ITEM 2. PROPERTIES
The Company owns no significant real property and leases all of its offices. See Note 10 of Notes to Consolidated Financial Statements on page 32 for information as to rental obligations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which its property is subject, nor are any such proceedings known to be contemplated by governmental authorities.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this item has been omitted pursuant to General Instruction J(2)(c).
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All outstanding shares of the Company's Common Stock are owned by Ford Holdings, and therefore there is no market for such shares. In the fourth quarter of 1989, the Company dividended to Ford the Company's ownership interests in its Australian, United Kingdom, Canadian and German operations in the aggregate amount of $19.9 million. Since such dividend, the Company has paid no dividend nor made any other distribution to Ford, Ford Holdings or any other Ford affiliate. Ford Holdings made a $30 million, a $5 million and a $40 million capital contribution to the Company in 1991, 1992 and 1993, respectively. The Company and Ford Holdings will, from time to time, determine the appropriate capitalization for the Company, which will, in part, affect any future payment of dividends to Ford Holdings or capital contributions to the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item has been omitted pursuant to General Instruction J(2)(a).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to General Instruction J(2)(a), the following narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
REVENUES, EXPENSES AND OPERATING PROFIT
Revenues
Revenues increased $63.1 million, or 13% in 1993 compared with 1992 primarily as a result of a 30% increase in average earning assets partially offset by a decrease in revenue yields relating to the general decline in interest rates and a change in the mix of assets in the operating lease portfolio. In addition, there was an increase of $10.1 million in the gain on sale of residuals and equipment in the Transportation and Industrial Financing business.
Expenses
Sales, administrative and general expenses increased $7.1 million, or 11% in 1993, primarily reflecting the effects of the substantial increase in earning assets.
Interest expense increased $35.8 million, or 23% in 1993, reflecting an increase in average borrowings from $2.31 billion in 1992 to $3.15 billion in 1993 to finance earning assets. This increase was offset in part by a decline in borrowing rates, which averaged 6.0% in 1993 compared with 6.6% in 1992.
Depreciation expense on operating lease equipment decreased $28.2 million, or 18% in 1993, although the average investment in operating lease equipment increased 30% or $151 million. This increase in equipment primarily reflects the addition of approximately $200 million in the Rail Services business, with an average life of 16 years. The reduction in depreciation expense is the result of the shift to the longer depreciable life rail car assets.
Other expenses increased $15.3 million, or 43%, due primarily to an $8.8 million increase in maintenance expense incurred by the Rail Services business as a result of routine maintenance on a significantly larger fleet. There was also an increase of $5.3 million in the provision for losses (see page 11 for discussion of credit loss experience).
Operating Profit
Operating profit improved $33.1 million or 37% compared with 1992. The improvement in operating results reflects the impact of higher earning assets.
Taxes on Income
Income taxes were 36.9% on income before taxes in 1993 compared with 32.8% in 1992. See Note 9 of Notes to Consolidated Financial Statements on page 31 for the principal reasons for differences from the normal statutory rates.
New Acccounting Standards
In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits", which requires companies to account for employee benefits on an accrual basis for periods when employees are no longer actively employed but have not yet reached retirement. The effect on the Company's financial statements was not material.
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment of a Loan". The Standards requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Company does not plan to adopt this standard until January 1, 1995 and the effect is not expected to be material.
In May 1993, the FASB issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". The Standard establishes standards of financial accounting and reporting for investments in equity securities (excluding those accounted for under the equity method and investments in consolidated subsidiaries) that have readily determinable fair values and for all investments in debt securities. The Company has adopted this standard effective January 1, 1994, and the effect is not expected to be material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are listed in Item 14 of Part IV on page 16, are set forth in detail at the end of this report, and are filed as part hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10, 11, 12 and 13 has been omitted pursuant to General Instruction J(2)(c).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements of the Company are included in this report at the pages indicated.
