<PAGE> 1
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
September 30, 2000 1-8319
[GATX CAPITAL LOGO]
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 November 10, 2000, 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Lease income $112,813 $ 83,332 $326,338 $ 231,258
Equity earnings from investment
in joint ventures 15,954 18,299 60,157 45,740
Interest 17,825 13,121 42,245 30,271
Gain on sale of assets 19,410 9,498 37,823 50,196
Gain on sale of securities 11,783 6,348 34,404 14,549
Fees 7,027 8,942 16,832 22,828
Other 2,248 1,604 6,964 4,961
-------- -------- -------- ---------
187,060 141,144 524,763 399,803
-------- -------- -------- ---------
EXPENSES:
Operating leases 64,205 48,302 187,894 128,537
Interest 45,643 28,273 125,292 83,502
Selling, general & administrative 33,479 28,043 90,509 77,928
Provision for losses on investments 4,568 2,752 8,568 8,251
Other 1,110 1,217 3,638 3,579
-------- -------- -------- ---------
149,005 108,587 415,901 301,797
-------- -------- -------- ---------
Income from continuing operations
before income taxes 38,055 32,557 108,862 98,006
Provision for income taxes 15,052 13,186 43,021 39,448
-------- -------- -------- ---------
INCOME FROM CONTINUING OPERATIONS 23,003 19,371 65,841 58,558
DISCONTINUED OPERATIONS:
Loss from discontinued operations,
net of income taxes -- -- -- (4,642)
Gain from sale of discontinued operations,
net of income tax benefits of $1,853 -- -- -- 2,137
-------- -------- -------- ---------
NET INCOME $ 23,003 $ 19,371 $ 65,841 $ 56,053
======== ======== ======== =========
</TABLE>
1
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GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 149,525 $ 45,817
Investments:
Direct financing leases 528,317 477,739
Leveraged leases 205,190 170,066
Operating lease equipment-net of depreciation 1,106,294 960,123
Secured loans 565,736 358,001
Investment in joint ventures 805,795 667,648
Assets held for sale or lease 51,614 36,993
Other investments 152,923 197,096
Investment in future residuals 5,324 14,538
Allowance for losses on investments (107,358) (109,771)
----------- -----------
Net investments 3,313,835 2,772,433
----------- -----------
Due from Parent 40,768 46,705
Other assets 114,771 76,736
----------- -----------
TOTAL ASSETS $ 3,618,899 $ 2,941,691
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 42,815 $ 17,366
Accounts payable and other liabilities 129,337 147,797
Debt financing:
Commercial paper and bankers' acceptances 6,719 128,927
Notes payable 57,522 5,454
Obligations under capital leases 7,108 7,253
Senior term notes 2,159,000 1,625,000
----------- -----------
Total debt financing 2,230,349 1,766,634
----------- -----------
Nonrecourse obligations 445,787 397,849
Deferred income 19,884 10,714
Deferred income taxes 200,654 143,560
Stockholder's equity:
Convertible preferred stock, par value $1,
and additional paid-in capital 125,000 125,000
Common stock, par value $1, and
additional paid-in capital 63,960 28,960
Accumulated other comprehensive income 47,748 27,661
Retained earnings 313,365 276,150
----------- -----------
Total stockholder's equity 550,073 457,771
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,618,899 $ 2,941,691
=========== ===========
</TABLE>
2
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GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,841 $ 56,053
Reconciliation of net income to net cash flows
provided by operating activities:
Provision for losses on investments 8,568 8,251
Depreciation expense 158,077 98,549
Provision for deferred income taxes 50,207 32,634
Gain on sale of assets (37,823) (50,196)
Gain on sale of discontinued operations -- (2,137)
Equity earnings from investment in joint venture (34,712) (24,465)
Changes in assets and liabilities:
Other assets (34,119) 16,995
Due from Parent 5,937 (4,227)
Accrued interest, accounts payable and other liabilities 5,272 (12,007)
Deferred income 9,170 5,749
Other - net (15,733) (2,294)
----------- ---------
Net cash flows provided by operating activities 180,685 122,905
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (412,602) (434,167)
Loans extended to borrowers (338,466) (204,653)
Other investments (273,020) (140,123)
----------- ---------
Total investments (1,024,088) (778,943)
----------- ---------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 108,905 125,476
Loan principal received 124,806 68,209
Proceeds from sale of assets 106,239 174,546
Joint venture investment recovery 52,336 32,315
----------- ---------
Recovery of investments 392,286 400,546
----------- ---------
Net cash flows used in investing activities (631,802) (378,397)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior term notes 600,000 162,000
