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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 September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
Commission File Number 1-11237
AT&T CAPITAL CORPORATION
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number 973-397-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At October 31, 1997, 90,337,379 shares of common stock, par value $.01 per
share, were outstanding.
1
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996* 1997 1996* 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Finance revenue $ 52,393 $ 57,251 $149,357 $ 166,417
Capital lease revenue 169,148 87,066 492,357 267,773
Rental revenue on
operating leases (a) 179,894 210,526 505,380 607,576
Equipment sales 24,012 14,387 72,608 35,127
Revenue from
securitizations
and loan sales 3,481 8,018 13,855 42,447
Other revenue, net 41,681 66,607 136,937 181,838
------- ------- --------- ---------
Total Revenues 470,609 443,855 1,370,494 1,301,178
------- ------- --------- ---------
Expenses:
Interest 120,288 112,901 350,359 327,071
Operating and
administrative ("O&A") 126,762 135,900 375,172 402,930
Depreciation on
operating leases 117,394 137,214 329,336 402,367
Cost of equipment
sales 21,018 13,000 61,677 31,652
Provision for credit
losses 22,918 21,236 71,454 67,193
------- ------- --------- ---------
Total Expenses 408,380 420,251 1,187,998 1,231,213
------- ------- --------- ---------
Distributions on Preferred
Securities - 4,530 - 13,590
------- ------- --------- ---------
Income before taxes 62,229 19,074 182,496 56,375
------- ------- --------- --------
Provision for income
taxes 21,762 5,899 67,206 20,577
------- ------- --------- ---------
Net Income $40,467 $13,175 $ 115,290 $ 35,798
======= ======= ========= =========
</TABLE>
2
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in Thousands)
(Unaudited)
(a) Includes $22,821 and $21,481 for the three months ended
September 30, 1996 and 1997, respectively, and $67,224 and
$64,339 for the nine months ended September 30, 1996 and 1997,
respectively, from AT&T Corp.("AT&T"), Lucent Technologies Inc.
("Lucent"), and NCR Corporation ("NCR")(herein, "AT&T/Lucent/NCR"
or the "Former Affiliates").
*Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
3
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30,
December 31, 1997
1996* (Unaudited)
--------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ - $ 44,703
Net investment in finance
receivables 2,135,250 2,353,302
Net investment in capital
leases 3,648,731 3,633,915
Investment in operating
leases, net of accumulated
depreciation of $777,905 in
1996 and $910,137 in 1997 1,403,470 1,669,505
Deferred charges and other assets 788,935 837,957
Deferred income taxes 116,126 246,306
----------- -----------
Total Assets $ 8,092,512 $ 8,785,688
=========== ===========
Liabilities, Preferred Securities and Shareowners' Equity:
Liabilities:
Short-term notes, less unamortized
discount of $3,112 in 1996 and
$20,649 in 1997 $ 1,867,247 $ 2,209,121
Income taxes and other payables 580,575 475,748
Payables to affiliates and
Former Affiliates 139,706 41,637
Medium and long-term debt 4,597,677 5,109,607
---------- ----------
Total Liabilities 7,185,205 7,836,113
---------- ----------
Commitments and contingencies
Company-obligated Preferred Securities: 200,000 200,000
------- -------
Shareowners' Equity:
Common stock, one cent par value:
Authorized 150,000,000 shares,
issued and outstanding, 90,198,571 shares
in 1996 and 90,337,379 shares in 1997 902 903
Additional paid-in capital 633,676 636,942
Recourse loans to senior executives (15,697) (16,259)
Unrealized gain on marketable
securities, net of taxes - 5,889
Foreign currency translation
adjustments (3,502) (3,737)
Retained earnings 91,928 125,837
----------- -----------
Total Shareowners' Equity 707,307 749,575
----------- -----------
Total Liabilities, Preferred
Securities and Shareowners' Equity $ 8,092,512 $ 8,785,688
=========== ===========
</TABLE>
*Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these consolidated
financial statements.
4
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
1996* 1997
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 115,290 $ 35,798
Noncash items included in income:
Depreciation and amortization 387,183 440,039
Deferred taxes (17,034) (123,443)
Provision for credit losses 71,454 67,193
Revenue from securitizations and loan sales (13,855) (42,447)
(Increase) decrease in deferred charges and
other assets (63,995) 15,860
Decrease in income taxes and
other payables (109,789) (109,937)
Increase (decrease) in payables to
affiliates and Former Affiliates 1,782 (26,935)
---------- ----------
Net Cash Provided by Operating Activities 371,036 256,128
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of finance asset portfolios (148,109) -
Financings and lease equipment purchases (4,170,561) (4,576,049)
Principal collections from customers 2,999,188 2,516,046
Cash proceeds from securitizations and
loan sales 248,720 959,806
----------- ----------
Net Cash Used for Investing Activities $(1,070,762) $(1,100,197)
----------- -----------
</TABLE>
(Continued)
5
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
1996* 1997
------------ -----------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term notes, net $ 790,842 $ 341,875
Additions to medium and long-term debt 1,288,102 2,327,525
Repayments of medium and long-term debt (1,101,718) (1,780,628)
Decrease in payables to Former Affiliates (247,397) -
Dividends paid (15,490) -
--------- ---------
Net Cash Provided by Financing Activities 714,339 888,772
--------- ---------
Net Increase in Cash and Cash Equivalents 14,613 44,703
Cash and Cash Equivalents at Beginning of Period 3,961 -
--------- ---------
Cash and Cash Equivalents at End of Period $ 18,574 $ 44,703
========== ==========
</TABLE>
Non-Cash Investing and Financing Activities:
In the first nine months of 1996 and 1997, the Company entered into
capital lease obligations of $24,456 and $3,500, respectively, for equipment
that was subleased.
*Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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, 1996 and the current year's previously
issued Form 10-Qs.
2. Recent Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. It allows companies to
choose either 1) a fair value method of valuing stock-based compensation plans
which will affect reported net income, or 2) to continue to follow the existing
accounting rules for stock option accounting but disclose what the impacts would
have been had the fair value method been adopted. The Company adopted the
disclosure alternative which requires annual disclosure of the pro forma net
income and earnings per share amounts assuming the fair value method was adopted
on January 1, 1995. As a result, the adoption of this standard did not have any
impact on the Company's consolidated financial statements.
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement requires that liabilities and
derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practical. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer. This statement was effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996 and its application is prospective. In December 1996,
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" was issued. Management does not expect the adoption of either
standard to have a material impact on the Company's consolidated financial
statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 129, which is applicable to all
entities, requires disclosure of information about the liquidation preference of
preferred stock, redeemable stock, and certain other disclosures. SFAS No. 129
is effective for financial statements for periods ending after December 15, 1997
which for the Company will be 1997. Management does not expect that the adoption
of SFAS No. 129 to have any impact on the Company's consolidated financial
statements.
