-----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, O78AR1vJ1YkBMkCxckuG+sKjuDfQQthE4l+xc4OJbiXnmPtozol5oc0JVBoX/GaG hLcWjvgvpn4D7ceKBwBK4w== 0000357019-97-000012.txt : 19970329 0000357019-97-000012.hdr.sgml : 19970329 ACCESSION NUMBER: 0000357019-97-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08319 FILM NUMBER: 97567375 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Year Ended Commission File Number December 31, 1996 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 March 17, 1997, Registrant has outstanding 1,031,250 shares of $1 par value Common Stock. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K Annual Report to Stockholders for Part II Items 6, 7, & 8 Fiscal Year Ended December 31, 1996 (the "Annual Report") Registration Statement on Form S-1 Part IV Item 14(a)3 filed with the Commission on December 23, 1981 (file No. 2-75467) Amendment No. 1 to Form S-1 filed Part IV Item 14(a)3 with the Commission on February 23, 1982 Amendment No. 2 to Form S-1 filed Part IV Item 14(a)3 with the Commission on March 2, 1982 Form 10-K for the Year Ended Part IV Item 14(a)3 December 31, 1982 filed with the Commission on March 28, 1983 Form 10-K for the Year Ended Part IV Item 14(a)3 December 31, 1990 filed with the Commission on March 30, 1991 Form 10-K for the Year Ended Part IV Item 14(a)3 December 31, 1992 filed with the Commission on March 31, 1993 Form 10-K for the Year Ended Part IV Item 14(a)3 December 31, 1994 filed with the Commission on March 27, 1995 Form 10-K for the Year Ended Part IV Item 14(a)3 December 31, 1995 filed with the Commission on March 28, 1996 PART I Item 1. Business - ----------------- GATX Capital Corporation and its subsidiaries ("GATX Capital" or the "Company") actively invest in a wide variety of assets. These investments are made through a variety of financing instruments, primarily leases and loans, either for the Company's own account or through partnerships and joint ventures. GATX Capital actively manages its existing portfolio of investments as well as those of institutional investors, and manages several joint ventures and partnerships in which it participates. Additionally, the Company arranges secured financing for others. The Company also sells computer network technology equipment and provides technical service on the equipment it sells. GATX Capital Corporation is a wholly-owned subsidiary of GATX Corporation. Item 2. Properties - ------------------- The Company leases all of its office space and owns no materially important physical properties other than those related directly to its investment portfolio. The Company's principal offices are rented under a twelve year lease expiring in 2003. Item 3. Legal Proceedings - -------------------------- On July 11, 1996, GATX/Airlog Company ("Airlog"), a California general partnership of which a subsidiary of the Company is a partner, and the Company filed a complaint for Declaratory Judgment against Evergreen International Airlines, Inc., ("Evergreen") in the United States District Court for the Northern District of California (No. C96-2494) seeking a declaration that neither the Company nor Airlog has any liability to Evergreen as a result of the issuance of Airworthiness Directive 96- 01-03 (the "Airworthiness Directive") by the Federal Aviation Administration (the "FAA") in January of 1996. The effect of the Airworthiness Directive is to reduce significantly the amount of freight that three of Evergreen's B747 aircraft may carry. Between 1988 and 1990, these three aircraft, along with a fourth no longer owned by Evergreen, were modified from passenger to freight configuration by subcontractors of Airlog, with Evergreen's knowledge and consent, pursuant to contracts between Airlog and Evergreen or one of its affiliates. These four aircraft are part of a group of ten B747 aircraft (the "Affected Aircraft") that were modified by subcontractors of Airlog pursuant to a design approved by the FAA at the time the modifications were made, and which are subject to the Airworthiness Directive. The three Evergreen aircraft were flown as part of its fleet for more than five years, and the seven other modified aircraft were flown by Evergreen and the three other operators for significant periods. The Company guaranteed certain of Airlog's obligations to Evergreen. The Company did not issue guarantees with respect to Airlog's obligations to any of Airlog's other customers for the affected aircraft. Evergreen filed an answer and counterclaim on August 1, 1996, asserting that Airlog and the Company are liable to it under a number of legal theories in connection with the application of the Airworthiness Directive to the three aircraft. In an initial disclosure statement dated October 29, 1996, and served on Airlog and the Company pursuant to applicable discovery rules, Evergreen alleges to have suffered damages which it has calculated as follows: (i) out-of-service costs amounting to approximately $16.2 million as of October 15, 1996; (ii) denial of access to then currently favorable capital markets, resulting in an alleged inability to issue shares in an initial public offering with a value of as much as $ 1.8 billion; (iii) lost flight revenues and profits amounting to approximately $25.8 million; (iv) lost business opportunities and profits attributable to Evergreen's diminished 747 fleet capacity (which Evergreen did not quantify, but has indicated is subject to further calculation); and maintenance costs in responding to the Airworthiness Directive (and to related airworthiness directives issued by the FAA) of approximately $1.6 million as of March 1996. The counterclaim also seeks exemplary and punitive damages in an unspecified amount. Airlog and the Company have filed a motion seeking partial summary judgment as to four of Evergreen's counterclaims. Airlog and the Company have alleged that three counterclaims, each for breach of warranty are barred by the California Commercial Code's four-year statute of repose, and that a fourth counterclaim, which seeks recovery for negligent misrepresentation is barred by the "economic loss doctrine" which prevents contracting parties from attempting to use tort law to avoid liability limitations they agreed to in their contracts. The Company learned that on December 18, 1996, General Electric Capital Corporation and a subsidiary (collectively, "GECC") filed a Complaint in the Superior Court for the county of San Francisco (Case No. 983351) against Airlog and the Company among others. The Complaint asserts causes of action under a number of legal theories arising out of the modification of three B747 aircraft from passenger to freighter configuration. These aircraft were modified by subcontractors of Airlog in 1991 with GECC's knowledge and consent, and are three of the ten Affected Aircraft. The Complaint seeks direct and consequential damages which it alleges may be in excess of $50 to $75 million, a declaration requiring defendants promptly to repair the aircraft and punitive damages. To the best of the Company's knowledge, no Summons has been served on any of the defendants in this action. On January 31, 1997, American International Airways, Inc. ("AIA") filed a complaint in the United States District Court for the Northern District of California (C97-0378) against Airlog, the Company, Airlog Management Corp., and others asserting that Airlog and the Company are liable to it under a number of legal theories in connection with the application of the Airworthiness Directive to two aircraft owned by AIA. These aircraft were modified by subcontractors of Airlog in 1992 and 1994 with AIA's knowledge and consent, and are two of the ten Affected Aircraft. The Complaint seeks damages (to be trebled under one count of the complaint) of an unspecified amount relating to lost revenues, lost profits, denied access to capital markets, repair costs, disruption of its business plan, lost business opportunities, maintenance and engineering costs, and other additional consequential, direct, incidental and related damages. The Complaint asks in the alternative for a recision of AIA's agreements with Airlog and a return of amounts paid, and for injunctive relief directing that Airlog, and certain individual defendants, properly staff and manage the correction of the alleged deficiencies that caused the FAA to issue the Airworthiness Directive. Consistent with its ongoing product support, Airlog continues to pursue, with the apparent cooperation of each of the four operators of the Affected Aircraft, including Evergreen, GECC and AIA, solutions to the FAA's 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 are without merit, and that the Company and Airlog have adequate defenses thereto. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ Omitted under provisions of the reduced disclosure format. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters - -------------------------------------------------------------------------------- Not applicable. All common stock of the Registrant is held by GATX Financial Services, Inc. (a wholly-owned subsidiary of GATX Corporation). Information regarding dividends is shown on the consolidated statements of income and reinvested earnings which are included in Item 8. Item 6. Selected Financial Data - ------------------------------- Omitted under provisions of the reduced disclosure format. Item 7. Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operations ------------------------- Incorporate herein by reference to the Annual Report, pages 26-30,included as Exhibit 13 of this document. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The following consolidated financial statements of GATX Capital Corporation, included in the 1996 Annual Report (Exhibit 13), are incorporated herein by reference (page references are to the Annual Report): Consolidated Statements of Income and Reinvested Earnings for Years Ended December 31, 1996, 1995, and 1994 Page 31 Consolidated Balance Sheets As of December 31, 1996 and 1995 Page 32 Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995, and 1994 Page 33 Notes to Consolidated Financial Statements Pages 34 - 44 Item 9. Changes in and Disagreements with Accountants on Accounting - --------------------------------------------------------------------- and Financial Disclosure ------------------------ None. PART III Item 10(a). Directors of the Registrant - ---------------------------------------- Name Office Held Since Age - ---------------------------------------------------------------------------- Ronald H. Zech Chairman of the Board 1984 53 Joseph C. Lane President, Chief Executive Officer and Director 1994 43 David B. Anderson Director 1996 55 Alan C. Coe Executive Vice President and Director 1994 45 Jesse V. Crews Executive Vice President, Chief Investment Officer, and Director 1994 44 David M. Edwards Director 1990 45 Frederick L. Hatton Executive Vice President and Director 1984 54 Item 10(b). Executive Officers of the Registrant - ------------------------------------------------- Name Office Held Since Age - ----------------------------------------------------------------------------- Joseph C. Lane President, Chief Executive Officer and Director 1994 43 Alan C. Coe Executive Vice President and Director 1994 45 Jesse V. Crews Executive Vice President, Chief Investment Officer, and Director 1994 44 Frederick L. Hatton Executive Vice President and Director 1984 54 Cal C. Harling Senior Vice President and Managing Director- Technology Group 1994 48 Glenn L. Hickerson Senior Vice President and President-Air Group 1995 59 Kathryn G. Jackson Executive Vice President and Managing Director-Corporate Finance 1995 40 Robert J. Sammis