UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
March 31, 1998 1-8319
GATX CAPITAL CORPORATION
Incorporated in the IRS Employer Identification Number
State of Delaware 94-1661392
Four Embarcadero Center
San Francisco, CA 94111
(415) 955-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
All Common Stock of Registrant is held by GATX Financial Services, Inc.
(a wholly-owned subsidiary of GATX Corporation).
As of May 12, 1998, Registrant has outstanding 1,031,250 shares of $1 par value
Common Stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(in thousands)
Three Months Ended
March 31,
1998 1997
--------- ---------
(Unaudited)
REVENUES:
Investment and asset management $ 123,462 $ 111,135
Technology equipment sales and service 34,374 39,252
------------ -----------
157,836 150,387
------------ -----------
EXPENSES:
Interest 29,869 22,041
Operating leases 32,999 27,445
Cost of technology equipment sales and service 27,274 31,963
Selling, general & administrative 27,716 26,148
Provision for losses on investments 2,250 2,250
Other 726 1,987
------------ -----------
120,834 111,834
------------ -----------
Income before income taxes 37,002 38,553
Provision for income taxes 15,437 15,613
------------ -----------
NET INCOME 21,565 22,940
Reinvested earnings at beginning of period 212,750 185,686
Dividends paid to stockholder (6,650) (5,914)
------------ -----------
REINVESTED EARNINGS AT END OF PERIOD $ 227,665 $ 202,712
============ ===========
1
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 86,718 $ 61,990
Investments:
Direct financing leases 474,147 666,524
Leveraged leases 161,082 170,555
Operating lease equipment-
net of depreciation 501,765 524,523
Secured loans 372,414 180,331
Investment in joint ventures 548,084 549,596
Assets held for sale or lease 13,178 15,398
Other investments 56,131 52,690
Investment in future residuals 19,338 19,693
Allowance for losses on investments (123,789) (121,576)
------------ -----------
Total investments 2,022,350 2,057,734
------------ -----------
Due from GATX Corporation 30,225 35,904
Other assets 135,003 161,515
------------ -----------
TOTAL ASSETS $ 2,274,296 $ 2,317,143
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 29,265 $ 16,070
Accounts payable and other liabilities 116,701 167,825
Debt financing:
Commercial paper and bankers' acceptances 115,900 127,832
Notes payable 69,082 74,161
Obligations under capital leases 10,239 9,754
Senior term notes 1,109,600 1,155,600
------------ -----------
Total debt financing 1,304,821 1,367,347
------------ -----------
Nonrecourse obligations 368,567 329,820
Deferred income 8,663 13,556
Deferred income taxes 63,994 55,600
Stockholder's equity:
Convertible preferred stock, par value $1, 125,000 125,000
and additional paid-in capital
Common stock, par value $1, and
additional paid-in capital 28,960 28,960
Reinvested earnings 227,665 212,750
Accumulated other comprehensive income:
Foreign currency translation adjustment (4,393) (4,404)
Unrealized gain on available-for-sale
securities 5,053 4,619
------------ -----------
Total accumulated other comprehensive income 660 215
------------ -----------
Total stockholder's equity 382,285 366,925
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,274,296 $ 2,317,143
============ ===========
2
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
1998 1997
---------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,565 $ 22,940
Reconciliation to net cash provided by operating
activities:
Provision for losses on investments 2,250 2,250
Depreciation expense 23,409 17,528
Provision for deferred income taxes 8,129 1,529
Gain on sale of assets (25,040) (25,489)
Changes in assets and liabilities:
Other assets 25,827 (11,278)
Due from GATX Corporation 5,679 19,786
Accrued interest, accounts payable and (37,929) (15,471)
other liabilities
Deferred income (4,893) 752
Other - net (2,527) 3,828
------------ ----------
Net cash flows provided by operating activities 16,470 16,375
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (71,009) (51,045)
Loans extended to borrowers (28,741) (2,529)
Other investments (18,588) (32,326)
------------ -----------
Total investments (118,338) (85,900)
------------ -----------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 36,477 31,483
Loan principal received 10,275 33,246
Proceeds from sale of assets 100,384 88,731
Joint venture investment recovery, net of earned
income 9,889 1,750
------------ -----------
Recovery of investments 157,025 155,210
------------ -----------
Net cash flows provided by investing activities 38,687 69,310
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings (17,011) 17,015
Proceeds from nonrecourse obligations 68,279 39,658
Repayment of long-term debt (46,000) (100,000)
Repayment of nonrecourse obligations (29,532) (25,742)
Dividends paid to stockholder (6,650) (5,914)
Other financing activities 485 (806)
------------ -----------
Net cash flows used in financing activities (30,429) (75,789)
------------ -----------
Net increase in cash and cash equivalents 24,728 9,896
Cash and cash equivalents at beginning of period 61,990 18,482
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,718 $ 28,378
============ ===========
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements, continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1. The consolidated balance sheet of GATX Capital Corporation and its
subsidiaries ("the Company") at December 31, 1997 was derived from the
audited financial statements at that date. All other consolidated financial
statements are unaudited and include all adjustments, consisting only of
normal recurring items, which management considers necessary for a fair
statement of the consolidated results of operations and financial position
for and as of the end of the indicated periods. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative of
the results that may be achieved for the entire year.
