and privileges in connection with the financing
of equipment to the Customers of the AT&T Entities) will expire on August 4,
2000, but will be automatically renewed for successive two-year periods unless
either party thereto gives the other a non-renewal notice at least one year
prior to the end of the initial or renewal term. None of the AT&T Entities is
required to renew the term of its Operating Agreement beyond the expiration of
the current term on August 4, 2000.
Although the Company will seek to maintain and improve its existing
relationships with Lucent, NCR and AT&T and seek to extend each of the Operating
Agreements beyond August 4, 2000, no assurance can be given that the Operating
Agreements, or any of them, will be extended beyond such date or, if extended,
that the terms and conditions thereof will not be modified in a manner adverse
to the Company. Failure to renew NCR's and Lucent's Operating Agreements on
terms not adverse to the Company could have a material adverse effect on the
Company. Moreover, in certain circumstances, the Operating Agreements may be
terminated prior to their expiration. See 'Relationship with AT&T Entities' for
a summary of certain important terms of the Operating Agreements, including a
description of the scope (and limitations) of the Company's 'preferred provider'
status under such agreements.
To provide additional incentive for Lucent to assist the Company in the
financing of products manufactured or distributed by Lucent, in recent years the
Company has paid Lucent a sales assistance fee equal to a designated percentage
of the aggregate sales prices and other charges ('volumes') of Lucent products
financed by the Company. In early 1996, following Lucent's request, the Company
agreed to pay a substantial increase in the Lucent sales assistance fee for
1995, both as an absolute amount and as a percentage of volumes attributable to
Lucent. After giving effect to the increase, the sales assistance fee paid by
the Company to Lucent for 1995 was approximately double the 1994 fee. The
Company and Lucent recently agreed to a modified formula for calculating the
sales assistance fee for the remaining years of the term of Lucent's Operating
Agreement (retroactive to January 1, 1996). The revised formula is expected to
result in aggregate annual sales assistance fees which are approximately double
the amounts that would have been paid if the pre-1995 formula had been
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maintained. No assurance can be given that Lucent will not seek higher sales
assistance fees in 1996 or future years (or otherwise attempt to share in the
revenues of the Company associated with the leasing of Lucent products) or seek
to use alternative providers of financing. Similarly, although neither AT&T nor
NCR has requested any sales assistance fees or other similar benefits from the
Company by reason of the financing by the Company of their respective products,
no assurance can be given that AT&T or NCR will not do so in the future. Any
such action by Lucent, alone or in combination with similar action by AT&T or
NCR, could have a material adverse effect on the Company.
The Operating Agreements do not require that the Company be the sole
provider of financing in connection with the AT&T Entities Product Sales. Also,
such Operating Agreements provide no assurance that the percentage of such sales
for which the Company provides financing will not decrease in the future.
Subject to certain restrictions, the Operating Agreements permit the AT&T
Entities to use or promote an alternative financing program offered by an
unaffiliated company that provides better terms than those offered by the
Company, without providing the Company an opportunity to match such better
terms. In addition, none of the Operating Agreements is generally required to be
assumed by the purchaser or other transferee of all or any portion of the
relevant AT&T Entity's product manufacturing business upon any sale or other
disposition thereof by such AT&T Entity, although such AT&T Entity is required
to use reasonable efforts to cause the related Operating Agreement to be so
assumed. Moreover, each Operating Agreement provides that the relevant AT&T
Entity may terminate the Company's 'preferred provider' status and organize
their own 'captive' finance subsidiaries if the Company's Financing Penetration
Rate (as defined in the respective Operating Agreements) decreases by certain
specified amounts or if the Company becomes a subsidiary of a person other than
Holdings or one of its affiliates. The Company does not expect its Financing
Penetration Rate under its Operating Agreements with Lucent and NCR to decrease
during the remainder of the initial term thereof by an amount that would permit
Lucent or NCR, as the case may be, to terminate the Company's 'preferred
provider' status, although no assurance can be given in that regard.
The Company's ability to capture a significant portion of the AT&T Entities
Product Sales is augmented by the provisions of the Agreement Supplements with
Lucent and NCR pursuant to which Lucent and NCR have licensed certain trade
names and service marks, including the 'Lucent Technologies' and 'NCR' trade
names, to the Company for use in the business of the Company and certain of its
subsidiaries. The Company's License Agreement with AT&T also has similar
provisions. The initial term of the License Agreement and Agreement Supplements
expires on August 4, 2000 but will be automatically renewed in the event of a
renewal of the relevant Operating Agreement, for a term equal to any renewal
term of that Operating Agreement. Each License Agreement may be terminated prior
to the end of its term upon the occurrence of certain events (including upon the
termination of the applicable Operating Agreement and the occurrence of certain
ratings downgrades below 'BB+' by S&P or below 'Ba1' by Moody's). In addition,
AT&T may require the Company to discontinue, following two years' prior notice,
use of (i) the 'AT&T' trade name as part of the Company's corporate name and
(ii) the other service marks licensed by AT&T to the Company. The Company's
subsidiaries may, in such event, continue to use the 'AT&T' trade name and
service marks in connection with the provision of financing services and
otherwise in accordance with the terms of the License Agreement, which include
extensive restrictions on the use thereof in connection with the issuance of
securities.