(a) 2. Financial Statement Schedules
Financial statements and schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required.
(a) 3. Exhibits required by Item 601 of Regulation S-K:
The Company agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Company, the authorized principal amount of which does not exceed 10% of the total assets of the Company.
(b) Report on Form 8-K.
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 28, 1994.
USL CAPITAL CORPORATION (Registrant)
By: /s/ JAMES G. DUFF James G. Duff, Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Letterhead of USL Capital Corporation
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's financial statements and the other financial information in this report. This responsibility includes maintaining the integrity and objectivity of the financial records and the presentation of the Company's financial statements in accordance with generally accepted accounting principles.
The Company maintains an internal control structure designed to provide, among other things, reasonable assurance that its records include the transactions of its operations in all material respects and to provide protection against significant misuse or loss of Company assets. The internal control structure is supported by careful selection and training of financial management personnel, by written procedures that communicate the details of the control structure to the Company's activities, by a staff of internal auditors of Ford Motor Company who employ thorough auditing programs, and by the Company's staff of operating control specialists who conduct reviews of adherence to the Company's procedures and policies.
The Company's financial statements have been audited by Coopers & Lybrand, independent certified public accountants. Their audit was conducted in accordance with generally accepted auditing standards which include a review of the Company's internal control structure to the extent deemed necessary for the purposes of their audit. The Report of Independent Accountants appears on the following page.
The Board of Directors is responsible for overseeing management's fulfillment of its responsibilities in the preparation of financial statements and the financial control of operations. The Board of Directors of Ford Motor Company, through its Audit Committee, selects the independent accountants. The independent accountants have full and free access to the Board to discuss their audit work, the Company's internal controls, and financial reporting matters.
/s/ J.G. Duff James G. Duff Chairman & Chief Executive Officer
/s/ George F. Stallos George F. Stallos Executive Vice President and Chief Financial Officer
LETTERHEAD OF COOPERS & LYBRAND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors, USL Capital Corporation:
We have audited the consolidated financial statements and the financial statement schedules of USL Capital Corporation and subsidiaries listed in Part IV Item 14(a)1. and 2. of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of USL Capital Corporation and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
/s/ Coopers & Lybrand
San Francisco, California January 28, 1994
USL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
USL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------
* Less than $1,000
See notes to consolidated financial statements.
USL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
USL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
- ---------------
* Less than $1,000
See notes to consolidated financial statements.
USL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include USL Capital Corporation ("Company") and all of its majority-owned subsidiaries. Investments in partnerships and 50%-or-less owned associated companies are accounted for on the equity method. Refer to Item 1. Business "Consolidation and Sale of Subsidiaries." All material intercompany balances and transactions are eliminated. Certain amounts have been reclassified to conform to the 1993 presentation.
In October 1989, all of the Company's outstanding capital stock was acquired by Ford Holdings, Inc. ("Ford Holdings") from Ford Motor Company ("Ford"). The acquisition by Ford in 1987 was accounted for as a purchase. The unamortized balance of the excess of the purchase price paid by Ford over the fair value of identifiable net assets acquired is shown as goodwill on the Company's books.
Cash and Cash Equivalents -- Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Outstanding checks ($21,582,000 at December 31, 1993 and $22,660,000 at December 31, 1992) are reclassified to Accounts Payable. For Cash and Cash Equivalents, the carrying amount is stated at fair value.
Finance Leases -- At lease commencement, the Company records the lease receivable, estimated residual value of the leased equipment, and unearned lease income. Initial direct costs are deferred as part of the investment and amortized over the lease term. Unearned lease income is recognized as revenue over the lease term so as to approximate a level rate of return on the net investment. Residual values, which are reviewed periodically, represent the estimated amount to be received at lease termination from the disposition of leased equipment.
Operating Leases -- Lease contracts that do not meet the criteria of finance leases are accounted for as operating leases. Rental equipment is recorded at cost and depreciated over its useful life or lease term to an estimated salvage or residual value (10 to 30 years for railroad cars and 3 to 7 years for other equipment), primarily on a straight-line basis.