Senior Vice President- Corporate Development 1993 50 Michael C. Cromar Vice President and Chief Financial Officer 1994 49 Richard M. Tinnon Vice President and Treasurer 1996 34 Thomas C. Nord Vice President, General Counsel, and Secretary 1980 56 Valerie C. Williams Vice President-Human Resources 1989 52 Curt F. Glenn Principal Accounting Officer, Vice President and Controller 1992 42 JOSEPH C. LANE, President, Chief Executive Officer and Director since 1994. Mr. Lane joined GATX in 1978 as a Financial Analyst. At GATX he has held a variety of positions including District Manager, Regional Marketing Manager, Managing Director of Corporate Finance and President of GATX International. Mr. Lane served as Vice President Corporate Finance for two years with the regional investment banking firm of Rotan Mosle in Houston, Texas, before re-joining GATX in 1983. He was elected to the Board of Directors of GATX Capital in 1988. Mr. Lane was a member of the staff at Yale University and a founding officer of American Digital Systems. He currently serves as Chairman of the Board of Directors of Centron Corporation and of Sun Financial. He is Vice Chairman of the Equipment Leasing Association, the national association of the leasing and finance industry. He received a Bachelor of Arts degree from Yale University in 1975. ALAN C. COE, Executive Vice President and Director since 1994. Mr. Coe joined the Company in 1977 as a Financial Analyst and has held a variety of positions both domestically and internationally. Prior to 1977, Mr. Coe served as an officer in the United States Air Force (four years) and as Vice President-Corporate Finance - with Rotan Mosle in Houston, Texas (three years). Mr. Coe received a BA from Southern Methodist University in 1973 and his MBA from Golden Gate University in 1976. JESSE V. CREWS, Executive Vice President, Chief Investment Officer and Director since 1995. Mr. Crews joined the Company in 1977 as a Financial Analyst and held a variety of positions, including Regional Manager of the Singapore (two years) and New Orleans/Houston (five years) offices before returning to San Francisco in 1985. He has been broadly responsible for the development of new business investment opportunities for the Company's own portfolio since 1986 and as head of the Corporate Finance Group from 1990 to 1994. Mr. Crews received a BA from Yale and an MBA from the University of Virginia. FREDERICK L. HATTON, Executive Vice President and Director since 1984. Mr. Hatton joined the Company in 1983 as Senior Vice President and President of GATX Air. He is currently responsible for GATX Airlog. He is currently a Director of IASCO and a Director of the International Society of Transport Aircraft Trading (CISTAT). Prior to 1983, he served as Vice President Marketing for two years, and Executive Vice President for four years with International Air Service Company (IASCO). Prior to IASCO, Mr. Hatton served in a number of managerial capacities for Flying Tiger Lines. He received a BS from Yale University in 1964, an MS in aerospace management from the University of Southern California in 1971, and an MBA from the Wharton School in 1972. Mr. Hatton served as a U.S. Marine Corps fighter pilot from 1964 to 1970, including a tour in Vietnam. CAL C. HARLING, Senior Vice President-Technology Group since 1994. Mr. Harling joined the Company in 1987 as Vice President, Technology Financing. Prior to 1987 Mr. Harling was an independent consultant for two years. Mr. Harling worked for Decimus Corporation, a subsidiary of Bank America Corporation, for ten years starting in 1975. While at Decimus Mr. Harling held various positions including Vice President of Vendor Operating Leasing, Vice President of Portfolio Management, and other management positions in systems development. Mr. Harling received a BS from California State University, Sacramento in 1973. GLENN L. HICKERSON, President of the Air Group since 1995 and Executive Vice President of the Air Group from 1990 to 1995. Prior to joining the Company, he was President/Managing Director of GPA Asia Pacific (1989-1990) and Vice President-Commercial Marketing and Sales at Douglas Aircraft Company (1983-1989). Mr. Hickerson served the Lockheed California Company from 1976 through 1983, the last four years as Vice President-Marketing and Sales- International. Prior to 1976 he served as Group Vice President-Travel Division with Marriott Corporation (four years), President, Universal Airlines (five years) and Secretary-Treasurer, Douglas Finance Corporation (five years). Mr. Hickerson received a BS from Claremont McKenna College and an MBA from New York University. KATHRYN G. JACKSON, Executive Vice President; has managed the Company's Corporate Finance Group since 1995. She joined the Company in 1981 as Financial Analyst, and transferred to the Chicago regional office in 1982 serving as District Manager, Vice President and Managing Director. From 1987 to 1994, she was employed by D'Accord Financial Services as a Managing Director, member of the Executive Committee and ultimately served as President, Chairman and Chief Executive Officer. Ms. Jackson holds a BA from Stanford University and an MBA from Northwestern University. ROBERT J. SAMMIS, Senior Vice President-Corporate Development since 1993. Mr. Sammis joined the Company in 1975 as Associate Counsel. He has served as a Senior Vice President in charge of Equipment Management and as Managing Director, International. Mr. Sammis is a Fulbright scholar and, in that capacity, taught law at the University of Los Andes, Bogota, Columbia. Prior to joining the Company, he was with Pillsbury, Madison & Sutro as Associate Counsel. Mr. Sammis received a BA from the University of California and a JD from the University of Michigan. MICHAEL E. CROMAR, Vice President and Chief Financial Officer since October 1994. Prior to joining the Company, Mr. Cromar was Vice President, Treasurer and Chief Financial Officer at The Harper Group, Inc., a San Francisco based international logistics services company from December 1992 to October 1994. From September 1988 through August 1992 he served S.A. Louis-Dreyfus & Cie., principally as Senior Vice President, Finance and Information, for Gearbulk Ltd. an industrial bulk shipping joint venture in Bergen, Norway. From 1982 to 1988 he was corporate controller and a director of information technology for American President Companies, Ltd. From 1975, he held a variety of financial management positions with Natomas Co., an energy resources company. Mr. Cromar began his career with Touche Ross & Co. where he was a Certified Public Accountant. He received a BS degree in Business Administration in 1972 from the University of Utah and was an infantry officer in the U.S. Army, including service in Vietnam. RICHARD M. TINNON, Vice President and Treasurer since 1996. Mr Tinnon joined GATX Capital in 1987 as a Senior Financial Analyst. He has also served as an Associated Director of GATX Realty, Director of Financial Planning and Analysis, Assistant Treasurer, and Assistant to the President. Prior to GATX Capital, Mr. Tinnon worked for Touche Ross & Co. Mr. Tinnon received his B.A. from Michigan State University in 1985 and his MBA in 1990 from the University of California, Berkeley. VALERIE C. WILLIAMS, Vice President-Human Resources since 1989. Prior to joining the Company, Ms. Williams was President of VC Williams & Associates, a human resources consulting firm; was Director, Corporate Compensation and Incentives at Carson Pirie Scott & Co. and Senior Consultant, Compensation with A.S. Hansen, Inc. Ms. Williams received her MBA from Lake Forest School of Management in 1980. CURT F. GLENN, Principal Accounting Officer, Vice President & Controller since 1992. Mr. Glenn joined the Company in 1980 as Assistant Tax Manager, was appointed Tax Manager in 1985 and elected Vice President in 1989. Prior to joining the Company, Mr. Glenn was a Senior Tax Analyst at GATX Corporation (two years) and a Senior Tax Accountant with Trans Union Corporation (four years). Mr. Glenn received a B.S. in Accounting from DePaul University in 1977. Mr. Glenn is currently Chairman of the Federal Tax Committee of the Equipment Leasing Association. Items 11, 12 & 13 - ----------------- Omitted under provisions of the reduced disclosure format. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) 1. Financial statements The following consolidated financial statements of GATX Capital Corporation are included in Item 8. Consolidated Statements of Income and Reinvested Earnings Years Ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets As of December 31, 1996 and 1995 Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial statement schedules All financial statement schedules have been omitted because they are not applicable or because required information is provided in the financial statements, including the notes thereto, which are included in Item 8. 3. Exhibits Required by Item 601 of Regulation S-K Exhibit Number -------------- 3(a) Restated Certificate of Incorporation of the Company.(6) 3(b) By-laws of the Company.(1) 4(d) Term Loan Agreement between the Company and a Bank dated December 26, 1990.(2) 10(a) Office Leases, Four Embarcadero Center, dated October 1, 1990 and June 1, 1991, between the Company and Four Embarcadero Center Venture.(2) 10(b) Tax Operating Agreement dated January 1, 1983 between GATX Corporation and the Company.(3) 10(c) Credit Agreement among the Company, the Subsidiaries listed in Schedule II thereto, the Banks listed on the signature pages thereto and Chase Manhattan Bank, as agent for the Banks, dated December 14, 1992.(4) 10(d) Amendment No.1, dated December 1, 1994, to Credit Agreement referred to in 10(c).(5) 10(e) Credit Agreement among the Company, its two subsidiaries operating in Canada, and the Bank of Montreal, dated December 14, 1992.(4) 10(f) First Amendment, dated June 20, 1993 to Credit Agreement referred to in 10(e).(5) 10(g) Second Amendment, dated June 14, 1994, to Credit Agreement referred to in 10(e).(5) 10(h) Third Amendment, dated December 1, 1994, to Credit Agreement referred to in 10(e).(5) 12 Ratio of Earnings to Fixed Charges (7) 13 Annual Report to Shareholders, pages 26-45. (7) 23 Consent of Independent Auditors.(7) 27 Financial Data Schedule.(7) 99 Listing of Medium Term Notes.(7) The Registrant agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Registrant the authorized principal amount of which does not exceed 10% of the total assets of Registrant. (1) Incorporated by reference to Registration Statement on Form S-1, as amended, (file number 2-75467) filed with the Commission on December 23, 1981, page II-4. (2) Incorporated by reference to Form 10-K filed with the Commission on March 30, 1991. (3) Incorporated by reference to Form 10-K filed with the Commission on March 28, 1983. (4) Incorporated by reference to Form 10-K filed with the Commission on March 31, 1993. (5) Incorporated by reference to Form 10-K filed with the Commission on March 27, 1995. (6) Incorporated by reference to Form 10-K filed with the Commission on March 28, 1996. (7) Submitted to the Securities and Exchange Commission with the electronic filing of this document. Item 14(b). Reports on Form 8-K - --------------------------------- The company filed no reports on Form 8-K during the last quarter of the period covered by this report. A current report on Form 8-K was filed on January 23, 1997, under Item 5., Other Events. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) By /s/ Joseph C. Lane -- ------------------ Joseph C. Lane President, Chief Executive Officer and Director March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. By /s/ Joseph C. Lane By /s/ Michael E. Cromar - -- ------------------ -- --------------------- Joseph C. Lane Michael E. Cromar President, Chief Executive Officer Vice President and and Director Chief Financial Officer Dated: March 28, 1997 Dated: March 28, 1997 By /s/ Curt F. Glenn By /s/ David M. Edwards - -- ----------------- -- -------------------- Curt F. Glenn David M. Edwards Principal Accounting Officer, Director Vice President & Controller Dated: March 28, 1997 Dated: March 28, 1997 By /s/ Jesse V. Crews By /s/ Alan C. Coe - -- ------------------ -- --------------- Jesse V. Crews Alan C. Coe Executive Vice President, Chief Executive Vice President Investment Officer and Director and Director Dated: March 28, 1997 Dated: March 28, 1997 REPORT OF INDEPENDENT AUDITORS Board of Directors GATX Capital Corporation We have audited the accompanying consolidated financial statements of GATX Capital Corporation (a wholly-owned subsidiary of GATX Corporation) and subsidiaries listed in the accompanying index to financial statements (Item 14(a)). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements listed in the accompanying index to financial statements (Item 14(a)) present fairly, in all material respects, the consolidated financial position of GATX Capital Corporation and subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Francisco, California January 28, 1997 EX-12 2 Exhibit 12 GATX Capital Corporation Ratio of Earnings to Fixed Charges Year Ended December 31, 1996 (in thousands) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Fixed Charges: Interest on indebtedness and amortization of debt discount and expense $86,106 $68,396 $62,744 $65,454 $71,889 Capitalized interest 3,074 1,601 292 279 73 Portion of rents representing interest factor (assumed to approximate 33%) 10,849 6,574 5,120 3,012 2,440 -------- ------- ------- ------- ------- Total fixed charges 100,029 76,571 68,158 68,745 75,060 ======= ====== ====== ======= ====== Earnings available for fixed charges: Net income (loss) 45,855 32,604 24,851 21,525 (7,197) Add (deduct): Income taxes (benefit) 32,636 22,740 18,785 21,361 (9,849) Cumulative effect of accounting changes - - - (9,456) - Equity in net earnings of joint ventures, net of dividends received 8,740 13,522 14,322 16,222 40,161 Fixed charges (excluding capitalized interest) 96,955 74,970 67,864 68,466 74,329 -------- ------- -------- -------- -------- Total earnings available for fixed charges $184,186 $143,836 $125,822 $127,574 $87,988 ======== ======== ======== ======== ======= Ratio of earnings to fixed charges 1.84 1.88 1.85 1.86 1.17 ======== ======== ======== ======== ======= EX-13 3 ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS ASSET CONCENTRATION Stacked pie charts presenting the following: As of December 31, 1996 1995 - ------------------ ---- ---- Commercial Aircraft 33% 39% Rail 20% 18% Technology 12% 8% Other 35% 35% OVERVIEW GATX Capital Corporation and its subsidiaries ("GATX Capital" or the "Company") actively invest in a wide variety of assets. These investments are made through a variety of financing instruments, primarily leases and loans, either for the Company's own account or through partnerships and joint ventures. GATX Capital actively manages its existing portfolio of investments as well as those of institutional investors, and several joint ventures and partnerships in which it participates. Additionally, the Company arranges secured financing for others. The Company also sells computer network technology equipment and provides technical service on the equipment it sells. In 1996, the domestic asset financing markets in which the Company participates remained extremely competitive, as the imbalance between investor supply (high) and financing demand (comparatively low) continued to depress lessor returns in new lease transactions. Nonetheless, GATX Capital enjoyed notable success in the secondary market purchase of leases or lease portfolios; in the operating lease of aircraft, rail and technology assets; and in successfully arbitraging between asset and financial markets. Going forward, the Company's response to tightening market conditions will include: (i) partnering with others possessing complementary expertise and/or funding capabilities, (ii) combining our financial structuring, asset management and investment banking skills in new ways to benefit our customers, and (iii) selectively adapting and exporting that skill set to markets around the globe. GATX Capital's operating lease rates for aircraft leases entered into during 1996 were higher for the same type of aircraft than in the past several years. Improvement in rental rates is expected to continue in 1997. Rental rates reflect the results of continuous traffic growth on top of already high industry load factors, the replacement of aircraft that do not meet Stage III noise levels, and relatively low manufacturer 1997/1998 production rates. Additionally, recent fuel cost increases, safety concerns about older aircraft, and a desire on the part of major airlines to reduce flight crew costs through the use of modern "common cockpit" fleets from the same manufacturer have combined to make new aircraft delivery positions relatively scarce until 2000. GATX Capital has positioned itself in this environment with its partner-oriented investment in six firm A321-200 orders and three options, together with its 1996 order for 10 firm and 10 option B737-800 aircraft, as well as a B757-200 purchase. As in 1996, our future aircraft strategy will include continuing to seek institutional partners for aircraft purchases to reduce risk, earn fees, and obtain performance-based upside in conjunction with managing partner investment. The North American rail equipment leasing marketplace continues to be characterized by relatively high demand for equipment as well as active competition among leasing companies and financial institutions. Railroads' increased efficiency, a relatively strong economy, and corresponding increases in freight traffic have contributed to an attractive supply-demand relationship for leased rail equipment in general, although certain rail car types experienced isolated instances of softness in demand. The year-end utilization of GATX Capital's operating lease fleet was approximately 97% for rail cars and 99% for locomotives. The outlook for this business remains positive and the Rail Group's primary focus will continue to be North America, although it will pursue attractive opportunities in other parts of the world. The market for information technology and communications equipment and services continues to provide substantial growth opportunities for GATX Capital. PAGE 26 With the October 1996 acquisition of the 50% of Centron it did not already own, the Company broadened its presence in this growing market. Businesses are increasingly migrating from centralized, proprietary legacy systems to distributed client/server systems based upon open standards which present complex design, procurement, integration and management issues. The Company believes that equipment financing and value-added services must be combined to be successful in this market. GATX Capital, with its joint venture partners and affiliates, is positioning itself to provide customers with a single source for the life cycle requirements of computing and networking products, both in North America and in Europe. RESULTS OF OPERATIONS The Company's 1996 record net income of $45.9 million exceeded 1995's net income by $13.3 million, or 41%. The increase is due primarily to an increase in investment income resulting from (1) an increase in the investment portfolio during the year and (2) an increase in fee income from asset remarketing services provided to third parties. The increase in net income between 1994 and 1995 was primarily due to higher gains and fees from asset remarketing coupled with increased joint venture income, partially offset by lower income from leases and loans and higher interest and administrative expenses. Investment Income The Company uses its financial structuring, asset management and investment banking skills to generate investment-related income in three primary ways: (1) managing its investments while under contract, (2) selling or remarketing its assets at the end of the contract term or when market opportunities arise and (3) generating fees from third parties by serving as a resource for similar transactions. During 1996, the Company invested approximately $656.7 million (70% more than in 1995), resulting in a net increase in the Company's investment portfolio of $240.7 million over year-end 1995. Depending on the type of investment, related revenues are recorded as lease income, interest income, joint venture income or other income. Investment revenues are offset by interest expense on borrowings used to fund investments, operating lease expense and other expenses. Loss reserves are provided to maintain an adequate allowance for losses in relation to investments based on assessments of credit, collateral and market risks. INVESTMENT INCOME Bar graph presenting following: Year ended December 31, 1996 1995 1994 - ---------------------------- -------- -------- -------- Leases $195,745 $139,712 $143,639 Interest 28,374 23,179 27,085 Investment in joint ventures 22,411 18,594 9,242 Other 10,414 2,875 4,511 -------- -------- -------- Total $256,944 $184,360 $184,477 ======== ======== ======== New investments in leased assets, including those funded with off-balance sheet financing, contributed to the increases in lease income and operating lease expense. The $56.0 million increase in lease income is attributable to the full-year impact of Sun Financial, which was acquired in late 1995 ($22.1 million), revenues from new lease investments ($29.3 million), and revenues related to the October 1996 acquisition of Centron ($4.6 million). The $26.9 million increase in operating lease expense is due primarily to higher depreciation expense resulting from increased investments (including the full-year impact of Sun Financial and the impact of Centron) and operating lease rent expense associated with investments funded with off-balance sheet financing. Lease income in 1995 was $3.9 million lower than 1994 despite an increase in lease investments. Four aircraft, subsequently sold, which had been generating $8.0 million per year in income, came off lease in early 1995. Operating lease expense in 1995 was essentially flat versus 1994, although depreciation expense decreased due to the termination of the aforementioned aircraft leases, offset by increased operating lease expense associated with off-balance sheet financed investments. PAGE 27 OPERATING LEASE EXPENSE Bar graph presenting following: Year ended December 31, 1996 1995 1994 - ----------------------- ------- ------- ------- Depreciation $41,366 $28,420 $33,262 Rent 29,974 17,110 12,669 Other 5,949 4,894 4,690 ------- ------- ------- Total $77,289 $50,424 $50,621 ======= ======= ======= Interest income increased $5.2 million in 1996 when compared to 1995, due to higher average loan balances outstanding during the year along with fees related to loan prepayments. Interest income in 1995 was lower than in 1994 due to early loan repayments in 1994, which generated $2.4 million of interest income from prepayment premiums and an additional $3.0 million of interest, which had not been accrued due to its uncertain nature and was realized from a real estate loan and an investment in purchased notes. The majority of the $3.8 million increase in joint venture income is due to the Company's continued focus on partnering with other investors. During the year, the Company entered into