The Operating Agreements do not apply to the Company's relationship with
the AT&T Entities as end-users of information technology and other equipment or
vehicles financed by the Company. Although the Intercompany Agreement and
Agreement Supplements provides that each AT&T Entity will view the Company as
its preferred provider of financing, the Intercompany Agreement and Agreement
Supplements do not require any of the AT&T Entities to continue to use the
Company as its financing source for its own acquisitions of such equipment or
vehicles if competitors of the Company offer financing on more attractive terms.
See 'Relationship with AT&T Entities.'
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RISKS RELATED TO THE TERMINATION OF AT&T'S OWNERSHIP INTEREST IN THE COMPANY
BUSINESS RELATIONSHIP. Prior to the consummation of the Merger, AT&T had an
approximately 86% economic interest in the Company. The Company believes that it
has benefitted from that interest because approximately 86% of the profits
derived by the Company from its commercial relationship with the AT&T Entities
(the Company's most important commercial relationship -- see ' -- Changes in
Relationship with AT&T Entities -- Revenues and Net Income Attributable to AT&T
Entities' above) directly or indirectly benefitted AT&T. Following the AT&T
Restructuring and the consummation of the Merger, the Company's relationship
with AT&T, Lucent and NCR as its principal customers and sources of business
will be based entirely on commercial dealings and its contract rights, without
any ownership interest by AT&T, Lucent or NCR in the Company. To the extent that
this change causes the relations of AT&T, Lucent and NCR with the Company to be
less favorable than in the past, there will be an adverse effect on the Company.
CERTAIN INCREASED COSTS AND EXPENSES.
General. In connection with the consummation of the Merger and related
transactions pursuant to which AT&T sold its entire indirect equity interest in
the Company (see 'The Merger'), certain of the Company's annual expenses are
expected to increase. A summary of the significant increases follows.
Borrowing Costs. While it is difficult to predict the response of investors
to the Company's medium and long-term note and commercial paper programs and,
therefore, it is difficult to quantify such effect of the Merger and related
transactions and consequent downgrading of ratings on the Company's debt with
reasonable accuracy, the Company has estimated an increase in borrowing costs of
approximately 20 basis points relating to its commercial paper program and 25
basis points relating to its medium and long-term debt issuances. Assuming such
an increase in borrowing costs, had the Merger occurred on January 1, 1995, the
Company's 1995 interest expense would have increased by $7.4 million. The
increase in interest expense was calculated using the 1995 average commercial
paper balance outstanding and the 1995 issuances of medium and long-term debt
multiplied by the respective incremental borrowing costs. To illustrate the
Company's sensitivity to interest rates, had the increase in such borrowing
costs been 10 basis points lower or higher than the assumed respective increases
in borrowing costs referred to above the Company's interest expense increase
would have been $4.1 million or $10.7 million, respectively.
Tax Deconsolidation. The Company was formerly a member of AT&T's
consolidated group for federal income tax purposes, but immediately after the
Merger ceased to be a member of such tax group (the 'Tax Deconsolidation'). The
Tax Deconsolidation is expected to have certain adverse effects on the Company
as described below.
Most financings by the Company of products manufactured by the AT&T
Entities involve the purchase of such products by the Company and the
contemporaneous lease of such products by the Company to third parties. Because
the Company and the AT&T Entities are no longer affiliated, sales of such
products to the Company by the AT&T Entities will generate current taxable
income for AT&T or the affiliate of AT&T manufacturing such products, together
with a liability of AT&T or such affiliate to pay federal income tax on such
income. Notwithstanding such sales of products, while the Company was a part of
the AT&T consolidated federal income tax group at the time of such sale, the
payment of such taxes had been deferred (the amount of such previously deferred
taxes being herein called 'Gross Profit Tax Deferral') generally until the
Company claimed depreciation on the products, or sold the products outside the
group. Pursuant to one of the former tax agreements between AT&T and the
Company, AT&T had extended interest-free loans to the Company in an amount equal
to the then outstanding amount of Gross Profit Tax Deferral, as well as certain
other intercompany transactions.
As a result of the Tax Deconsolidation, the Company no longer receives such
loans, which had constituted a competitive advantage to the Company in financing
the AT&T Entities Products. In addition, the Company was required to repay all
such outstanding loans immediately prior to the Tax Deconsolidation. The
aggregate outstanding principal amount of the interest-free loans associated
with Gross Profit Tax Deferral which were repaid by the Company in connection
with the Tax Deconsolidation equaled approximately $247.4 million. Additionally,
as a result of Tax Deconsolidation,
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the Company made a payment to AT&T of $35 million in exchange for AT&T's
assumption of certain federal and combined state tax liabilities of the Company
relating to periods prior to the Merger.
Operating and Administrative Expenses. The Company's annual expenses for
operating and administrative expenses are expected to increase after the Merger
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. The incremental and
recurring costs in the Company's operating and administrative expenses for which
the Company received such discounts include services for telecommunication,
certain information processing, travel, human resources, real estate, express
mail and insurance services. In addition, annual management and advisory fees of
initially $3.0 million will be paid to Nomura. The Company estimates the total
increase in operating and administrative expenses to be $5.9 million annually
(including such management and advisory fees).