7
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In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires total comprehensive income to be reported in a
financial statement. Comprehensive income is defined as the total of net income
and all other non-owner changes in equity. SFAS No. 130 is effective for
financial statements for periods beginning after December 15, 1997 which for the
Company will be 1998. Comparative information for earlier years will be
restated.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes a new model for
segment reporting. The Statement requires reporting of financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. It also
requires reporting of certain information about products and services,
geographic areas of operation, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997 which for
the Company will be 1998. Comparative information for earlier years will be
restated.
3. Derivative Disclosure
For a discussion regarding the Company's derivatives and related
accounting policies, see Notes 2, 11, and 15 to the Consolidated Financial
Statements included in the Company's 1996 Annual Report filed on Form 10-K. In
addition, the following information is provided pursuant to the SEC's Financial
Reporting Release No. 48 issued in 1997, the purpose of which is to enhance
disclosures regarding derivatives and other financial instruments.
Foreign Currency Forward Exchange Contacts
The Company enters into foreign currency forward exchange contracts to
manage foreign exchange risk (primarily British pounds and Canadian dollars). In
the event of an early termination, sale or extinguishment of such a contract
that is determined to be a hedge, the gain or loss shall continue to be deferred
over the remaining term of the contract. The exchange of the principal amount
under the foreign currency forward exchange contracts is reflected in the
statement of cash flows in the "short-term notes, net" amount since the
underlying amount is generally commercial paper.
Interest Rate Swaps and Currency Swaps
Interest rate swaps and the interest component of the currency swaps
generally include the exchange of interest payments without the exchange of
underlying principal amounts. The difference between the two interest payments
is recorded as an adjustment to interest expense and is reflected in the
statement of cash flows in the "net income" amount. The exchange of the
principal amount under the currency swap is reflected in the statement of cash
flows in the "short-term notes, net" amount since the underlying amount is
generally commercial paper.
8
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4. Subsidiary Debentures
The table below shows summarized consolidated financial information for
AT&T Capital Leasing Services, Inc. and AT&T Capital Services Corporation, both
wholly owned subsidiaries of the Company. The Company has guaranteed, on a
subordinated basis, payment on debentures issued by these subsidiaries. (dollars
in thousands)
<TABLE>
<CAPTION>
AT&T Capital Leasing Services, Inc. For the nine months ended
September 30,
(unaudited)
1996 1997
---- ----
<S> <C> <C>
Total revenues $176,342 $ 98,042
Interest expense 59,653 32,428
Operating and administrative expenses 61,848 62,235
Provision for credit losses 32,393 31,179
Income (loss) before taxes 20,719 (29,926)
Net (loss) income 12,477 (18,118)
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Total assets $628,945 $829,478
Total debt 507,180 729,082
Total liabilities 597,203 782,540
Total shareowner's equity 31,742 46,938
</TABLE>
<TABLE>
<CAPTION>
AT&T Capital Services Corporation For the nine months ended
September 30,
(unaudited)
1996 1997
---- ----
<S> <C> <C>
Total revenues $ 81,188 $ 86,512
Interest expense 3,656 5,089
Operating and administrative expenses 32,620 34,881
Provision for credit losses - 1,139
Income before taxes 9,601 4,983
Net income 5,723 2,930
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Total assets $161,232 $149,399
Total debt 116,545 112,193
Total liabilities 145,565 135,186
Total shareowner's equity 15,667 14,213
</TABLE>
9
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5. Sale of Equity Securities
In October 1997, the Company recognized a pre-tax gain of $12.4 million on
the disposition of certain equity securities. On September 30, 1997, these
securities were classified as available for sale in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115") and, therefore, the related unrecognized after-tax gain of $5.9
million was included in shareowners' equity. The Company receives equity
securities (e.g., warrants and common stock) in connection with the structuring
of some of its complex capital markets transactions. As of September 30, 1997,
no other such equity security was required to be marked to market pursuant to
SFAS No. 115.
6. Subsequent Events
On November 4, 1997 the Company announced that it had plans to exit
certain businesses which represent approximately 11 percent and nine percent of
the Company's assets and revenues, respectively, at and for the first nine
months of 1997. On November 6, the Company entered into a definitive agreement
for the sale of one of these businesses, its inventory financing business unit,
which represented two percent and less than one-half percent of the Company's
assets and revenues, respectively, at and for the first nine months of 1997.
Management does not expect to recognize a loss on the sale of these businesses.
On November 4, 1997, the Company confirmed that it was engaged in
discussions about a possible business combination with Newcourt Credit Group, a
major asset finance company headquartered in Toronto, Canada ("Newcourt"). On
November 4, 1997, Newcourt also confirmed discussions with the Company regarding
a "possible business combination to be financed by equity issued by Newcourt
pursuant to a prospectus and a share exchange with [the Company's]
shareholders". No definitive agreement regarding any such transaction has been
signed at the time of this filing.
Due to such possible business combination, the Company currently is not
issuing medium and long-term debt in the public market. Therefore, subsequent to
September 30, 1997, the Company issued notes of $500 million in aggregate
principal amount to an affiliate to fund interim cash flow requirements.
Because of such possible business combination, one of the Company's rating
agencies, Moody's Investors Service, has placed the Company's rating "On Review
with Direction Uncertain".
10
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AT&T CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
When included in this Quarterly Report on Form 10-Q, the words, "will",
"should", "expects", "intends", "anticipates", "estimates" and similar
expressions, among others, identify forward looking statements for purposes of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"). Such statements, which include statements contained in this
Item 2, inherently are subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those set forth in such
statements. Such risks and uncertainties, many of which are beyond the control
of AT&T Capital Corporation (the "Company"), include, among others, those
described under "Risk Factors" included in Item 7 of the Company's 1996 Annual
Report on Form 10-K. These forward looking statements are made only as of the
date of this Quarterly Report on Form 10-Q. The Company expressly disclaims any
obligation or undertaking to release any update or revision to any forward
looking statement contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
Subsequent Events
On November 4, 1997 the Company announced that it had plans to exit
certain businesses which represent approximately 11 percent and nine percent of
the Company's assets and revenues, respectively, at and for the first nine
months of 1997. On November 6, the Company entered into a definitive agreement
for the sale of one of these businesses, its inventory financing business unit,
which represented two percent and less than one-half percent of the Company's
assets and revenues, respectively, at and for the first nine months of 1997.
Management does not expect to recognize a loss on the sale of these businesses.
On November 4, 1997, the Company confirmed that it was engaged in
discussions about a possible business combination with Newcourt Credit Group, a
major asset finance company headquartered in Toronto, Canada ("Newcourt"). On
November 4, 1997, Newcourt also confirmed discussions with the Company regarding
a "possible business combination to be financed by equity issued by Newcourt
pursuant to a prospectus and a share exchange with [the Company's]
shareholders". No definitive agreement regarding any such transaction has been
signed at the time of this filing.
