-----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, NWfAEX4Z+6KdcEHzs0nla+Y54OK9N9XKv8QCOJtY7dq8BUSJrB9SP7NqJBqB2YEW eGl7YbALcQ1n51daugTj8w== 0000357019-98-000004.txt : 19980401 0000357019-98-000004.hdr.sgml : 19980401 ACCESSION NUMBER: 0000357019-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-08319 FILM NUMBER: 98581987 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 For the Year Ended Commission File Number December 31, 1997 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 20, 1998, 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. 1 DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K Annual Report to Stockholder for Part II Items 6,7,& 8 Fiscal Year ended December 31, 1997 (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 2 PART I Item 1. 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. 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 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 under authority of Supplemental Type Certificates issued by the FAA pursuant to a design approved by the FAA at the time the modifications were made, and which are subject to the Airworthiness Directive (the "STCs"). The three Evergreen Affected Aircraft were flown as part of its fleet for more than five years, and the seven other Affected 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 its three Affected Aircraft. In an initial disclosure statement dated October 29, 1996, and served on Airlog and the Company pursuant to applicable discovery rules, Evergreen alleged damages which it 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 3 attributable to Evergreen's diminished 747 fleet capacity (which Evergreen did not quantify, but 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. In its November 7, 1997 Subsequent Case Management Statement, Evergreen claimed that it seeks recovery for out-of-pocket losses, lost revenues, lost profits, lost business opportunities, maintenance work, repair costs and capital losses in an amount that exceeds $145 million. Airlog and the Company filed a motion seeking partial summary judgment as to four of Evergreen's counterclaims. Airlog and the Company 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, seeking 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. On June 5, 1997, the Court ruled on the Motion For Partial Summary Judgment. The Court granted the motion as to Evergreen's counterclaim that alleged Airlog breached its warranty under the Purchase Agreement pursuant to which Airlog sold one of the converted aircraft to Evergreen, and denied the motion as to Evergreen's counterclaim that Airlog breached its warranty under the Modification Agreements pursuant to which Airlog manufactured and installed freighter conversion kits with respect to two other aircraft owned by Evergreen. The Court ruled that the Purchase Agreement was a contract for the sale of goods and that claims thereunder were barred by the four year statute of repose under the California Commercial Code (the "Code"). The Court ruled that the Modification Agreements were contracts for services not governed by the Code, and that any applicable statute of limitations did not begin to run until Evergreen had, or should have had, knowledge of the alleged breach. The Court also denied the motion with respect to Evergreen's counterclaim in which it alleged that Airlog negligently misrepresented certain facts which purportedly induced Evergreen to enter into the Purchase and Modification Agreements. The Court's ruling bars Evergreen from recovering under its claim for breach of warranty under the Purchase Agreement, and permits Evergreen (subject to reconsideration or appeal) to proceed with its claim for breach of warranty under the Modification Agreements and its claim of negligent misrepresentation. The ruling does not represent a decision that Evergreen is entitled to prevail on those claims. Airlog and the Company have other defenses to those claims which they are vigorously asserting. 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 Affected Aircraft owned by AIA. These aircraft were modified by subcontractors of Airlog in 1992 and 1994 with AIA's knowledge and consent. 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. AIA filed a Joint Case Management Statement and Proposed Order specifying the damages it has allegedly suffered as a result of the application of the Airworthiness Directive to the two Affected Aircraft it owns. In that pleading, AIA alleges that it sustained damages of $43,787,954 through May 31, 1997, and further alleges that it continues to accrue loss of use damages of at least $1,800,000 per month until the aircraft are operational. 