Compensation and Benefit Plans. Under the Company's Share Performance
Incentive Plan ('SPIP'), approximately 120 employees had the right to receive
cash awards at the end of five, 3-year performance periods. The first such
period ended on June 30, 1996, with each of the other performance periods ending
on the annual anniversary of such date through and including June 30, 2000. In
connection with the Merger, nearly all of these cash awards for the second
through the fifth performance periods were accelerated and paid at the closing
of the Merger, resulting in an aggregate payment of approximately $50.9 million.
In addition, approximately $9.9 million is expected to be paid to certain
officers and other key employees of the Company in connection with the waiver
and modification of the Company's Leadership Guarantee Plan and other
termination and compensation related payments effective upon closing of the
Merger.
Transaction Costs. The Company will incur an $11.3 million after-tax
expense relating to the Company's Merger-related and other transaction costs.
COMPETITION
The equipment leasing and finance industry in which the Company operates is
highly competitive and has been undergoing a process of consolidation. As a
result, certain of the Company's competitors' relative cost bases have been
reduced. Participants in the industry compete through price (including the
ability to control costs), risk management, innovation and customer services.
Principal cost factors include the cost of funds, the cost of selling to or
obtaining new end-user customers and vendors and the cost of managing
portfolios. The Company's competitors include captive or related leasing
companies (such as General Electric Capital Corporation and IBM Credit
Corporation), independent leasing companies (such as Comdisco, Inc.), certain
banks engaged in leasing, lease brokers and investment banking firms that
arrange for the financing of leased equipment, and manufacturers and vendors
which lease their own products to customers. Many of the competitors of the
Company are large companies that have substantial capital, technological and
marketing resources; some of these competitors are significantly larger than the
Company and have access to debt at a lower cost than the Company.
CERTAIN OTHER RISKS
The Company is subject to certain other risks including the risk that its
allowance for credit losses may not prove adequate to cover ultimate losses and
that its estimated residual values will not be realized at the end of the lease
terms. On an aggregate basis, the Company has historically realized proceeds
from the sale of equipment during the lease term and at lease termination in
excess of the Company's recorded residual values. There can be no assurance,
however, that credit allowances will prove adequate to cover losses in
connection with the Company's investment in finance receivables, capital leases
and operating leases ('Portfolio Assets', and net of allowance for credit
losses, 'Net Portfolio Assets') or that such residual values will be realized in
the future. See 'Business of the Company -- Certain Business Skills.'
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CAPITALIZATION
The following table sets forth the short-term notes and capitalization of
the Company as of September 30, 1996, pro forma for the Merger and related
transactions (excluding the effects of this offering) as described below under
'The Merger', and as adjusted to give effect to the sale of the Trust Preferred
Securities (the 'Offering') and the application of the proceeds therefrom. This
table should be read in conjunction with the Consolidated Financial Statements
and the related notes thereto incorporated by reference in this Prospectus.
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<CAPTION>
PRO FORMA AS ADJUSTED FOR
ACTUAL FOR MERGER(1) THE OFFERING
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term notes, less unamortized discounts....................... $3,021,459 $ 1,714,859 $ 1,514,859
Medium and long-term debt.......................................... 4,896,467 4,896,467 4,896,467
Company-obligated preferred securities of subsidiary(2)............ -- -- 200,000
Shareowners' equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares;
no shares issued and outstanding............................ -- -- --
Common Stock, $.01 par value, authorized 100,000,000 shares;
issued and outstanding 47,097,447 shares (150,000,000 shares
authorized and 90,000,000 shares issued and outstanding on a
pro forma basis)............................................ 471 900 900
Additional paid-in capital......................................... 786,163 624,206 624,206
Foreign currency translation adjustment............................ (2,804) (2,804) (2,804)
Retained earnings.................................................. 454,895 84,900 84,900
Recourse loans to senior executives(3)............................. (20,923) (15,423) (15,423)
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Total shareowners' equity..................................... 1,217,802 691,779 691,779
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Total capitalization.......................................... $9,135,728 $ 7,303,105 $ 7,303,105
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(1) Gives effect to the Merger and related transactions (excluding the effects
of this offering), which are described below under 'The Merger.'
(2) The assets of the Trust will be comprised of the
Partnership Preferred Securities issued by the Partnership, and the assets
of the Partnership will initially be comprised of the Debentures and the
Eligible Debt Securities. Except to the extent described under 'Risk
Factors -- Risk Factors Related to TOPrS -- Insufficient Income or Assets
Available to Partnership,' the Guarantees, when taken together with the
Company Debenture and the Company's obligations to pay all fees and expenses
of the Trust and the Partnership, constitute a guarantee by the Company of
the distribution, redemption and liquidation payments payable to the holders
of the Trust Preferred Securities.
(3) These recourse loans to senior executives were made pursuant to the
Company's 1993 Leveraged Stock Purchase Plan and the 1993 Long Term
Incentive Plan. Most of these loans remain outstanding following the Merger.
