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
June 30, 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 August 11, 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- ---------
(Unaudited) (Unaudited)
REVENUES:
Investment and asset management $ 112,821 $ 94,508 $236,283 $205,643
Technology equipment sales and service 39,707 54,551 74,081 93,803
-------- ------- -------- ---------
152,528 149,059 310,364 299,446
-------- ------- -------- ---------
EXPENSES:
Interest 29,738 22,444 59,607 44,485
Operating leases 33,641 28,522 66,640 55,967
Cost of technology equipment
sales & service 31,310 44,571 58,584 76,534
Selling, general & administrative 29,829 26,532 57,545 52,680
Provision for losses on investments 2,250 3,775 4,500 6,025
Other 762 1,307 1,488 3,294
-------- -------- -------- ---------
127,530 127,151 248,364 238,985
-------- -------- -------- ---------
Income before income taxes 24,998 21,908 62,000 60,461
Provision for income taxes 11,434 8,873 26,871 24,487
-------- -------- -------- ---------
NET INCOME 13,564 13,035 35,129 35,974
Reinvested earnings at
beginning of period 227,665 202,712 212,750 185,686
Dividends paid to stockholder (6,650) (6,196) (13,300) (12,109)
-------- -------- -------- ---------
REINVESTED EARNINGS AT END OF PERIOD $ 234,579 $ 209,551 $ 234,579 $ 209,551
========= ========= ========== =========
1
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 112,255 $ 61,990
Investments:
Direct financing leases 471,572 666,524
Leveraged leases 142,248 170,555
Operating lease equipment-
net of depreciation 517,113 524,523
Secured loans 392,659 180,331
Investment in joint ventures 587,370 549,596
Assets held for sale or lease 13,094 15,398
Other investments 62,736 52,690
Investment in future residuals 19,565 19,693
Allowance for losses on investments (126,317) (121,576)
----------- ------------
Total investments 2,080,040 2,057,734
----------- ------------
Due from GATX Corporation 29,535 35,904
Other assets 140,407 161,515
----------- -----------
TOTAL ASSETS $ 2,362,237 $ 2,317,143
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 14,015 $ 16,070
Accounts payable and other liabilities 126,016 167,825
Debt financing:
Commercial paper and bankers' acceptances 205,800 127,832
Notes Payable 103,740 74,161
Obligations under capital leases 8,660 9,754
Senior term notes 1,061,600 1,155,600
------------ ----------
Total debt financing 1,379,800 1,367,347
------------ ----------
Nonrecourse obligations 377,401 329,820
Deferred income 9,593 13,556
Deferred income taxes 67,767 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
and additional paid-in capital 28,960 28,960
Reinvested earnings 234,579 212,750
Accumulated other comprehensive income:
Foreign currency translation adjustment (4,938) (4,404)
Unrealized gain on available-for-sale securities 4,044 4,619
------------- ----------
Total accumulated other comprehensive income (894) 215
------------- ----------
Total stockholder's equity 387,645 366,925
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,362,237 $ 2,317,143
============= ===========
2
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
1998 1997
---------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,129 $ 35,974
Reconciliation to net cash provided by operating activities:
Provision for losses on investments 4,500 6,025
Depreciation expense 47,322 36,382
Provision for deferred income taxes 14,258 2,402
Gain on sale of assets (26,671) (40,908)
Changes in assets and liabilities:
Other Assets 19,747 (18,017)
Due from GATX Corporation 6,369 22,466
Accrued interest, accounts payable
and other liabilities (43,864) (5,124)
Deferred income (3,963) 149
Other - net (18,306) 323
---------- --------
Net cash flows provided by operating activities 34,521 39,672
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (135,978) (156,225)
Loans extended to borrowers (105,978) (14,864)
Other investments (66,948) (94,835)
---------- ---------
Total investments (308,904) (265,924)
---------- ---------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 88,471 60,143
Loan principal received 69,746 34,472
Proceeds from sale of assets 111,053 129,075
Joint venture investment recovery, net of earned income 8,644 18,479
----------- ---------
Recovery of investments 277,914 242,169
----------- ---------
Net cash flows used in investing activities (30,990) (23,755)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 107,547 97,619
Proceeds from nonrecourse obligations 109,843 83,725
Repayment of long-term debt (94,000) (130,000)
Repayment of nonrecourse obligations (62,262) (52,869)
Dividends paid to stockholder (13,300) (12,109)
Other financing activities (1,094) (2,248)
----------- ---------
Net cash flows provided by (used in) financing activities 46,734 (15,882)
----------- ---------
Net increase in cash and cash equivalents 50,265 35
Cash and cash equivalents at beginning of period 61,990 18,482
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 112,255 $ 18,517
========== ==========
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements, continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
six-month period ended June 30, 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 six months ended June 30, 1998 and June 30, 1997, respectively,
total comprehensive income amounted to $34.0 million and $33.7 million.
5. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Company
has not yet determined what effect the adoption of SFAS No. 133 will have
on its financial position and results of operations.
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 June 30, 1998 was $13.6 million
compared to $13.0 million in the second quarter of 1997 and $35.1 million during
the six months then ended compared to $36.0 million during the same period in
1997. Income from investments was greater during 1998 as a result of larger
investment balances during the first half of 1998 compared to the first half of
1997. This increase in investment income was partially offset by a decrease in
income from the Company's technology equipment sales and service activities.
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 technology equipment
sales and service revenue. Revenue earned from financing related to technology
solutions is included in the investment and asset management revenue line.
Revenues
- --------
Investment and asset management revenue increased $18.3 million and $30.6
million during the three and six-month periods ended June 30, 1998,
respectively, compared to the same periods in 1997. Revenue generated from
higher average investment balances during 1998 was the most significant
contributor to these increases. Total average investments were approximately
$405.6 million (23%) greater during the six months ended June 30, 1998 than
during the same period in 1997.
Asset remarketing income includes gains on sales of Company owned assets and fee
income (including residual shares) generated from providing remarketing services
to third parties, including the equipment related investment portfolios managed
by the Company. Asset remarketing income was a significant contributor to income
in both the first half of 1998 ($49.1 million) and the first half of 1997 ($52.4
million). Although it has historically been a significant contributor to income,
income from asset remarketing opportunities, which are realized at lease end or
in response to specific market conditions, can fluctuate significantly depending
on market conditions.
The increase in revenue from investments was partially offset by a decrease in
technology equipment sales and service revenue. Technology equipment sales and
service revenue was $14.8 million lower during the quarter than during the
second quarter of 1997 and $19.7 million lower during the first half of 1998
than during the first half of 1997. 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. During 1998 the Company's
technology equipment sales and service activities have been adversely 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 largely offset by a corresponding decrease in cost of sales and the
Company is managing to improve gross margins. Consistent with its strategy,
beginning with the second quarter of 1998 the Company broadened its product line
by becoming a value added reseller for the products of Cisco Systems, Inc., the
world's leading supplier of internet related communications technology
equipment.
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.
Selling, general and administrative expenses were higher during 1998 due
primarily to higher human resource and other administrative expenses associated
with 1) increased investment and asset management business activity and 2) costs
incurred to support a technology equipment sales and service infrastructure that
was larger during 1998 than during 1997. During the second quarter the Company
began to more closely align the size and nature of the technology equipment
sales and service infrastructure with current market conditions by reducing
costs, a process which will be completed during the remainder of 1998.
The allowance for losses increased during the second quarter as there were no
significant recoveries or write-downs during the period. At June 30, 1998, the
allowance for losses is 6.1% of investments, including off-balance sheet assets
and after deducting 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.
At June 30, 1998 the Company had borrowing capacity consisting of $182.0 million
remaining under its Series E shelf registration and $64.2 million of unused
capacity under its commercial paper and bankers' acceptances credit agreements.
Two of the Company's subsidiaries also maintain various stand-alone bank
facilities.
During the first quarter of 1998 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 effect like-kind exchanges for federal income tax purposes. At June 30,
1998 approximately $58.6 million is held in trust and is classified as cash and
cash equivalents in the accompanying balance sheet.