2. Certain prior year amounts have been reclassified to conform to current
presentation.
3. The Company is engaged in various matters of litigation and has unresolved
claims pending. In one matter, the Company, through an affiliate, is the
subject of both litigation and unasserted claims related to the conversion
of certain aircraft from passenger to freighter configuration. While the
amounts claimed in this matter and other matters are substantial and the
ultimate liability with respect to such claims cannot be determined at this
time, it is the opinion of management that damages, if any, required to be
paid by the Company in the discharge of such liability are not likely to be
material to the Company's financial position or results of operations.
4. As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
stockholder's equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately
in stockholder's equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
During the first quarter of 1998 and 1997, respectively, total
comprehensive income amounted to $22,010,000 and $18,710,000.
4
<PAGE>
PART I. FINANCIAL INFORMATION, continued
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Net income earned during the three months ended March 31, 1998 was $21.6
million, approaching GATX Capital's record first quarter 1997 results of $22.9
million. Asset remarketing income was a significant contributor to both
quarters' strong results, but was approximately $6.0 million (16%) lower in the
first quarter of 1998. An increase in income from investments (other than gains
on sales) partially offset the decrease in asset remarketing income during the
quarter.
Overview
- ---------
The Company engages in two main activities: (1) it is actively involved in
asset-based investment and generates income by financing equipment (through
lease, loan and joint venture investments); by remarketing assets; by managing
the equipment related investment portfolios of others; and by brokering or
arranging asset financing transactions, all of which are intertwined and (2) it
provides a wide range of technology services enabling its customers to acquire,
construct and finance information networks. Sales and service revenue related to
the Company's technology solutions business is included in the technology
equipment sales and service revenue line. Revenue earned from financing
alternatives related to technology solutions is included in the investment and
asset management revenue line.
Revenues
- --------
Investment and asset management revenue increased $12.3 million during the
three-month period ended March 31, 1998, compared to the same period in 1997.
Revenue generated from higher average investment balances during 1998 was the
most significant contributor to this increase. Average investments during the
quarter were almost 25% higher than during the same period in 1997. The increase
in revenue from investments (other than from gains on sales) was partially
offset by a decrease in asset remarketing income. As mentioned above, asset
remarketing income was $6.0 million (16%) lower during the three months ended
March 31, 1998 than during the same period in 1997.
Although asset remarketing income, which includes gains on sales of Company
owned assets and fee income generated from providing remarketing services to
third parties, has historically been a significant contributor to income, asset
remarketing opportunities are realized at lease end or in response to specific
market conditions and the income they generate can fluctuate significantly
depending on market conditions.
Technology equipment sales and service revenue was $4.9 million lower during the
quarter than during the first quarter of 1997, primarily due to market
conditions for certain products. The information technology business,
particularly the market for communications network technology, is experiencing
and will continue to experience a rapid pace of change which will have a
significant effect on the demand for products. 1998's first quarter was
primarily affected by the demand for IBM legacy network protocol equipment.
While the Company's strategy includes adding products for a broader range of
network protocols, much of its historical sales base was in these IBM related
products. This decrease in revenue is almost entirely offset by a corresponding
decrease in the cost of technology equipment sales and services.
5
<PAGE>
Expenses
- --------
Higher average borrowings (to fund new investments) resulted in interest expense
being higher than last year. Continued growth in the Company's operating lease
portfolio resulted in an increase in operating lease expense, which includes
depreciation expense and rent expense related to off-balance sheet financing.