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RATIO OF EARNINGS TO FIXED CHARGES OF THE COMPANY
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<CAPTION>
PRO FORMA FOR OFFERING(1)
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NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, -----------------------------------------
1996 1995 1996 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges......... 1.49x 1.47x 1.51x 1.50x 1.62x 1.57x 1.44x 1.29x
</TABLE>
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(1) The pro forma data represents the Company's results as if the issuance of
the Trust Preferred Securities had taken place on January 1, 1995. Had the
Merger and related transactions, including the issuance of the Trust
Preferred Securities, taken place on January 1, 1995, the pro forma ratio of
earnings to fixed charges for the nine months ended September 30, 1996 would
have been 1.17x, and for the year ended December 31, 1995 there would have
been an earnings deficiency of $30.0 million to cover fixed charges. See
'The Merger' for a description of the Merger and the transactions related to
the Merger reflected in this pro forma presentation.
Earnings consist of income before income taxes and cumulative effect on
prior years of accounting change plus fixed charges. Fixed charges consist of
interest on indebtedness and the portion of rentals representative of the
interest factor.
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BUSINESS OF THE COMPANY
The following information should be read in conjunction with the
description of the Company's business in the 1995 Form 10-K of the Company
incorporated herein by reference.
GENERAL
AT&T Capital is a full-service, diversified equipment leasing and finance
company with a presence in more than 20 countries in North America, Europe,
Canada, the Asia/Pacific Region and Latin America. The Company is one of the
largest equipment leasing and finance companies in the United States and is the
largest lessor of telecommunications equipment in the United States, in each
case, based on the aggregate value of equipment leased or financed.
AT&T Capital leases and finances equipment manufactured and distributed by
numerous vendors, including Lucent and NCR. In addition, the Company provides
equipment leasing and financing and related services directly to end-user
customers. The Company's approximately 500,000 customers include large global
companies, small and mid-size businesses and federal, state and local
governments and their agencies.
A significant portion of the Company's total assets and revenues and a
substantial majority of its net income are attributable to financing provided by
the Company to Customers of the AT&T Entities with respect to AT&T Entities
Products and, to a lesser extent, transactions with the AT&T Entities as
End-Users, primarily with respect to the lease of information technology and
other equipment or vehicles to them as end-users and the administration and
management of certain leased assets on behalf of AT&T.
The following table shows the respective percentages of the Company's total
assets, revenues and net income (loss) related to its United States and foreign
operations that are attributable to (i) leasing and financing services provided
by the Company to Customers of the AT&T Entities, (ii) transactions involving
the AT&T Entities as End-User and (iii) the Company's non-AT&T Entities related
business, in each case at or for the nine months ended September 30, 1996 and at
or for the years ended December 31, 1995, 1994 and 1993. A substantial majority
of the assets and revenues, and substantially all the Company's net income, that
were attributable to Customers of the AT&T Entities were attributable to leasing
and financing services provided by the Company to customers of Lucent and its
subsidiaries. The net income (loss) shown below were calculated based upon what
the Company believes to be a reasonable allocation of interest, income taxes and
certain corporate overhead expenses.
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<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
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% OF ASSETS % OF TOTAL REVENUES % OF NET INCOME (LOSS)
------------------------ ------------------------ --------------------------
U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
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Customers of the AT&T
Entities.................... 27.7 0.6 28.3 30.0 0.5 30.5 59.6 0.1 59.7
AT&T Entities as End-User..... 4.0 -- 4.0 7.2 -- 7.2 7.6 -- 7.6
Non-AT&T Entities Related
Business.................... 49.0 18.7 67.7 49.3 13.0 62.3 36.8 (4.1) 32.7
---- ------- ----- ---- ------- ----- ----- ------- ------
Total............... 80.7 19.3 100.0 86.5 13.5 100.0 104.0 (4.0) 100.0
---- ------- ----- ---- ------- ----- ----- ------- ------
---- ------- ----- ---- ------- ----- ----- ------- ------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
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% OF ASSETS % OF TOTAL REVENUES % OF NET INCOME (LOSS)
------------------------ ------------------------ -------------------------
U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
---- ------- ----- ---- ------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customers of the AT&T
Entities.................... 29.4 0.1 29.5 32.3 0.4 32.7 67.2 0.7 67.9
AT&T Entities as End-User..... 5.3 -- 5.3 8.3 -- 8.3 8.2 -- 8.2
Non-AT&T Entities Related
Business.................... 47.8 17.4 65.2 46.3 12.7 59.0 27.0 (3.1) 23.9
---- ------- ----- ---- ------- ----- ----- ------- -----
Total............... 82.5 17.5 100.0 86.9 13.1 100.0 102.4 (2.4) 100.0
---- ------- ----- ---- ------- ----- ----- ------- -----
---- ------- ----- ---- ------- ----- ----- ------- -----
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------------------