Leveraged Leases -- Leveraged lease assets acquired by the Company are financed primarily through nonrecourse loans from third-party debt participants. These loans are secured by the lessee's rental obligations and the leased property. Unearned income is recognized over the lease term at a constant after-tax rate of return on the net investment in the lease in those periods in which the net investment is positive. Unguaranteed estimated residual values are principally based on independent appraisals of the estimated values of the assets remaining at the expiration of the lease.
Investment in Securities -- Investments in securities consist principally of debt securities (preferred stock, corporate and Municipal bonds) which are recorded at amortized cost because the Company has the ability to hold such securities until maturity and presently has this intention. See Note 6 for additional information on the fair value of securities.
Goodwill -- Goodwill, arising principally from the acquisition by Ford, is being amortized on the straight-line method over 40 years (1993, $5,643,000; 1992, $5,643,000; 1991, $5,643,000).
Taxes on Income and Tax Credits -- Since the transfer of ownership of the Company by Ford to Ford Holdings in 1989, the Company has been included in the consolidated federal income tax return of Ford Holdings and continues to be included in the combined state income tax returns of Ford, except in those states where the Company is required to file separate returns. Income taxes, including the federal alternative minimum tax, if any, are allocated by Ford Holdings based on the Company's effect on taxes paid by the group. Deferred income tax liabilities give effect to temporary differences between financial statement and tax return amounts based upon enacted tax rates in effect for the future periods when such differences are expected to reverse.
NOTE 2 -- INVESTMENT IN FINANCE LEASES
Finance lease receivables at December 31, 1993 are due in installments as follows (in thousands): 1994, $751,956; 1995, $547,200; 1996, $327,429; 1997, $228,880; 1998, $161,459 and thereafter, $1,247,246. Receivables of $6.9 million serve as collateral to long-term debt.
In December 1991, U.S. Fleet Financing ("USFF") , a wholly owned subsidiary of the Company, sold a portfolio of finance leases for proceeds of $211.5 million. During 1992 and 1993, additional leases were sold for proceeds of $79.9 million and $103.0 million, respectively, to replace the run-off of principal in the leases initially securitized. The sale agreement provides recourse to the assets of USFF, $35.7 million at December 31, 1993, for any uncollectible receivables in the portfolio. USFF is a separate entity from its parent company, USL Capital Corporation, and its assets will be available first and foremost to satisfy the claims of its creditors. An allowance of $772,000 has been provided on the books of USFF for estimated losses on the sold receivables. The agreement provides that the Company will service the lease receivables for the purchaser. At December 31, 1993, $171.6 million of net investment in the leases serviced by the Company was outstanding.
In April 1992, the Company sold a portfolio of municipal finance leases for proceeds of $95.1 million. The sale agreement provides the buyers with limited recourse against the Company, $3.0 million at December 31, 1993, for any uncollectible receivables in the portfolio. An allowance of $26,000 has been provided for estimated losses on the sold receivables. The agreement provides that the Company will service the lease receivables for the purchaser. At December 31, 1993, $19.3 million of net investment in the leases serviced by the Company was outstanding.
NOTE 3 -- INVESTMENT IN OPERATING LEASES
NOTE 3 -- INVESTMENT IN OPERATING LEASES (CONTINUED)
Initial lease terms of rental equipment range from one month to 8.5 years. Future minimum rentals on operating leases at December 31, 1993 are due in installments as follows (in thousands): 1994, $182,026; 1995, $95,430; 1996, $66,666; 1997, $27,137; 1998, $15,337 and thereafter, $25,358.
Minimum future rentals do not include contingent rentals that may be received under certain rail car leases, because of use in excess of specified amounts. Contingent rentals (in thousands) received were $8,170 in 1993, $2,454 in 1992 and $2,033 in 1991. The increase in 1993 is the result of the large expansion of the Rail Services fleet (see Item 1. Business "Business Units").
