-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CTyYpA6EvmKia9utVhR1NkpwjvP5usPHWGtDSGXTN72DZ4roLn3gKph+VJpHb7mm LXdQWAeR4AQ9wStPZej5NQ== 0000357019-98-000011.txt : 19980817 0000357019-98-000011.hdr.sgml : 19980817 ACCESSION NUMBER: 0000357019-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATX CAPITAL CORP CENTRAL INDEX KEY: 0000357019 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 941661392 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08319 FILM NUMBER: 98690200 BUSINESS ADDRESS: STREET 1: FOUR EMBARCADERO CTR SUITE 2200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4159553200 FORMER COMPANY: FORMER CONFORMED NAME: GATX LEASING CORP DATE OF NAME CHANGE: 19900405 10-Q 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 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. 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 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 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 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 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 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 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 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 EX-27 2
5 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. 1000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 112,255 0 1,006,479 126,317 42,817 0 517,113 0 2,362,237 0 1,447,661 1,031 0 1,027 385,587 2,362,237 74,081 310,364 58,584 0 125,673 4,500 59,607 62,000 26,871 0 0 0 0 35,129 0 0 CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 471,572, LEVERAGED LEASE RECEIVABLES OF 142,248, AND SECURED LOANS OF 392,659. CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 13,094 AND TECHNOLOGY EQUIPMENT INVENTORY OF 29,723. CONSISTS OF COST OF EQUIPMENT LEASED TO OTHERS UNDER OPERATING LEASES, NET OF DEPRECIATION. GATX CAPITAL CORPORATION HAS AN UNCLASSIFIED BALANCE SHEET. CONSISTS OF SENIOR TERM NOTES OF 1,061,600, OBLIGATIONS UNDER CAPITAL LEASES OF 8,660, AND NONRECOURSE OBLIGATIONS OF 377,401. PAR VALUE ONLY. 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). CONSISTS OF OPERATING LEASE EXPENSE OF 66,640, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF 57,545, AND OTHER EXPENSES OF 1,488.
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