% OF ASSETS % OF TOTAL REVENUES % OF NET INCOME (LOSS)
------------------------ ------------------------ -------------------------
U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
---- ------- ----- ---- ------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customers of the AT&T
Entities.................... 34.3 0.3 34.6 33.1 0.3 33.4 83.9 (1.4) 82.5
AT&T Entities as End-User..... 6.8 -- 6.8 9.5 -- 9.5 8.5 -- 8.5
Non-AT&T Entities Related
Business.................... 48.0 10.6 58.6 47.8 9.3 57.1 11.8 (2.8) 9.0
---- ------- ----- ---- ------- ----- ----- ------- -----
Total............... 89.1 10.9 100.0 90.4 9.6 100.0 104.2 (4.2) 100.0
---- ------- ----- ---- ------- ----- ----- ------- -----
---- ------- ----- ---- ------- ----- ----- ------- -----
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------------------------
% OF ASSETS % OF TOTAL REVENUES % OF NET INCOME (LOSS)
------------------------ ------------------------ -------------------------
U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
---- ------- ----- ---- ------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customers of the AT&T
Entities.................... 38.1 0.3 38.4 31.1 0.2 31.3 99.8 (1.7) 98.1 (1)
AT&T Entities as End-User..... 9.5 -- 9.5 14.9 -- 14.9 20.8 -- 20.8 (1)
Non-AT&T Entities Related
Business.................... 46.1 6.0 52.1 47.8 6.0 53.8 (6.9) (12.0) (18.9)(1)
---- ------- ----- ---- ------- ----- ----- ------- -----
Total............... 93.7 6.3 100.0 93.8 6.2 100.0 113.7 (13.7) 100.0
---- ------- ----- ---- ------- ----- ----- ------- -----
---- ------- ----- ---- ------- ----- ----- ------- -----
</TABLE>
- ------------
(1) In 1993, the Customers of the AT&T Entities, AT&T Entities as End-User and
non-AT&T Entities related business net income (loss) accounted for 89.0%,
20.2% and (9.2%), respectively, of the Company's net income before
cumulative effect of the 1993 accounting change and impact of the tax rate
change. For a description of the 1993 accounting change and impact of the
tax rate change, see Note 10 to the Consolidated Financial Statements which
are included in the 1995 Form 10-K incorporated herein by reference.
The increases in 1995 in the non-AT&T Entities related business assets and
revenues (as a percentage of total assets and revenues) were generated almost
equally from United States and foreign operations. The significant increase in
1995 in the Company's United States non-AT&T Entities related business net
income was primarily generated from large-ticket specialty and structured
finance activities, Small Business Administration loan sales and growth in the
vehicle portfolio. Net losses from foreign non-AT&T Entities related business
somewhat offset the strong United States results.
The securitization of certain non-AT&T Entities related Portfolio Assets
positively affected net income of the non-AT&T Entities related business in all
years presented as well as in the nine months ended September 30, 1996. However,
the Company decreased significantly the amount of securitization each year from
1993 through 1995. Partly as a result of the reduction in securitized assets,
the portion of the Company's non-AT&T Entities related business net income
attributable to securitization has decreased by 88.7% from 1993 to 1995. See
Note 6 to the Consolidated Financial Statements in the 1995 Form 10-K
incorporated herein by reference. The Company's non-AT&T Entities related
business contributed 30.9% of the Company's net income for the nine months ended
September 30, 1996 without giving effect to a securitization of non-AT&T
Entities related business Portfolio Assets effected by the Company during such
period. No similar securitization was effected during the nine months ended
September 30, 1995. See ' -- Business Strategy' below for a discussion of the
Company's current securitization plans.
BUSINESS STRATEGY
AT&T Capital has two broad business strategies: (i) to enhance its position
as a leader in providing leasing and financing services that are marketed to
customers of equipment manufacturers, distributors and dealers with whom the
Company has a marketing relationship for financing services (the Company's
'Global Vendor Finance' strategy); and (ii) to establish itself as a leader in
providing leasing, financing and related services that are marketed directly to
end-users of equipment, including customers of the Company's Global Vendor
Finance marketing activities (e.g., end-users acquiring general equipment for
which the Company previously financed telecommunications equipment), as well as
customers of
<PAGE>
<PAGE>
vendors with whom the Company does not have a marketing relationship for
financing services (the Company's 'Direct Customer Finance' strategy).
In 1995, Global Vendor Finance constituted 58% of the Company's total
financing volume (24% attributable to the AT&T Entities and 34% attributable to
other vendors) and represented 56% of the Company's year-end total assets (29%
attributable to the AT&T Entities and 27% attributable to other vendors). In
1995, Direct Customer Finance constituted 42% of the Company's total financing
volume (4% attributable to AT&T Entities and their employees as end-users and
38% to other end-users) and 44% of the Company's year-end total assets (5%
attributable to the AT&T Entities and their employees as end-users and 39% to
other end-users).
The Company anticipates that significant changes in the Company's financing
strategy will be implemented. In particular, the Company anticipates that
approximately 30% of its financing volume originated each year may be
securitized annually pursuant to off-balance sheet securitization transactions.
To the extent that the actual level of securitization deviates significantly
from the planned level, there could be a material adverse effect on the Company.
