ITEM 1. BUSINESS
RESTRUCTURING AND INITIAL PUBLIC OFFERING
AT&T Capital Corporation ("AT&T Capital" or the "Company"), was incorporated on December 21, 1992 as AT&T Leasing, Inc., and was renamed AT&T Capital Corporation on March 31, 1993. The Company is the successor entity to certain businesses of AT&T Capital Holdings, Inc. (formerly known as AT&T Capital Corporation, renamed AT&T Capital Holdings, Inc. ("Old Capital") on March 31, 1993) a wholly owned subsidiary of AT&T Corp. ("AT&T") and AT&T Credit Holdings, Inc. which commenced operations in 1985, and renamed AT&T Credit Holdings, Inc. ("Old Credit") on March 31, 1993, an indirect wholly owned subsidiary of AT&T. In a restructuring that occurred on March 31, 1993, (the "Restructuring") Old Capital and Old Credit transferred substantially all their assets to the Company except for certain assets, consisting principally of equity interests in project finance transactions and leveraged leases of commercial aircraft ("Lease Finance Assets"), in exchange for shares of the Company's common stock and the assumption by the Company of certain related liabilities.
In connection with the Restructuring, AT&T issued a direct, full and unconditional guarantee of all existing indebtedness outstanding as of March 31, 1993 for borrowed money incurred, assumed or guaranteed by Old Capital entitled to the benefit of a Support Agreement between AT&T and Old Capital (the "Support Agreement"), including the debt of Old Capital assumed by the Company in the Restructuring. Debt issued by the Company subsequent to March 31, 1993, however, is not guaranteed or supported by AT&T.
An initial public stock offering combined with a management stock offering totalling approximately 14 percent of the Company's stock occurred on August 4, 1993. (See Note 8 to the Consolidated Financial Statements). As a result of the stock offerings, approximately 86 percent of the outstanding common stock of the Company is owned indirectly by AT&T (through Old Capital and Old Credit.)
In connection with its initial public offering, the Company entered into certain intercompany, operating, license and tax agreements with AT&T. The Intercompany Agreement includes a provision requiring minimum ownership by AT&T of 20% of the Company's common stock outstanding immediately after the initial public offering for a period of five years. Provisions for management by the Company of certain portfolios owned by AT&T, allowing the Company to utilize certain AT&T corporate and administrative services (for a fee) and generally requiring the Company to continue certain equipment financing programs for AT&T are also included. The Operating Agreement, provides, among other things, that AT&T is required to promote the Company's financing and ancillary services and to provide the Company with certain preferred provider rights in connection with the financing of AT&T products and services. In addition, the Operating Agreement restricts AT&T from competing with the Company with respect to certain products of the Company. The License Agreement defines the Company's rights to use certain AT&T service marks and trade names, and to use "AT&T" as part of the corporate names of the Company and certain of its subsidiaries. The initial term of the License Agreement will expire on the seventh
anniversary of the date of the initial public offering. The License Agreement may be terminated prior to the end of its term by either party if the other party breaches or defaults on terms of the Intercompany agreement, the Operating Agreement or the License Agreement. Additionally, AT&T can elect to terminate the license agreement if the long-term unsecured debt of the Company is rated below investment grade by at least two nationally recognized rating agencies or if the Company receives a qualified audit opinion from its independent accountants. Because such license is an important strategic asset of the Company, termination of the License Agreement could have an adverse effect on the Company.
DESCRIPTION OF THE BUSINESS
AT&T Capital is one of the largest equipment leasing and finance companies in the United States based on the aggregate value of equipment leased or financed. The Company is a full-service, diversified equipment leasing and finance company that operates in the United States, Canada, Europe, the Asia/Pacific Region and Mexico.
The Company leases and finances equipment manufactured and distributed by AT&T and its affiliates and numerous other companies. The Company's customers include many of the nation's largest industrial and service companies, as well as many small and mid-size business customers and federal, state and local governments and their agencies.
AT&T Capital, through its various subsidiaries, leases and finances telecommunications equipment (such as private branch exchanges ("PBXs"), telephone systems and voice processing units), general purpose equipment (such as office equipment and manufacturing equipment), data center equipment (including mainframe computers and related equipment), other data processing equipment (such as personal computers, retail point-of-sale computers, automatic teller machines and bank transaction processing equipment) and transportation equipment (primarily vehicles). The Company is the largest lessor in the United States of telecommunications equipment. The Company also provides inventory financing for equipment dealers and distributors, Small Business Administration ("SBA")lending, and asset management and remarketing services. In addition, the Company offers its customers certain equipment rental and repair services and certain other asset administration services.
AT&T Capital offers a variety of lease and other finance instruments, including leases where the Company is the owner of the equipment for tax or accounting purposes and leases and installment sales arrangements where the end-user is such owner. At December 31, 1994, 12.1% of the Company's net investment in leases and finance receivables ("portfolio assets") consisted of leases where the Company was the owner of the equipment for both tax and accounting purposes. The Company's portfolio assets, which aggregated approximately $7.5 billion at December 31, 1994, are diversified across various types of financed equipment, with telecommunications equipment comprising approximately 26% of such portfolio assets at such date. At December 31, 1994, approximately 5% of the Company's portfolio assets were comprised of real estate assets (including commercial loans collateralized
by real estate generated through the Company's small business lending activity, e.g., SBA and franchise lending) and commercial aircraft leases.
AT&T Capital's portfolio assets are diversified among a large customer base as well as geographic regions. At December 31, 1994, the Company's 99 largest customers (after AT&T and its affiliates) accounted for approximately 20% of the Company's portfolio assets, and no single customer (with the exception of AT&T and its affiliates) accounted for more than 1.0% of such portfolio assets.
A substantial part of the Company's total United States assets, revenue and net income are attributable to leasing and financing of AT&T equipment provided to customers of AT&T and its affiliates (collectively, "Customers of AT&T Equipment"). AT&T and its affiliates and employees (collectively, "AT&T as End-User") are also significant customers of the Company, primarily with respect to data processing equipment and vehicles leased to as them as end-users.
The following table shows (in millions of dollars) the assets, revenue, net income(loss) and income before cumulative effect of accounting change and impact of tax rate change related to United States operations (together with the respective percentages of the assets, revenue, net income(loss) and income before cumulative effect of accounting change and impact of tax rate change related to United States operations represented by such dollar amounts) attributable to (I) leasing and financing services provided by the Company to customers of AT&T equipment, (ii) transactions involving AT&T as End-User and (iii) the Company's non-AT&T businesses, in each case at and for the years ended December 31, 1992, 1993 and 1994. The net income(loss) and income before cumulative effect of accounting change and impact of tax rate change amounts shown below were calculated based upon what the Company believes to be a reasonable allocation of interest, income taxes and certain corporate overhead expenses.
Customers of AT&T Equipment Income before
cumulative effect of 1993 accounting
change and impact Assets Revenue Net Income of tax rate change __________________________________________________________________________ $ % $ % $ % $ % ___________________________________________________________________________
1992 $2,305.0 40.1% $410.5 32.8% $52.4 60.0% $52.4 60.0% 1993 $2,441.7 40.7% $423.3 33.2% $68.5 87.8% $75.9 80.1% 1994 $2,749.8 38.4% $458.5 36.7% $84.2 80.5% $84.2 80.5%
AT&T as End-User Income before
cumulative effect of 1993 accounting
change and impact Assets Revenue Net Income of tax rate change ___________________________________________________________________________ $ % $ % $ % $ % ___________________________________________________________________________ 1992 $658.4 11.4% $185.2 14.8% $13.0 14.9% $13.0 14.9% 1993 $608.8 10.1% $201.9 15.9% $14.2 18.3% $16.9 17.9% 1994 $548.0 7.7% $131.2 10.5% $ 8.5 8.2% $ 8.5 8.2%
Non-AT&T Businesses Income before
cumulative effect of 1993 accounting
Net Income change and impact Assets Revenue (Loss) of tax rate change ___________________________________________________________________________ $ % $ % $ % $ % ___________________________________________________________________________ 1992 $2,786.9 48.5% $655.8 52.4% $21.9 25.1% $21.9 25.1% 1993 $2,952.4 49.2% $649.4 50.9% ($ 4.7) (6.1%) $ 1.9 2.0% 1994 $3,850.9 53.9% $660.9 52.8% $11.9 11.3% $11.9 11.3%
The net income(loss) and income before cumulative effect of accounting change and impact of tax rate change from the Company's United States non-AT&T businesses reflects the fact that costs and expenses associated with developing additional and changing existing non-AT&T business units were substantial. Conversely, the securitization of certain non-AT&T portfolio assets positively impacted the non-AT&T businesses in 1992, 1993 and 1994 (see Note 6 to the Consolidated Financial Statements). The Company intends to pursue its strategy of expanding its non-AT&T businesses, while at the same time enhancing its AT&T relationship. Because the desired growth in revenue generated by the Company's non-AT&T businesses can be expected to lag behind the incurrence of costs and expenses necessary to expand and operate such businesses, the Company anticipates that the percentage of its total United States net income and revenue growth attributable to non-AT&T businesses may vary from year to year depending upon the developmental stages associated with the non-AT&T businesses.
Although the Company operates principally in the United States, the Company began operations in the United Kingdom in 1991 and, through the hiring of certain employees and the acquisition of certain operating assets (but not Portfolio Assets), began significant operations in Canada in 1992. In January 1994, the Company purchased the stock of Australian Guarantee Corporation Finance (H.K.) Limited ("A.G.C. Finance"), a Hong Kong-based vehicle and equipment leasing finance company with assets at that time of approximately $150 million. Also in January 1994, the Company, through its wholly-owned Canadian subsidiary, acquired the vehicle portfolio and infrastructure assets constituting the Avis Canada Leasing Division of AvisCar, Inc. ("Avis Leasing"). Avis Leasing provides automobile leasing to small and mid-size commercial and corporate clients in Canada and had
approximately $90 million in assets at the time of acquisition.
Also in 1994, the Company opened offices in Mexico and Australia. The Company, from time to time, investigates potential opportunities to make acquisitions abroad, and the Company may open additional foreign offices on a limited basis either directly or through acquisition.
On January 4, 1995, the Company acquired the vendor leasing and finance companies of Banco Central Hispano and certain of its affiliates (collectively, "CFH Leasing International") located in the United Kingdom, Germany, France, Italy, Belgium, the Netherlands and Luxembourg. CFH Leasing International provides financial services to equipment manufacturers and vendors. With offices throughout much of western Europe, it serves approximately 4,600 customers and had approximately $540 million in assets at the time of acquisition.