five new air, rail and technology joint ventures, in addition to making additional investments in existing joint ventures. Partially offsetting the increase in joint venture income was the impact of the acquisition of the non-owned portion of Centron, which was accounted for under the equity method prior to the acquisition and consolidated thereafter. The increase in 1995 joint venture income was due to (1) the Company's aircraft leasing joint venture generating more lease income in 1995 than in 1994 as a result of certain aircraft earning higher than normal rents for a short term during the year coupled with the impact of higher interest rates on variable rate leases, and (2) $3.1 million from the final disposition of a real estate investment. JOINT VENTURE INCOME Bar graph presenting following: Year ended December 31, 1996 1995 1994 - ----------------------- ------- ------- ------- Air $9,869 $11,329 $6,878 Rail 6,683 1,172 204 Technology 4,856 3,498 2,360 Other 1,003 2,595 -- ------- ------- ------- Total $22,411 $18,594 $ 9,442 ======= ======= ======= Other income increased $7.3 million. The 1996 income amount includes $3.0 million of realized gains on sales of stock acquired with warrants received in conjunction with certain financing activities. Such gains are not generally predictable. The $17.7 million increase in interest expense is primarily a result of an overall increase in the Company's average debt balance related to portfolio growth, partially offset by lower average borrowing rates. Also affecting interest expense was the full year impact of Sun Financial. The increase in interest expense in 1995 compared to 1994 was primarily due to an increase in average outstanding debt balances and an increase in interest rates. Asset Remarketing Asset remarketing income includes gains on the sales of the Company's owned assets and fee income 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. Because asset remarketing income is realized at both lease end and in response to market opportunities, it does not occur evenly between periods and can fluctuate significantly depending on market conditions. Income from asset remarketing has historically been a significant contributor to income. PAGE 28 Bar graph presenting following: Year ended December 31, Gains Residual on Sale Sharing Fees Total 1996 35,534 21,425 56,959 1995 33,131 9,382 42,513 1994 21,444 2,883 24,327 1993 44,434 262 44,696 1992 22,277 1,678 23,955 1991 50,510 1,765 52,275 1990 47,062 1,537 48,599 1989 34,485 1,138 35,623 1988 23,675 2,252 25,927 1987 21,403 -- 21,403 Portfolio Management and Transaction Services In addition to earning fees for asset remarketing services, the Company also generates fees from managing leased asset portfolios for institutional investors, from managing substantially all of the partnerships in which the Company invests, and from brokering or arranging transactions. As with asset remarketing fees, transaction fees do not occur evenly between periods. Equipment Sales and Service In October 1996, the Company purchased the 50% of Centron which it did not already own. Centron sells computer hardware and technical services required to build and operate corporate computer networks. During the two months of 1996 in which Centron financial results were consolidated in the Company's financial statements, Centron's equipment sales and service business contributed $36.3 million of sales and service revenue and $33.0 million of related costs and expenses. Centron's sales and earnings are seasonal in nature, with a disproportionately positive impact in the fourth quarter. Related trade accounts receivable and inventory balances at December 31, 1996 are included in the other assets balance. GATX Capital expects this business activity to have a much larger financial impact in 1997, the first full year in which Centron will be consolidated. SELLING, GENERAL AND ADMINISTRATIVE expenses include costs to manage the Company's own portfolio as well as the portfolios of institutional investors and of partnerships in which the Company has an interest. These costs increased in 1996 as a result of higher human resource and other administrative costs resulting from increased business activity, including the full-year impact of Sun Financial and the two-month impact of Centron. The increase in selling, general and administrative expenses in 1995 compared to 1994 was also caused by an increase in business activity. THE PROVISION FOR LOSSES ON INVESTMENTS is based on the current estimate of reserve needs, and fluctuates from period to period as warranted based on a review of credit, collateral and market risks. The allowance for losses on investments increased $21.6 million during the year as a result of a $12.7 million provision for losses and $13.9 million in recoveries of previously written-off investments, offset by $5.0 million in write-downs. At December 31, 1996 the allowance for losses was 6.6% of investments, including off-balance sheet assets and after deducting non-leveraged non-recourse debt. Cash Flow, Liquidity and Capital Resources In 1996, the Company generated cash from operations and from investments of $454.2 million, borrowed $159.8 million net of repayments, and received $63.8 million from sale-leasebacks. This cash was used to fund new investments of $656.7 million and pay dividends of $22.6 million. Historically, dividends have been paid on the Company's common stock at the rate of 50% of net income. CASH FROM OPERATING ACTIVITIES IN 1996 increased primarily as a result of an increase in fee income received during the year. 1995 was negatively impacted by a $48 million payment made that year related to the return of four wide-body aircraft. CASH USED IN INVESTING ACTIVITIES increased in 1996, reflecting a record $656.7 million of new investment, up 70% over 1995, partially offset by an increase in cash from recovery of investments including proceeds from sale-leaseback transactions. The increase in cash from recovery of investments resulted mainly from an increase in loan repayments and lease rents received. In 1995, cash used in investing activities was relatively unchanged from the prior year, despite an increase in cash from recovery of investments, because this cash was reinvested in new leases, loans and other investments. PAGE 29 INVESTMENT VOLUME Bar graph presenting following: Year ended December 31, 1996 1995 1994 - ----------------------- ---- ---- ---- New investment volume $656,662 $385,938 $279,126 ======== ======== ======== LIQUIDITY AND CAPITAL RESOURCES In December 1996, the Company issued $200 million of 10-year bonds in an underwritten public offering under its existing medium-term note shelf registration. Proceeds from the issuance were used to pay down commercial paper and fund new investments. As of December 31, 1996, the Company has approved unfunded transactions totaling $425 million, of which $203.6 million is expected to fund in 1997 and the remaining $221.4 million thereafter. Once approved for funding, a transaction may not be completed for various reasons, or the investment may be shared with partners or sold. The Company expects to fund a portion of future growth through issuance of additional medium-term notes, commercial paper and bankers' acceptances. The commercial paper and bankers' acceptances are backed by credit agreements from a syndicate of domestic and international commercial banks. The Company has unused capacity under these agreements of $256.2 million at December 31, 1996. In addition, the Company has a $300 million shelf registration for Series D medium-term notes, under which $268 million has been issued as of December 31, 1996. A new shelf registration of Series E medium-term notes is planned for the second quarter of 1997. The Company has no firm commitments for the purchase of notes that it may issue from the unused portions of these shelf registration statements. Certain lease transactions are financed by obtaining nonrecourse loans equal to the present value of some or all of the rental stream. The interest rates used to discount the rentals are based on the credit quality of the lessee and the size and term of the lease. The Company uses a wide variety of nonrecourse lenders to ensure adequate and reliable access to the credit markets. GATX Capital's senior unsecured notes are rated BBB+ by Standard & Poor's and Baa2 by Moody's Investors Service. The Company ensures a stable margin over its cost of funds by managing the relationship of its fixed and floating rate lease and loan investments to its fixed and floating rate borrowings. In order to meet this objective, derivative financial instruments, primarily interest rate swaps, are used to modify the interest characteristics of the Company's debt. The Company manages the credit risk of counterparties by dealing only with institutions that it considers financially sound and by avoiding concentrations of risk with a single counterparty. Fluctuations in interest rates may impact earnings, either negatively or positively, depending on the Company's net floating rate asset or debt position. At December 31, 1996, the Company has $50.2 million more floating rate assets than floating rate debt. Total debt financing and stockholder's equity both increased to bring the Company's debt to equity ratio from 2.78:1 in 1995 to 2.79:1 in 1996. GATX Capital can borrow an additional $450.0 million and still meet the 4:1 leverage ratio defined in its credit agreements. 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, including those discussed elsewhere in this report, and could cause actual results to differ materially from those projected. PAGE 30 CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS Year ended December 31, (in thousands) 1996 1995 1994 - -------------------------------------- ---- ---- ---- Earned income Leases $ 195,745 $139,712 $ 143,639 Gain on sale of assets 35,533 33,123 21,444 Fees 31,840 19,026 10,111 Interest 28,374 23,179 27,085 Investment in joint ventures 22,411 18,594 9,242 Equipment sales and service 36,286 -- -- Other 10,174 2,875 4,511 --------- --------- --------- 360,363 236,509 216,032 --------- --------- --------- Expenses Interest 86,106 68,396 62,744 Operating leases 77,289 50,424 50,621 Cost of equipment sales and service 32,991 -- -- Selling, general and administrative 68,298 43,517 39,296 Provision for losses on investments 12,744 18,000 19,000 Other 4,444 828 735 --------- --------- --------- 281,872 181,165 172,396 --------- --------- --------- Income before income taxes 78,491 55,344 43,636 Provision for income taxes 32,636 22,740 18,785 --------- --------- --------- Net income 45,855 32,604 24,851 Reinvested earnings at beginning of year 162,400 146,036 133,570 Dividends paid to stockholder (22,569) (16,240) (12,385) --------- --------- --------- Reinvested earnings at end of period $ 185,686 $ 162,400 $ 146,036 ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. PAGE 31 CONSOLIDATED BALANCE SHEETS As of December 31, (in thousands) 1996 1995 - --------------------------------- ---- ---- Assets Cash and cash equivalents $ 18,482 $ 19,905 Investments: Direct financing leases 461,757 406,950 Leveraged leases 257,039 220,407 Operating lease equipment--net of depreciation 429,880 315,707 Secured loans 222,602 239,873 Investment in joint ventures 308,934 205,292 Assets held for sale or lease 12,393 28,230 Other investments 65,506 77,604 Investment in future residuals 21,457 23,223 Allowance for losses on investments (114,096) (92,489) ----------- ----------- Total investments 1,665,472 1,424,797 ----------- ----------- Due from GATX Corporation 45,147 44,337 Other assets 119,528 29,344 ----------- ----------- TOTAL