Due to such possible business combination, the Company currently is not
issuing medium and long-term debt in the public market. Therefore, subsequent
to September 30, 1997, the Company issued notes of $500 million in aggregate
principal amount to an affiliate to fund interim cash flow requirements.
Because of such possible business combination, one of the Company's rating
agencies, Moody's Investors Service, has placed the Company's rating "On Review
with Direction Uncertain".
11
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The Merger, Related Transactions and Future Results
In 1996, the Company was acquired by an investor group financed by
Nomura International plc which included certain members of management in a
transaction that valued the Company's equity at approximately $2.2 billion (the
"Merger"). The purchase price was funded with $1.1 billion of the net proceeds
from the securitization of $3.1 billion of lease and loan receivables in October
of 1996 (the "1996 Securitization"), the issuance of $200 million of
Company-obligated preferred securities (the "Preferred Securities"), and $900
million of equity from the investor group.
The 1996 Securitization represented approximately one-third of total
assets and the related gain contributed approximately $80.2 million, or 48% of
the Company's net income in 1996. The mix of assets sold was split approximately
equally between (a) AT&T, Lucent Technologies Inc., and NCR Corporation (herein
collectively the "Former Affiliates") and (b) customers other than the Former
Affiliates ("Other Clients"). As a result of the 1996 Securitization, 1997 and
future periods will be impacted by reduced earning assets and less finance
revenue. In addition, the Company anticipates a decreased level of
securitization revenue, offset in part by increased servicing revenues. The
Company's post-Merger recapitalization structure also resulted in higher
leverage and, consequently, higher relative interest expense. As a result of
securitizing higher yielding assets in 1996, and the increased ratio of debt to
equity, the Company expects the 1997 net interest margin (as defined below) to
decrease relative to 1996.
Financial Overview
Financing volume, portfolio assets and net portfolio revenue
Financing volumes, one of the most important financial indicators of a
leasing company, are generally measured by the amount of the loan or cost of the
equipment financed at the inception of the loan or lease agreement. The
financing is then recorded on the balance sheet as an investment in finance
receivables, capital leases or operating leases (together known as "Portfolio
Assets"). The lease classification is based upon certain criteria under the
Statement of Financial Accounting Standards No. 13, as amended ("SFAS 13").
For loans and other similar products ("finance receivables"), finance
revenue is recognized over the life of the contract using the effective interest
method. The amount of finance revenue earned during a period relative to the
average balance of finance receivables outstanding during the period is known as
the finance receivable yield.
For leases classified as capital leases, unearned income is initially
recorded as the difference between (i)the sum of the minimum lease payments due
and the estimated unguaranteed residual values and (ii)the asset purchase price
paid by the Company. Unearned income is amortized to capital lease revenue over
the life of the lease contract using the effective interest method. The amount
of capital lease revenue earned during a period relative to the average balance
of capital leases outstanding during the period is known as the capital lease
yield. Estimated unguaranteed residual values, which are included as part of the
investment in capital leases, are established upon lease inception based upon
the estimated fair value of the equipment at the end of the lease term. They are
determined on the basis of studies prepared by the Company, professional
appraisals, historical experience and industry data. The
12
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Company regularly monitors its estimates of residual values associated with its
owned and securitized portfolios and believes that, in general its residual
values are conservatively stated. The Company has developed extensive expertise
in the area of asset management which contributes to its ability to maximize the
proceeds received upon the disposition of the residuals.
Rental revenue on operating leases is recognized on a straight-line
basis over the related lease term. Rental revenue also includes renewal revenue
which is revenue the Company earns when a customer continues to lease equipment
after its original lease term. During the term of the related lease,
depreciation is generally calculated using the straight-line method based on the
estimated salvage value of the equipment at the end of the lease term. A key
financial measure of operating lease profitability is the associated margin
(which equals the rental revenue less the associated depreciation expense
("operating lease margin") divided by the rental revenue ("operating lease
margin percent")).
Net portfolio revenue is the total of finance revenue, capital lease
revenue, and rental revenue on operating leases ("portfolio revenue") less
depreciation on operating leases. Net portfolio revenue is negatively affected
by the suspension of revenue recognition when a loan or a lease becomes
contractually delinquent for 90 days or more (or earlier if deemed necessary).
Revenue recognition is resumed when the receivable becomes contractually current
and management believes there is no longer any significant probability of loss.
Costs & expenses
The Company incurs three significant types of costs associated with
portfolio revenue: (1)interest expense, (2)operating and administrative ("O&A")
costs and (3)credit provisions.
Interest expense
Interest expense includes the amortization of costs associated with
raising funds primarily used for financings and lease equipment purchases. In
connection with the Merger, the Company's senior medium and long-term debt and
commercial paper ratings were downgraded. Currently, the Company's senior medium
and long-term debt and commercial paper are rated BBB and A-2, respectively, by
Standard & Poors; BBB and D-2, respectively, by Duff & Phelps Credit Rating Co.;
BBB and F-2, respectively, by Fitch Investor Services; and Baa3 and P-3,
respectively, by Moody's Investors Service. In addition, the Company's average
cost of debt has been, and is expected to be, negatively impacted by the loss of
interest free loans from AT&T. As a result of the foregoing, the Company's
average cost of debt has increased. As interest rates change, the pricing of new
financing volume is generally adjusted to reflect the Company's higher or lower
cost of debt. However, the pricing in connection with certain small-ticket
financing volume tends to lag and may not be commensurate with the change in the
Company's cost of debt. See "Asset and Liability Management - Match Funding".
The Company generates a substantial portion of its funds to support the
Company's operations from customer receipts, but is also highly dependent upon
external financing, including commercial paper and medium and long-term debt,
foreign bank lines of credit, and public and/or private asset-backed security
interests (or securitizations) (See "Securitizations" for further discussion).
13
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O&A costs
O&A includes the costs associated with processing new financing volume
such as salaries, benefits, occupancy and other day-to-day expenses, account
maintenance (including billing and collecting) and costs incurred during end of
lease activity. As with the Company's other expenses, the ability to minimize
such costs plays an integral part of the competitive pricing of the Company's
financial products. O&A expenses are generally measured as a percentage of total
period-end owned and managed assets. The Company has a strategic objective to
achieve improvements in this ratio, by (i)increasing operating efficiencies and
productivity, (ii)increasing utilization of its operating infrastructure
(primarily related to acquired businesses, international growth, and start-up
activities), and (iii)investing in technology and other operational
improvements. The Company's goal is to reduce its ratio of O&A to total
period-end owned and managed assets to 3.5% or lower.
Credit provisions
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
office, manufacturing and medical equipment, information technology and
transportation) and a large number of customers located throughout the United
States and, to a lesser extent, abroad. The Company maintains an allowance for
credit losses (which is adjusted through the provision for credit losses
reflected in the income statement) 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. Generally, the relative provisions recorded on medium and
large-ticket transactions are lower than small-ticket assets. Management also
takes into consideration the potential impact of existing and anticipated
economic conditions in determining the adequacy of allowance levels.