The Company's assets, revenue and net income related to foreign operations are not reflected in the above tables which show assets, revenue, net income(loss) and income before cumulative effect of accounting change and impact of tax rate change attributable to the Company's United States operations. At December 31, 1994, 1993 and 1992, the total assets of the Company's foreign operations were $873.2 million (or 10.9% of total assets), $406.9 million (or 6.3% of total assets) and $145.1 million (or 2.5% of total assets), respectively. The total revenue of such operations for the years ended December 31, 1994, 1993 and 1992, were $133.5 million (or 9.6% of total revenue), $85.0 million (or 6.2% of total revenue) and $14.0 million (or 1.1% of total revenue), respectively, and such operations generated net losses of $4.2 million, $9.4 million and $13.8 million, respectively. Such losses reflected the fact that most of the Company's foreign operations are in the start-up phase, with revenue from such operations not yet covering operating costs and expenses.
Although a substantial majority of the Company's foreign assets and revenues at and for the years ended December 31, 1994, 1993 and 1992, were attributable to the Company's non-AT&T businesses, a principal focus of such foreign operations is to serve foreign customers of AT&T and its affiliates as well as other vendors. Total assets, revenue and net income related to non-AT&T businesses including both domestic and international businesses for the year ended December 31, 1994 were $4,698.7 million (or 58.6% of total assets), $789.9 million (or 57.1% of total revenue), and $9.0 million (or 9.0% of total net income), respectively. Total assets, revenue and net loss (before cumulative effect of accounting change and the impact of the tax rate change) related to non-AT&T businesses including both domestic and international businesses for the year ended December 31, 1993 were $3,337.1 million, $731.6 million and $7.5 million, respectively. Total assets, revenue and net loss related to non-AT&T businesses including both domestic and international businesses for the year ended December 31, 1992 were $2,906.3 million, $668.1 million and $11.7 million, respectively.
Income Tax Considerations
The Company is currently a member of AT&T's consolidated group for federal income tax purposes. The Company would cease to be a member of such consolidated group for federal income tax purposes (a "Tax
Deconsolidation") if, among other events, AT&T's ownership interest in the outstanding common stock decreases to below 80%. Tax Deconsolidation would have certain adverse effects on the Company.
As long as the Company is a part of the AT&T consolidated federal income tax group, the payment of federal and state income taxes in all states in which combined returns are filed associated with sales of products manufactured by AT&T is deferred (the amount of such taxes so deferred being herein called "Gross Profit Tax Deferral"), generally as the products are depreciated or until sold outside the group. Pursuant to the Gross Profit Tax Deferral Interest Free Loan Agreement between the Company and AT&T, AT&T has extended and has agreed to extend interest-free loans to the Company from time to time in an amount equal to the then outstanding amount of Gross Profit Tax Deferral. Such loans are repayable by the Company when and to the extent that any such deferred taxes are required to be paid by AT&T. Upon any Tax Deconsolidation, the Company would be required to repay such loans and would no longer receive such loans, which have constituted a competitive advantage to the Company in financing AT&T products.
Pursuant to the Federal Tax Sharing and the State Tax Sharing Agreements between the Company and AT&T, the AT&T consolidated federal income tax liability is generally allocated among the members of the AT&T consolidated group that report taxable income. Members of the AT&T consolidated group that report tax losses are compensated currently by AT&T (through cash payments made on a quarterly basis) for their losses to the extent those losses are used to reduce the AT&T consolidated federal income tax liability. Similar principles and cash payments also apply to certain state and local income tax liabilities.
Upon any Tax Deconsolidation, the Company would no longer be entitled to receive quarterly cash payments from AT&T in compensation for the use of any tax losses. The tax losses would, instead, be available to the Company to reduce future taxable income. Thus, the Company may derive a benefit in the future from tax losses, but only to the extent the Company has taxable income in later years. In 1994, on a stand-alone basis, the Company had taxable income.
In addition, upon Tax Deconsolidation, it is possible that the Company could be subject to the federal alternative minimum tax. A taxpayer's alternative minimum tax liability is computed by applying the alternative minimum tax rate, which is lower than the regular tax rate, to a measure of taxable income that is broader than that used in computing the regular tax. Payments of any alternative minimum tax incurred by the Company after a Tax Deconsolidation would be available in the future as credits against the Company's regular tax liability.
Although AT&T has the right to reduce its ownership interest in the
Company (subject to certain contractual restrictions in the Intercompany Agreement between the Company and AT&T) and effect a Tax Deconsolidation at any time, AT&T has advised the Company that no decision has been made to reduce its ownership interest in the Company. AT&T has indicated to the Company that any decision by AT&T to reduce such ownership interest would be made, in the future on the basis of all the circumstances existing at such time including the effect of any such reduction on AT&T (including any benefit to AT&T from the removal from AT&T's consolidated balance sheet of the Company's indebtedness (and assets) in the event AT&T's interest in the common stock of the Company is reduced below 50%), the needs of AT&T, the success of the Company, stock market conditions and other factors.
Credit Quality
The control 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, customer type, geographic location and maturity. The Company's financing activities have been spread across a wide range of equipment segments (e.g., telecommunications, general, data center, other data processing and transportation) and a large number of end-users located throughout the United States and, to a lesser extent, abroad.
The table below provides allowance for credit losses components by loan classification (as prescribed by the Securities and Exchange Commission, "SEC") where Lease Financing includes capital leases and rentals receivable on operating leases and Commercial and Financial includes finance receivables (collectively "finance assets"), as well as other key credit quality indicators. The breakdown of the allowance for credit losses at each year end reflects management's estimate of credit losses and may not be indicative of actual future charge-offs by loan classification.
(Dollars in Thousands) 1994 1993 1992 1991 ___________________________________________________________________________ Balance at beginning of year: - - Lease Financing $102,760 $ 87,774 $ 74,106 $ 57,578 $ 31,886 - - Commercial and
Financial 57,059 36,187 19,861 17,791 5,982 ___________________________________________________________________________ Total 159,819 123,961 93,967 75,369 37,868 ___________________________________________________________________________ Additions Charged to Operations: - - Lease Financing 66,306 95,034 88,577 100,445 58,767 - - Commercial and Financial 14,582 28,644 23,138 8,190 16,741 ___________________________________________________________________________ Total $ 80,888 $123,678 $111,715 $108,635 $ 75,508 ___________________________________________________________________________
1994 1993 1992 1991 ___________________________________________________________________________ Charge-offs: - Lease Financing $ 50,294 $ 61,517 $ 76,587 $ 76,422 $ 49,468 - Commercial and Financial 23,223 14,135 18,183 15,466 4,970 ___________________________________________________________________________ Subtotal 73,517 75,652 94,770 91,888 54,438 ___________________________________________________________________________ Recoveries: - Lease Financing 16,316 15,505 15,038 8,261 7,953 - Commercial and Financial 1,656 1,118 1,365 1,672 ___________________________________________________________________________ Subtotal 17,972 16,623 16,403 9,933 7,991 ___________________________________________________________________________ Net Charge-offs: - - Lease Financing 33,978 46,012 61,549 68,161 41,515 - - Commercial and Financial 21,567 13,017 16,818 13,794 4,932 ___________________________________________________________________________ Total 55,545 59,029 78,367 81,955 46,447 ___________________________________________________________________________
Transfers and Other (a): - - Lease Financing (6,558) (34,036) (13,360) (15,756) 8,440 - - Commercial and Financial (2,176) 5,245 10,006 7,674 - ___________________________________________________________________________ Total (8,734) (28,791) (3,354) (8,082) 8,440 ___________________________________________________________________________
Balance at end of year: - - Lease Financing 128,530 102,760 87,774 74,106 57,578 - - Commercial and Financial 47,898 57,059 36,187 19,861 17,791 ___________________________________________________________________________
Total $ 176,428 $159,819 $123,961 $ 93,967 $ 75,369 =========================================================================== Percentage of lease financing assets to total finance assets 80.6% 80.3% 79.9% 78.9% 78.3% =========================================================================== Percentage of commercial and financial assets to total finance assets 19.4% 19.7% 20.1% 21.1% 21.7% ===========================================================================
1994 1993 1992 1991 ___________________________________________________________________________ Ratio of Net Charge-offs during the year to average finance assets (excluding operating leases) outstanding during the year: - Lease Financing 0.71% 1.21% 1.89% 2.35% 1.72% - Commercial and Financial 1.67% 1.13% 1.51% 1.34% 0.56% =========================================================================== Nonaccrual assets $120,494 $160,574 $151,562 $ 85,381 $ 80,156 =========================================================================== (a) Primarily includes transfers out of allowance for credit losses related to receivables securitized, transfers in of reserves related to businesses acquired and reclassifications.
AT&T has agreed in the Operating Agreement to repurchase certain finance assets that go into default. Finance assets subject to such provisions were $243.0 million, $321.0 million and $282.4 million at December 31, 1994, 1993 and 1992, respectively. The Company believes that the remaining net investment in finance assets is adequately reserved for given the level of the Company's total allowance for credit losses.
Portfolio credit performance indicators in 1994 have continued to show positive trends. Delinquency and charge-off levels have declined during 1994, and the provision for credit losses decreased $42.8 million, or 34.6%, compared with 1993. The allowance for credit losses as a percentage of portfolio assets at December 31, 1994 was 2.30% compared with 2.56% at December 31, 1993. At December 31, 1994 the allowance for credit losses was $176.4 million compared with $159.8 million at December 31, 1993. Nonaccrual assets at December 31, 1994 totalled $120.5 million compared with $160.6 million at December 31, 1993.
The ratio of net charge-offs to average commercial and financial assets increased in 1994 compared with 1993, while the allowance for credit losses decreased in 1994 compared with 1993 due to reserves established for specific assets (particularly in the media portfolio) that were subsequently charged off in 1994. As a result, in 1994 there were fewer assets that required specific reserves.
Accounts are placed in nonaccrual status at 90 days past due or sooner if identified as a problem account. Revenue which would have been recorded in 1994 on nonaccrual assets had these assets been earning at the original contractual rate amounted to approximately $12.9 million. Revenue actually recognized in 1994 for assets in nonaccrual status at December 31, 1994 amounted to approximately $7.3 million.