See 'Risk Factors -- Risks Related to Expected Plans Involving the
Company-Securitization Program.' The Company anticipates that the cost of the
Company's on-balance sheet financing will increase by virtue of its
disaffiliation from AT&T and its lower debt ratings. See 'Risk Factors -- Risks
Related to the Termination of AT&T's Ownership Interest in the Company.'
However, such increase in borrowing costs is expected to be offset in
significant part by the lower financing rates associated with the Company's
planned off-balance sheet securitization program.
CERTAIN BUSINESS SKILLS
The Company has developed a number of business skills and competencies that
management believes make the Company an effective competitor in the leasing and
finance industry. For example, in connection with its Global Vendor Finance
relationship with the AT&T Entities, the Company has developed the capabilities
necessary to service large numbers of customers on an efficient and timely
basis. In general, the Company has linked its telecommunications and data
systems with those of the sales and marketing offices of the AT&T Entities and
has placed its own personnel and equipment at these offices. These linkages and
on-site presence, in conjunction with the Company's credit review and scoring
capabilities (see ' -- Vendor Relationship Management Skills -- Credit
Management Skills' below), enable the Company to receive and process a large
volume of applications, provide related credit review and approval and otherwise
efficiently service a high volume of transactions at what the Company believes
is a relatively low cost per transaction. This process allows the Company to
respond on a timely basis to credit inquiries (generally within 10 minutes for
routine financings under $50,000).
VENDOR RELATIONSHIP MANAGEMENT SKILLS
As a result of its Global Vendor Finance and Direct Customer Finance
relationships, the Company has, in addition to its credit management skills and
asset management skills described below, gained significant experience in
structuring and managing vendor finance and direct customer finance programs
tailored to specific customer needs. The Company has tailored programs to
specific customer needs by providing a number of specialized products and
programs, including (i) customer financing products; (ii) specialized sales aid
services, including training of vendor personnel and point-of-sale support;
(iii) tailored private label programs, in which financing is provided to the
vendor's customers under the vendor's name; (iv) specialized customer operations
support and interfaces; (v) alternate channel programs; (vi) inventory
financing; and (vii) support for value-added retailers or distributions.
CREDIT MANAGEMENT SKILLS. The Company has adopted policies and procedures
that management believes allow the Company to review carefully the
creditworthiness of its customers under procedures that management believes are
efficient and timely. Management of key risks is initially the responsibility of
business unit operating personnel and is further coordinated throughout the
Company by the Risk Management Department, which has established policies and
procedures for tracking credit performance results on a monthly basis.
Consistent with its strategy, the Company has diversified its credit risk
associated with its Portfolio Assets by customer, industry segment, equipment
type, geographic location
<PAGE>
<PAGE>
and transaction maturity. Small transactions are generally credit scored by
operating personnel utilizing innovative expert systems credit scoring
technology developed in conjunction with the Bell Laboratories Operations
Research Department. This credit scoring technology supports decisions and
associated strategies for credit risk management throughout the customers'
financing lifecycle. Larger transactions are individually reviewed by
experienced credit officers. This system, when combined with the Company's
ongoing risk management review process, provides overall risk management
techniques that management believes position the Company favorably in the
marketplace.
ASSET MANAGEMENT SKILLS. The Company's asset management skills include its
equipment remarketing capabilities, its in-house equipment refurbishing
facilities and its knowledge of developing technologies and products and
obsolescence trends, particularly with respect to information technology
equipment. These skills assist the Company in its efforts to establish residual
values, to maximize the value of equipment that is returned to the Company at
the end of a lease and to help reduce the Company's risks in connection with its
residual values. Estimates of residual values are determined by the Company
from, among other things, studies prepared by the Company, professional
appraisals, historical experience, industry data, market information on sales of
used equipment, end-of-lease customer behavior and estimated obsolescence
trends. The Company actively manages its residuals by working with lessees and
vendors during the lease term to encourage lessees to extend their leases or
upgrade and enhance their leased equipment, as appropriate, and by monitoring
the various equipment industries, particularly the information technology
industries, for obsolescence trends. The Company strategically manages its
portfolio to ensure a broad diversification of residual value risk by equipment
type and lease expiration.
FINANCIAL STRUCTURING CAPABILITIES. The Company manages approximately $1.4
billion in lease finance assets (consisting principally of equity interests in
leveraged leases of commercial aircraft and project finance transactions) for
AT&T. The personnel that structured and negotiated the transactions under which
the lease finance assets were acquired, in addition to providing services
relating to the management of the lease finance assets, assist other segments of
the Company's business in structuring transactions that require use of complex
financial expertise, including transactions in specialty product areas that the
Company believes are not currently being served adequately by the industry.
THE MERGER
On October 1, 1996, the Company consummated the Merger with Merger Sub,
pursuant to the Merger Agreement among AT&T, the former indirect owner of
approximately 86% of the outstanding Common Stock of the Company, Holdings and
Merger Sub. Pursuant to the Merger Agreement, Merger Sub was merged with and
into the Company, with the Company continuing its corporate existence under
Delaware law as the surviving corporation.