Proceeds from nonrecourse obligations 650,811 91,857
Proceeds from capital lease obligation 1,910 --
Proceeds from additional paid-in capital 35,000 --
Net (decrease) increase in short-term borrowings (70,140) 215,179
Repayment of senior term notes (66,000) (88,600)
Repayment of capital lease obligations (2,055) (1,752)
Repayment of nonrecourse obligations (566,075) (134,720)
Dividends paid to stockholder (28,626) (25,427)
----------- ---------
Net cash flows provided by financing activities 554,825 218,537
----------- ---------
Net increase (decrease) in cash and cash equivalents 103,708 (36,955)
Cash and cash equivalents at beginning of period 45,817 67,975
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 149,525 $ 31,020
=========== =========
</TABLE>
3
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GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 23,003 $ 19,371 $ 65,841 $ 56,053
Other comprehensive gain (loss), net of tax:
Foreign currency translation adjustment (2,317) 371 (2,080) (110)
Unrealized gain (loss) on securities, net of
reclassification adjustments (a) 12,813 (4,738) 22,167 5,834
-------- -------- -------- --------
Other comprehensive gain (loss) 10,496 (4,367) 20,087 5,724
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 33,499 $ 15,004 $ 85,928 $ 61,777
======== ======== ======== ========
(a) Reclassification adjustments:
Unrealized gain (loss) on securities $ 19,974 $ (881) $ 43,076 $ 14,676
Less - Reclassification adjustment for gains
realized included in net income (7,161) (3,857) (20,909) (8,842)
-------- -------- -------- --------
Net unrealized gain (loss) on securities $ 12,813 $ (4,738) $ 22,167 $ 5,834
======== ======== ======== ========
</TABLE>
4
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GATX CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of GATX
Capital Corporation and its subsidiaries (the "Company"), which is an
active investor in a wide variety of asset-based financing. The
Company's consolidated balance sheet at December 31, 1999 was derived
from the audited financial statements at that date.
The unaudited interim consolidated financial statements and related
unaudited financial information in the footnotes have been prepared in
accordance with accounting principles generally accepted in the United
States and the rules and regulations of the Securities and Exchange
Commission (the "SEC") for interim financial statements. Such interim
financial statements reflect all adjustments consisting of normal
recurring adjustments which, in the opinion of management, are necessary
to present fairly the consolidated financial position of the Company and
the results of its operations and its cash flows for the interim
periods. These consolidated financial statements should be read in
conjunction with the Company's financial statements and the notes
thereto contained in the Annual Report on Form 10-K for the year ended
December 31, 1999. The nature of the Company's business is such that the
results of any interim period may not be indicative of the results to be
expected for the entire year.
All significant intercompany transactions and balances have been
eliminated. Certain reclassifications have been made to prior year
financial statements to conform to the current presentation.
2. CONTINGENCIES
The Company has previously reported on its Form 10-K the litigation
involving conversion of certain aircraft from passenger to freighter
configuration. Refer to Part II, Item 1, "Legal Proceedings," for a
complete discussion of this issue.
3. DERIVATIVES AND THE IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging instruments. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in fair value of the derivative will either be offset
against the change in 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. The Company believes that the adoption of SFAS
No. 133, as amended, will have a material impact on the accounting for
stock warrants.
In connection with its financing activities, the Company frequently
obtains stocks and warrants from non-public, venture capital-backed
companies. Under current accounting guidance, these items are generally
accounted for as available-for-sale securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," with changes in fair value recorded as unrealized gain or
loss in other comprehensive income in the equity section of the balance
sheet. Upon adoption of SFAS No. 133, as
5
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amended, the Company's warrants must be accounted for as derivatives,
with prospective changes in fair value recorded in current earnings.