Lease terms that are modified in the normal course of business, for which additional consideration is received or insignificant concessions are made, are accounted for as changes in a provision for a lease in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." During the past five years, the Company has had no significant earning finance assets that are required to be reported as a troubled debt restructuring pursuant to SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Residual Value Realization
The establishment and realization of residual values on leases are also important elements of the Company's business. Residual values are established upon acquisition and leasing of the equipment based upon the estimated value of the equipment at the end of the lease term. These estimates are derived by the Company from, among other things, market information on sales of used equipment, end-of-lease customer behavior and estimated obsolescence trends. The Company's risk management department, in conjunction with the management of the Company's business units, regularly reviews residual values, and if they have declined, adjustments are made that result in an immediate charge to income for capital leases and adjustments to depreciation expense for operating leases over the shorter of the useful life of the asset or the remaining term of the lease. In January 1994, the Company entered into a significant lease extension associated with mainframe computers leased to AT&T. This extension significantly reduced related mainframe residual exposure. At December 31, 1994 and 1993, total portfolio assets related to mainframe computers were $527.1 million, or 7.0%, and $687.0 million, or 11.3%, respectively. The related residual values of mainframe computers were $79.1 million and $232.2 million at December 31, 1994 and 1993, respectively.
The Company actively manages its residuals by working with lessees during the lease term to encourage lessees to extend their leases or upgrade and enhance their leased equipment, as appropriate, and by monitoring the various equipment industry segments, particularly the data center and other data processing industry segments, for obsolescence trends. The Company utilizes its asset management (including asset remarketing), engineering and other technical expertise to help manage its residual positions.
In 1994, 1993 and 1992, the Company recognized, in total revenue, amounts in excess of recorded residuals upon the re-lease, sale or other disposition by the Company of leased equipment.
Competition and Related Matters
The equipment leasing and finance industry is highly competitive. Participants in the industry compete through price (including the ability to control costs), risk management, innovation and customer service. Principal cost factors include the cost of funds, the cost of selling to or obtaining new end-user customers and vendors, and the cost of managing portfolios (including, for example, billing, collection, credit risk management, residual management, etc.). Adequate risk management is required to achieve satisfactory returns on investment and to provide appropriate pricing of finance products. The Company believes that innovation is necessary to compete in the industry, involving specialization in certain types of equipment, financial structuring for
larger transactions, utilization of alternative channels of distribution and optimization of tax treatment between owner and user. End-users of equipment generally desire transactions to be simple, flexible and customer-responsive.
In its leasing and financing operations and programs, the Company competes with captive or related leasing companies (such as General Electric Capital Corporation and IBM Credit Corporation), independent leasing companies (such as Comdisco, Inc.), certain banks engaged in leasing, lease brokers and investment banking firms that arrange for the financing of leased equipment, and manufacturers and vendors who lease their own products to customers. In addition, the Company competes with all banking and other financial institutions, manufacturers, vendors and others who extend or arrange credit for the acquisition of equipment and, in a sense, with the available cash resources of end-users (i.e., end-users may use their available cash resources to purchase for cash equipment that the Company may otherwise finance). Many of the competitors of the Company are large companies that have substantial capital, technological and marketing resources; some of these competitors are significantly larger than the Company and have access to capital at a lower cost than the Company.
Recently there have been substantial changes in the equipment leasing and finance industry, including the sale or cessation of operations of certain large competitors of the Company and an apparent trend toward consolidation. While these developments may on balance be favorable for the Company's prospects, they are indicative of the strong competitive pressures on all participants in the industry, including the Company.
The Company's penetration rate for AT&T's sales of telecommunications equipment in the United States (i.e., the percentage of the dollar volume of such sales that the Company finances) was approximately 37% for the year ended December 31, 1994. The Company does not expect material increases in this penetration rate, and there can be no assurance that the existing rate will be maintained. Although, the Company has a lower penetration rate (approximately 22% for the year ended December 31, 1994) with respect to sales of AT&T Global Information Solutions products (data processing and related products, including personal computers, retail point-of-sale computers, automatic teller machines and bank transaction processing equipment), the penetration rate has increased in 1994 compared with 1993. Additionally, the Company has an insignificant penetration rate with respect to international sales of AT&T's network systems products (large telecommunications switches, cable products, cellular telephone equipment and microwave dishes and equipment), which sales the Company has been financing for a shorter period of time. Because the markets for financing these products are highly competitive and substantially different from the markets for financing telecommunications equipment in the United States, there can be no assurance that the penetration rates in these product areas will increase.
In addition to competition within the leasing and financing industry, competition experienced by AT&T and its affiliates' industries may adversely affect the Company because of the significance to the Company of its business with customers of AT&T and its affiliates. Those industries
are highly competitive and subject to rapid changes in technology and customer needs. Many of AT&T and its affiliates' competitors are large companies that have substantial capital, technology and marketing resources.
Employees
AT&T Capital has approximately 2,700 employees as of February 28, 1995, each of whom is referred to within the Company as a "member". Titles are generally not used internally. In general, the members function using a team approach, with business conducted on a collaborative rather than hierarchical basis. Management believes that its members are skilled and highly motivated and that the Company's ability to achieve its objectives depends upon their efforts and competencies. None of the Company's members are represented by a union. The Company believes that its relations with its members are good.
ITEM 2.

ITEM 2. PROPERTIES
The Company's properties consist primarily of administrative offices and warehouses for the storage and refurbishment of equipment. The Company has its headquarters in Morristown, New Jersey, with its principal domestic offices and warehouses located in Parsippany, New Jersey; Framingham, Massachusetts; Bloomfield Hills, Michigan; Miamisburg, Ohio; Towson, Maryland; and Dallas, Texas. The Company's principal international offices are in London, England; Toronto, Canada; Hong Kong; Sydney, Australia; and Mexico City, Mexico. All these offices and warehouses are leased (some being subleased from AT&T or one of its affiliates), except for two buildings (of approximately 23,000 and 9,000 square feet) in Framingham, Massachusetts, owned by a subsidiary of the Company. Each of these two buildings is used for office space and storage and one is partially sublet to a nonaffiliated company. The Company considers its present locations suitable and adequate to carry on its current business.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any pending litigation nor is the Company aware of any threatened litigation which in the opinion of the Company's management will have a material adverse impact on the Company's financial condition or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There have been no matters submitted to a vote of security holders during the fourth quarter of 1994.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information The principal market on which the common stock of the Company is traded is the New York Stock Exchange.
Quarter Ended: Quarterly Stock Prices Dividends
declared per share High Low
December 31, 1993 $29.250 $22.375 $0.09 March 31, 1994 $27.000 $22.875 $0.09 June 30, 1994 $24.750 $21.625 $0.09 September 30, 1994 $24.375 $21.375 $0.09 December 31, 1994 $24.500 $19.750 $0.10
(b) Holders As of February 28, 1995, there were 815 holders of record of the Company's common stock, including AT&T through Old Capital and Old Credit (which held 40,250,000 shares or approximately 86% of total shares outstanding).
(c) Dividends It is anticipated that the Company will continue to pay regular quarterly dividends. The declaration of dividends and their amounts will be at the discretion of the Company's board of directors, and there can be no assurance that additional dividends will be declared.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The Results of Operations Data for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, as well as the Balance Sheet Data and Other Data at December 31, 1994, 1993, 1992 and 1991, are derived from the Consolidated Financial Statements of the Company at such dates and for such periods, which have been audited by Coopers & Lybrand L.L.P., independent accountants. The Results of Operations Data for the years ended December 31, 1989, 1988, 1987, 1986 and 1985, as well as the Balance Sheet Data and Other Data at December 31, 1990, 1989, 1988, 1987, 1986 and 1985, are derived from unaudited consolidated financial information. In management's opinion, the Company's unaudited consolidated financial statements at or for the years ended December 31, 1990, 1989, 1988, 1987, 1986 and 1985, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation.
The selected financial data as presented under the "Financial Highlights" caption in the Company's Annual Report should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto.