Non-portfolio revenue
Non-portfolio revenue consists of: (i)revenue from securitizations
(which represents the gain realized from selling lease receivables and loans
through securitizations) and the sale of Small Business Administration ("SBA")
loans; (ii) revenue from sales of equipment, primarily buy/sell activity related
to computer equipment; and (iii)other revenue which consists mainly of sales of
leased and off-lease equipment, portfolio servicing fees and other fee related
revenue. Non-portfolio revenue as a percent of total revenue is expected to
increase due to the Company's higher securitization activity.
Securitizations
Under a securitization, the Company sells receivables primarily
associated with capital lease transactions. The receivables and the associated
net unearned income stream are removed from the Company's balance sheet for
accounting purposes, although for tax purposes the treatment is unchanged. In
conjunction with a securitization, the Company records a gain on the sale which
generally equals the difference between the proceeds received and the historical
basis of the net assets sold, net
14
<PAGE>
<PAGE>
of the fair value of any retained interests. The Company's anticipated ongoing
securitizations of approximately one-third of annual volumes could have
significant impact on the Company's financial position and results of operations
depending upon their timing and magnitude. In addition, assets, revenues and
income derived from the Other Clients businesses as well as foreign businesses
will change depending upon the mix of assets securitized.
With respect to the Company's balance sheet, the impacts from
securitization include, but are not limited to: (i)net investment in finance
receivables and capital leases will decrease (including residual values,
allowance for credit losses and initial direct costs); (ii)upon the sale of
substantially all of the lease receivables associated with a lease, the related
residual value is frozen at its present value at the time of securitization and
reclassified to other assets and deferred charges; (iii)proceeds generated from
securitizations will generally be used to reduce debt and manage leverage; and
(iv)portfolio quality measures such as delinquency, non-accrual assets, and net
charge-offs/portfolio assets will likely increase since only receivables less
than 61 days past due are included in securitizations.
In addition to the gain, the impacts to the Company's income statement
include, but are not limited to: (i)lower asset levels will result in lower
finance revenue and capital lease revenue; (ii)capital lease revenue will no
longer be recognized on residuals associated with the securitization where such
residuals are frozen at the time of securitization; (iii)with lower carrying
values of frozen residuals, income (losses) generated from renewals and sales of
assets at end of lease will be higher (lower) than if the assets were not
securitized; (iv)yields and margins on owned assets are likely to be lower due
to the fact the securitizations will typically include small-ticket products
which generally have higher yields and margins; (v)lower debt levels will
generally result in reduced interest expense; and (vi)fees will be earned on
servicing the portfolios.
Cash flows
Cash required for funding new financing volume represents the Company's
most significant capital need. As the Company continues to grow, cash from
customer collections will generally fall short of the Company's cash financing
needs. To supplement this shortfall, as discussed above, the Company utilizes a
securitization program (funds generated from this activity are captured in the
investing activity category) and accesses commercial paper and medium and
long-term debt markets (such funds are captured under financing activities).
Results of Operations
Net Income
In light of the Company's significant securitization during the fourth
quarter of 1996, coupled with the Company's post-Merger recapitalization,
management expects 1997 income results to be significantly less than 1996.
However, management expects 1997 earnings performance to improve as the Company
more fully transitions to its new financing strategy of securitizing one-third
of its annual volumes.
15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C>
Net Income $40.5 $13.2 $115.3 $35.8
</TABLE>
Net income for the quarter ended September 30, 1997 was $13.2 million, a
decrease of $27.3 million, or 67.4%, from the comparable period in 1996. Net
income was lower due to the decreased level of capital lease revenue as a result
of the 1996 Securitization, higher relative interest expense associated with
higher leverage relating to the additional debt incurred to finance the Merger
and distributions on Preferred Securities. These factors reduced the quarter's
net income by approximately $30 to $35 million. Somewhat offsetting these
factors were increases in other revenues, operating lease margin and revenue
from securitizations and loan sales.
Net income for the nine months ended September 30, 1997 was $35.8
million, a decrease of $79.5 million, or 68.9%, from the comparable period in
1996. Net income was lower due to the same factors described in the quarterly
comparison above. These factors reduced net income by approximately $95 to $105
million.
Key financial operating statistics
The following table sets forth certain key financial operating statistics of the
Company's operations:
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1996 1997 1996 1997
---------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Finance revenue $52.4 $57.2 $149.4 $166.4
Capital lease revenue 169.1 87.1 492.4 267.8
Operating lease margin 62.6 73.3 176.0 205.2
---------------------------------------------------------------
Net portfolio revenue 284.1 217.6 817.8 639.4
---------------------------------------------------------------
less: interest expense 120.3 112.9 350.4 327.1
---------------------------------------------------------------
Net interest margin (a) 163.8 104.7 467.4 312.3
---------------------------------------------------------------
Average net portfolio assets
$9,694.8 $7,457.1 $9,417.1 $7,330.1
---------------------------------------------------------------
Net interest margin percentage (a)
6.76% 5.62% 6.62% 5.68%
---------------------------------------------------------------
Finance receivables- average yield
10.39% 10.13% 10.32% 10.07%
Capital leases-average yield
10.56% 9.63% 10.45% 9.80%
Operating lease margin percentage
34.74% 34.82% 34.83% 33.78%
---------------------------------------------------------------
Total portfolio yield 11.72% 11.67% 11.58% 11.63%
---------------------------------------------------------------
Debt/Equity plus Preferred Securities 6.50x 7.71x 6.50x 7.71x
</TABLE>
a) Net interest margin is comprised of net portfolio revenue (finance revenue,
capital lease revenue and operating lease margin) less interest expense. Net
interest margin percentage equals the net interest margin (annualized for
the three months and nine months ended September 30,
16
<PAGE>
<PAGE>
1996 and 1997, respectively) divided by the respective average net portfolio
assets.
Finance revenue
Finance revenue of $57.2 million increased $4.8 million, or 9.3%, for
the quarter ended September 30, 1997 compared to $52.4 million in the comparable
1996 period. A 12.0% increase in average net finance receivables accounted for
$6.3 million of the increase, while the decrease in the average yield to 10.13%
from 10.39% offset this increase by $1.5 million. The growth in the portfolio
was primarily due to increases in the large-ticket structured finance,
asset-backed lending and SBA loan portfolios. The reduction in yield was
experienced by many of the Company's businesses and relates to increased
competitive pressures and the mix of the assets recently securitized (See
"Capital lease revenue" below for a discussion of the impact of securitizations
on yields).