All of the outstanding common equity capital of the Company is currently
directly or indirectly owned by the members of the Leasing Consortium consisting
of (i) the Management Investors, including Thomas C. Wajnert, Chairman of the
Board and Chief Executive Officer of the Company, and approximately 23 other
members of the Company's senior management, and (ii) GRSH. Following the
consummation of the Merger and the related transactions, the Management
Investors own 3.3% of the Common Stock (or approximately 5.5% on a fully diluted
basis) and GRSH indirectly owns 96.7% of the Common Stock (or approximately
94.5% on a fully diluted basis).
The Merger and related transactions had a significant impact on the
Company's financial position and results of operations. Had the Merger and
related transactions occurred on September 30, 1996, on a pro forma basis, the
Company's total assets, debt, total liabilities and shareowners' equity would
have been $8.1 billion, $6.4 billion, $7.2 billion and $0.7 billion,
respectively. Had the Merger and related transactions occurred on January 1,
1995, the Company's revenues for the nine months ended September 30, 1996 and
the year ended December 31, 1995 would have been $1.2 billion and $1.3 billion,
respectively, and the Company's net income (loss) for the nine months ended
September 30, 1996 and the year ended December 31, 1995 would have been $38.4
million and $(16.4) million, respectively. The transactions related to the
Merger include: (i) the securitization of approximately $3.1 billion of lease
and loan receivables which occurred on October 15, 1996, and the application of
the net proceeds therefrom principally to repay short-term borrowings of
approximately $1.3 billion incurred as
<PAGE>
<PAGE>
part of the financing of the Merger; (ii) the conversion of the Company's then
outstanding common stock to the right to receive $45 per share in cash pursuant
to the Merger Agreement; (iii) the issuance and sale of the Trust Preferred
Securities by the Trust and the application of the net proceeds therefrom; (iv)
the Tax Deconsolidation from AT&T (see 'Risk Factors -- Risks Related to the
Termination of AT&T's Ownership Interest in the Company -- Tax
Deconsolidation'), including the repayment of approximately $247.4 million of
non-interest bearing notes held by AT&T and the payment by the Company to AT&T
of $35.0 million in exchange for AT&T's assumption of all federal and combined
state tax liabilities of the Company relating to periods prior to the Merger;
(v) effects of an Internal Revenue Code of 1986, as amended (the 'Code') Section
338(h)(10) election, including the deferred tax effects relating to the Merger
and the Section 338(h)(10) election; (vi) the issuance of short-term notes and
the incurrence of liabilities for payments under certain benefit plans, other
payments to certain employees and for Merger related transaction costs; (vii)
the expected increase in the Company's borrowing cost resulting from the Merger;
(viii) the expected increase in the Company's annual expenses for operating and
administrative expenses resulting from the Company no longer being entitled to
the discounts accorded to AT&T and its subsidiaries or received directly from
AT&T; (ix) the payment of certain annual transaction management and advisory
fees; and (x) payments associated with acceleration of amounts payable under
compensation and benefit plans.
The Company's pro forma revenues and net income results for the periods
described above do not reflect the Company's proposed future strategy of
increasing its use of periodic securitizations of lease and loan receivables as
a funding source. In addition, such pro forma results do not reflect the
significant gain associated with the Company's October 15, 1996 asset
securitization. Had the securitization taken place on January 1, 1995 and had
such gain been included in the Company's pro forma results, the Company's
revenues for the year ended December 31, 1995 would have been $1.4 billion, and
the Company's net income for the year ended December 31, 1995 would have been
$68.5 million (excluding other non-recurring expenses of $39.4 million).
In addition to asset sales in connection with the Company's anticipated
securitization transactions described in this Prospectus, the Company may review
opportunities from time to time to dispose of certain assets depending upon
market conditions and other circumstances at such time, although the Company
does not currently have any agreements for such dispositions. The Company's
Board of Directors and management will continue to evaluate the Company's
corporate structure, business, management composition, operations, organization
and other matters and make such changes as the Board deems appropriate.
The Company's Current Report on Form 8-K dated October 1, 1996, which is
incorporated by reference into this Prospectus, contains unaudited pro forma
consolidated financial information with respect to the Company. Such unaudited
pro forma consolidated financial information gives effect to the Merger and
related transactions described above.
RELATIONSHIP WITH AT&T ENTITIES
In September 1995, AT&T announced plans to effect the AT&T Restructuring,
which was comprised of separating itself into three publicly traded companies
(AT&T, Lucent and NCR) and disposing of its approximately 86% equity interest in
the Company to the general public or another company. Pursuant to the AT&T
Restructuring, the Company consummated the Merger which resulted in, among other
things, the disposition by AT&T of its remaining equity interest in the Company.
See 'The Merger.'
On September 30, 1996, AT&T spun off its entire remaining interest in
Lucent to AT&T's shareholders. Lucent's businesses involve the manufacture and
distribution of public telecommunications systems, business communications
systems, micro-electronic components, and consumer telecommunications products.
In addition, AT&T has announced that it intends to distribute to its
shareholders all of its interest in NCR by the end of 1996. NCR's businesses
involve the manufacture and distribution of information technology equipment,
including automatic teller machines and point-of-sale terminal equipment.