ASSETS $ 1,848,629 $ 1,518,383 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Accrued interest $ 15,821 $ 15,053 Accounts payable and other liabilities 138,660 80,045 Debt financing: Commercial paper and bankers' acceptances 13,772 130,600 Notes payable 63,114 54,883 Obligations under capital leases 12,429 15,802 Senior term notes 935,600 679,600 ----------- ----------- Total debt financing 1,024,915 880,885 ----------- ----------- Nonrecourse obligations 268,044 193,446 Deferred income 5,786 4,392 Deferred income taxes 51,726 27,562 Stockholder's equity: Convertible preferred stock, par value $1.00 1,027 1,027 Authorized--4,000,000 shares Issued and outstanding --1,027,050 shares in both years Common stock, par value $1.00 1,031 1,031 Authorized--2,000,000 shares Issued and outstanding --1,031,250 shares in both years Additional paid-in capital --convertible preferred stock 123,973 123,973 --common stock 27,929 27,929 Foreign currency translation adjustment (1,543) 640 Unrealized gain on equity securities 5,574 -- Reinvested earnings 185,686 162,400 ----------- ----------- Total stockholder's equity 343,677 317,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,848,629 $ 1,518,383 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. PAGE 32 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands) 1996 1995 1994 - -------------------------------------- ---- ---- ---- Cash flows from operating activities Net income $ 45,855 $ 32,604 $ 24,851 Reconciliation to net cash provided by operating activities: Provision for losses on investments 12,744 18,000 19,000 Depreciation expense 41,363 27,360 33,341 Provision for deferred income taxes 18,932 15,065 6,673 Gain on sale of assets (35,533) (33,123) (21,444) Joint venture income (22,411) (18,594) (9,242) Changes in assets and liabilities: Accrued interest, accounts payable and other liabilities 29,951 (40,219) 61,836 Due from GATX Corporation (810) (1,822) 123 Deferred income 1,394 (205) (48,072) Other--net 8,868 8,220 (6) --------- --------- --------- Net cash flows provided by operating activities 100,353 7,286 67,060 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Investments in leased equipment, net of nonrecourse borrowings for leveraged leases (376,276) (256,137) (161,341) Loans extended to borrowers (117,052) (84,050) (101,500) Other investments (163,334) (45,751) (16,285) --------- --------- --------- Total investments (656,662) (385,938) (279,126) --------- --------- --------- Lease rents received, net of earned income and leveraged lease nonrecourse debt service 100,350 51,960 24,234 Loan principal received 121,952 56,042 88,415 Proceeds from sale of assets 100,362 139,338 75,697 Proceeds from disposition of real estate -- 2,020 10,475 Joint venture investment recovery 31,151 32,116 23,564 --------- --------- --------- Recovery of investments 353,815 281,476 222,385 --------- --------- --------- Proceeds from sales of other assets 63,807 46,975 -- --------- --------- --------- Net cash flows used in investing activities (239,040) (57,487) (56,741) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (133,014) 13,425 16,920 Proceeds from issuance of long-term debt 368,000 170,000 55,000 Repayment of long-term debt (112,000) (104,000) (66,250) Dividends paid to stockholder (22,569) (16,240) (12,385) Other financing activities 36,847 (2,486) (7,147) --------- --------- --------- Net cash flows provided by (used in) financing activities 137,264 60,699 (13,862) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,423) 10,498 (3,543) --------- --------- --------- Cash and cash equivalents at beginning the year 19,905 9,407 12,950 --------- --------- --------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 18,482 $ 19,905 $ 9,407 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid to parent $ 14,402 $ 13,473 $ 15,557 ========= ========= ========= Interest paid $ 88,560 $ 68,645 $ 61,918 Interest capitalized (3,074) (1,601) (292) --------- --------- --------- Net interest paid $ 85,486 $ 67,044 $ 61,626 ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. PAGE 33 SIGNIFICANT ACCOUNTING POLICIES Business GATX Capital Corporation and its subsidiaries (the "Company") actively invest in a wide variety of assets. These investments are made through a variety of financing instruments, primarily leases and loans, either for the Company's own account or through partnerships and joint ventures. GATX Capital actively manages its existing portfolio of investments as well as those of institutional investors, and several joint ventures and partnerships in which it participates. Additionally, the Company arranges secured financing for others. The Company also sells computer network technology equipment and provides technical service on the equipment it sells. GATX Capital Corporation is a wholly-owned subsidiary of GATX Corporation. Acquisitions On October 25, 1996, the Company purchased the 50% of Centron DPL Company, Inc. (Centron) which it did not already own for approximately $22.8 million. Centron is a technology solutions provider that offers products, technical services and financial services required for building corporate information networks. The acquisition has been accounted for using the purchase method. Assets with a book value of $63.4 million were acquired and liabilities of $51.7 million were assumed. The Company recorded approximately $11.7 million of goodwill associated with this acquisition, which is being amortized on a straight-line basis over ten years. Centron's results of operations for the two months ended December 31, 1996 are consolidated in the Company's financial statements. While the Company now owns 100% of Centron, a small portion of two Centron-managed partnerships is owned by third-party investors. This minority interest is included in other liabilities in the balance sheet. Unaudited pro forma consolidated revenue of the Company as if the acquisition of Centron had occurred at the beginning of 1996 and 1995 is $520.5 million and $389.1 million, respectively. Pro forma consolidated net income is $48.9 million and $34.8 million for 1996 and 1995, respectively. In November 1995, the Company entered into an agreement to purchase the stock of Sun Financial Group, Inc. (Sun Financial), a technology-focused finance company, for a $26.0 million note payable over four years. Under the agreement, 80% of Sun Financial's stock was acquired in 1995, with the remaining shares to be exchanged on December 31, 1999. The Company may be required to make an additional payment in 1999, contingent upon the attainment of certain financial measures. The seller remains an executive officer of the Company. Assets with a book value of $134.2 million were acquired and liabilities of $126.7 million were assumed. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of intercompany accounts and transactions. Investments in minority-owned or non-controlled affiliated companies are accounted for using the equity method. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Lease and Loan Origination Costs Initial direct costs for originated direct financing and leveraged leases (collectively, financing leases) are capitalized and amortized as an adjustment of yield over the term of the lease. For operating leases, initial direct costs are deferred and amortized on a straight-line basis over the lease term. Loan origination fees are netted with loan costs, and are deferred and recognized over the term of the loan as an adjustment to interest income. Residual Values Residual values of leased equipment are estimated at the inception of the lease. The Company reviews these estimates at least annually. Declines in estimated residual values for financing leases are recognized as an immediate charge to income. Declines in estimated residual values for operating leases are recognized as adjustments to depreciation expense over the shorter of the useful life of the asset or the remaining term of the lease. PAGE 34 Technology Equipment Inventory Technology equipment inventory, which is included in other assets on the balance sheet, consists of new and used computer equipment purchased from manufacturers and is stated at the lower of cost or market. Goodwill The excess of cost over the fair value of the net assets of businesses acquired is classified as goodwill and is included in other assets on the balance sheet. Goodwill is amortized on a straight-line basis over periods ranging from 10 to 25 years. The Company continually evaluates the carrying value of goodwill for possible impairment. Equity Securities The Company receives stock warrants of investee companies as consideration for certain investments. In January 1996, the Company recorded the effect of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that available-for-sale securities, including these warrants as well as common stock obtained by exercising these warrants, be carried at fair value when such securities are marketable. Fair value of the stock warrants is estimated based on the market price of the underlying security; no cost is allocated to these warrants. Fair value of the common stock is estimated based on its market price. The effect as of December 31, 1996 was to increase stockholder's equity by $5.6 million (net of $3.6 million in deferred income taxes) to reflect the net unrealized holding gain on these securities classified as available-for-sale. SFAS 115, which was effective as of January 1, 1994, did not have a material effect on the Company's financial statements in prior years. Deferred Income Deferred income primarily represents income related to operating leases where the Company is the lessee and for which the earnings process has not been completed. The income is recognized on a straight-line basis over the terms of the operating leases. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results, when ultimately realized, could differ from those estimates. INVESTMENTS Direct Financing Leases The Company's investment in direct financing leases includes lease contracts receivable, plus the estimated residual value of the equipment at the lease termination date less unearned income. Lease contracts receivable includes the total rent to be received over the term of the lease reduced by rent already collected. Initial unearned income is the amount by which the lease contract receivable plus the estimated residual value exceeds the initial investment in the leased equipment at lease inception. The remaining unearned income is amortized to lease income over the lease term in a manner which produces a constant rate of return on the net investment in the lease. The components of the Company's investment in direct financing leases are as follows: At December 31, 1996 1995 - --------------- ---- ---- Lease contracts receivable $ 469,644 $ 451,489 Estimated residual value 139,205 103,301 Unearned income (147,092) (147,840) -------- -------- Net investment $ 461,757 $ 406,950 ========= ========= PAGE 35 Leveraged Leases Financing leases, which are financed principally with nonrecourse borrowings at lease inception and which meet certain criteria, are accounted for as leveraged leases. Leveraged lease contracts receivable are stated net of the related nonrecourse debt service, which includes unpaid principal and aggregate remaining interest on such debt. Unearned income represents the excess of anticipated cash flows (including estimated residual values after taking into account the related debt service) over the Company's investment in the lease. The components of the Company's net investment in leveraged leases are as follows: At December 31, 1996 1995 - -------------------------------- --------- --------- Lease