4 On June 4, 1997 Tower Air, Inc. ("Tower") filed an action in the Supreme Court of the State of New York, County of New York (Index No. 97/602851) against the Company, Airlog, an officer of the Company and others with respect to one Affected Aircraft it leased and subsequently purchased from a trust for the benefit of an affiliate of Airlog in December 1994. This action asserts causes of action in fraud and deceit, negligent misrepresentation, breach of contract, negligence and seeks damages in excess of $25 million together with interest, costs, attorneys' fees and punitive damages. General Electric Capital Corporation and a subsidiary thereof (collectively, "GECC"), Airlog, GATX Corporation and the Company entered into a Tolling Agreement dated December 17, 1996 and amended in April 1997 and January 1998. The Tolling Agreement relates to certain causes of action under a number of legal theories arising out the modification of three Affected Aircraft from passenger to freighter configuration. These aircraft were modified by subcontractors of Airlog in 1991 with GECC's knowledge and consent. Under the Tolling Agreement, as amended, the parties have agreed that any defenses of expiration of the statute of limitations or statute of repose or laches applicable to the causes of action asserted by GECC are tolled up to and including July 6, 1998. On February 25, 1998 The Bank of New York ("BNY") filed an action, as beneficial owner of an Affected Aircraft, in the United States District Court for the Northern District of California (No. C98-0385 WHO). This aircraft was originally converted by Airlog for Evergreen. This action seeks declaratory relief and asserts claims for breach of contract, intentional misrepresentation, nondisclosure of known facts, negligence, negligent misrepresentation and unfair competition. The suit alleges damages of a minimum of $262,000 per month in lost rent and storage costs since February 1996, unspecified maintenance and related expenses, diminution in the value of its aircraft by well in excess of $10 million plus the costs of aircraft inspection and modifications to comply with the Airworthiness Directive,"Anticipated to be in the millions of dollars". Claims for interest, injunctive relief, restitution and attorneys' fees are also included. Airlog and the Company have filed an action in the United States District Court for the Northern District of California against Pemco Aeroplex, Inc. (C97-2484WHO), a contractor for Airlog which obtained the STCs and modified certain of the Affected Aircraft. The Complaint in this action alleges causes of action for fraudulent and negligent misrepresentation, breach of contract, professional negligence, implied and equitable indemnity and contribution. This action seeks a judgment awarding the plaintiffs any and all damages, costs and expenses in connection with the resolution of the concerns of the FAA as expressed in the Airworthiness Directive or relating to it, repairing the Affected Aircraft, defending against the litigation involving the plaintiffs arising from the Affected Aircraft, paying any judgments against plaintiffs that may be entered in said litigation and attorneys' fees incurred by the plaintiffs in connection with defending said litigation. On December 18, 1997 Airlog filed a claim under the Federal Tort Claims Act against the FAA for negligence in connection with the FAA's participation in the design and manufacture of the Affected Aircraft in the amount of $6,204,065. This amount represents, as at December 18, 1997, the expenses incurred by Airlog in responding to the Airworthiness Directive and legal fees and costs incurred in defending the litigation described above. Airlog reserved its right to increase the amount of its claim in the future. On January 29, 1998 the FAA rejected Airlog's claim. While disappointing, the FAA's rejection of Airlog's claim was a procedural requirement to initiating litigation against the agency. Under the applicable statute Airlog has six months in which to commence such litigation against the FAA. On February 10, 1998 the FAA issued a letter to Airlog that approves a number of Airlog generated Service Bulletins which, when collectively performed on an Affected Aircraft, permit an operator of such aircraft to achieve revenue service, but at payloads less than the original certified payload. 5 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, Tower, GECC and AIA, solutions to the FAA's remaining concerns raised in the Airworthiness Directive. While the results of any litigation are impossible to predict with certainty, the Company believes that each of the foregoing claims are without merit, and that the Company and Airlog have adequate defenses thereto. In addition to those matters set forth above, the Company is involved in various matters of litigation (including those matters set forth above) 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. 