NOTE 4 -- INVESTMENT IN LEVERAGED LEASES
A summary of the components of income from leveraged leases were as follows:
NOTE 5 -- NOTES RECEIVABLE
At December 31, 1993, $609.6 million of principal was collateralized by equipment, real estate, and other assets. The weighted average interest rate at December 31, 1993 was 8.1%. Notes receivable are due in subsequent years as follows (in thousands): 1994, $96,792; 1995, $101,230; 1996, $114,867; 1997, $98,383; 1998, $142,069; and thereafter, $178,300.
The fair value of loans is estimated by either discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, or dealer quotes. At December 31, 1993, the estimated fair values of the Company's Notes Receivable were $727.4 million.
NOTE 6 -- INVESTMENT IN SECURITIES
At December 31, 1993 and 1992 the amortized cost and estimated fair value of investment in securities were as follows:
The amortized cost and estimated fair value of debt securities at December 31, 1993 and 1992 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or pre-pay obligations with or without call or pre-payment penalties, and the Company may have the option to redeem or convert securities prior to redemption.
In 1993 proceeds from the sale of investments in debt securities (in thousands) were $58,251, resulting in a gross gain of $4,888. In 1992, proceeds (in thousands) were $44,253, resulting in a gross gain of $2,195.
The fair value of the investment in debt and equity securities is estimated primarily by market and dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Debt securities are also valued using the discounted future cash flows based upon current rates of similar debt instruments traded, when a market quote or market quote of a similar investment is not available.
NOTE 7 -- SHORT-TERM NOTES PAYABLE
Short-term notes payable consist entirely of commercial paper. The balance outstanding at December 31, 1993 had an average maturity of 10 days. The Company has committed credit lines, wherein it may borrow up to $1.19 billion at floating rates which approximate prime. A commitment fee of 1/8% to 1/4% is paid on the unused portion of these credit lines. These lines contain certain provisions related to (a) continuing Ford ownership; (b) limitations on liens; and (c) limitations on activities and indebtedness of subsidiaries. There were no borrowings outstanding on these lines at December 31, 1993.
For short-term notes payable, the carrying amount approximates fair value because of the short maturity of these instruments.
NOTE 8 -- LONG-TERM DEBT
Payments required on long-term debt are (in thousands): 1994, $386,422; 1995, $323,165; 1996, $357,310; 1997, $197,351; 1998, $192,393; and thereafter, $1,091,609. Average interest rates on collateralized and senior debt outstanding at December 31, 1993 were 6.3% and 6.7%, respectively.
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. At December 31, 1993, the estimated fair value of the Company's long-term debt, collateralized and senior, was $2.451 billion.
It is the Company's policy to follow a strategy of match funding all financing, and as such, the Company believes that the change in the fair market value of its debt would be off-set by a corresponding increase in the estimated fair value of its investment in leases. See Note 13 for information concerning interest rate swap agreements.
NOTE 9 -- TAXES ON INCOME
The Company uses the liability method of accounting for income taxes pursuant to SFAS No. 109. The Company adopted the liability method in 1987 in accordance with SFAS No. 96, which was subsequently superseded by SFAS No. 109. The adoption of SFAS No. 109 at the beginning of 1992 had no effect on net income in that year.
The provision for taxes on income includes:
Deferred income taxes, on a SFAS No. 109 basis, reflect the estimated future tax effect of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of deferred income tax assets and liabilities as of December 31, 1993 and 1992 were as follows:
State Net Operating Loss carry forwards will be recovered in future periods as an offset to future state tax liabilities in accordance with the Company's tax sharing agreement with Ford Holdings.