contracts receivable $ 434,182 $ 356,330 Nonrecourse debt service (242,358) (157,771) --------- --------- Net receivable 191,824 198,559 Estimated residual value 186,042 130,391 Unearned income (120,827) (108,543) --------- --------- Investment in leveraged leases 257,039 220,407 Deferred taxes arising from leveraged leases (57,409) (50,762) --------- --------- Net investment $ 199,630 $ 169,645 ========= ========= Operating Leases Leases that do not qualify as direct financing or leveraged leases are accounted for as operating leases. Most rental income is reported on a straight-line basis over the term of the lease. Rental income on certain leases is based on equipment usage and is recognized when received. Usage rents totaled $1.9 million, $3.1 million, and none in 1996, 1995 and 1994, respectively. Equipment subject to operating leases is stated at cost less accumulated depreciation plus accrued rent and is generally depreciated using the straight-line method to an estimated residual value. Aircraft and rail equipment are depreciated over their useful lives, while other equipment is generally depreciated over the term of the lease. Estimated useful lives are up to 25 years for aircraft, 37.5 years for rail cars, and 27.5 years for locomotives. Depreciation expense of $41.4 million, $27.4 million and $33.3 million was included in operating lease expense for 1996, 1995 and 1994, respectively. Major classes of equipment on operating leases are as follows: At December 31, 1996 1995 - ------------------------ --------- --------- Commercial aircraft $ 212,576 $ 217,065 Rail 123,791 92,448 Technology 82,524 12,751 Other 46,441 34,122 --------- --------- Total cost 465,332 356,386 Accumulated depreciation (50,986) (49,557) --------- --------- Net book value 414,346 306,829 Accrued rent and other 15,534 8,878 --------- --------- Net investment $ 429,880 $ 315,707 ======== ========= Earned Income from Leases The sources of earned income from leases are as follows: At December 31, 1996 1995 1994 - --------------- ---- ---- ---- Direct financing leases $ 43,644 $ 31,491 $ 28,612 Leveraged leases 23,843 25,013 25,894 Operating leases 128,258 83,208 89,133 ------- ------ ------ Total earned income $195,745 $139,712 $143,639 ======== ======== ======== The tax expense related to leveraged lease income was $8.6 million, $9.4 million and $9.3 million in 1996, 1995 and 1994, respectively. Secured Loans Investments in secured loans are stated at the principal amount outstanding plus accrued interest. The loans are collateralized by equipment, golf courses, or real estate. A loan is classified as impaired when it is probable, based on normal portfolio review procedures, that the Company will be unable to collect all amounts due under the loan agreement. Most loans in the portfolio are collateral dependent and, if impaired, are measured using the fair value of the collateral. If the measure of the impaired loan is less than the recorded investment in the loan, an adjustment to the allowance for losses on investments is made. Interest income is not recognized on impaired loans until the outstanding loan balance is recovered. PAGE 36 Significant changes in the fair value of the collateral, subsequent to the initial measure of impairment, are reflected as adjustments to the allowance for losses on investments. The average balance of impaired loans was $26.7 million, $14.3 million and $8.7 million in 1996, 1995 and 1994, respectively. The types of loans in the Company's portfolio are as follows: At December 31, 1996 1995 - --------------- ---- ---- Equipment $122,994 $137,248 Golf courses 78,286 73,835 Real estate 21,322 28,790 ------ ------ Total investment $222,602 $239,873 ======== ======== Impaired loans (included in total) $ 29,600 $ 23,800 ======== ======== Future Lease and Loan Receivables As of December 31, 1996, financing lease receivables (net of nonrecourse debt service related to leveraged leases), minimum future rentals under operating leases, and secured loan principal by year due are as follows: Financing Operating Lease Lease Loan Year Due Receivables Receivables Principal - ----------- ----------- ----------- --------- 1997 $161,398 $ 95,582 $ 42,644 1998 125,559 81,900 17,444 1999 96,260 61,334 19,903 2000 78,952 38,169 11,903 2001 55,814 24,548 14,294 After 2001 143,485 85,632 116,414 ------- ------- ------- Total $661,468 $387,165 $222,602 ======== ======== ======== Investment in Joint Ventures Investments in joint ventures include commercial aircraft leasing, rail equipment leasing, information technology equipment leasing, and asset residual guarantee ventures in both U.S. and foreign markets. These joint ventures are accounted for using the equity method, as dictated by the Company's effective ownership interest and/or level of management control. Original investments are recorded at cost and are adjusted by the Company's share of undistributed earnings or losses and reduced by cash distributions. In October 1996, the Company purchased the 50% of Centron which it did not already own. Prior to the acquisition, the Company had accounted for its investment in Centron and Centron-managed partnerships using the equity method. Subsequent to the acquisition, the results of Centron are consol- idated in the Company's financial statements. Unaudited combined and condensed information for affiliated ventures, which are accounted for using the equity method, is shown below on a 100% basis. The Company makes certain adjustments to pre-tax income as reported by some of the joint ventures prior to the Company's calculation of its share of that pre-tax income in order to provide consistency with the Company's accounting policies. The information shown below has been restated to reflect these adjustments. Pre-tax income has been increased by $30.8 million, $34.2 million and $27.3 million in 1996, 1995 and 1994, respectively, to reverse interest expense recognized on loans to two joint ventures from its partners; the Company records these loans as equity contributions. The partner loan balances of $527.9 million, $457.0 million and $472.2 million at December 31, 1996, 1995 and 1994, respectively, have been reclassified from indebtedness to partners' equity. This results in a difference between the carrying value of the Company's investment in the joint venture and the Company's equity in the underlying net assets as reported by the joint venture. Pre-tax income is presented because the majority of the joint ventures are partnerships which do not provide for income taxes in their separate financial statements. Consistent with the Company's unclassified balance sheet, the joint venture balance sheets are unclassified as to assets and liabilities. Year ended December 31, 1996 1995 1994 - ----------------------- -------- -------- -------- Revenues $175,973 $292,989 $282,352 Pre-tax income 47,247 51,517 41,510 Total assets 1,651,495 1,310,062 1,257,794 Indebtedness 643,909 442,514 441,625 Total liabilities 719,446 585,532 558,679 Equity 932,049 724,530 699,115 PAGE 37 Assets Held for Sale or Lease Assets held for sale or lease consist of equipment which the Company has used for investment purposes that has been repossessed or returned by the lessee after normal lease maturity, and real estate upon which the Company foreclosed. These assets are recorded at the lower of their then carrying amount or fair value and are being remarketed for re-lease or sale in the normal course of business. The major classes of assets held for sale or lease are as follows: At December 31, 1996 1995 - --------------- -------- ------ Rail $5,023 $8,092 Real estate 4,081 4,687 Aircraft -- 13,931 Other 3,289 1,520 -------- ------ Net investment $12,393 $28,230 ======== ====== Other Investments The components of other investments are as follows: At December 31, 1996 1995 - --------------- ------ ------ Progress payments $15,338 $31,934 Cogeneration facility 29,062 31,100 Real estate development 11,935 14,570 Equity securities 9,171 -- ------- ------- Total other investments $65,506 $77,604 ======= ======= Progress payments include amounts paid, including capitalized interest, toward the construction of aircraft and steel production equipment at December 31, 1996 and 1995, respectively. In a 1995 noncash transaction, the Company reacquired a majority interest in the cogeneration facility. The December 31, 1995 balance is net of $9.2 million of accumulated depreciation. The facility is financed by a nonrecourse obligation having a balance of $37.7 million at December 31, 1995. Investment in Future Residuals Investment in future residuals consists primarily of purchased interests in the residual values of equipment leased by others. In general, purchased residual interests are recorded at cost. The difference between initial cost and realized value is recognized upon sale. Allowance for Losses on Investments The purpose of the allowance is to provide for credit and collateral losses which are inherent in the investment portfolio. The allowance is at a level deemed adequate by management, considering an assessment of overall risks and probable losses in the portfolio as a whole and a review of historical experience. It is the Company's policy to charge off amounts which, in the opinion of management, are not recoverable from obligors or the disposition of collateral. The Company reviews the recoverability of all investments, both on and off the balance sheet, at least annually. Factors considered include a customer's payment history and financial position, and the value of the underlying collateral determined by reference to internal and external equipment knowledge and resources. Activity within the allowance for losses on investments is as follows: Year ended December 31, 1996 1995 1994 - ----------------------- -------- -------- -------- Beginning balance $ 92,489 $ 82,206 $ 88,193 Provision 12,744 18,000 19,000 Charges to allowance (5,025) (11,734) (27,480) Recoveries and other 13,888 4,017 2,493 -------- -------- -------- Balance at end of year $114,096 $92,489 $ 82,206 ======== ======== ======== OTHER ASSETS Other assets consist of the following: At December 31, 1996 1995 - -------------------------------- -------- -------- Trade and other receivables 48,67 $ 5,833 Technology equipment inventory 27,895 -- Goodwill 21,093 10,268 Other 21,864 13,243 -------- -------- Total other assets $119,528 $ 29,344 ======== ======== PAGE 38 Trade and other receivables consist primarily of trade accounts receivable related to the Company's sales and service of computer network technology. DEBT AND CAPITAL LEASE FINANCING Short-Term Borrowing At December 31, 1996, the Company has commitments under its credit agreements with a group of banks for revolving credit loans aggregating up to $270 million. These credit agreements contain various covenants which include, among other factors, minimum net worth, restrictions on dividends and requirements to maintain certain financial ratios. At December 31, 1996, these covenants limit the Company's ability to transfer net assets to its parent to no more than $44.2 million. While the commitments are available for borrowing, repaying and reborrowing at any time, they are used primarily as undrawn facilities and serve to support the Company's issuance of commercial paper in the U.S. and bankers' acceptances in Canada. At December 31, 1996, the Company had $13.8 million of commercial paper and bankers' acceptances outstanding, meaning that $256.2 million was available. The Company also has $63.1 million of notes payable outstanding at December 31, 1996, which includes $14.0 million due to the seller of Sun Financial, who remains an officer-employee of the Company. The