Finance revenue of $166.4 million increased $17.0 million, or 11.4%, for
the nine months ended September 30, 1997 compared to $149.4 million in the
comparable 1996 period. A 14.3% increase in average net finance receivables
accounted for $21.2 million of the increase. A decline in yield from 10.32% to
10.07% offset $4.2 million of the increase. The increase in the portfolio and
the reduction in yield are due to the same factors described in the quarterly
comparison above.
Capital lease revenue
Capital lease revenue of $87.1 million decreased $82.0 million, or
48.5%, for the quarter ended September 30, 1997, from the comparable period in
1996. A 43.5% decrease in the average net capital lease portfolio was
responsible for $73.6 million of the decrease. The decrease in the average
portfolio was principally due to the 1996 Securitization which involved
primarily capital leases. The overall yield on capital leases decreased from
10.56% to 9.63% contributing $8.4 million to the decreased revenue. The
reduction in yields reflects the effects of securitizing higher yielding assets
and competitive pressures. The Company's securitizations have included
small-ticket transactions which generally have higher yields and margins as
compared to larger ticket transactions. Therefore, as securitizations occur, the
proportion of these higher yielding transactions in the Company's owned
portfolio is reduced causing a decrease in yields. Higher yields are not
necessarily associated with higher profitability since these assets commonly
carry higher credit provisions and servicing costs.
Capital lease revenue of $267.8 million decreased $224.6 million, or
45.6%, for the first nine months of 1997 from the comparable period in 1996 due
primarily to a 42.0% decrease in the average net capital lease portfolio. The
decrease in average net capital leases accounted for $206.9 million of the
revenue drop. The decrease in the overall yield for the nine months ended
September 30, 1997 to 9.80% from 10.45% for the comparable prior year period
contributed $17.7 million to the revenue decrease. Refer to the three month
discussion above for an explanation of the decreased capital lease revenue,
average net capital lease portfolio and overall yield.
Operating lease margin
Rental revenue on operating leases of $210.5 million increased $30.6
million, or 17.0%, for the quarter ended September 30, 1997 from the comparable
period in 1996 and depreciation expense on operating leases of
17
<PAGE>
<PAGE>
$137.2 million increased $19.8 million, or 16.9%, from the comparable period.
Operating lease margin was $73.3 million, or 34.82% of rental revenue for the
third quarter of 1997, compared with $62.6 million, or 34.74% of rental revenue
for the comparable period in 1996. The revenue increase was generated by the
Company's enterprise server, international and telecommunications portfolios.
Rental revenue on operating leases of $607.6 million increased $102.2
million, or 20.2%, for the nine months ended September 30, 1997 from the
comparable period in 1996 due to the factors described in the quarterly
discussion. Depreciation expense on operating leases of $402.4 million increased
$73.0 million, or 22.2%, from the comparable period. Operating lease margin was
$205.2 million, or 33.78% of rental revenue for the first nine months of 1997,
compared with $176.0 million, or 34.83% of rental revenue for the comparable
period in 1996. The decreased operating lease margin percentage is due to a
lower proportion of renewal revenue, which is generally more profitable, coupled
with a slightly lower utilization rate of testing and diagnostic equipment.
Net interest margin
Net interest margin of $104.7 million was 5.62% of average net portfolio
assets for the quarter ended September 30, 1997. This compares with a net
interest margin of $163.8 million, or 6.76% of average net portfolio assets for
the quarter ended September 30, 1996. The $59.1 million decrease in net interest
margin was due to lower capital lease revenue, higher relative interest expense
associated with the Company's post-Merger capitalization structure, offset by
lower interest expense associated with carrying a lower level of portfolio
assets. Average net portfolio assets for the third quarter of 1997 of $7,457.1
million were $2,237.7 million, or 23.1%, lower than the comparative prior year
quarter resulting in a decrease in portfolio revenue of approximately $65.5
million. A slight decrease in the overall portfolio yield to 11.67% from 11.72%
contributed to the revenue drop by approximately $.9 million. The Company's
post-Merger recapitalization includes higher debt relative to assets. The
interest expense associated with carrying such higher relative debt reduced the
third quarter margin by approximately $21.0 million. The lower level of debt
associated with a smaller asset base decreased interest expense by $31.2
million. The remaining decrease in margin is associated with the increased
average cost of debt.
Net interest margin of $312.3 million was 5.68% of average net portfolio
assets for the nine months ended September 30, 1997. This compares with a net
interest margin of $467.4 million, or 6.62% of average net portfolio assets, for
the nine months ended September 30, 1996. The $155.1 million decrease in net
interest margin was due to the same factors cited in the quarterly discussion.
Lower average net portfolio assets for the nine months ended September 30, 1997
generated lower portfolio revenue of approximately $181.1 million. A slight
increase in the overall portfolio yield to 11.63% from 11.58%, due to a shift in
the mix toward operating leases, offset the revenue drop by approximately $2.7
million. The interest expense associated with carrying such higher relative debt
reduced the margin by approximately $63.0 million. The lower level of debt
associated with a smaller asset base decreased interest expense by $84.7
million. The remaining increase in margin is associated with the decreased
average cost of debt.
Non-portfolio revenue
18
<PAGE>
<PAGE>
The following table summarizes the components of non-portfolio revenue
which includes revenue from securitizations and loan sales, equipment sales, and
other net revenue. In addition, equipment sales margin (equipment sales less
cost of equipment sales) and the equipment sales margin percentage (equipment
sales margin divided by equipment sales) are presented.
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
1996 1997 1996 1997
------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Revenue from securitizations and loan
sales $3.5 $8.0 $13.9 $42.4
------------------------------------------------------------
Equipment sales 24.0 14.4 72.6 35.1
Cost of equipment sales (21.0) (13.0) (61.7) (31.6)
------------------------------------------------------------
Equipment sales margin $3.0 $1.4 $10.9 $3.5
------------------------------------------------------------
Equipment sales margin percentage
12.5% 9.6% 15.1% 9.9%
------------------------------------------------------------
------------------------------------------------------------
Other revenue, net $41.7 $66.6 $136.9 $181.8
------------------------------------------------------------
------------------------------------------------------------
Total non-portfolio revenue $69.2 $89.0 $223.4 $259.3
------------------------------------------------------------
Revenue from securitizations and loan sales
Revenue from securitizations and loan sales for the quarter ended
September 30, 1997 of $8.0 million increased $4.5 million from the comparable
period in 1996. Higher loan sales revenue accounted for $2.7 million of the
increase, while the remaining increase was attributable to higher securitization
revenue. Higher revenue from securitizations and loan sales was generated
through the securitization/sale of $175.5 million of loans and leases in the
third quarter of 1997 compared to $37.9 million for the comparable prior year
quarter.
Revenue from securitizations and loan sales for the nine months ended
September 30, 1997 of $42.4 million increased $28.5 million, from the comparable
period in 1996. Higher securitization revenue accounted for $20.8 million of the
increase, while the remaining increase was attributable to higher loan sales
revenue. Higher revenue from securitizations and loan sales was generated
through the securitization/sale of $884.2 million of loans and leases in the
first nine months of 1997 compared to $168.8 million for the comparable prior
year period.