NOTE 9 -- TAXES ON INCOME (CONTINUED)
Deferred income taxes for 1991 were derived using the guidelines in SFAS No. 96. Under SFAS No. 96, deferred income taxes are the result of temporary differences in the financial reporting and tax bases of assets and liabilities. The source of the changes in deferred taxes were as follows:
The provision for taxes on income differs from the normal statutory rate for the following reasons:
The deferred tax assets and liabilities were restated effective January 1, 1993 to reflect the increase of the U.S. Corporate Tax Rate to 35% from 34%, resulting in additional tax provision of $5.6 million.
At December 31, 1993, investment tax credit carry forwards of approximately $600,000 are available to reduce future federal income tax liabilities and expire between 1997 and 1999 if not utilized.
Federal income taxes payable to Ford Holdings (in thousands) were: $15,466 at December 31, 1993 and $2,700 at December 31, 1992.
NOTE 10 -- COMMITMENTS
The Company leases office facilities and equipment under operating leases. The equipment leased by the Company is for sublease to end-user lessees under operating leases of various terms. New leases are arranged when the equipment is returned to the Company. Rental expense (in thousands) for all operating leases was $11,574 in 1993, $12,626 in 1992, and $14,353 in 1991; and sublease income was $6,129, $6,169 and $8,859, respectively. Future minimum rentals (excluding executory costs) and related sublease income under operating leases that have non-cancelable lease terms in excess of one year as of December 31, 1993 are:
NOTE 11 -- PENSIONS
The Company sponsors a defined contribution retirement plan comprising a profit sharing part and a deferred compensation part which covers substantially all of its employees. Under the profit sharing part, contributions are determined as a percent (12.6%) of each covered participant's qualified earnings, minus the Old Age, Survivors, and Disability Insurance portion of social security taxes paid for the participant by the Company. Profit sharing cost represents contributions minus the unvested amounts of terminated participants. Under the deferred compensation part, contributions (cost) are determined as 75 cents per dollar of deferred compensation for the first 3 percent of a participant's compensation and 25 cents per dollar for the next 3 percent, up to 6 percent of a participant's compensation. The total cost of the retirement plan (in thousands) amounted to $3,500 in 1993, $3,700 in 1992, and $4,400 in 1991.
NOTE 12 -- TRANSACTIONS WITH AFFILIATED COMPANIES
The Company provides administrative services for Ford Credit and other Ford affiliates, for which the Company is reimbursed. Ford also provides administrative services to the Company, for which Ford is reimbursed. The Company believes that these arrangements, which are not covered by any formal agreement between the Company, Ford Credit and Ford or its affiliates, are mutually beneficial. Assessments for services by the Company to Ford Credit and other affiliates were (in thousands): 1993, $12,423; 1992, $11,781; 1991, $13,553; and assessments by Ford to the Company were $2,280, $2,776, and $2,566, respectively.
In 1989, the Company leased office space from Ford Motor Land Development Corporation, a subsidiary of Ford. The lease, with a term of five years plus an extension of an additional five years, is classified as an operating lease. The base rent (in thousands) for the initial five year lease term amounts to $2,204, plus 22% of the operating expenses and property taxes related to the building. Rent expense (in thousands) amounted to $701 in 1993, $731 in 1992, and $823 in 1991. Beginning in 1991, a portion of the leased office space was subleased to several divisions of Ford Motor Company. Sublease income, which includes amounts for leasehold improvements and furniture and fixtures, (in thousands) amounted to $1,013 in 1993, $716 in 1992 and $438 in 1991.
In 1992, the Company purchased equipment and the remaining payments under an existing operating lease agreement due from Ford. The revenue earned during the remaining operating lease term in 1992 amounted to $8.1 million. The corresponding depreciation of the asset during the period was $7.5 million. In December 1992 the lease with Ford was renewed with upgraded equipment, purchased for $28.2 million, and classified as a finance lease with an initial lease term of 42 months. The revenue earned under the finance lease was $2.2 million in 1993 and $198,000 in 1992.