For the years ended December 31, (Dollars in thousands, 1994 1993 1992 1991 except per share amounts)______ ______ ______ ______ ______
Results of Operations Data: Total revenue $1,384,079 $1,359,589 $1,265,526 $1,160,150 $ 881,183 Interest expense 271,812 236,335 252,545 275,650 262,646 Operating and administrative expenses 427,187 381,515 359,689 298,833 193,882 Provision for credit losses 80,888 123,678 111,715 108,635 75,508 Income before income taxes, extraordinary loss and cumulative effect on prior years of accounting change 173,614 138,040 114,875 82,559 70,891 Income before extra- ordinary loss, cumu- lative effect on prior years of accounting change and impact of tax rate change 100,336 83,911 73,572 54,199 47,755 Extraordinary loss - - - - - Cumulative effect on prior years of accounting change (1) - (2,914) - - - Impact of 1993 tax rate change (1) - (12,401) - - - Net income (1) 100,336 68,596 73,572 54,199 47,755 Earnings per share (1) 2.14 1.60 1.83 1.35 1.19 Earnings per share before tax charges (1), (2) 2.14 1.95 1.83 1.35 1.19 Dividends paid 17,338 4,216 49,632 55,512 34,423 Dividends per share (7) 0.37 0.09 - - - Return on average equity 10.5% 8.5% 11.4% 10.7% 11.0% Return on average assets 1.4% 1.1% 1.3% 1.1% 1.1% Return on average equity before tax charges (2) 10.5% 10.3% 11.4% 10.7% 11.0% Return on average assets before tax charges (2) 1.4% 1.4% 1.3% 1.1% 1.1% ___________________________________________________________________________ Balance Sheet Data, at December 31: Total assets 8,021,923 6,409,726 5,895,429 5,197,245 4,722,694 Total debt(3) 5,556,458 4,262,405 4,089,483 3,594,247 3,312,421 Total liabilities 7,013,705 5,485,283 5,158,808 4,647,979 4,257,186 Total shareowners' equity $1,008,218 $ 924,443 $ 736,621 $ 549,266 $ 465,508
For the years ended December 31, (Dollars in thousands, 1989 1988 1987 1986 except per share amounts)______ ______ ______ ______ ______
Results of Operations Data: Total revenue $ 466,508 $ 319,029 $ 259,716 $ 191,284 $ 130,473 Interest expense 177,474 130,913 93,275 67,145 55,947 Operating and administrative expenses 118,430 90,528 76,752 55,211 28,198 Provision for credit losses 32,222 19,135 39,227 28,049 5,970 Income before income taxes, extraordinary loss and cumulative effect on prior years of accounting change 59,346 47,306 40,269 38,816 39,283 Income before extra- ordinary loss, cumu- lative effect on prior years of accounting change and impact of tax rate change 44,416 30,756 26,147 22,659 21,256 Extraordinary loss - - - (1,157) - Cumulative effect on prior years of accounting change (1) - - - - - Impact of 1993 tax rate change (1) - - - - - Net income (1) 44,416 30,756 26,147 21,502 21,256 Earnings per share (1) 1.10 0.76 0.65 0.53 0.53 Earnings per share before tax charges (1), (2) 1.10 0.76 0.65 0.53 0.53 Dividends paid 17,746 28,192 24,674 15,195 7,348 Dividends per share (7) - - - - - Return on average equity 12.7% 11.5% 11.8% 13.0% 16.8% Return on average assets 1.4% 1.2% 1.3% 1.7% 3.1% Return on average equity before tax charges (2) 12.7% 11.5% 11.8% 13.0% 16.8% Return on average assets before tax charges (2) 1.4% 1.2% 1.3% 1.7% 3.1% ___________________________________________________________________________ Balance Sheet Data, at December 31: Total assets 3,836,799 2,715,592 2,324,695 1,552,847 1,048,583 Total debt(3) 2,742,843 1,692,556 1,640,879 1,019,970 739,888 Total liabilities 3,435,792 2,417,280 2,074,198 1,360,870 911,006 Total shareowners' equity $ 401,007 $ 298,312 $ 250,497 $ 191,977 $ 137,577
At or for the years ended December 31, (Dollars in thousands, 1994 1993 1992 1991 except per share amounts)______ ______ ______ ______ ______
Other Data: Net portfolio assets of the Company $7,484,798 $6,076,805 $5,600,741 $4,956,830 $4,513,280 Allowance for credit losses 176,428 159,819 123,961 93,967 75,369 Assets of others managed by the Company 2,659,526 2,795,663 1,374,354 649,014 313,981 Volume of equipment financed (4) 4,251,000 3,467,000 3,253,000 2,453,000 2,300,000 Ratio of earnings to fixed charges (5) 1.62 1.57 1.44 1.29 1.26 Ratio of total debt to shareowners' equity 5.51 4.61 5.55 6.54 7.12 Ratio of allowance for credit losses to net charge-offs 3.18 2.71 1.58 1.15 1.62 Ratio of charge-offs to net investment (6) 0.73% 0.95% 1.37% 1.62% 1.01% Ratio of allowance for credit losses to net investment (6) 2.30% 2.56% 2.17% 1.86% 1.64%
At or for the years ended December 31, 1989 1988 1987 1986 ______ ______ ______ ______ ______ Other Data: Net portfolio assets of the Company 3,228,609 2,529,834 2,094,593 1,440,626 948,307
Allowance for credit losses 37,868 42,733 52,695 29,015 8,794 Assets of others managed by the Company 102,003 18,529 - - - Volume of equipment financed (4) $1,729,000 $1,489,000 $1,409,000 $1,101,000 $ 679,000 Ratio of earnings to fixed charges (5) 1.33 1.36 1.43 1.58 1.70 Ratio of total debt to shareowners' equity 6.84 5.67 6.55 5.31 5.38 Ratio of allowance for credit losses to net charge-offs 1.02 1.47 3.04 3.71 4.40 Ratio of charge-offs to net investment (6) 1.13% 1.13% 0.81% 0.53% 0.21% Ratio of allowance for credit losses to net investment (6) 1.16% 1.66% 2.45% 1.97% 0.92%
(1) Net income and earnings per share for 1993 were adversely impacted by the federal tax rate increase to 35% ($12.4 million) and a cumulative effect on prior years of accounting change ($2.9 million). (See Note 10 to the Consolidated Financial Statements.) Net income and earnings per share without these charges for 1993 would have been $83.9 million and $1.95 per share, respectively. (2) The Company defines return on average equity before tax charges, return on average assets before tax charges and earnings per share before tax charges, as income before cumulative effect on prior years of accounting change and impact of tax rate change as a percentage of average equity, average assets and divided by average weighted shares outstanding, respectively. (3) Does not include certain interest free loans from AT&T to the Company under certain tax agreements, in aggregate outstanding principle amounts of $214.1 million, $188.6 million, $193.1 million, $206.6 million, $239.6 million, $232.6 million, $244.5 million, $209.0 million, $134.1 million and $56.9 million at December 31, 1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987, 1986 and 1985, respectively. (4) Total principal amount of loans and total cost of equipment associated with finance and lease transactions recorded by the Company and the increase, if any, in outstanding inventory financing loans. (5) Earnings before income taxes, extraordinary loss and cumulative effect on prior years of accounting change plus the sum of interest on indebtedness and the portion of rentals representative of the interest factor divided by the sum of interest on indebtedness and the portion of rentals representative of the interest factor. A portion of the Company's indebtedness to AT&T does not bear interest. (6) Net investment includes net investment in finance receivables, capital leases and operating leases, prior to deduction of allowance for credit losses. (7) Prior to July 28, 1993, AT&T owned 100% of the Company's stock and therefore, dividends per share is not meaningful.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1994 versus 1993
Net income for the year ended December 31, 1994, was $100.3 million, an increase of $31.7 million, or 46.3%, compared with 1993. Earnings per share for the year ended December 31, 1994, were $2.14, a 33.8% increase over the $1.60 reported in 1993. The increase in net income and earnings per share for 1994 compared with 1993 was impacted by the 1993 adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which resulted in a cumulative effect of accounting change of $2.9 million, and an $11.4 million charge to reflect the impact on deferred tax balances of the third quarter 1993 increase in the income tax rate to 35% from 34%. Absent the 1993 effect of adopting SFAS No. 109 and the impact of the increase in the income tax rate, net income increased $17.4 million, or 21.0%, and earnings per share increased $.21 per share. The increase principally reflected a higher average level of finance assets resulting from both origination volume and acquisitions of portfolios and businesses, and improved portfolio performance attributable to a stronger economy, which contributed to a lower provision for credit losses.
Finance revenue of $120.8 million increased $13.4 million, or 12.4%, for 1994, compared with 1993, while the average earning finance receivable portfolio increased $165.3 million, or 15.8%, to $1,213.3 million for 1994. The increase in finance revenue due to the higher average earning finance receivables was offset by slightly lower average rates earned on the average 1994 portfolio compared with rates earned on the average portfolio. This is consistent with the Company's slightly lower average cost of borrowing for 1994, compared with 1993. (See interest expense discussion below.) A higher interest rate environment generally does not impact the margin on assets that are already recorded by the Company, since the Company employs a well-defined strategy to match fund assets with borrowings in order to limit interest rate risk. The effects of higher borrowing costs would be reflected in the pricing of new assets leased or financed. As the lower yielding earning assets (as well as the corresponding lower cost borrowings) are replaced with higher yielding assets, reflective of the current interest rate environment, the Company's average rates associated with recorded assets and associated borrowings will increase.
Capital lease revenue of $477.9 million increased $85.9 million, or 21.9%, for 1994, compared with 1993, while the average earning capital lease portfolio increased $1,007.4 million, or 27.6%, to $4,653.3 million for 1994. $40.7 million of the increase in capital lease revenue for 1994, compared with 1993, is due to international acquisitions and expansion. The growth in capital lease revenue resulted from a higher level of assets (including an AT&T mainframe lease extension which resulted in the reclassification of the lease from an operating lease to a capital lease) but was partially offset by a decline in yields due to lower average rates associated with recorded assets of the Company. As noted above, this is
consistent with the Company's slightly lower cost of borrowing for 1994, compared with 1993. However, the Company has experienced some margin compression in certain equipment leasing portfolios as pricing in connection with some portfolios is less reactive to interest rate movements.
Rental revenue on operating leases of $475.4 million decreased $26.8 million, or 5.3%, for 1994, compared with 1993. Depreciation on operating leases of $313.6 million decreased $20.6 million, or 6.2%, for the year ended December 31, 1994, compared with the year ended December 31, 1993. These decreases were primarily due to the AT&T mainframe computer lease extension during the first quarter of 1994. The terms of the extension, which reduced the Company's mainframe residual exposure, resulted in the reclassification of the lease from an operating lease to a capital lease. The impact of this lease extension reduced rental revenue and depreciation by $75.3 million and $51.2 million, respectively, for the year ended December 31, 1994, compared with the year ended December 31, 1993. While domestic rental revenue and depreciation have decreased, rental revenue and depreciation related to the Company's international operations increased $13.0 million and $10.8 million, respectively, for the year ended December 31, 1994, compared with the year ended December 31, 1993. Rental revenue less associated depreciation ("operating lease margin") was $161.8 million or 34.0% of rental revenue for 1994, compared with $167.9 million, or 33.4%, for 1993.
Market forces, economic uncertainty and the transition to a new generation of mainframes and technological alternatives, have adversely impacted the market for mainframe computers. At December 31, 1994, $527.1 million, or 7.0%, of portfolio assets (with related residual values of $79.1 million) related to mainframe computers. This compares with $687.0 million, or 11.3%, (with related residual values of $232.2 million) at December 31, 1993. The Company regularly monitors its estimates of residual values for all leased equipment including mainframe computers and believes that its residual values are conservatively stated.
For the year ended December 31, 1994, revenue from sales of equipment purchased for resale of $126.6 million decreased $35.0 million, or 21.6%, compared with 1993. Cost of equipment sales of $117.0 million decreased $28.8 million, or 19.8%, for 1994, compared with 1993. Equipment sales revenue less associated cost of equipment sold ("equipment sales margin") was $9.6 million, or 7.6%, of equipment sales revenue for the year ended December 31, 1994. Equipment sales margin for the year ended December 31, 1993, was $15.7 million, or 9.7%, of equipment sales revenue. The decrease in the equipment sales margin as a percentage of related revenue for 1994, compared with 1993, reflects continued softness in the mainframe computer market, as well as increased competition. In 1993, the Company, was able to seize an opportunity to expand this activity to Europe. However, the European market has experienced increased competition in 1994. Therefore, the Company was not able to maintain its 1993 level of European sales and expects that future European activity in this area will be limited.
Other revenue of $183.5 million decreased $13.0 million, or 6.6%, in 1994, compared with 1993. Other revenue consists mainly of sales of leased and off-lease equipment, gains on securitization of lease receivables and
service fee revenue. (See Note 6 to the Consolidated Financial Statements.) The decrease in other revenue for 1994, compared with 1993, is primarily due to lower securitization gains of $36.7 million and lower service fee revenue of $10.2 million recognized for the year ended December 31, 1994, compared with the year ended December 31, 1993. The decreases were partially offset by increased gains on sales of leased and off-lease equipment of $26.8 million.