The allowance for losses increased $2.2 million during the first three months of
1998 primarily as a result of a $2.3 million provision for losses. There were no
significant recoveries or write-downs during the period. At March 31, 1998, the
allowance for losses is 6.2% of investments, including off-balance sheet assets
and after deducting nonleveraged lease nonrecourse debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations and from portfolio proceeds and has
certain facilities for borrowing. In addition, certain lease transactions are
financed by obtaining nonrecourse loans equal to the present value of some or
all of the rental streams. During the three months ended March 31, 1998, the
Company used cash generated from operations and from portfolio proceeds to repay
$46.0 million of senior term notes and invest in $118.3 million of new
investments.
At March 31, 1998 the Company had borrowing capacity consisting of $182.0
million remaining under its Series E shelf registration, $154.1 million of
unused capacity under its commercial paper and bankers' acceptances credit
agreements, and $31.0 million remaining under stand-alone bank facilities
maintained by two of the Company's subsidiaries.
During the quarter the Company placed the proceeds from certain asset sales
(approximately $55.1 million) in trust with qualified intermediaries pending the
identification and acquisition of qualified replacement assets in order to
affect like-kind exchanges for federal income tax purposes. Also during the
quarter, the Company withdrew approximately $33.8 million of proceeds from 1997
sales previously deposited with a qualified intermediary because qualified
replacement assets were not identified. At March 31, 1998 approximately $57.9
million is held in trust and is classified as cash and cash equivalents in the
accompanying balance sheet.
During the quarter the Company financed the sale of approximately $173.3 million
of direct financing leases resulting in a recharacterization of the Company's
investment as secured loans. The loans are due in 1998. No gain or loss will be
recognized on the sale until the loans are repaid.
The Company's capital structure includes both fixed and floating rate debt. The
Company ensures a stable margin over its cost of funds by approximately matching
its fixed and floating rate investments to its fixed and floating rate
borrowings.
At March 31, 1998, the Company had approved unfunded transactions totaling
approximately $253.7 million, including approximately $146.1 million expected to
fund during the remainder of 1998. Once approved for funding, a transaction may
not be completed for various reasons, or the investment may be shared with
partners or sold.
FORWARD LOOKING STATEMENTS
Certain statements in the Management's Discussion and Analysis constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the
Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, such statements are subject to
risks and uncertainties, and could cause actual results to differ materially
from those projected.
6
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the three months ended
March 31, 1998.
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATX CAPITAL CORPORATION
/s/ Michael E. Cromar
---------------------
Michael E. Cromar
Senior Vice President and
Chief Financial Officer
/s/ A. Douglas Shattuck
-----------------------
A. Douglas Shattuck
Principal Accounting Officer and
Corporate Controller
May 14, 1998
7
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF INCOME
AND THE CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 86,718
<SECURITIES> 0
<RECEIVABLES> 1,007,643 <F1>
<ALLOWANCES> 123,789
<INVENTORY> 46,753 <F2>
<CURRENT-ASSETS> 0 <F4>
<PP&E> 501,765 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 2,274,296
<CURRENT-LIABILITIES> 0 <F4>
<BONDS> 1,488,406 <F5>
<COMMON> 1,031 <F6>
0
1,027 <F6>
<OTHER-SE> 380,227 <F7>
<TOTAL-LIABILITY-AND-EQUITY> 2,274,296
<SALES> 34,374
<TOTAL-REVENUES> 157,836
<CGS> 27,274
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 61,441 <F8>
<LOSS-PROVISION> 2,250
<INTEREST-EXPENSE> 29,869
<INCOME-PRETAX> 37,002
<INCOME-TAX> 15,437
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,565
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 474,147, LEVERAGED LEASE
RECEIVABLES OF 161,082, AND SECURED LOANS OF 372,414.
<F2> CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 13,178 AND TECHNOLOGY
EQUIPMENT INVENTORY OF 33,575.
<F3> CONSISTS OF COST OF EQUIPMENT LEASED TO OTHERS UNDER OPERATING LEASES,
NET OF DEPRECIATION.
<F4> GATX CAPITAL CORPORATION HAS AN UNCLASSIFIED BALANCE SHEET.
<F5> CONSISTS OF SENIOR TERM NOTES OF 1,109,600, OBLIGATIONS UNDER
CAPITAL LEASES OF 10,239, AND NONRECOURSE OBLIGATIONS OF 368,567.
<F6> PAR VALUE ONLY.
<F7> CONSISTS OF RETAINED EARNINGS OF 227,665 , ADDITIONAL PAID-IN CAPITAL
OF 151,902, UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX
OF 5,053 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (4,393).
<F8> CONSISTS OF OPERATING LEASE EXPENSE OF 32,999, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES OF 27,716, AND OTHER EXPENSES OF 726.
</FN>
</TABLE>