As of September 30, 2000, a total of $57.1 million of unrealized gains,
net of tax, were recorded in other comprehensive income, consisting of
$32.1 million, net of tax, from warrants and $25.0 million, net of tax,
from stock held in the available-for-sale securities portfolio.
Apart from warrants, the Company uses interest rate and currency swap
agreements, and forward sale agreements, as hedges that manage the
Company's exposure to interest rate, market rate, and currency exchange
rate risk on existing and anticipated transactions. To qualify for hedge
accounting under current accounting guidance, the derivative instrument
must be identified with and reduce the risk arising from a specific
transaction. Interest income or expense on interest rate swaps is
accrued and recorded as an adjustment to the interest income or expense
related to the hedged item. Realized and unrealized gains on currency
swaps are deferred and included in the measurement of the hedged
investment over the term of the contract. Fair value changes arising
from forward sale agreements are deferred in the investment section of
the balance sheet and recognized in other comprehensive income in
stockholder's equity in conjunction with the designated hedged item. The
application of SFAS No. 133, as amended, to derivative instruments,
other than warrants, is not expected to have a material impact on the
Company's consolidated financial statements.
4. STAFF ACCOUNTING BULLETIN NO. 101 ON REVENUE RECOGNITION
The SEC issued Staff Accounting Bulletin No. 101, effective beginning in
the fourth quarter of 2000, to provide their views in applying generally
accepted accounting principles to selected revenue recognition issues.
Inasmuch as the Company's transactions are generally within the scope of
specific authoritative accounting literature that provides revenue
recognition guidance, such as SFAS No. 13, "Accounting for Leases", the
Company does not believe SAB No. 101 will have a material impact on the
consolidated financial statements.
6
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PART I. FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company is a diversified international financial services company. Revenues
arise from providing asset-based financing for transportation, industrial and
information technology equipment, financing venture-backed and high-technology
companies, managing assets for outside parties, and providing transaction
structuring, residual guarantees and asset remarketing services.
Net income earned during the three months ended September 30, 2000, was $23.0
million, up $3.6 million from the same period last year. Net income earned
during the nine months ended September 30, 2000, was $65.8 million, up $9.8
million from the same period last year.
The Company sold its technology equipment sales and service business segment in
June 1999; accordingly, the Company reclassified all of the segment's revenue
and expenses to income from discontinued operations for the three and nine-month
periods ended September 30, 1999.
Revenues
Investment income, which includes lease income, equity earnings from investments
in joint ventures, and interest, increased $31.8 million and $121.5 million
during the three and nine-month periods ended September 30, 2000, respectively,
compared to the same periods in 1999. This increase in revenue is consistent
with the increase in average investment balances of approximately $930 million
and $793 million during the corresponding three and nine-month periods in 2000
compared to 1999.
Gain on sale of assets, which arise from the sale of the Company's investments
other than marketable securities, were $19.4 million and $9.5 million for the
third quarter of 2000 and 1999, respectively, and $37.8 million and $50.2
million for the nine months ended September 30, 2000 and 1999, respectively.
Gain on sale of securities increased $5.4 million and $19.9 million during the
three and nine-month periods ended September 30, 2000, respectively, compared to
the corresponding periods in 1999. The Company generally obtains its stocks upon
exercise of warrants received in connection with financing non-public, venture
capital-backed companies. Prior to sale, these stocks and warrants are recorded
in other investments on the balance sheet.
Fees include income from providing remarketing services to third parties,
proceeds from the sale of non-owned assets in which the Company has a residual
share, and income from providing lease-related services and management. Fees
were $7.0 million and $8.9 million for the third quarter of 2000 and 1999,
respectively, and $16.8 million and $22.8 million for the nine months ended
September 30, 2000 and 1999, respectively.
7
<PAGE> 9
Expenses
Operating lease expense includes depreciation of operating lease equipment and
rent expense on off-balance sheet financing. Operating lease expense was $64.2
million and $187.9 million for the three and nine-month periods ended September
30, 2000, compared to $48.3 million and $128.5 million for the same periods in
1999. This increase is consistent with approximately $427 million and $376
million increases in average operating lease balances in the third quarter and
first nine months of 2000, respectively, compared to the same periods last year.