A 1991 agreement with Ford provides for payments by Ford to the Company of broker fees for the negotiation and arrangement of leases for Ford. Such fees (in thousands) were $2,546 in 1993, $1,514 in 1992 and $1,794 in 1991.
The Company receives fees for the management of rail cars for Ford Credit. Such fees (in thousands) were $294 in 1993, $145 in 1992, and $130 in 1991.
In 1993 and 1992, Ford Holdings made capital contributions to the Company of $40 million and $5 million, respectively.
The Company acts as general partner to a limited partnership, in which it has a 23% equity interest. In addition, the Company had a nominal investment interest and acted as general partner to three limited partnerships which were liquidated in 1991. In accordance with the limited partnership agreements, the Company receives fees and other compensation for services provided. Such amounts earned were as follows (in thousands): 1993, $774; 1992, $770; and 1991, $1,042.
NOTE 12 -- TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)
The Company, in partnership with AT&T Capital Corporation, leased vehicles to subsidiaries and affiliates of American Telephone and Telegraph Company. In such arrangements, the Company provided the services of accounting, purchasing, collections and fleet management, as well as providing loans to an affiliate. Fees received (in thousands) were $326 in 1993, $276 in 1992, and $326 in 1991. Notes receivable and interest income, respectively, (in thousands) were: 1993, $0 and $407; 1992, $11,060 and $409; and 1991, $11,281 and $728. The Company sold its equity interest in the partnership in December, 1993, but continues to provide operational services.
NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into certain transactions that can give rise to financial instruments with off-balance-sheet risk. The following information pertains to those financial instruments held at December 31, 1993.
The Company has entered into arrangements to manage exposure to fluctuations in interest rates. These arrangements primarily include interest rate swap agreements. Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amounts. The agreements generally mature at the time the related debt matures. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense over the life of the agreements. Notional amounts are used to express the volume of interest rate swap agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap agreement, the Company's exposure is limited to the interest rate differential. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and current credit-worthiness of the swap counterparties. At December 31, 1993, the Company had 95 interest rates swaps, of which 22 swaps were in a net receivable position with a notional principal amount of $629.9 million and 73 swaps in a net payable position with a notional principal amount of $1.3 billion. It would cost the Company $43.6 million to terminate the swaps in a net payable position and the Company would receive $45.3 million to terminate the swaps in a net receivable position.
The Company has issued financial guarantees in support of lines of credit and lease/sublease transactions entered into by two affiliates of Ford. These affiliates, located in the United Kingdom and Australia, were previously subsidiaries of the Company, which retains management responsibility for their operations. The lines of credit have various expiration dates through 1994, and the sublease transactions extend through 1994. At December 31, 1993, the financial guarantees issued totaled $197 million for the United Kingdom, and $61 million for Australia. At December 31, 1993, the outstanding balances subject to such guarantees were $39 million for the United Kingdom, and $38 million for Australia. The disclosed amount of the guarantees is a reasonable estimate of the market value as it represents the cost to satisfy the guarantees. (See Item 1. Business "Management of Foreign Affiliates".)
Additionally, under several of the Company's domestic lease transactions, it guaranteed under certain conditions that the lessor or lender will receive additional rents of specified amounts after the original lease terms expire. The expiration dates are between 1996 and 2001. At December 31, 1993, such guarantees totaled $17 million. The Company has not provided collateral or other security to support financial instruments with credit risk.
The Company has also entered into several commitment agreements with third parties contemplating possible first mortgage loans and equipment leases. The interest rates on the first mortgage loan commitments average prime or Libor plus 3.98% and they have various expiration dates through 1998. At December 31, 1993, such commitments totaled approximately $95 million. The disclosed amount of the commitments is a reasonable estimate of the market value, as all financing rates are floating until funding.
The Company has entered into a variety of other financial agreements which contain potential risk of loss. These agreements include interest rate swap spread contracts and revolving loan commitments. Neither the amounts of these agreements, fair value, nor the potential risk of loss was considered to be significant at December 31, 1993.