In the fourth quarter of 1994, the Company securitized $259.1 million of lease receivables resulting in a gain of $14.8 million. Similar securitizations in the first and fourth quarters of 1993 of $561.9 million in lease receivables resulted in $51.5 million in gains. While the assets securitized in 1994 were down by 53.9%, the related gain decreased by 71.3%. The difference is primarily attributable to a higher discount rate used in the 1994 securitization due to the higher interest rate environment.
Under the terms of these securitizations, the Company is liable to the purchasers of such receivables for a limited amount of recourse granted by the Company to such purchasers. In the unlikely event that all such receivables became uncollectible at December 31, 1994, the Company's maximum exposure under limited recourse provisions granted to the purchasers of all securitized lease receivables was $353.1 million. In addition, the Company provides such purchasers with billing and collection and other services with respect to such securitized receivables.
At December 31, 1994, total assets managed by the Company on behalf of others were $2.7 billion compared with $2.8 billion at December 31, 1993. Of the total assets managed by the Company on behalf of others, 55.9% in 1994 and 59.2% in 1993, were assets managed on behalf of AT&T and its affiliates.
A substantial part of the Company's total United States assets, revenue and net income are attributable to leasing and financing of AT&T equipment and to leasing and financing equipment to AT&T and its affiliates and employees of AT&T (together, the "relationship with AT&T"). Total United States assets associated with the relationship with AT&T were $3,297.8 million (or 46.1% of total United States assets) and $3,050.5 million (or 50.8% of total United States assets) at December 31, 1994 and 1993, respectively. Total United States revenue and net income associated with the relationship with AT&T was $589.7 million (or 47.2% of total United States revenue) and $92.7 million (or 88.7% of total United States net income) for 1994, and $625.2 million (or 49.1% of total United States revenue) and $92.8 million (or 98.0% of total United States net income, excluding the cumulative effect of accounting change and impact of the tax rate change) for 1993. The Company's United States non-AT&T businesses had assets of $3,850.9 million (or 53.9% of total United States assets) and $2,952.4 million (or 49.2% of total United States assets) at December 31, 1994 and 1993, respectively. The Company's United States non-AT&T businesses contributed revenue of $660.9 million (or 52.8% of total United States revenue) and net income of $11.9 million (or 11.3% of total United States net income) for 1994, and revenue of $649.4 million (or 50.9% of total United States revenue) and net income of $1.9 million (or 2.0% of
total United States net income, excluding the cumulative effect of accounting change and the impact of the tax rate change) for 1993.
At December 31, 1994 and 1993, the total assets of the Company's international operations were $873.2 million (or 10.9% of total assets) and $406.9 million (or 6.3% of total assets), respectively. The total revenue of such operations for the years ended December 31, 1994, 1993 and 1992, were $133.5 million (or 9.6% of total revenue), $85.0 million (or 6.2% of total revenue) and $14.0 million (or 1.1% of total revenue), respectively. The profitability of the Company's international operations continued to improve in 1994. While such operations generated net losses of $4.2 million for the year ended December 31, 1994, the results compare favorably to the $9.4 million loss reported in 1993 and the $13.8 million loss reported in 1992. These losses reflected the fact that most of the Company's international operations are in the start-up phase, with revenue from such operations not covering operating costs and expenses. The Company's operations in the United Kingdom, which were established in 1991, were profitable for the first time in 1994.
Although a substantial majority of the Company's international assets and revenues at and for the years ended December 31, 1994, 1993 and 1992, were attributable to the Company's non-AT&T businesses, a principal focus of such foreign operations is to serve foreign customers of AT&T and its affiliates as well as other vendors.
Total non-AT&T net income, revenue and total assets including both United States and international businesses for the year ended December 31, 1994, was $9.0 million (or 9.0% of total net income), $789.9 million (or 57.1% of total revenue) and $4,698.7 million (or 58.6% of total assets), respectively. For the year ended December 31, 1993, total non-AT&T net loss (before the impact of SFAS No. 109 and the impact of the 1993 increase in the federal tax rate), revenue and total assets including both United States and international businesses were $7.5 million, $731.6 million (or 53.8% of total revenue) and $3,337.1 million (or 52.1% of total assets), respectively.
Growth in the Company's portfolio assets caused the average borrowings outstanding to increase by 15.6%, or $650.2 million, to $4.8 billion, while the Company's interest expense increased 15.0%, or $35.5 million, to $271.8 million during the year ended December 31, 1994, compared with the year ended December 31, 1993. The increase in average borrowings caused interest expense to increase by approximately $37.0 million. This increase was partially offset by $1.5 million in lower interest expense due to lower average interest rates for the year ended December 31, 1994, compared with the year ended December 31, 1993. The Company's average interest rate on borrowings was 5.65% for the year ended December 31, 1994, compared with 5.68% for the year ended December 31, 1993. The recent increase in borrowing costs is reflected in new borrowings made by the Company. Generally, the Company's product pricing is impacted by interest rate movements. As interest rates change, product pricing is generally adjusted to compensate for the Company's higher or lower cost of funds. Although, in certain portfolios, the Company may not be able to increase its product pricing commensurate with, or simultaneous to, any future increases in its borrowing costs.
Operating and administrative costs of $427.2 million increased $45.7 million, or 12.0%, in 1994, compared with 1993. The increase is primarily attributable to costs of approximately $30 million associated with the start-up of certain non-AT&T businesses, acquisitions and international expansion as well as costs of $10.9 million associated with the Company's new benefit and incentive plans for the year ended December 31, 1994, compared with the year ended December 31, 1993. Also contributing to the increase were higher costs associated with managing a higher level of finance assets. For 1994, operating and administrative costs to total year-end assets decreased to 5.3% compared with 6.0% for 1993. This decrease can be attributed to some of the Company's start-up businesses more fully utilizing their infrastructure, increased operating efficiencies and timing of assets financed. The Company's goal is to reach 4.5% or lower within the next few years.
Effective January 1, 1993, the Company adopted SFAS No. 109. The change in accounting for income taxes resulted in a charge to earnings of $2.9 million in the first quarter of 1993 as the cumulative effect on prior years of this change, but had no effect on cash flows. The majority of this charge related to establishing a valuation allowance against certain deferred tax assets relating to state and local income taxes.
The effective income tax rate was 42.2% and 48.2% for 1994 and 1993, respectively. The decrease was primarily due to the effect of the retroactive tax rate increase recorded in the third quarter of 1993. Due to the increase in the federal statutory corporate income tax rate from 34% to 35% signed into law in August 1993, the Company recorded an additional charge to the provision for income taxes of $12.4 million in 1993. The $12.4 million charge includes the impact of increasing previously recorded deferred tax liabilities by $11.4 million. (See Note 10 to the Consolidated Financial Statements.) Excluding the $11.4 million impact of increasing previously recorded deferred tax liabilities to reflect the increase in the federal statutory corporate income tax rate for 1993, the effective tax rate would have been 39.9%. The increase in the effective tax rate for 1994, compared with the adjusted effective tax rate for 1993, was due to increased non-deductible goodwill amortization expense related to goodwill associated with assets that were sold during the second quarter of 1994 as well as various other increases.
See "Credit Quality" below for a discussion of the provision for credit losses.
1993 versus 1992
Income before income taxes and cumulative effect of an accounting change for the year ended December 31, 1993, of $138.0 million increased $23.2 million, or 20.2%, compared with the year ended December 31, 1992. Total revenue of $1,359.6 million for the year ended December 31, 1993, grew $94.1 million, or 7.4%, compared with the year-earlier period, while total expenses of $1,221.5 million (excluding the provision for income taxes and cumulative effect of accounting change) increased $70.9 million, or 6.2%. The impact of the federal statutory tax rate increase from 34% to 35% in 1993 of $12.4 million (of which $11.4 million related to the impact of adjusting deferred tax balances) adversely affected net income for 1993,
compared with 1992. Also in the first quarter of 1993, the Company adopted SFAS No. 109, resulting in a charge to earnings of $2.9 million. Without these charges, net income for the year ended December 31, 1993, would have been $83.9 million or $1.95 per share, a 14.1% increase over net income in the prior year. Reported net income for 1993 was $68.6 million, or $1.60 per share.
The Company's increase in earnings before income taxes for the year ended December 31, 1993, compared with 1992, principally resulted from a higher average level of finance assets, increased gains on end of lease activity, lower rates on borrowings and higher servicing fees for managed portfolios.
Finance revenue of $107.4 million decreased $11.8 million, or 9.9%, for 1993, compared with 1992, while the average finance receivable portfolio increased $73.0 million, or 7.2%, over the same period. The positive revenue variance generated by the increased asset level was more than offset by a decline in rates charged to customers that reflected the lower interest rate environment of 1993, compared with 1992.
Capital lease revenue of $392.0 million increased $10.8 million, or 2.8%, for 1993, compared with 1992, while the average capital lease portfolio increased 14.8%. The growth in capital lease revenue resulted from a higher level of assets but was partially offset by a decline in product pricing reflective of the lower interest rate environment.
Rental revenue on operating leases of $502.1 million increased $31.1 million, or 6.6%, for 1993, compared with 1992. This increase was due to increased rates charged to customers and to a slight increase in the average net investment in operating leases for 1993, compared with 1992. Depreciation on operating leases of $334.2 million increased $28.7 million, or 9.4%, for 1993, compared with 1992. Rental revenue less associated depreciation ("operating lease margin") was $167.9 million, or 33.4%, of rental revenue for 1993, compared with $165.5 million, or 35.1%, for 1992. The operating lease margin for 1993, was somewhat lower than the operating lease margin for 1992, due to lower estimated residual value assumptions of equipment in both the primary and secondary markets, particularly for computers, resulting in higher depreciation expense.
Market forces, economic uncertainty and the transition to a new generation of mainframes and technological alternatives, have impacted the market for mainframe computers. At December 31, 1993, $687.0 million, or 11.3%, of portfolio assets, the majority of which were operating leases, related to mainframe computers. This compares with $791.9 million, or 14.1%, at December 31, 1992. The Company regularly monitors its estimates of residual values for all leased equipment including mainframe computers and believes that its residual values are conservatively stated. As a result of the Company's analysis of developments affecting the major mainframe computer manufacturers and their pricing policies, and technological advances in the computer industry (e.g., advances made in client server architectures), declines in the future residual value of certain mainframe computers were identified during 1993. The effect of this change increased depreciation expense by $2.5 million in 1993.