Interest expense increased $17.4 million and $41.8 million during the three and
nine-month periods ended September 30, 2000, respectively, compared to the same
periods last year, corresponding to $841 million and $687 million increases in
related average debt balances, incurred to fund increasing new investments.
Selling, general and administrative expenses were $5.4 million and $12.6 million
higher during the three and nine-month periods ended September 30, 2000,
respectively, compared to the same periods last year. This was due to higher
human resources and other administrative expenses associated with an overall
increase in business activity.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations and investment portfolios, 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 nine months ended September 30, 2000, the
Company used cash generated from operations, recovery of investments, and
proceeds from the issuance of senior term notes and nonrecourse obligations to
fund $1,024.1 million of new investments and to repay $70.1 million of
short-term borrowings.
At September 30, 2000, $600 million of debt securities have been issued from a
$1,015 million Series G shelf registration. $300 million of unused capacity
remains under the Company's commercial paper and bankers' acceptances credit
agreements, and $20 million remains under a stand-alone bank facility maintained
by one of the Company's subsidiaries.
The Company's recourse debt to equity ratio increased to 4.1:1 at September 30,
2000 from 3.9:1 at December 31, 1999, due to a $464 million increase in recourse
borrowings primarily offset by a $35 million capital injection from GATX
Corporation ("Parent") in June 2000, $37 million year-to-date earnings net of
dividends, and a $22 million increase in unrealized gains from securities
available-for-sale. At September 30, 2000, the Company could borrow an
additional $894 million and still meet the 4.5:1 leverage ratio defined in its
bank credit agreements.
The Company's capital structure includes both fixed and floating rate debt. The
Company strives for 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 September 30, 2000, the Company had approved unfunded transactions totaling
approximately $1.8 billion, approximately $269 million of which is expected to
fund during the remainder of 2000. Once approved for funding, a transaction may
not be completed for various reasons, or the investment may be shared with
partners or sold.
8
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FORWARD-LOOKING INFORMATION
This quarterly report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements include
statements regarding intent, belief or current expectations of the Company and
its management. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," anticipate,"
"believe," "estimate," "predict," "potential," or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Shareholders and
prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company is a party to actions arising from the
issuance by the Federal Aviation Administration (the "FAA") in January 1996 of
Airworthiness Directive 96-01-03 (the "AD"). The AD had the effect of
significantly reducing the amount of freight that ten 747 aircraft may carry.
These aircraft (the "Affected Aircraft") were modified from passenger to
freighter configuration by GATX/Airlog Company ("Airlog"), a California general
partnership. A subsidiary of the Company, GATX Aircraft Corporation is a partner
in Airlog. The modifications were carried out between 1988 and 1994 by
subcontractors of Airlog under authority of Supplemental Type Certificates
("STC's") issued by the FAA in 1987 pursuant to a design approved by the FAA. In
the AD, the FAA stated that the STC's were issued "in error".
On August 11, 2000, the United States District Court for the Northern District
of California granted Elsinore Aerospace Services LP's ("Elsinore") motion for
summary judgment against the Company on its claim for indemnification and
defense under its contract with Airlog. Under this contract, Elsinore was to
develop engineering, design and analysis necessary to develop Airlog's existing
747-100 STC's into STC's for converting 747-200 aircraft from passenger to
freighter configuration.
One Affected Aircraft was converted for American International Airlines ("AIA")
under the STC's which were obtained pursuant to the Elsinore contract. AIA sued
Elsinore, Airlog and the Company, among others, as a result of the issuance of
the AD.
The Company believes the Court's ruling is in error both as a matter of law and
application of the facts of this claim. Therefore, the Company intends to pursue
and appeal.
While the amounts claimed in this matter are substantial and the liability with
respect to such claims cannot be determined at this time, management believes
that damages, if any, required to be paid by the Company in the discharge of
such liability could be material to the results of operation for a given quarter
or year, but are not likely to be material to the Company's consolidated
financial position.
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 and nine
months ended September 30, 2000.
9
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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/ Curt F. Glenn
-----------------------------------------
Curt F. Glenn
Senior Vice President and Chief Financial
Officer
/s/ Delphine M. Regalia
-----------------------------------------
Delphine M. Regalia
Principal Accounting Officer and
Controller
November 10, 2000
10
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
27. Financial Data Schedule
</TABLE>