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 June 30, 1998, the Company had approved unfunded transactions totaling
approximately $320.0 million, including approximately $160.5 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 1. Legal Proceedings
The Company has previously reported various lawsuits filed by and against it and
GATX/Airlog Company ("Airlog"), a general partnership of which a Company
subsidiary is a partner, concerning the conversion by Airlog of ten 747 aircraft
from passenger to freighter configuration (the "Affected Aircraft"). The
litigation arises from the January 1996 issuance by the Federal Aviation
Administration (the "FAA") of Airworthiness Directive 96-01-03 (the
"Airworthiness Directive") which had the effect of significantly reducing the
amount of freight the Affected Aircraft were permitted to carry. As a result of
this reduction, the Affected Aircraft became uneconomic to operate.
On June 15, 1998, General Electric Capital and PALC II, Inc. (collectively
"GECC") filed a complaint in the United States District Court for the Northern
District of California (C98-2387) against Airlog, the Company, and others with
respect to three of the ten Affected Aircraft. These aircraft were modified by
subcontractors of Airlog in 1991 and 1992 with GECC's knowledge and consent. In
the action GECC asserts that the defendants are liable to it under a number of
legal theories in connection with the application of the Airworthiness Directive
to the three aircraft owned by GECC. The complaint seeks unspecified damages (to
be trebled under one count of the complaint), loss of rental income, cost of
repair and loss of value of the aircraft, repair of the aircraft, punitive
damages and costs of suit (including attorneys' fees).
On July 24, 1998 Airlog filed an action in United States District Court for the
Western District of Washington against the United States of America (C98-1029).
This action is to recover losses suffered by Airlog as a result of the alleged
negligence of the FAA in the development and approval of the design to convert
the Affected Aircraft from passenger to freighter configuration. The complaint
seeks damages in excess of $8.3 million representing the expenses incurred by
Airlog in responding to the Airworthiness Directive and legal fees and costs
incurred by Airlog in defending the litigation described above.
Consistent with its ongoing product support, Airlog has developed a partial
weight restoration solution that allows operators to utilize the Affected
Aircraft subject only to limited constraints proscribed by the FAA. Airlog
continues to pursue, with the apparent cooperation of each of the four operators
of the Affected Aircraft, including Evergreen, Tower, GECC and AIA, solutions to
the FAA's remaining concerns raised in the Airworthiness Directive. While the
results of any litigation are impossible to predict with certainty, the Company
believes that each of the foregoing claims is without merit, and that the
Company and Airlog have adequate defenses thereto.
7
<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 six months ended
June 30, 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
Chief Accounting Officer
August 14, 1998
8
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 112,255
<SECURITIES> 0
<RECEIVABLES> 1,006,479 <F1>
<ALLOWANCES> 126,317
<INVENTORY> 42,817 <F2>
<CURRENT-ASSETS> 0 <F4>
<PP&E> 517,113 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 2,362,237
<CURRENT-LIABILITIES> 0 <F4>
<BONDS> 1,447,661 <F5>
<COMMON> 1,031 <F6>
0
1,027 <F6>
<OTHER-SE> 385,587 <F7>
<TOTAL-LIABILITY-AND-EQUITY> 2,362,237
<SALES> 74,081
<TOTAL-REVENUES> 310,364
<CGS> 58,584
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 125,673 <F8>
<LOSS-PROVISION> 4,500
<INTEREST-EXPENSE> 59,607
<INCOME-PRETAX> 62,000
<INCOME-TAX> 26,871
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,129
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 471,572, LEVERAGED LEASE
RECEIVABLES OF 142,248, AND SECURED LOANS OF 392,659.
<F2> CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 13,094 AND TECHNOLOGY
EQUIPMENT INVENTORY OF 29,723.
<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 1,061,600, OBLIGATIONS UNDER
CAPITAL LEASES OF 8,660, AND NONRECOURSE OBLIGATIONS OF 377,401.
<F6> PAR VALUE ONLY.
<F7> CONSISTS OF RETAINED EARNINGS OF 234,579, ADDITIONAL PAID-IN CAPITAL
OF 151,902, UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX
OF 4,044 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (4,938).
<F8> CONSISTS OF OPERATING LEASE EXPENSE OF 66,640, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES OF 57,545, AND OTHER EXPENSES OF 1,488.
</FN>
</TABLE>