Revenue from equipment sales
Revenue from sales of equipment for the third quarter of 1997 of $14.4
million decreased 40.1% from $24.0 million in the comparable quarter of 1996.
Similarly, cost of equipment sales of $13.0 million decreased 38.1% from $21.0
million in the comparable period in 1996. Equipment sales margin was $1.4
million, or 9.6% of equipment sales compared to $3.0 million, or 12.5% in the
comparable prior year quarter. The drop in both equipment sales revenue and
margin highlights the unusually strong results attained in 1996. During 1996,
equipment sales and margin were bolstered by strong demand for enterprise
servers and emerging technology equipment. Volume and profitability from
equipment sales tend to follow customer behavior and generally are difficult to
predict.
19
<PAGE>
<PAGE>
Revenue from sales of equipment for the first nine months of 1997 of
$35.1 million decreased 51.6% from $72.6 million in the comparable period in
1996. Similarly, cost of equipment sales of $31.6 million decreased 48.7% from
$61.7 million in the comparable period in 1996. Equipment sales margin was $3.5
million, or 9.9% of equipment sales compared to $10.9 million, or 15.1% in the
comparable period in 1996. Refer to the quarterly discussion for an explanation
of lower equipment sales and margin.
Other revenue
Other revenue for the quarter ended September 30, 1997 of $66.6 million
increased $24.9 million, or 59.8%, from the comparable quarter in 1996. Service
revenue contributed $7.2 million to the increase, more than tripling to $10.6
million from $3.4 million, reflecting a higher managed asset base. Other revenue
for the third quarter was up $6.3 million compared to the prior comparable
period in 1996 due to the disposition of certain warrant positions. The Company
receives warrants in conjunction with the structuring of some of its complex
capital markets transactions. (In October 1997, the Company recognized an
additional pre-tax gain of $12.4 million on the disposition of certain equity
securities. See Note 5 for further discussion.) Gain on assets sales contributed
$4.7 million to the increase, up from $17.6 million in the third quarter of
1996. Fee income grew by $3.2 million, from $4.7 million for the third quarter
of 1996, as a result of providing software development services by the Company's
enterprise server business.
Other revenue for the nine months ended September 30, 1997 of $181.8
million increased $44.9 million, or 32.8%, from the comparable period in 1996.
Reflecting a higher managed asset base, service revenue contributed $18.6
million to the increase nearly tripling to $30.5 million from $11.9 million. Fee
income grew by $8.3 million, from $9.9 million in the comparable period in 1996,
largely the result of providing software development services. Other revenue was
up $6.3 million due to the disposition of warrants discussed above. Gain on
assets sales contributed $5.9 million to the increase.
Business by Channel
The Company intends to continue its strategy of expanding its Other
Clients businesses, while at the same time enhancing its relationships with the
Former Affiliates. Because the growth in revenues generated by the Company's
Other Clients businesses can be expected to lag behind the incurrence of
expenses necessary to expand and operate such businesses, the Company
anticipates that the percentage of its total net income and revenues
attributable to Other Clients businesses may vary from year to year depending
upon the stage of development of these Other Clients businesses.
For the third quarter 1997, Other Clients businesses represented 73.28%,
67.17% and 31.47% of the Company's total assets, revenues and net income,
respectively. That compares to 67.69%, 63.11% and 40.71% for the comparable
captions and prior year quarter, respectively.
For the nine months ended September 30, 1997, Other Clients businesses
represented 73.28% and 65.01% of the Company's total assets and revenues,
respectively. The Other Clients businesses generated net losses that accounted
for a negative 7.95% of the Company's net income. That compares to 67.69%,
62.24% and 32.73% of assets, revenues and net income for the comparable prior
year period, respectively.
20
<PAGE>
<PAGE>
The third quarter of 1997 Other Clients businesses' lower net income and
the nine months ended September 30, 1997 Other Clients businesses net loss are
consistent with lower portfolio revenue generated from lower average net
portfolio assets (as a result of the 1996 Securitization), lower yields on the
remaining portfolio as higher yielding assets were sold in the 1996
Securitization, lower securitization gains relative to the Former Affiliate
related gains, lower capital lease revenue in the Company's automotive portfolio
due to competitive pressures and increased costs incurred in connection with
developing and expanding foreign businesses. The Company anticipates ongoing
securitization activity equal to approximately one-third of the Company's total
annual financing volumes. As a result, the assets, revenues and net
income/(loss) of the Other Clients businesses will vary depending upon the mix
of assets securitized.
Expenses
Interest expense
</TABLE>
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
1996 1997 1996 1997
----------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Interest expense $120.3 $112.9 $350.4 $327.1
Average borrowings outstanding $7,539.8 $6,991.9 $7,240.5 $6,900.7
Average cost of debt 6.38% 6.46% 6.45% 6.32%
</TABLE>
Interest expense for the third quarter of 1997 of $112.9 million
decreased $7.4 million, or 6.1%, from the comparable 1996 quarter. The higher
relative proportion of debt to assets contributed $21.0 million in higher
interest which was more than offset by the $31.2 million reduction to interest
resulting from carrying fewer assets. The remaining increase in interest expense
is due to an increased average cost of debt. The Company issued medium and
long-term debt in the third quarter at an average rate of 6.38%, compared to
debt maturing at an average rate of 5.86%.
Interest expense for the nine months ended September 30, 1997 of $327.1
million decreased $23.3 million, or 6.6%, from the comparable period in 1996.
The higher relative proportion of debt to assets contributed $63.0 million in
higher interest, which was more than offset by the $84.7 million reduction to
interest resulting from carrying fewer assets. The remaining decrease in
interest expense is due to a decreased average cost of debt. The Company issued
medium and long-term debt for the nine months ended September 30, 1997 at an
average rate of 6.46%, compared to debt maturing having an average rate of
6.44%. Average borrowings for the nine months ended September 30, 1997 of
$6,900.7 million decreased $339.8 million, or 4.7%, from the comparable period
in 1996. The decrease was primarily due to lower debt requirements associated
with a smaller asset base.
21
<PAGE>
<PAGE>
Operating and Administrative (O&A) Expenses
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
1996 1997 1996 1997
--------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
O&A expenses $126.8 $135.9 $375.2 $402.9
Total period-end owned and managed assets $12,410.9 $13,554.4 $12,410.9 $13,554.4
O&A/period-end total owned and managed assets(a) 4.09% 4.01% 4.03% 3.96%
--------------------------------------------------------------
</TABLE>
(a) Ratio annualizes O&A for the three and nine months ended September 30, 1996
and 1997, respectively.