For the year ended December 31, 1993, revenue from sales of equipment purchased for resale increased $28.8 million, or 21.7%, to $161.5 million compared with 1992. Cost of equipment sales of $145.8 million increased $24.7 million, or 20.3%, for 1993, compared with 1992. During 1993, the Company expanded this activity to Europe which caused the increase from the prior year.
In 1993 and 1992, the Company's total United States revenue associated with financing provided for customers of AT&T and its affiliates was $423.3 million, or 33.2%, of total United States revenue, and $410.5 million, or 32.8%, of total United States revenue, respectively. United States revenue generated from AT&T and its affiliates and employees of AT&T and its affiliates as end-users of equipment was $201.9 million, or 15.9%, and $185.2 million, or 14.8%, in 1993 and 1992, respectively, of total United States revenue. Therefore, $625.2 million, or 49.1%, in 1993 and $595.7 million, or 47.6%, in 1992, of the Company's total United States revenue was associated with the Company's relationship with AT&T.
Other revenue of $196.5 million grew $35.1 million, or 21.8%, in 1993, compared with 1992. Other revenue consists mainly of gains on securitization of lease receivables, sales of leased and off-lease equipment and service fee revenue. (See Note 6 to the Consolidated Financial Statements.) The increase in other revenue for 1993, compared with 1992, is primarily due to increased gains on sales of leased and off-lease equipment of $9.8 million and increased service fee revenue of $18.8 million, of which $18.4 million relates to service fees from AT&T for managing certain assets on behalf of AT&T.
In the first and fourth quarters of 1993, the Company securitized $151.9 million and $410.0 million of lease receivables, respectively, resulting in a gain of $51.5 million. A similar securitization in the fourth quarter of 1992, resulted in a $52.4 million gain.
Under the terms of these securitizations, the Company is liable to the purchasers of such receivables for a limited amount of recourse granted by the Company to such purchasers. In the unlikely event that all such receivables became uncollectible at December 31, 1993, the Company's maximum exposure under limited recourse provisions granted to the purchasers of all securitized lease receivables was $347.3 million. In addition, the Company provides such purchasers with billing and collection and other services with respect to such securitized receivables.
At December 31, 1993, total assets managed by the Company on behalf of others were $2.8 billion compared with $1.4 billion at December 31, 1992. Included in assets managed at December 31, 1993, was $1.4 billion of lease finance assets retained by AT&T as a result of the Restructuring. These assets consist principally of equity interests in project finance transactions and leveraged leases of commercial aircraft. Of the total assets managed by the Company, 59.2% in 1993, and 21.6% in 1992, were assets managed on behalf of AT&T and its affiliates.
The Company continued to benefit from lower interest rates on its borrowings. Interest expense of $236.3 million decreased $16.2 million, or 6.4%, in 1993, compared with 1992. The decrease was the result of a lower
cost of funds in 1993, compared with 1992. The lower cost of funds was partially offset by an increase in average borrowings for 1993, compared with 1992.
Operating and administrative costs of $381.5 million increased $21.8 million, or 6.1%, in 1993, compared with 1992. The increase in operating and administrative costs for 1993, compared with 1992, reflected an increase of $11.4 million in the Company's cost of operations in Europe and Canada over 1992. The Company's European and Canadian operations generated an aggregate net loss of $9.4 million for 1993, compared with an aggregate net loss of $13.8 million for 1992.
The Company also incurred an additional $6.7 million in operating and administrative costs related to start-up businesses such as Small Business Administration ("SBA") lending (which commenced operations late in 1992) for 1993, compared with 1992. The balance of the increase in operating and administrative expenses for the year ended December 31, 1993, compared with the year ended December 31, 1992, is due primarily to costs associated with managing a higher level of finance assets.
Effective January 1, 1993, the Company adopted SFAS No. 109. The change in accounting for income taxes resulted in a charge to earnings of $2.9 million, in the first quarter of 1993, as the cumulative effect on prior years of this change, but had no effect on cash flows. The majority of this charge related to establishing additional net deferred tax credits relating to state and local income taxes.
The effective income tax rate was 48.2% and 36.0% for 1993 and 1992, respectively. The increase was primarily due to the effect of the retroactive 1993 tax rate increase recorded in the third quarter of 1993. Due to the increase in the federal statutory corporate income tax rate from 34% to 35% signed into law in August 1993, the Company recorded an additional charge to the provision for income taxes of $12.4 million in 1993. The $12.4 million charge includes the impact of increasing previously recorded deferred tax liabilities by $11.4 million. (See Note 10 to the Consolidated Financial Statements.)
See "Credit Quality" below for a discussion of the provision for credit losses.
FINANCIAL CONDITION
Portfolio assets (investment in finance receivables, capital leases and operating leases), net of reserves, increased by $1,408.0 million, or 23.2%, at December 31, 1994, to $7,484.8 million compared with December 31, 1993, principally due to growth in the Company's international lease portfolio and the domestic automobile lease portfolio, as well as a lower level of assets securitized in 1994.
During January 1994, the Company purchased Australian Guarantee Corporation Finance (H.K.) Limited ("A.G.C. Finance"), a subsidiary of Australian Guarantee Corporation Limited and A.G.C. Overseas Holdings Limited. A.G.C. Finance, renamed The Capita Corporation Hong Kong Limited,
is a Hong Kong based automobile and equipment financing and leasing company which also provides commercial and personal loans. Also in January 1994, the Company purchased Avis Leasing, a division of AvisCar, which provides automobile fleet leasing and supporting service programs to small and mid-size commercial and corporate customers in Canada. The total assets acquired through these two international acquisitions were approximately $240 million.
Additionally, during 1994, the Company opened offices in Mexico and Australia. The Company has from time to time investigated potential opportunities to make acquisitions abroad, and the Company may open additional foreign offices on a limited basis either directly or through acquisition.
As a result of the above mentioned acquisitions, the Company's international assets (excluding cross border transactions) at December 31, 1994, grew to 10.9% of total assets, up from 6.3% at December 31, 1993.
In January 1995, the Company acquired the vendor leasing and finance companies of Banco Central Hispano and certain of its affiliates ("CFH Leasing International") located in the United Kingdom, Germany, France, Italy, Belgium, the Netherlands and Luxembourg. CFH Leasing International provides financial services to equipment manufacturers and vendors. With offices throughout western Europe, it serves approximately 4,600 customers and had approximately $540 million in assets at the time of acquisition.
The net investment in finance receivables increased by $255.6 million, or 21.4%, at December 31, 1994, to $1,452.9 million compared with December 31, 1993, due primarily to increases in the Company's telecommunications systems portfolio, small business lending portfolio and the acquisition of A.G.C. Finance.
The net investment in capital leases increased by $1,229.1 million, or 31.5%, at December 31, 1994, to $5,129.3 million compared with December 31, 1993. This increase was primarily due to an increase in the international lease portfolio and the domestic automobile lease portfolio, as well as to a lower level of assets securitized in the Company's small ticket business equipment lease portfolio in 1994. Also contributing to the increase was the AT&T lease extension in the first quarter of 1994. The terms of the extension, which reduced the Company's mainframe residual exposure, resulted in a reclassification of the mainframe lease from an operating lease to a capital lease. The net investment recorded in capital leases at December 31, 1994, with respect to this lease, was approximately $150 million.
The net investment in operating leases decreased by $76.8 million, or 7.8%, at December 31, 1994, to $902.5 million compared with December 31, 1993. The decline was primarily due to the AT&T lease extension during the first quarter of 1994, discussed above, but was somewhat offset by increases in the international lease portfolio and the domestic automobile lease portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates a substantial portion of its funds from lease and rental receipts, but is also highly dependent upon external financing, including the issuance of commercial paper and medium-term notes in public markets and, to a lesser extent, privately placed asset-backed financings (or securitizations). Standard & Poor's Corporation, Moody's Investors Service, Inc., and Duff & Phelps Credit Rating Co. have rated the Company's senior long-term debt A, A3 and A, respectively, and have rated the Company's commercial paper A-1, P-1 and D-1, respectively.
Funds required to support the Company's operations during 1994, were derived internally primarily from principal and interest collections from customers (which include realization of cash from residual values through remarketing activities), and externally from issuances of commercial paper, and issuances of medium-term debt. The Company estimates that, under existing lease and loan terms, gross cash receipts of approximately $8.1 billion may be generated in the future.
In 1994, the Company issued commercial paper of $29.0 billion, issued medium-term notes of $2.1 billion and made commercial paper repayments of $28.4 billion and medium-term note repayments of $1.4 billion. In 1993, the Company issued commercial paper of $17.0 billion and made commercial paper repayments of $17.4 billion, and issued medium-term notes of $1.2 billion and repaid medium-term notes of $632.6 million. Additionally, the Company borrowed and repaid approximately $5.0 billion from AT&T on a short-term basis during 1993.
During 1994 and 1993, principal collections from customers and proceeds from securitized receivables of approximately $3.8 billion and $4.1 billion, respectively, were received. These receipts were primarily used for financing portfolio assets (including purchases of finance asset portfolios and businesses) of approximately $5.5 billion in 1994, and $5.1 billion in 1993.
In conjunction with the Hong Kong acquisition, the Company assumed $106.1 million of A.G.C. Finance's debt, of which $93.0 million was outstanding at December 31, 1994.
The Company has paid quarterly dividends every quarter since the fourth quarter of 1993, its first full quarter of operations after its initial public offering. On January 20, 1995, the Company's board of directors declared a quarterly dividend of ten cents per share. The dividend was paid on February 28, 1995, to shareowners of record as of February 10, 1995.
During 1993, the Company's borrowings consisted primarily of loans from AT&T, until July 14, 1993, when the Company established its own commercial paper facility. The Company filed a shelf registration with the Securities and Exchange Commission ("SEC") on July 26, 1993, registering $2.5 billion of debt securities. Borrowing under this shelf registration commenced on August 5, 1993. In July 1994, the Company registered with the SEC an additional $2.5 billion of debt securities (including medium-term notes) and warrants to purchase debt securities, currency warrants, index
warrants and interest rate warrants. At December 31, 1994, $2,474.7 million of medium-term debt was outstanding under these debt registrations.
