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, 1999 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 10, 1999, 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
(unaudited, in thousands)
Three Months Ended
March 31,
1999 1998
--------- ---------
(Unaudited)
REVENUES:
Lease income $ 72,744 $ 69,307
Technology equipment sales and service 36,748 34,374
Gain on sale of assets 18,132 25,040
Equity earnings from investment in
joint ventures 13,448 10,355
Interest 8,380 7,170
Fees 8,788 9,076
Other 5,804 2,514
------------ -----------
164,044 157,836
------------ -----------
EXPENSES:
Operating leases 39,548 32,999
Cost of technology equipment sales and service 31,477 27,274
Selling, general & administrative 29,771 27,716
Interest 28,526 29,869
Provision for losses on investments 2,749 2,250
Other 1,151 726
------------ -----------
133,222 120,834
------------ -----------
Income before income taxes 30,822 37,002
Provision for income taxes 12,877 15,437
------------ -----------
NET INCOME $ 17,945 $ 21,565
============ ===========
1
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
---------- ------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 69,288 $ 67,975
Investments:
Direct financing leases 523,608 537,897
Leveraged leases 138,102 133,380
Operating lease equipment-
net of depreciation 560,551 547,221
Secured loans 273,347 241,567
Investment in joint ventures 594,625 570,255
Assets held for sale or lease 33,290 26,286
Other investments 78,575 84,856
Investment in future residuals 17,370 18,706
Allowance for losses on investments (132,005) (129,278)
------------ ------------
Net investments 2,087,463 2,030,890
------------ ------------
Due from Parent 33,817 37,816
Other assets 130,832 139,001
------------- ------------
TOTAL ASSETS $ 2,321,400 $ 2,275,682
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 27,228 $ 13,634
Accounts payable and other liabilities 112,945 150,504
Debt financing:
Commercial paper and bankers' acceptances 118,300 128,329
Notes payable 31,043 25,847
Obligations under capital leases 8,730 8,781
Senior term notes 1,146,600 1,076,600
------------- -----------
Total debt financing 1,304,673 1,239,557
------------- -----------
Nonrecourse obligations 362,760 381,390
Deferred income 18,683 9,702
Deferred income taxes 89,535 83,754
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
Accumulated other comprehensive income (238) 772
Reinvested earnings 251,854 242,409
------------- -----------
Total stockholder's equity 405,576 397,141
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,321,400 $ 2,275,682
============= ===========
2
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended
March 31,
1999 1998
---------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,945 $ 21,565
Reconciliation of net income to net cash flows
provided by operating activities:
Provision for losses on investments 2,749 2,250
Depreciation and amortization expense 29,932 24,094
Provision for deferred income taxes 7,729 8,129
Gain on sale of assets (18,132) (25,040)
Joint venture income, net of cash dividends (8,100) (6,197)
Changes in assets and liabilities:
Other assets 6,512 24,837
Due from Parent 3,999 5,679
Accrued interest, accounts payable and (23,965) (37,929)
other liabilities
Deferred income 8,981 (4,893)
Other - net 9,371 (2,378)
------------ -----------
Net cash flows provided by operating activities 37,021 10,117
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (88,643) (71,009)
Loans extended to borrowers (74,638) (28,741)
Other investments (51,793) (18,588)
------------ -----------
Total investments (215,074) (118,338)
------------ -----------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 54,070 36,477
Loan principal received 13,529 10,275
Proceeds from sale of assets 71,880 100,376
Joint venture investment recovery 1,901 16,250
------------- -----------
Recovery of investments 141,380 163,378
------------- -----------
Net cash flows (used in) provided by
investing activities (73,694) 45,040
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior term notes 100,000 -
Proceeds from nonrecourse obligations 19,828 68,279
Repayment of senior term notes (30,000) (46,000)
Repayment of nonrecourse obligations (38,458) (29,532)
Net decrease in short-term borrowings (4,833) (17,011)
Dividends paid to Parent (8,500) (6,650)
Other financing activities (51) 485
------------ -----------
Net cash flows provided by (used in)
financing activities 37,986 (30,429)
------------ -----------
Net increase in cash and cash equivalents 1,313 24,728
Cash and cash equivalents at beginning of period 67,975 61,990
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,288 $ 86,718
============ ==========
3
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
Three Months Ended
March 31,
1999 1998
---------- ----------
Net income $ 17,945 $ 21,565
Foreign currency translation adjustment 443 11
Unrealized gain (loss) on securities, net of
reclassification adjustments (a) (1,453) 434
---------- ----------
Other comprehensive loss (1,010) 445
---------- ----------
COMPREHENSIVE INCOME $ 16,935 $ 22,010
========== ==========
(a) Reclassification adjustments:
Unrealized gain on securities $ 933 $ 1,134
Less - Reclassification adjustment for gains
realized included in net income (2,386) (700)
---------- ----------
Net unrealized (loss) gain on securities $ (1,453) $ 434
========== ==========
4
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements, continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. The consolidated balance sheet of GATX Capital Corporation and its
subsidiaries (the "Company") at December 31, 1998 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, 1999 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. The Company is a party to litigation relating to the
conversion of ten 747 aircraft from passenger to freighter configuration by
an affiliate of the Company. While the amounts claimed in this matter and
other matters are substantial, 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. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133"), which is required to be adopted in years beginning after June
15, 1999. The Company, which utilizes fundamental derivatives to hedge
changes in interest rates and foreign currencies, expects to adopt SFAS No.