O&A expenses for the third quarter of 1997 of $135.9 million increased
$9.1 million, or 7.2%, from the comparable quarter in 1996. O&A expenses for the
nine months ended September 30, 1997 of $402.9 million increased $27.7 million,
or 7.4%, from the comparable period in 1996. The increases were primarily due to
severance payments, certain systems investments and costs associated with
managing a higher level of assets. Total owned and managed assets at September
30, 1997 of $13,554.4 million grew 9.2% from the $12,410.9 million reported at
September 30, 1996. As a percent of owned and managed assets, third quarter and
nine months ended September 30, 1997 annualized O&A expenses of 4.01% and 3.96%
improved from 4.09% and 4.03% for the comparable 1996 periods, respectively. The
Company's objective is to reduce this ratio to 3.50% or lower.
Provision for credit losses
See "Credit Quality" below for a discussion of the provision for credit
losses.
Provision for income taxes
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
1996 1997 1996 1997
----------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Provision for income taxes $21.8 $5.9 $67.2 $20.6
Effective income tax rate 35.0% 30.9% 36.8% 36.5%
---------------------------------------------------------------
</TABLE>
The decrease in the 1997 effective rates resulted from a lower overall
provision for state taxes, higher tax-exempt income, somewhat offset by higher
foreign taxes.
Credit Quality
The following table reflects the Company's key portfolio credit
performance indicators. Portfolio assets include the investment in finance
receivables, capital leases and operating leases.
22
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
nine months ended year ended
September 30, December 31,
1996 1997 1996
------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
Provision for credit losses (a) $71.5 $67.2 $113.6
Allowance for credit losses $235.2 $165.3 $169.0
Allowance for credit losses/Portfolio
assets 2.34% 2.11% 2.30%
Allowance for credit losses/Non-accrual
assets 1.59x 1.05x 1.25x
Non-accrual assets $148.3 $158.1 $135.1
Non-accrual assets
/Portfolio assets 1.48% 2.02% 1.84%
Net charge-offs(b)
/Portfolio assets 0.76% 0.72% 1.17%
Delinquency(c)-owned assets 2.13% 2.67% 2.56%
Delinquency(c)-owned and securitized 2.24% 2.50% 2.18%
------------------ ------------------- --------------------------
</TABLE>
a) Provision for credit losses for the quarters ended September 30, 1996 and
1997 were $22.9 million and $21.2 million, respectively.
b) Net charge-offs at September 30 are based on the twelve months then ended.
c) Delinquencies of two months or greater.
The 1997 third quarter provision for credit losses of $21.2 million
decreased $1.7 million, or 7.3%, compared to the third quarter of 1996. This
decrease is consistent with the decrease in small-ticket assets as a result of
continuing securitization activity and lower net write-offs. Generally, the
relative provisions recorded on medium and large-ticket transactions are lower
than small-ticket assets.
The decrease in the allowance for credit losses and related ratio is due
to the decrease in portfolio assets and the portfolio shift away from
small-ticket assets.
The increase in non-accrual assets to portfolio assets at September 30,
1997 over September 30, 1996 is primarily due to a $27.4 million project finance
transaction suspended from income recognition in February 1997 and a $4.1
million account suspended in March 1997.
The increase in the delinquencies since December 31, 1996 and September
30, 1996 of both owned and owned and securitized assets, is primarily due to the
project finance transaction discussed above.
23
<PAGE>
<PAGE>
Financial Condition
Net portfolio assets
The following table reflects components of the Company's net portfolio
assets.
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1996 1997
---------------------- ---------------------
(in millions)
<S> <C> <C>
Net investment in finance receivables (a) $2,135.3 $2,353.3
Net investment in capital leases (a) 3,648.7 3,633.9
Net investment in operating leases (b) 1,403.5 1,669.5
---------------------- ---------------------
Net portfolio assets $7,187.5 $7,656.7
---------------------- ---------------------
</TABLE>
a) Generally represents the sum of the (i)the gross receivable, (ii)the
associated unearned income, (iii)the unguaranteed residual value (for
capital leases only), less (iv)the allowance for credit losses.
b) Generally represents the historical cost of the equipment less the
associated accumulated depreciation.
Net portfolio assets increased $469.2 million, or 6.5%, at September 30,
1997 compared to December 31, 1996. The net investment in operating leases
increased $266.0 million, or 19.0%, primarily due to growth in the Company's
international businesses and computer-related portfolios and automobile
portfolios. The net investment in finance receivables increased $218.0 million,
or 10.2%, to $2,353.3 million primarily due to increases in the asset-backed
lending, SBA loan and large-ticket structured finance portfolios. Capital lease
originations in the first nine months of 1997 offset the effect of
securitizations, keeping capital leases flat at $3,633.9 million. In the first
nine months of 1997, the Company securitized $884.2 million of capital leases
and finance receivables.
Debt
Total debt increased by $853.8 million, or 13.2%, from December 31,
1996, to $7,318.7 million at September 30, 1997. For further detail of the
change in debt see "Liquidity and Capital Resources - Cash Flows."
Liquidity and Capital Resources
Cash flows
The decrease in the level of cash provided by operating activities to
$256.1 million for the nine months ended September 30, 1997, from $371.0 million
for the nine months ended September 30, 1996 is a function of lower net income
without a corresponding reduction in current tax payments.
24
<PAGE>
<PAGE>
The table below includes key cash flows generated from and used in
investing and financing activities.
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1996 1997
-----------------------------
(dollars in millions)
<S> <C> <C>
Investing Activities:
Principal collections from customers $2,999.2 $2,516.0
Cash used for financings and lease equipment purchases(a) (4,318.7) (4,576.0)
Cash proceeds from securitizations and loan sales 248.7 959.8
Financing Activities:
Proceeds from issuance of short-term notes (b) 29,896.6 34,603.6
Repayments of short term notes (b) (29,105.8) (34,261.7)
Proceeds from the issuance of medium and long-term debt 1,288.1 2,327.5
Repayments of medium and long-term debt $(1,101.7) $(1,780.6)
------------------------------
</TABLE>
(a) Includes purchases of finance asset portfolios and businesses.
(b) Short-term notes include primarily commercial paper.
Borrowings
During the fourth quarter of 1996, the Company filed with the Securities
and Exchange Commission a registration statement for debt securities and
warrants in the amount of $4,000.0 million. As of September 30, 1997, the
Company had issued $2,277.7 million of debt under this registration statement.
See also the "Subsequent Events" section above for discussion of affiliate
borrowings.
In August 1997, the Company renegotiated its back-up credit facility of
$1,800.0 million and raised it to $2,000.0 million. This facility, negotiated
with a consortium of 24 lending institutions, supports its commercial paper. At
September 30, 1997, this facility was unused. Pursuant to one of the more
restrictive provisions of the Company's back-up facility, the Company is
required to maintain a minimum consolidated tangible net worth (based on a
formula that includes a portion of current net income) of $566.5 million at
September 30, 1997. The Company is in compliance with this and all other
covenants of the agreement. To meet local funding requirements, as of September
30, 1997, the Company's foreign operations have available lines of credit of
approximately $346.5 million, of which approximately $91.1 million was
available. These facilities are generally renewed annually.