Also in July 1994, the Company re-established credit facilities of $2.0 billion. These facilities, negotiated with a consortium of 32 lending institutions, support the commercial paper issued. At December 31, 1994, these facilities were unused. The Company also has available local lines of credit to meet local funding requirements in Hong Kong, Canada, the United Kingdom and Australia of approximately $134 million, of which approximately $29 million was unused at December 31, 1994.
On August 4, 1993, the Company received $117.2 million of proceeds (excluding costs of the transaction of approximately $1.7 million) from stock offerings. (See Notes 1 and 8 to the Consolidated Financial Statements.) These proceeds were used to reduce the amount of the Company's outstanding commercial paper and loans from AT&T otherwise required to be "rolled over" (i.e., refinanced at maturity with the proceeds of newly-incurred indebtedness for borrowed money).
The Company has, from time to time, borrowed funds directly from AT&T, including on an interest free basis pursuant to tax agreements. These interest free loans amounted to $214.1 million at December 31, 1994. These sources of funds would not be available if the Company were to cease being a member of AT&T's consolidated group for federal income tax purposes.
The Company anticipates obtaining all necessary external financing through issuances of commercial paper, privately placed asset-backed financings (or securitizations), available lines of credit for certain foreign operations and debt registrations.
Future financing is contemplated to be arranged through a large number of financial institutions as necessary to meet the Company's capital and other requirements with the timing of issue, principal amount and form depending on the Company's needs, prevailing market and general economic conditions.
The Company considers its current financial resources, together with the debt facilities referred to above, and estimated future cash flows, to be adequate to fund the Company's future growth and operating requirements.
ASSET AND LIABILITY MANAGEMENT
AT&T Capital's asset and liability management ("ALM") process takes a coordinated approach to the management of interest rate and foreign currency risks. The Company's overall strategy is to match the average maturities of its borrowings with the average cash flows of its portfolio assets, as well as the currency denominations of its borrowings with those of its portfolio assets, in a manner intended to reduce the Company's interest rate and foreign currency exposure. The following discussion
describes certain key elements of this process, including AT&T Capital's use of derivatives to manage risk.
Match Funding
AT&T Capital 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
AT&T Capital 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-term notes, 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. This is a continual process due to prepayments, refinancings, non-performing 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 expects to enter into more foreign exchange contracts and currency swaps in 1995, as a result of the January 1995 acquisition of CFH Leasing International, described above.
Using Derivatives to Manage Interest Rate and Currency Risk
AT&T Capital 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 AT&T Capital issues medium-term notes, 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 which will determine the final mix of medium-term notes, commercial paper and swaps
(or other derivatives) used to manage interest rate risk. Notes 7 and 13 to the Consolidated Financial Statements provide more details regarding the Company's debt portfolio and interest rate and currency swap and foreign exchange contract positions.
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 AT&T Capital 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 "A" or better 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 December 31, 1994, related to derivative transactions, nor were there any charge-offs during the three years ended December 31, 1994.
Debt to Equity
Total debt to equity at December 31, 1994, of 5.51 increased from 4.61 at December 31, 1993. This increase was due to the deployment of the proceeds of the initial public offering of the Company's common stock in the third quarter of 1993. As a result of the January 1995 acquisition of CFH Leasing International, leverage increased to approximately 6.00.
CREDIT QUALITY
The control 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, customer type, geographic location and maturity. The Company's financing activities have been spread across a wide range of equipment segments (e.g., telecommunications, general, data center, other data processing, and transportation) and a large number of customers located throughout the United States and, to a lesser extent, abroad.
Portfolio credit performance indicators continued to improve in 1994. Delinquency and charge-off levels declined during 1994, while nonaccrual assets at December 31, 1994, totalled $120.5 million compared with $160.6
million at December 31, 1993. This lower level of nonaccrual assets, charge-off levels and delinquency, resulted in a decrease in the Company's provision for credit losses of $42.8 million, or 34.6%, to $80.9 million, compared with 1993. For 1994, charge-offs to investment in portfolio assets improved to .73%, compared with .95% for 1993. As a result of the improved credit performance indicators and the strong economy, the allowance for credit losses was 2.30% of the Company's investment in portfolio assets at December 31, 1994, compared with 2.56% at December 31, 1993. At December 31, 1994, the allowance for credit losses was $176.4 million, compared with $159.8 million at December 31, 1993.
The Company maintains an allowance for credit losses at an amount based on a detailed analysis of delinquencies and problem portfolio assets, an assessment of overall risk and management's evaluation of probable losses in the portfolio as a whole given its diversification, and a review of historical loss experience. Management also takes into consideration the potential impact of existing and anticipated economic conditions.
The Company's management believes that the diversity and strength of its portfolio assets, along with vigilant attention to risk management, position it to deal effectively with a changing global economic environment.
RECENT PRONOUNCEMENTS
For a discussion of the effect on the Company of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", each of which was recently issued by the Financial Accounting Standards Board ("FASB"), see Note 4 to the Consolidated Financial Statements included herein.
The FASB also recently issued SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", which was effective for the Company's December 31, 1994, financial statements. SFAS No. 119 required or suggested certain disclosures with respect to derivative financial instruments. (See Note 13 to the Consolidated Financial Statements included herein.)
ITEM 8.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in independent auditors and no disagreements with independent auditors on any accounting or financial disclosure during the past two years.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information set forth under the caption "Nominees for Election" in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on April 21, 1995 (the "Proxy Statement") to be filed within 120 days after the end of the Company's fiscal year ended December 31, 1994, is incorporated herein by reference.
EXECUTIVE OFFICERS
Executive officers of the Company serve at the discretion of the Board of Directors. No officer of the Company has a written employment or noncompetition agreement with the Company, although each such officer has agreed not to disclose confidential information of the Company. The Company does not have "key man" insurance coverage on any of its officers. The executive officers of the Company comprise the Corporate Leadership Team consisting of the following six officers: Messrs. Wajnert, Rothman, Van Sickle, Dwyer, and McCarthy and Ms. Morey.
Thomas C. Wajnert, 51, has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since July 1993 and as a director of the Company since April 1993. From April 1993 to July 1993 Mr. Wajnert was President, Chief Executive Officer and Vice Chairman of the Board of Directors of the Company. From February 1990 to March 1993, Mr. Wajnert was President and Chief Executive Officer and a director of Old Capital. From October 1984 to May 1993, Mr. Wajnert was the Chief Executive Officer of Old Credit.
Irving H. Rothman, 47, has served as Group President of the Company since April 1993. Together with Mr. Van Sickle, Mr. Rothman shares responsibility for the operations of the Company, with the heads of the Company's several business units reporting to Messrs. Rothman and Van Sickle jointly. From March 1992 to March 1993 Mr. Rothman served as Vice Chairman of Old Credit. From November 1991 to March 1993, Mr. Rothman was Group President of Old Capital. From March 1990 to January 1992, Mr. Rothman was president and Chief Operating Officer of Old Credit and from February 1990 to March 1993, Mr. Rothman was a director of Old Credit. From February 1988 to February 1990, Mr. Rothman was Executive Vice President and Chief Financial Officer of Old Credit.
Charles D. Van Sickle, 52, has served as Group President of the Company since April 1993. Together with Mr. Rothman, Mr. Van Sickle shares responsibility for the operations of the Company, with the heads of the Company's business units reporting to Messrs. Van Sickle and Rothman jointly. From November 1991 to March 1993, Mr. Van Sickle was Group President of Old Capital and from March 1992 to March 1993, he was Vice Chairman of Old Capital's Capital Markets division. From January 1991 to March 1992 Mr. Van Sickle was President and Chief Operating Officer of Old Capital's Capital Markets division. From March 1990 to January 1991 and from November 1991 to March 1993, Mr. Van Sickle was a director of Old Credit. From February 1988 to January 1991, Mr. Van Sickle was a Senior Vice President of Old Credit's Capital Markets division.
Edward M. Dwyer, 38, has served as Senior Vice President, Chief Financial Officer and Treasurer of the Company since July 1994. From April 1993 to June 1994, Mr. Dwyer was Vice President and Treasurer of the Company. From July 1991 to March 1993, he was Vice President and Treasurer of Old Capital. From February 1990 to July 1991, Mr. Dwyer was Chief Financial Officer of Old Capital's Capital Markets division. From October 1989 to February 1990, he was Old Capital's Head of Business Planning.
G. Daniel McCarthy, 45, has served as Senior Vice President, General Counsel, Secretary and Chief Risk Management Officer of the Company since April 1993. From February 1990 to March 1993, Mr. McCarthy was Senior Vice President, General Counsel, Secretary and Chief Risk Management Officer of Old Capital. From February 1988 to February 1990 he was Vice President, General Counsel and Secretary of Old Credit.
Ruth A. Morey, 51, has served as Senior Vice President and Corporate Resource Officer of the Company since April 1993. From February 1990 to March 1993, Ms. Morey served as Senior Vice President and Chief Administrative Officer of Old Capital. From March 1989 to February 1991, Ms. Morey was Vice President of Old Credit's Human Resources division and from March 1990 to March 1993 she was a director of Old Credit. From 1987 to March 1989, Ms. Morey was the head of Old Credit's Human Resources division.
Item 11.

Item 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership" in the Proxy Statement is incorporated herein by reference.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K.
(a) Documents filed as a part of the report:
(1) Financial Statements: Page
Consolidated Balance Sheets 32 Consolidated Statements of Income 34 Consolidated Statements of Changes in Shareowners' Equity 36 Consolidated Statements of Cash Flows 37 Notes to the Consolidated Financial Statements 39 Report of Management 66 Report of Independent Auditors 68
(2) Financial Statement Schedules:
Schedule VIII - Valuation and Qualifying Accounts
Financial statement schedules other than the one listed above are omitted because the required information is included in the financial statements or notes thereto or because of the absence of conditions under which they are required.
Report of Independent Auditors
(3) Exhibits:
Exhibit Number
3(a). Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant's Registration Statement on Form S-1 [No. 33-49605], filed with the Securities and Exchange Commission).
3(b). Amended and Restated By-laws of the registrant dated as of October 21, 1994.
4(a). Indenture dated as of July 1, 1993 between the registrant and Chemical Bank, Trustee (the "Indenture")(incorporated by reference to Exhibit 4A to the registrant's Registration Statement on Form S-3 [No. 33-49671] filed with the Securities and Exchange Commission).