weighted average interest rate of short-term borrowings at the end of the period was 5.60% and 6.20% as of December 31, 1996 and 1995, respectively. In addition, two consolidated subsidiaries have bank commitments totaling $75.5 million at December 31, 1996 to finance their operations, of which $34.7 million was available. Senior Term Notes In December 1996, the Company issued $200 million of bonds due in December 2006. The proceeds of this borrowing were used to repay outstanding commercial paper indebtedness. At December 31, 1996 1995 - --------------- -------- -------- Variable Rate Notes, due 1997-1999 $ 65,000 $ 40,000 Fixed Rate Notes, 5.45%-10.20%, due 1997-2006 870,600 639,600 -------- -------- Total senior term notes $935,600 $679,600 ======== ======== Interest on variable rate senior term notes is calculated using LIBOR. The Company has significant amounts of floating rate lease and loan investments, potentially giving rise to market risks associated with changing interest rates. The Company mitigates these risks by attempting to approximately match its floating rate assets with floating rate liabilities. Derivative financial instruments are a useful tool in matching the portfolio and in otherwise reducing the Company's exposure to interest rate risk. Interest rate swap agreements are used to modify the underlying interest characteristics of the Company's outstanding debt, either from a fixed to a floating basis, or from floating to fixed. These agreements involve the receipt (or payment) of fixed rate amounts in exchange for floating rate interest payments (receipts) over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is calculated based on the notional amounts and a widely used floating rate index (LIBOR). It is accrued as interest rates change and is recognized as an adjustment to interest expense related to the debt. As a result of interest rate swaps, interest expense was higher by $0.8 million in 1996 and was reduced by $2.2 million in 1995 and $3.1 million in 1994. The related amount payable to or receivable from counterparties is included in accrued interest. The fair values of the swap agreements are not recognized in the financial statements. The total notional principal of all interest rate swaps as of December 31, 1996 was $251.8 million, with termination dates ranging from 1997 to 2006. PAGE 39 Nonrecourse Obligations Nonrecourse obligations consist primarily of debt collateralized by the assignment of leases and a security interest in the underlying asset. The carrying amount of this collateral at December 31, 1996 is $305.0 million. The nonrecourse obligation associated with one aircraft will become recourse to the Company to the extent of the then remaining debt balance in 2002 when a balloon payment of $7.3 million is due. Nonrecourse obligations include the following: At December 31, 1996 1995 - ----------------------------- -------- -------- Variable Rate, due 2000-2002 $ 50,220 $ 52,633 Fixed Rate, 5.10%-11.08%, due 1997-2013 217,824 140,813 -------- -------- Total nonrecourse obligations $268,044 $193,446 ======== ======== Interest on variable rate nonrecourse obligations is calculated using the prime rate or LIBOR. Obligations Under Capital Leases Obligations under capital leases consist of equipment subject to capital lease financing which has been subleased. Such subleases are classified as direct financing leases, having carrying values of $12.4 million and $15.9 million at December 31, 1996 and 1995, respectively. Minimum future lease payments receivable under the subleases aggregate $15.6 million receivable over a period ending in 2003. The obligations under capital leases and the related subleases have the same terms and call for fixed rental payments. The Company has purchase and renewal options under the leases which allow it to accommodate similar options exercisable by sublessees. Maturities Maturities of debt financings, obligations under capital leases and nonrecourse obligations are presented in the following table. Imputed interest on capital leases totaled $3.2 million at December 31, 1996. This table assumes that the commercial paper, notes payable and bankers' acceptances are retired by the unused revolving commitments. Obligations Converted Under Total Total Revolving Senior Capital Debt Nonrecourse Year Due Credit Loans Term Notes Leases Financing Obligations - ------ -------- -------- -------- -------- ----------- 1997 $ 36,626 $130,000 $2,157 $168,783 $ 86,192 1998 -- 99,000 1,483 100,483 61,517 1999 40,260 98,600 1,537 140,397 36,615 2000 -- 94,000 1,660 95,660 21,138 2001 -- 90,000 1,832 91,832 14,107 After 2001 -- 424,000 3,760 427,760 48,475 -------- -------- -------- -------- -------- Total $ 76,886 $935,600 $12,429 $1,024,915 $268,044 ======== ======== ======== ========== ======== OPERATING LEASE OBLIGATIONS The Company is a lessee under certain equipment and facility leases which are classified as operating leases. Total rental expense was $34.0 million, $20.5 million and $16.1 million in 1996, 1995 and 1994, respectively. The equipment under these leases has been subleased, generating operating lease income of $38.3 million, $23.8 million and $17.4 million in 1996, 1995 and 1994, respectively. The Company has purchase and renewal options under certain of these leases. During 1996, the Company entered into transactions for the sale leaseback of rail equipment and a steel production facility. During 1995, the Company entered into a transaction for the sale leaseback of an aircraft. The net book value of the equipment is not shown on the balance sheet. Future rentals payable by the Company through 2021 and sublease receivables under noncancellable operating leases through 2011 are as follows: Obligations Operating Year Due Under Sublease Lease Receivables - -------- -------------- ----------------- 1997 $ 37,284 $ 43,067 1998 38,103 40,745 1999 38,020 38,762 2000 35,606 24,908 2001 23,954 18,201 After 2001 268,636 83,054 -------- -------- Total $441,603 $248,737 ======== ======== PAGE 40 Stockholder's Equity As of December 31, 1996 and 1995, all issued common and preferred stock of the Company was held by GATX Corporation. The preferred stock is convertible to common stock on a one-for-one basis at the option of the holder. Dividends on preferred stock are payable on a share-for-share basis at the same rate per share as common stock when and as declared by the board of directors. The equity adjustment from foreign currency translation decreased stockholder's equity $2.2 million in 1996, increased stockholder's equity $1.4 million in 1995 and decreased stockholder's equity $0.4 million in 1994. The net unrealized gain on equity securities increased stockholder's equity $5.6 million in 1996 and was not material in either 1995 or 1994. INCOME TAXES GATX Corporation files a consolidated federal income tax return which includes the Company. Under an intercompany tax agreement, the parent reimburses the Company to the extent the Company's operating losses and investment tax credits are utilized in the consolidated federal return. Should the Company generate taxable income, the agreement provides for payment by the Company of any resulting additional federal tax liability incurred by GATX Corporation. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recorded these differences in its deferred tax accounts, intercompany accounts receivable, and equity accounts. In exchange for cash payments, GATX Corporation has assumed a portion of GATX Capital's deferred tax liability. GATX Corporation recontributed these amounts through the purchase of Convertible Preferred Stock, currently outstanding, over the period from 1975 to 1985. In addition, GATX Capital has an account receivable of $46.1 million from GATX Corporation resulting from the reassumption of a portion of these deferred taxes through December 31, 1994. Offsetting this receivable is $0.9 million due to GATX Corporation, which consists of amounts owed for dividends, overhead and taxes pursuant to the intercompany tax agreement. Significant components of the Company's deferred tax liabilities and assets are as follows: At December 31, 1996 1995 - --------------- -------- -------- DEFERRED TAX LIABILITIES Leveraged leases $ 57,409 $ 50,762 Other leases 85,250 79,360 Investment in joint ventures 30,725 22,684 Alternative minimum tax adjustment 4,217 2,839 Other 10,647 12,259 -------- -------- Total deferred tax liabilities 188,248 167,904 -------- -------- DEFERRED TAX ASSETS Allowance for losses on investments 44,754 36,279 Loans 7,235 9,653 Other 5,592 15,469 -------- -------- Total deferred tax assets 57,581 61,401 -------- -------- Net deferred tax liabilities $130,667 $106,503 ======== ======== TAX ACCOUNT BALANCES Deferred income tax liabilities $ 51,726 $ 27,562 Preferred stock and related additional paid-in capital 125,000 125,000 Due from GATX Corporation (46,059) (46,059) -------- -------- Net deferred tax liabilities $130,667 $106,503 ======== ======== PAGE 41 The provision for income taxes consists of the following: Year ended December 31, 1996 1995 1994 - ----------------------- ---- ---- ---- CURRENT Federal $13,276 $ 7,389 $11,437 State and local 371 1,513 (44) Foreign 57 (1,227) 719 ------ ------ ------ Total current 13,704 7,675 12,112 ------ ------ ------ DEFERRED Federal 12,730 10,515 2,683 State and local 4,301 2,175 2,778 Foreign 1,901 2,375 1,212 ------ ------- ------- Total deferred 18,932 15,065 6,673 ------ ------ ------- Total provision for income taxes $32,636 $22,740 $18,785 ======= ======= ======= A reconciliation between the federal statutory tax rate and the Company's effective tax rate is shown below: Year ended December 31, 1996 1995 1994 - ----------------------- ---- ---- ---- Federal statutory income tax rate 35.0% 35.0% 35.0% State tax provision, net of federal tax benefit 4.1% 4.1% 4.1% Other 2.5% 2.0% 3.9% ---- ---- ---- Effective tax rate 41.6% 41.1% 43.0% ==== ==== ==== Income before income taxes from foreign operations was $4.7 million, $2.5 million and $1.8 million in 1996, 1995 and 1994, respectively. Federal income taxes have not been provided on the undistributed earnings of foreign subsidiaries and affiliates which the Company intends to permanently reinvest in these foreign operations. The cumulative amount of such earnings was $14.3 million at December 31, 1996. It is not practicable to estimate the tax liability, if any, related to these earnings. FOREIGN OPERATIONS The Company provides or arranges equipment financing for non-affiliated entities both inside and outside the United States. In the following table, export income pertains to revenue generated by domestic operations through transactions with customers in foreign countries. Some of these transactions are denominated in foreign currencies. Information designated as foreign in the following table pertains to operations that are located outside of the United States, primarily in Canada, Europe and Australia. Year ended December 31, 1996 1995 1994 - ----------------------- ---- ---- ---- EARNED INCOME Domestic $306,896 $191,343 $179,709 Export 28,750 28,537 26,436 Foreign 25,902 17,591 10,505 Eliminations (1,185) (962) (618) ------ ---- ------- $360,363 $236,509 $216,032 ======== ======== ======== NET INCOME United States $37,261 $24,246 $20,596 Foreign 8,594 8,306 4,192 Eliminations -- 52 63 ------- ------- ------- $45,855 $32,604 $24,851 ======= ======== ======= TOTAL ASSETS United States $ 1,613,390 $ 1,318,020 $ 1,038,762 Foreign 244,729 $207,779 236,828 Eliminations (9,490) (7,416) (6,000) ----------- ----------- ----------- $ 1,848,629 $ 1,518,383 $ 1,269,590 =========== =========== =========== The Company has entered into currency swap agreements to hedge the risk that the eventual dollar net cash in-flow from foreign denominated investments will be adversely affected by changes in exchange rates. The currency swaps exchange U.S. borrowings of $31.2 million for liabilities of $42.3 million Canadian dollars, with termination dates ranging from 2001 to 2003. PAGE 42 RETIREMENT BENEFITS The Company, exclusive of Sun Financial and Centron, participates in the GATX Corporation Non-Contributory Pension Plan for Salaried Employees (the "Plan"), a defined benefit pension plan with GATX Corporation covering substantially all employees. Sun Financial and Centron employees participate in a 401(k) retirement plan. Pension cost for each GATX subsidiary included in the Plan is determined by independent actuaries. However, accumulated Plan obligation information, Plan assets and the components of net periodic pension costs pertaining to each subsidiary have not been separately determined. Contributions to the Plan made by the Company through GATX Corporation and pension expense allocated to the Company are not material to these financial statements. In addition to pension benefits, the Company provides other postretirement benefits including limited healthcare and life insurance benefits for certain retired employees who meet established criteria. Most domestic employees, exclusive of Sun Financial and Centron employees, are eligible if they retire from the Company with immediate pension benefits under the Plan. The net periodic cost and accrued liability are not material to these financial statements. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK At December 31, 1996, the Company's investment portfolio consists of 33% commercial jet aircraft, 20% rail equipment, 12% warehouse and production equipment, 12% information technology equipment, 11% marine equipment, 4% golf courses, and 8% other equipment. The Company's backlog was $425 million (unaudited) and $325.0 million (unaudited), at December 31, 1996 and 1995, respectively. Backlog represents planned equipment purchases at year-end, a portion of which are subject to firm purchase commitments. The Company is a party to financial guarantees with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Guarantees are commitments issued by the Company to guarantee the value of an asset at the end of the lease, or to guarantee performance of an affiliate to a third-party, and involve, to varying degrees elements of credit and market risk which are not recognized in the consolidated balance sheets. These commitments have fixed expiration dates ranging from 1997 to 2015. Since many of the assets on lease are expected to retain their value, the total amount guaranteed does not necessarily represent future cash requirements. the value of such guarantees was $148.2 and $131.1 million at December 31, 1996 and 1996 respectively. Fees received are generally recognized over the guarantee period. The Company uses essentially the same credit policies in making commitments and conditional obligations as it does for funded transactions. All investments are subject to normal credit policies, collateral requirements and senior management review. For example, lease provisions require lessees to meet certain standards for maintenance and return conditions, and provide for repossession upon default. Loans are generally secured by equipment or real estate, and may involve guarantees or other assets as collateral. All commitments having off-balance sheet risk are reviewed at least annually for potential exposure using the same criteria discussed in the Allowance for Losses on Investments footnote, and the allowance is adjusted accordingly. The Company is engaged in various matters of litigation and has unresolved claims pending. While the amounts claimed 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. FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles require disclosure of the estimated fair value of the Company's financial instruments, excluding lease transactions for under SFAS 13. Fair value is a subjective and imprecise measurement that is based on assumptions and market data. PAGE 43 The use of different market assumptions and valuations methodologies may have a material effect on the estimated fair value amounts. Accordingly, managements cannot provide assurance that the fair values presented are indicative of the amounts that the company could realize in a current market exchange. The following methods and assumtions were used to estimate the fair value of each class of financial instruments: Short-Term Financial Instruments The carrying amounts included on the balance sheet approximate fair value because of the short maturity of these instruments. This approach applies to cash and cash equivalents, accrued interest, accounts payable, commercial paper, and banker's acceptances. Secured Loans The fair values of the fixed rate loans are estimated using discounted cash flow analysis at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The fair values of the variable rate secured loans are assumed to be equal to their carrying values. Senior Term Notes and Nonrecourse Obligations The fair value of fixed rate senior term notes and non-recourse obligations are estimated by discounting future contractual cash flows using the market interest rate for each note based on the Company's current incremental borrowing rates for similar borrowing arrangements. The fair values of variable senior notes and nonrecourse obligations are assumed to be equal to their carrying values. Interest Rate and Currency Swaps The fair value of the interest rate and currency swaps are estimated by discounting the fixed cash flows received under each swap using the rate at which the Company could enter into new swaps of similar remaining maturities. The carrying amount shown on the table below represents the amount of accrued interest payable or receivable at the end of the period. The fair value represents the accrued amount plus the amount that the Company would have to pay or would receive in the current market to unwind the swaps. Other Off-Balance Sheet Financial Instruments It is not practicable to estimate the fair value of the Company's other off-balance sheet financial instruments because there are few active markets for these transactions, and the Company is unable at this time to estimate fair value without incurring excessive costs. Summary of Fair Values The following table presents the fair values of only those financial instruments required to be presented by generally accepted accounting principles. Proceeds from senior term notes are invested in a variety of activities including both financial instruments shown in this table as well as leases and joint venture investments for which fair value disclosures are not required. Carrying Fair At December 31, 1996 Amount Value - -------------------- ------ ----- ASSETS Secured Loans $ 222,602 $ 219,389 LIABILITIES Senior term notes 935,600 954,428 Nonrecourse obligations 268,044 269,917 Interest rate and currency swaps (240) 5,420 Carrying Fair At December 31, 1995 Amount Value - -------------------- ------ ----- ASSETS Secured Loans $239,873 $252,443 LIABILITIES Senior term notes 679,600 726,700 Nonrecourse obligations 193,446 199,797 Interest rate and currency swaps 103 (964) PAGE 44 REPORT OF INDEPENDENT AUDITORS Board of Directors GATX Capital Corporation We have audited the accompanying consolidated balance sheets of GATX Capital Corporation (a wholly-owned subsidiary of GATX Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and reinvested earnings, and consolidated cash flows for each of the three years in the period ended December 31, 1996. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GATX Capital Corporation and subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Francisco, California January 28, 1997 EX-23 4 Exhibit 23 - Consent of Independent Auditors We consent to the incorporation by reference in Registration Statements No.33-6910 on Form S-3 filed July 7, 1986 (as amended by Amendment No. 1 filed December 19, 1986, Amendment No. 2 filed January 7, 1987, Amendment No. 3 filed December 23, 1987, and Amendment No. 4 filed August 9, 1989), No. 33-30300 on Form S-3 filed August 2, 1989, No. 33-40327 on Form S-3 filed May 2, 1991, and No. 33-64474 on Form S-3 filed June 17, 1993 , and No.35-65053 on Form S-3 filed January 5, 1996 of GATX Capital Corporation of our report dated January 28, 1997, with respect to the consolidated financial statements of GATX Capital Corporation incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. ERNST & YOUNG LLP San Francisco, California March 27, 1997 EX-27 5
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 TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 18,482 0 941,398 114,096 12,393 0 429,880 0 1,848,629 0 1,216,073 1,031 0 1,027 341,619 1,848,629 36,286 360,363 32,991 110,280 72,742 12,744 86,106 78,491 32,636 0 0 0 0 45,855 0 0 CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 461,757, LEVERAGED LEASE RECEIVABLES OF 257,039, AND SECURED LOANS OF 222,602. CONSISTS OF ASSETS HELD FOR SALE OR LEASE. 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 735,600, OBLIGATIONS UNDER CAPITAL LEASES OF 12,429, AND NONRECOURSE OBLIGATIONS OF 268,044. PAR VALUE ONLY. CONSISTS OF RETAINED EARNINGS OF 185,686, ADDITIONAL PAID-IN CAPITAL OF 151,902 ,UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX OF 5,574 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (1,543). CONSISTS OF COTS OF GOODS SOLD OF 32,991 AND OPERATING LEASE EXPENSE OF 52,404, CONSISTS OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF 68,298, AND OTHER EXPENSES OF 4,444.
EX-99 6 Exhibit 99 Medium Term Notes Interest Amount Maturity Rate Fixed $50,000,000 1/1/96 9.380 $5,000,000 01/30/98 10.000 $2,000,000 02/25/98 9.760 $7,000,000 03/10/98 10.000 $10,000,000 03/16/98 10.000 $2,000,000 03/19/98 10.000 $6,000,000 03/19/98 10.000 $5,000,000 03/20/98 9.930 $10,000,000 04/01/98 10.000 $5,000,000 03/22/99 9.900 $16,000,000 04/15/99 9.900 $4,000,000 05/10/00 10.200 $2,000,000 03/21/01 10.000 $5,000,000 03/22/01 10.000 $16,000,000 04/11/01 10.000 $32,600,000 05/05/99 9.850 $25,000,000 01/15/97 7.900 $10,000,000 05/05/97 8.200 $5,000,000 03/10/98 8.670 $13,000,000 04/30/98 6.120 $5,000,000 05/07/98 6.110 $5,000,000 10/15/98 8.780 $10,000,000 11/15/99 6.375 $17,000,000 07/26/00 6.210 $10,000,000 10/11/00 6.500 $2,000,000 10/30/00 9.280 $6,000,000 11/15/00 9.120 $10,000,000 10/08/01 9.125 $2,000,000 10/08/01 9.050 $10,000,000 01/10/02 9.500 $15,000,000 01/10/02 9.500 $20,000,000 06/03/03 7.200 $4,000,000 02/02/98 5.400 $10,000,000 06/09/98 6.150 $5,000,000 02/02/99 5.560 $30,000,000 06/09/00 6.440 $5,000,000 02/02/00 5.810 $10,000,000 12/5/00 6.165 $5,000,000 02/02/01 5.880 $15,000,000 03/15/01 6.660 $10,000,000 06/09/01 6.535 $15,000,000 12/5/01 6.270 $4,000,000 02/04/02 6.100 $5,000,000 04/04/02 7.460 $15,000,000 05/17/02 7.170 $15,000,000 05/17/02 7.170 $15,000,000 12/16/02 6.360 $21,500,000 04/25/03 7.070 $6,000,000 02/02/04 6.340 $5,000,000 04/14/04 7.920 $5,000,000 04/14/04 7.920 $3,000,000 02/02/05 6.375 $25,000,000 10/13/05 6.860 $15,000,000 11/30/05 6.690 $10,000,000 11/30/05 6.690 $3,000,000 02/02/06 6.450 $3,500,000 02/02/07 6.480 $10,000,000 06/11/98 6.550 $5,000,000 06/11/99 6.800 $5,000,000 06/11/99 6.760 $10,000,000 06/12/00 6.950 $10,000,000 05/21/01 6.930 $5,000,000 05/20/04 7.290 $5,000,000 05/20/04 7.290 $8,000,000 05/10/06 7.640 $10,000,000 05/31/06 7.350 $200,000,000 12/15/06 6.875 Floating $20,000,000 04/07/97 $20,000,000 02/16/99 $25,000,000 01/16/97 ------------- $935,600,000 ============= -----END PRIVACY-ENHANCED MESSAGE-----