The Company considers its current financial resources, together with the
borrowings referred to above and estimated future cash flows, to be adequate to
fund the Company's planned future growth and operating requirements.
Asset and Liability Management
The Company's asset and liability management process takes a coordinated
approach to the management of interest rate and foreign currency risks. The
Company's overall strategy is to match the duration and average cash flows of
its borrowings with the duration and average cash flows of its portfolio assets,
as well as the currency denominations of its borrowings with those of its
portfolio assets, in a manner intended to
25
<PAGE>
<PAGE>
reduce the Company's interest rate and foreign currency exposure. The following
discussion describes certain key elements of this process, including the
Company's use of derivatives to mitigate risk.
Match funding
The Company generally matches the duration and maturity structure of its
liabilities to that of its portfolio assets. The Company routinely projects the
expected future cash flows related to its current portfolio assets. Based on
these projections, the Company is able to match the maturity and duration of its
debt with that of its assets. The cash flow projections incorporate assumptions
about customer behavior such as prepayments, refinancings and charge-offs. The
assumptions are based on historical experience with the Company's individual
markets and customers and are continually monitored and updated as markets and
customer behaviors change, to reflect current customer preferences, competitive
market conditions, portfolio growth rates and portfolio mix.
Interest rate risk and currency exchange risk
The Company actively manages interest rate risk to protect the Company's
margins on existing transactions. Interest rate risk is the risk of earnings
volatility attributable to changes in interest rates. The Company routinely
analyzes its portfolio assets and strives to match floating rate assets with
floating rate debt and fixed rate assets with fixed rate debt. The Company
generally achieves a matched position through issuances of commercial paper and
medium and long-term debt, as well as through the use of interest rate swaps.
The Company does not speculate on interest rates, but rather seeks to mitigate
the possible impact of interest rate fluctuations encountered in the normal
course of business. This is a continual process due to prepayments,
refinancings, non-accrual leases and loans, as well as other portfolio dynamics,
and therefore, interest rate risk can be significantly limited but never fully
eliminated. Additionally, the Company enters into foreign exchange contracts and
participates in the currency swap market to mitigate its exposure to assets and
liabilities denominated in foreign currencies and to meet local funding
requirements.
The Company has and expects to continue to enter into foreign exchange
contracts and currency swaps in 1997 as a result of its international
operations.
Using derivatives to manage interest rate and currency risk
The Company uses derivatives to match fund its portfolio and thereby
manage interest rate and currency risk. Derivatives can be customized in terms
of duration and interest rate basis (i.e., fixed or floating). Derivatives used
by the Company are operationally efficient to arrange and maintain. Whether the
Company issues medium and long-term debt on which it pays a fixed rate, or
issues floating rate debt and utilizes interest rate swaps, on which it
generally pays a fixed rate and receives a floating rate, the Company's interest
rate risk position can be equally well managed. However, it is the interplay
between liquidity, capital, portfolio characteristics, and economic and market
conditions that will determine the final mix of medium and long-term debt,
commercial paper and swaps (or other derivatives) used to manage interest rate
risk. See Note 3 to the unaudited consolidated financial statements for further
discussion.
The total notional amount of the Company's interest rate swaps was
$2,865.7 million and $1,436.8 million at September 30, 1997 and December
26
<PAGE>
<PAGE>
31, 1996, respectively. The total notional amount of the Company's currency
swaps was $634.2 million and $320.6 million at September 30, 1997 and December
31, 1996, respectively. The U.S. dollar equivalent of the Company's foreign
currency forward exchange contracts was $1,206.7 million and $907.3 million at
September 30, 1997 and December 31, 1996, respectively.
Derivative credit risk
The notional amount of derivative contracts does not represent direct
credit exposure. Rather, credit exposure may be defined as the market value of
the derivative contract and the ability of the counterparty to perform its
payment obligation under the agreement. The majority of the Company's interest
rate swaps require the Company to pay a fixed rate and receive a floating rate.
Therefore, this risk is reduced in a declining interest rate environment as the
Company is generally in a payable position and is increased in a rising interest
rate environment as the Company is generally in a receivable position. The
Company seeks to control the credit risk of its interest rate swap agreements
through credit approvals, exposure limits and monitoring procedures. All swap
agreements are with major money center banks and intermediaries rated investment
grade by national rating agencies with the majority of the Company's
counterparties being rated "AA" or better.
There were no past due amounts or reserves for credit losses at
September 30, 1997, related to derivative transactions. The Company has never
experienced a credit related charge-off associated with derivative transactions.
Recent Pronouncements
See Note 2 to the unaudited consolidated financial statements.
27
<PAGE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Current reports on Form 8-K:
None
28<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AT&T CAPITAL CORPORATION
/s/ Thomas G. Adams
November 12, 1997 ________________________
Thomas G. Adams
Controller
Chief Accounting Officer
29
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
- ------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
30
<PAGE>
<PAGE>
EXHIBIT 12
FORM 10-Q for the Quarter
Ended September 30, 1997
File No. 1-11237
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES*
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30, 1997
----------------
<S> <C>
Earnings from continuing operations:
Income before income taxes $ 56,375
Add: Fixed charges included in income before taxes 333,217
--------
Total earnings from continuing operations, as adjusted 389,592
--------
Total fixed charges* $333,217
========
Ratio of earnings to fixed charges 1.17
========
</TABLE>
* Fixed charges include interest on indebtedness and the portion of rentals
representative of the interest factor.
31
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information primarily
extracted from AT&T Capital Corporation's unaudited consolidated
income statement and balance sheet as of and for the nine months
ended September 30, 1997 and is qualified in its entirety by
reference to such unaudited consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 44,703
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (165,269)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 0
<DEPRECIATION> (910,137)<F1>
<TOTAL-ASSETS> 8,785,688
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 5,109,607
<COMMON> 903
0
0
<OTHER-SE> 748,672
<TOTAL-LIABILITY-AND-EQUITY> 8,785,688<F3>
<SALES> 0
<TOTAL-REVENUES> 1,301,178
<CGS> 31,652
<TOTAL-COSTS> 434,019
<OTHER-EXPENSES> 402,930
<LOSS-PROVISION> 67,193
<INTEREST-EXPENSE> 327,071
<INCOME-PRETAX> 56,375
<INCOME-TAX> 20,577
<INCOME-CONTINUING> 35,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,798
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
* In accordance with Regulation S-K item 601(c) 2, inapplicable or
immaterial financial data is reflected as zero value.
<F1> Accumulated depreciation relates to equipment under operating
leases.
<F2> This item is not applicable since the Company does not prepare
a classified balance sheet.
<F3> Includes Preferred Securities.
</FN>
</TABLE>