4(b). First Indenture Supplement dated as of June 24, 1994, to the Indenture (incorporated by reference to Exhibit 4A-2 to the registrant's Registration Statement on Form S-3 [No.33-54359] filed with the Securities and Exchange Commission).
4(c). Instruments other than described above in 4(a) and 4(b) that define the rights of holders of long-term debt of the registrant and all of its consolidated subsidiaries, are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
10(a). Operating Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to exhibit 10.1 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(b). Intercompany Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.2 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(c). License Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.3 to the registrant's Registration Statement on Form S-1 [No. 33- 49605] filed with the Securities and Exchange Commission).
10(d). Registration Rights Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.4 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(e). Tax Agreements between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.5 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(f). AT&T Capital Corporation 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(g). Form of Stock Option Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.10 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(h). Form of Restricted Stock Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.11 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(i). Form of Director's Stock Option Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.12 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(j). Form of Director's Restricted Stock Award under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(k). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan (incorporated by reference to Exhibit 10.14 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(l). Form of Stock Purchase Agreement and related exhibits under the 1993 Leveraged Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(m). AT&T Capital Corporation 1993 Annual Incentive Plan (incorporated by reference to Exhibit 10.16 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(n). AT&T Capital Corporation 1993 Share Performance Incentive Plan (incorporated by reference to Exhibit 10.17 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(o). Restructuring Agreement dated as of March 29, 1993, among the Registrant, Old Capital, Old Credit and AT&T (incorporated by reference to Exhibit 10.18 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(p). Credit Agreement dated as of July 11, 1994, among the registrant, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (three-year term).
10(q). Credit Agreement dated as of July 11, 1994, among the registrant, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (364-day term).
10(r). Form of AT&T Capital Corporation 1993 Employee Compensation Adjustment Plan (incorporated by reference to Exhibit 10.21 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(s). Form of AT&T Capital Corporation 1993 Deferred Compensation Plan (incorporated by reference to Exhibit 10.22 to the registrant's Registration Statement on Form S-1 [No.33- 49605]filed with the Securities and Exchange Commission).
10(t). Form of AT&T Capital Corporation 1993 Financial Counseling Plan (incorporated by reference to Exhibit 10.22 to the registrant's Registration Statement on Form S-1 [No.33-49605] filed with the Securities and Exchange Commission).
10(u). AT&T Capital Corporation 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4(c) to the registrant's Registration Statement on Form S-8 [No. 33- 54315] filed with the Securities and Exchange Commission).
10(v). Form of Summary Plan Description AT&T Capital Corporation Retirement and Savings Plan (including the Form of Description AT&T Capital Corporation Excess Benefit Plan).
10(w). AT&T Capital Corporation 1995 Annual Incentive Plan.
10(x). AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan (incorporated by reference to Exhibit A to the registrant's definitive Proxy Statement dated March 20, 1995 issued in connection with the 1995 Annual Meeting of Stockholders).
10(y). Form of Summary Plan Description of AT&T Capital Corporation Executive Benefit Plan.
10(z). Form of Summary Plan Description of AT&T Capital Corporation Supplemental Executive Retirement Plan.
10(aa).Form of Summary Plan Description of AT&T Capital Corporation Compensation Limit Excess Plan.
11. Computation of Earnings Per Share
12. Computation of Ratio of Earnings to Fixed Charges.
21. Subsidiaries of the registrant.
23. Consent of Coopers & Lybrand L.L.P.
24(a). Powers of Attorney executed by officers and directors who signed this report.
24(b). Certificate of Corporate Resolution.
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
SCHEDULE VIII
AT&T CAPITAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars In Thousands)
Column A Column B Column C Column D Column E Column F ___________________________________________________________________________ Other Balance at Charge-offs, Additions/ Balance Beginning Net of (Deductions) at End of Period Additions Recoveries (a) of Period ___________________________________________________________________________
Allowance for Credit Losses: Lease Financing(1)$102,760 $ 66,306 $ 33,978 $ (6,558) $128,530 Commercial & Financial (2) 57,059 14,582 21,567 (2,176) 47,898 ___________________________________________________________________________ Total $159,819 $ 80,888 $ 55,545 $ (8,734) $176,428
===========================================================================
Allowance for Credit Losses: Lease Financing(1)$ 87,774 $ 95,034 $ 46,012 $(34,036) $102,760 Commercial & Financial (2) 36,187 28,644 13,017 5,245 57,059 __________________________________________________________________________ Total $123,961 $123,678 $ 59,029 $(28,791) $159,819 ==========================================================================
Allowance for Credit Losses: Lease Financing(1)$ 74,106 $ 88,577 $ 61,549 $(13,360) $ 87,774 Commercial &
Financial (2) 19,861 23,138 16,818 10,006 36,187 __________________________________________________________________________ Total $ 93,967 $111,715 $ 78,367 $ (3,354) $123,961 ========================================================================== (1) Shown on the balance sheet as a deduction from applicable finance assets, primarily capital leases.
(2) Shown on the balance sheet as a deduction from finance receivables.
(a) Primarily includes transfers out of credit losses related to receivables securitized, transfers in of reserves related to businesses acquired and reclassifications.
REPORT OF INDEPENDENT AUDITORS ______________________________
Our report on the consolidated financial statements of AT&T Capital Corporation and Subsidiaries is included on page 68 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed as an exhibit on page 71 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in our report referred to above, the Company changed its method of accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas New York, New York January 26, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Thomas C. Wajnert
By_____________________________
Thomas C. Wajnert, March 15, 1995 (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 registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
T. C. Wajnert Chairman and Chief Executive Officer
Principal Financial Officer:
E. M. Dwyer Senior Vice President, Chief Financial Officer and Treasurer Thomas C. Wajnert By _________________________
Principal Accounting Officer: (Thomas C. Wajnert,
Attorney-in-fact* and on his own behalf as R. Oliu, Jr. Vice President, Controller Director and a Principal and Chief Accounting Officer Executive Officer).
Directors:
T. C. Wajnert J. P. Clancey J. P. Kelly March 15, 1995 G. M. Lowrie A. J. Mandl R. A. McGinn J. J. Melone R. W. Miller * by power of attorney S. L. Prendergast B. Walker, Jr.
EXHIBIT INDEX
Exhibit Number
3(a). Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant's Registration Statement on Form S-1 [No. 33-49605], filed with the Securities and Exchange Commission).
3(b). Amended and Restated By-laws of the registrant dated as of October 21, 1994.
4(a). Indenture dated as of July 1, 1993 between the registrant and Chemical Bank, Trustee (the "Indenture")(incorporated by reference to Exhibit 4A to the registrant's Registration Statement on Form S-3 [No. 33-49671] filed with the Securities and Exchange Commission).
4(b). First Indenture Supplement dated as of June 24, 1994, to the Indenture (incorporated by reference to Exhibit 4A-2 to the registrant's Registration Statement on Form S-3 [No.33-54359] filed with the Securities and Exchange Commission).
4(c). Instruments other than described above in 4(a) and 4(b) that define the rights of holders of long-term debt of the registrant and all of its consolidated subsidiaries, are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
10(a). Operating Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to exhibit 10.1 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(b). Intercompany Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.2 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(c). License Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.3 to the registrant's Registration Statement on Form S-1 [No. 33- 49605] filed with the Securities and Exchange Commission).
10(d). Registration Rights Agreement between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.4 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(e). Tax Agreements between the registrant and AT&T dated as of June 25, 1993 (incorporated by reference to Exhibit 10.5 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(f). AT&T Capital Corporation 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.9 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(g). Form of Stock Option Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.10 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(h). Form of Restricted Stock Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.11 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(i). Form of Director's Stock Option Agreement under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.12 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(j). Form of Director's Restricted Stock Award under the 1993 Long Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(k). AT&T Capital Corporation 1993 Leveraged Stock Purchase Plan (incorporated by reference to Exhibit 10.14 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(l). Form of Stock Purchase Agreement and related exhibits under the 1993 Leveraged Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(m). AT&T Capital Corporation 1993 Annual Incentive Plan (incorporated by reference to Exhibit 10.16 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(n). AT&T Capital Corporation 1993 Share Performance Incentive Plan (incorporated by reference to Exhibit 10.17 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(o). Restructuring Agreement dated as of March 29, 1993, among the Registrant, Old Capital, Old Credit and AT&T (incorporated by reference to Exhibit 10.18 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(p). Credit Agreement dated as of July 11, 1994, among the registrant, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (three-year term).
10(q). Credit Agreement dated as of July 11, 1994, among the registrant, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (364-day term).
10(r). Form of AT&T Capital Corporation 1993 Employee Compensation Adjustment Plan (incorporated by reference to Exhibit 10.21 to the registrant's Registration Statement on Form S-1 [No. 33-49605] filed with the Securities and Exchange Commission).
10(s). Form of AT&T Capital Corporation 1993 Deferred Compensation Plan (incorporated by reference to Exhibit 10.22 to the registrant's Registration Statement on Form S-1 [No.33- 49605]filed with the Securities and Exchange Commission).
10(t). Form of AT&T Capital Corporation 1993 Financial Counseling Plan (incorporated by reference to Exhibit 10.22 to the registrant's Registration Statement on Form S-1 [No.33-49605] filed with the Securities and Exchange Commission).
10(u). AT&T Capital Corporation 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4(c) to the registrant's Registration Statement on Form S-8 [No. 33- 54315] filed with the Securities and Exchange Commission).
10(v). Form of Summary Plan Description of AT&T Capital Corporation Retirement and Savings Plan (including the Form of Description of AT&T Capital Corporation Excess Benefit Plan).
10(w). AT&T Capital Corporation 1995 Annual Incentive Plan.
10(x). AT&T Capital Corporation 1995 Senior Executive Annual Incentive Plan (incorporated by reference to Exhibit A to the registrant's definitive Proxy Statement dated March 20, 1995 issued in connection with the 1995 Annual Meeting of Stockholders).
10(y). Form of Summary Plan Description of AT&T Capital Corporation Executive Benefit Plan.
10(z). Form of Summary Plan Description of AT&T Capital Corporation Supplemental Executive Retirement Plan.
10(aa).Form of Summary Plan Description of AT&T Capital Corporation Compensation Limit Excess Plan.
11. Computation of Earnings Per Share
12. Computation of Ratio of Earnings to Fixed Charges.
21. Subsidiaries of the registrant.
23. Consent of Coopers & Lybrand L.L.P.
24(a). Powers of Attorney executed by officers and directors who signed this report.
24(b). Certificate of Corporate Resolution.
27. Financial Data Schedule