133 effective January 1, 2000. This new accounting standard will require
that all derivatives be recorded on the balance sheet at fair value. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in the
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Management is
currently assessing the impact that the adoption of SFAS No. 133 will have
on the Company's financial position, results of operations, and cash flows.
5
<PAGE>
PART I. FINANCIAL INFORMATION, continued
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Overview
- ---------
The Company engages in two main activities: 1) asset-based investment and
finance, and 2) value-added reselling of technology equipment and services.
Revenue from asset-based investment and finance activities is generated from
financing equipment (either for the Company's own account or through
partnerships and joint ventures), from the remarketing of assets, from managing
the equipment - related investment portfolios of others, and from brokering or
arranging asset financing transactions.
Net income earned during the three months ended March 31, 1999, was $17.9
million, down $3.6 million from the same period last year.
Revenues
- --------
Investment income, which includes lease income, equity earnings from investments
in joint ventures, interest and other income, increased $11.0 million during the
three-month period ended March 31, 1999, compared to the same period in 1998.
Revenue generated from higher investment balances during 1999 was the primary
reason for this increase. Investments at March 31, 1999, were approximately
$73.3 million higher than the same period last year.
In addition, other income of $5.8 million for the first quarter 1999 was $3.3
million greater than during the same period in 1998. This is primarily
attributable to sales of stock which were derived from warrants received during
the financing of non-public, start-up companies.
Asset remarketing income includes gains on the sale of the Company's investment
assets, fees generated from providing remarketing services for third parties,
and from the sale of non-owned assets in which the Company has a residual share.
Fee income from asset remarketing services is generally performance-based.
Although not necessarily consistent from year to year, asset remarketing income
is a core component of the Company's business and has historically been a
significant contributor to income. Asset remarketing income totaled $23.3
million for the first quarter of 1999 compared to $30.9 million for the same
period in 1998. Gains on sales of Company investment assets were $18.1 million
and $25.0 million for first quarter 1999 and 1998, respectively. Residual
sharing fees were $5.2 million and $5.9 million for the first quarter 1999 and
1998, respectively.
Technology equipment sales and service revenue was $2.4 million higher during
the quarter than during the first quarter of 1998, while cost of sales and
services was $4.2 million higher. Gross margin for the first quarter of 1999 was
$5.3 million, or $1.8 million lower than the first quarter of 1998 primarily due
to market conditions for legacy network protocol equipment.
Expenses
- --------
Operating lease expense includes depreciation of operating lease equipment and
rent expense on off-balance sheet financing. Operating lease expense was $39.5
million during the first quarter of 1999 compared to $33.0 million during the
same period last year. The increase in operating lease expense is due to higher
depreciation expense resulting from; (1) increased operating lease investments,
and (2) shorter average depreciable lives due to changes in investment mix.
Lower interest rates and lower average debt balances resulted in a decrease in
interest expense for first quarter 1999 compared to 1998.
Selling, general and administrative expenses were higher in the first quarter of
1999 than during the first quarter of 1998 due to higher human resources and
other administrative expenses associated with increased investment and asset
management business activity.
6
<PAGE>
CASH FLOW, 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, 1999, the
Company used cash generated from operations to repay $30.0 million of senior
term notes. Cash generated from the recovery of investments and proceeds from
the issuance of senior term notes were used to fund $215.1 million of new
investments.
At March 31, 1999, the Company had borrowing capacity consisting of $62.0
million remaining under its Series E shelf registration, $191.7 million of
unused capacity under its commercial paper and bankers' acceptances credit
agreements, and $45.9 million remaining under stand-alone bank facilities
maintained by two of the Company's subsidiaries.
During 1999, primarily as a result of issuing senior term notes, total debt
financing increased. This increase, partially offset by an increase in equity,
caused the Company's debt to equity ratio to increase to 3.2:1 at March 31, 1999
from 3.1:1 at December 31, 1998. At March 31, 1999, the Company could borrow an
additional $703.4 million and still meet the 4.5:1 leverage ratio defined in its
bank credit agreements.