<PAGE>
<PAGE>
In connection with the Company's IPO in 1993, the Company entered into a
series of agreements with AT&T to formalize the relationship between the two
companies, including the following three significant agreements, each dated as
of June 25, 1993: (i) the Operating Agreement, (ii) the Intercompany Agreement
and (iii) the License Agreement. Each of these agreements, together with the
Agreement Supplements entered into with Lucent and NCR, are described below. The
descriptions of such agreements set forth herein do not purport to be complete
and are subject in their entirety to the actual terms of such agreements, copies
of which have been filed with the Commission.
The AT&T Operating Agreement provides, among other things, that (i) the
Company serves as AT&T's 'preferred provider' of financing services and has
certain related and other rights and privileges in connection with the financing
of AT&T equipment to AT&T's customers and (ii) subject to various exceptions,
the AT&T Entities shall not compete or maintain an ownership interest in any
business that competes with the Company and its subsidiaries. The Company has
executed agreements comparable to the AT&T Operating Agreement with each of
Lucent and NCR.
As the 'preferred provider' of financing services for customers of Lucent,
NCR and AT&T, the Company receives a number of significant benefits, including
the receipt by the Company of information from Lucent and NCR relating to their
product development and marketing plans, the promotion and support by Lucent and
NCR of the efforts of the Company to market its leasing and financing services
to their customers and dealers, the provision of space at the Lucent and NCR
sales sites for personnel and equipment of the Company and the right of the
Company to maintain computer and telecommunication linkages with Lucent and NCR
in connection with the offering, documenting and monitoring of the Company's
leasing and financing services. The Company endeavors to take advantage of these
benefits, and has, over the past eleven years, invested significant resources in
creating a financing organization dedicated to and integrated (through such
computer and telecommunication linkages) with the sales forces of Lucent and, to
a lesser extent, NCR. In addition, the Company has developed relationships with
the organizations of the AT&T Entities (particularly Lucent), has developed and
maintained comprehensive, proprietary customer databases and has gained a
significant position with respect to the aftermarket for Lucent and NCR
equipment. The Company believes that Lucent and NCR are likewise the recipients
of significant benefits as a result of AT&T Capital's preferred provider status,
although there can be no assurance that any of such agreements will be extended
beyond the expiration of their initial term on August 4, 2000, or, if extended,
that the terms and conditions thereof will not be modified in a manner adverse
to the Company. See 'Risk Factors -- Changes in Relationship with AT&T
Entities -- Operating and Certain Other Agreements with AT&T Entities.'
In connection with its financing business for Lucent, the Company provides
an additional incentive, in the form of a sales assistance fee, for Lucent to
assist the Company in the financing of products manufactured or distributed by
Lucent. The sales assistance fee is based on designated percentages of the
aggregate sales prices and other charges ('volumes') of Lucent products financed
by the Company. In early 1996, the Company agreed to increase the designated
percentage for the sales assistance fee from the percentage paid by the Company
in prior years. After giving effect to the changes in the fee for 1995, the
sales assistance fee paid by the Company to Lucent for 1995 was approximately
double the 1994 fee. The Company and Lucent recently agreed to a modified
formula for calculating the sales assistance fee for the remaining years of the
term of Lucent's Operating Agreement (retroactive to 1996). The revised formula
is expected to result in aggregate annual sales assistance fees which are
approximately double the amounts that would have been paid if the pre-1995
formula had been maintained.
The Intercompany Agreement provides, among other things, that the Company
will administer for a fee various portfolios of financing and leasing assets,
including certain portfolios which prior to the Company's IPO had been owned by
the Company. In addition, the Company has entered into the Agreement Supplements
with Lucent and NCR pursuant to which Lucent and NCR have agreed that various
provisions of the Intercompany Agreement shall equally apply to them.
Pursuant to the License Agreement, AT&T has licensed certain trade names
and service marks, including the 'AT&T' trade name, to the Company for use in
the leasing and financing business of the
<PAGE>
<PAGE>
Company and certain of its subsidiaries and, in the case of the 'AT&T' trade
name, to use as part of the corporate names of the Company and certain
subsidiaries. Pursuant to the Agreement Supplements, Lucent and NCR have
similarly licensed to the Company certain trade names and service marks,
including the 'Lucent Technologies' and 'NCR' trade names.
The initial term of each of the Operating Agreements, the Intercompany
Agreement, the License Agreement and the Agreement Supplements is scheduled to
end on August 4, 2000, subject to early termination rights. In addition, AT&T
has the right under the License Agreement, after two years' prior notice, to
require the Company to discontinue use of the 'AT&T' trade name as part of the
Company's corporate or assumed or 'doing business' name.
See 'Risk Factors -- Changes in Relationship with AT&T Entities -- Revenues
and Net Income Attributable to AT&T Entities' for a description of the Company's
dependence on the revenue and net income attributable to the Company's
relationship with the AT&T Entities and their customers and employees.
<PAGE>
<PAGE>
Form 8-K November 1, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T CAPITAL CORPORATION
By: /s/ EDWARD M. DWYER
-------------------------------
Edward M. Dwyer
Senior Vice President and
Chief Financial Officer
October 31, 1996