NOTE 14 -- CONCENTRATIONS OF CREDIT RISK
The Company controls its credit risk through credit standards, limits on exposure, and monitoring the financial condition of other parties. The lease, note and investment portfolios are well diversified, consisting of more than 75 industries.
A significant portion of the Company's business activity is with customers and businesses located in California. As of December 31, 1993, the Company's net finance and operating leases, notes receivable and investments in California totaled approximately $700 million. There were no other significant regional, industrial or group concentrations at December 31, 1993.
The Company generally requires the leased asset to serve as collateral for the lease. The collateral consists principally of autos, computers and peripherals, office furnishings, copiers, rail cars and aircraft. Notes receivable are collateralized by first mortgages on real estate or equipment. Investments are not collateralized.
NOTE 15 -- POSTRETIREMENT BENEFITS
The Company sponsors defined benefit postretirement health care plans that provide medical and life insurance coverage to retirees and their dependents. The cost of retiree and dependent medical coverage is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's past practice. The Company defines a maximum amount (or "cap") that it will contribute toward the health benefits of each retiree. This cap is redetermined annually, and is based on the individual retiree's number of dependents. The Company has a history of increasing this cap. Over the last seven years the aggregate increase in the cap approximates the average increase in the underlying premium costs of the program. This valuation assumed that in future years the Company will continue to increase the cap at the average rate of increase of the underlying cost of the retiree benefit program. However, benefits and eligibility rules may be modified by the Company from time to time.
The following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's statement of financial position at December 31:
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
The Company's postretirement plans are underfunded; the accumulated postretirement benefit obligation and plan assets for the plan at December 31, 1993 (in thousands) are $5,858 and $0, respectively.
NOTE 15 -- POSTRETIREMENT BENEFITS (CONTINUED)
NET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS:
For measurement purposes, 12 percent and 8 percent annual rates of increase in the per capita cost of postretirement medical benefits were assumed for 1993 for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively; the rates were assumed to decrease gradually to 5.5 percent for 2006 and remain at that level thereafter. The comparable rates assumed for 1992 were 14 percent and 9 percent for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $477,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $159,000.
SCHEDULE II
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
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* Real estate loans for relocated employees, collateralized by first mortgages. Amounts are due 1996-1998 and carry interest at 5.41% to 9.65%.
Column D(2) has been omitted as the answer is "none."
SCHEDULE V
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
PROPERTY, PLANT, AND EQUIPMENT
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(1) Increase (decrease) in initial direct costs. (2) Transfer or reclassifications.
SCHEDULE VI
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
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(1) Transfer or reclassifications.
SCHEDULE VIII
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
VALUATIONS AND QUALIFYING ACCOUNTS
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(1) Reclassification
(2) Write-offs, net of recoveries.
(3) Principally included in "Other receivables" caption on the balance sheet.
(4) Included in "Residual value" caption on the balance sheet, the purpose for which relates to equipment casualties and lessee defaults.
(5) Represents balance of purchased portfolio.
SCHEDULE IX
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
SHORT-TERM NOTES PAYABLE
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(1) The weighted average interest rate was based on rates and borrowings at the end of the period after giving effect to interest rate exchange agreements. These agreements, which expire through 2005, had the effect of fixing interest rates on $292.1 million of debt at rates ranging from 5.66% to 9.46%.
(2) The average amount outstanding was based on the balances at the beginning of the period and each month-end divided by 13.
(3) The weighted average interest rate during the period was computed by dividing actual interest expense by the average short-term debt outstanding during the period and after giving effect to interest rate exchange agreements.
SCHEDULE X
USL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
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* Less than 1% of total revenues.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
COMMISSION FILE NUMBER 1-4976
USL CAPITAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(STATE OF INCORPORATION)
733 Front Street San Francisco, California
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 94-1360891
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 627-9000
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EXHIBITS INDEX
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* Incorporated by Reference.