The Company maintains the proceeds from the sale of certain assets in a trust
with a qualified intermediary pending the identification and acquisition of
qualified replacement assets in order to affect a like-kind exchange for federal
income tax purposes. The amounts in trust are classified as cash and cash
equivalents in the accompanying balance sheet. The amount in trust at March 31,
1999 and December 31, 1998 was $29.2 million.
The Company's capital structure includes both fixed and floating rate debt. The
Company ensures a stable margin over its cost of funds by managing the
relationship of its fixed and floating rate investments to its fixed and
floating rate borrowings.
At March 31, 1999, the Company had approved unfunded transactions totaling
approximately $419.0 million, including approximately $157.5 million expected to
fund during the remainder of 1999. Once approved for funding, a transaction may
not be completed for various reasons, or the investment may be shared with
partners or sold.
YEAR 2000 DISCLOSURE
The Company continues to address what is commonly referred to as the Year 2000
problem. The Company has completed the assessment phase of reviewing its
critical information systems for Year 2000 compliance. The Company's
enterprise-wide information system has been certified Year 2000 compliant by the
manufacturer and the Company has performed testing on the system. Other less
critical information systems have been reviewed and corrective action is being
taken as necessary. These projects should be completed by mid-year 1999.
The Company also is reviewing its operating assets to determine any significant
exposure to time-sensitive controls which may be embedded in the equipment.
These exposures are being assessed on an ongoing basis.
The Company is inquiring of customers to ensure that their systems are or will
be Year 2000 compliant. Where considered appropriate, the Company is working
directly with third parties to test or remediate affected systems. The Company
also interacts electronically with certain external entities but has no means of
ensuring that they will be Year 2000 ready. Additionally, the Company has been
inquiring of key vendors in an effort to establish the ability of the provider
to deliver products or services on a timely basis in the year 2000. Today, the
Company is not aware of any third party with a Year 2000 issue that would
materially impact the Company's results of operations.
7
<PAGE>
The Company believes it has an effective program in place to resolve the Year
2000 issue in a timely manner and to minimize the Company's exposure. If these
steps were not taken, or are not completed in a timely manner, the Year 2000
issue could have a significant impact on the operations of the Company. The
project is estimated to be completed during 1999, which is prior to any
anticipated impact on its operating systems. Based on the progress and results
of the Year 2000 project thus far, the Company believes that the Year 2000 issue
should not pose significant operational problems. However, in the event that the
Company's efforts have not addressed all potential systems problems, a
contingency plan is being developed to enable business operations to continue.
This contingency plan involves reducing the scope and duration of any
disruptions by having sufficient personnel and other resources in place to
permit a timely response. The total Year 2000 project cost is estimated to be
immaterial to the Company's results of operations.
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.
8
<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, 1999.
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/ Jack F. Jenkins-Stark
-------------------------
Jack F. Jenkins-Stark
Senior Vice President and
Chief Financial Officer
/s/ Delphine M. Regalia
-----------------------
Delphine M. Regalia
Principal Accounting Officer and
Controller
May 12, 1999
9
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 69,288
<SECURITIES> 0
<RECEIVABLES> 935,057 <F1>
<ALLOWANCES> 132,005
<INVENTORY> 51,477 <F2>
<CURRENT-ASSETS> 0 <F4>
<PP&E> 560,551 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 2,321,400
<CURRENT-LIABILITIES> 0 <F4>
<BONDS> 1,518,090 <F5>
<COMMON> 1,031 <F6>
0
1,027 <F6>
<OTHER-SE> 403,518 <F7>
<TOTAL-LIABILITY-AND-EQUITY> 2,321,400
<SALES> 36,748
<TOTAL-REVENUES> 164,044
<CGS> 31,477
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70,470 <F8>
<LOSS-PROVISION> 2,749
<INTEREST-EXPENSE> 28,526
<INCOME-PRETAX> 30,822
<INCOME-TAX> 12,877
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,945
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 523,608, LEVERAGED LEASE
RECEIVABLES OF 138,102, AND SECURED LOANS OF 273,347.
<F2> CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 33,290 AND TECHNOLOGY
EQUIPMENT INVENTORY OF 18,187.
<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 1,146,600, OBLIGATIONS UNDER
CAPITAL LEASES OF 8,730, AND NONRECOURSE OBLIGATIONS OF 362,760.
<F6> PAR VALUE ONLY.
<F7> CONSISTS OF RETAINED EARNINGS OF 251,854 , ADDITIONAL PAID-IN CAPITAL
OF 151,902, UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX
OF 5,170 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (5,408).
<F8> CONSISTS OF OPERATING LEASE EXPENSE OF 39,548, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES OF 29,771, AND OTHER EXPENSES OF 1,151.
</FN>
</TABLE>