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 - ------------- Incorporated herein by reference to the Annual Report, pages 26-29, 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 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, 1997, 1996, and 1995 Page 30 Consolidated Balance Sheets As of December 31, 1997 and 1996 Page 31 Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996, and 1995 Page 32 Notes to Consolidated Financial Statements Pages 33 - 43 6 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 54 Joseph C. Lane President, Chief Executive Officer and Director 1994 44 David B. Anderson Director 1996 56 Alan C. Coe Executive Vice President and Director 1994 46 Jesse V. Crews Executive Vice President, Chief Investment Officer, and Director 1994 45 David M. Edwards Director 1990 46 Kathyrn G. Jackson Executive Vice President and Director 1997 42 Item 10(b). Executive Officers of the Registrant - ------------------------------------------------- Name Office Held Since Age - ----------------------------------------------------------------------------- Joseph C. Lane President, Chief Executive Officer and Director 1994 44 Alan C. Coe Executive Vice President and Director 1994 46 Jesse V. Crews Executive Vice President, Chief Investment Officer, and Director 1994 45 Frederick L. Hatton Executive Vice President 1984 55 Cal C. Harling Executive Vice President- Technology Group 1994 49 Kathryn G. Jackson Executive Vice President, Managing Director-Corporate Finance and Director 1997 42 Robert J. Sammis Executive Vice President- Diversified Portfolios 1993 51 Michael C. Cromar Senior Vice President and Chief Financial Officer 1994 50 Richard M. Tinnon Vice President and Treasurer 1996 34 Thomas C. Nord Vice President, General Counsel, and Secretary 1980 57 Valerie C. Williams Vice President-Human Resources 1989 53 Curt F. Glenn Vice President-Investment and Managed Portfolios 1997 43 A. Douglas Shattuck Principal Accounting Officer and Corporate Controller 1997 35 7 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 an 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. Mr. Coe is currently responsible for the activities of GATX Air. 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 had 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 since 1984. Mr. Hatton joined the Company in 1983 as Senior Vice President and President of GATX Air and is responsible for GATX/Airlog. He is currently a Director of International Air Leasing Co. (IASCO) and a Director of the International Society of Transport Aircraft Trading (ISTAT). Prior to GATX, he served as Vice President Marketing, and Executive Vice President with IASCO, and in a number of managerial capacities for The Flying Tiger Line. He received a BS from Yale University in 1964, 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, Executive Vice President-GATX Technology Services since 1997. 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. 8 KATHRYN G. JACKSON, Executive Vice President and Director since 1997. Ms. Jackson 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 graduated Phi Beta Kappa from Stanford University and holds an MBA from Northwestern University. ROBERT J. SAMMIS, Executive Vice President. 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 and Senior Vice President, Corporate Development. 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, Senior 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 Associate 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. THOMAS C. NORD, Vice President, General Counsel and Secretary since 1980. Mr. Nord joined the Company as Associate Counsel in 1977 and became Assistant General Counsel in 1978. Prior to 1977, Mr. Nord served as Counsel for Irving Trust Company (three years) and as an Associate in the New York law firm of Seward & Kissel (five years). Mr. Nord received a BA from Northwestern University in 1962 and a JD from the University of North Carolina in 1969. 9 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, Vice President-Investment and Managed Portfolios since 1997. Mr. Glenn joined the Company in 1980 as Assistant Tax Manager, was appointed Tax Manager in 1985 and elected Vice President in 1989. He was the Controller and Principal Accounting officer from 1992 until 1997. 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. A. DOUGLAS SHATTUCK, Principal Accounting Officer and Corporate Controller since 1997. Mr. Shattuck joined the Company in 1996 as Assistant Controller, Financial Reporting. Prior to joining GATX Capital, Mr. Shattuck was Assistant Controller of Matson Navigation Company, a San Francisco based container shipping firm, from March 1992 to December 1996. Mr. Shattuck began his career in 1984 with Deloitte & Touche in San Francisco. He received his BS degree in Business Administration in 1984 from Georgetown University. 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, 1997, 1996 and 1995 Consolidated Balance Sheets As of December 31, 1997 and 1996 Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995 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. 10 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 Shareholder, pages 26-44. (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. 11 Item 14(b). Reports on Form 8-K - -------------------------------- The Company filed a current report on Form 8-K on October 14, 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 30, 1998 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 Senior Vice President and and Director Chief Financial Officer Dated: March 30, 1998 Dated: March 30, 1998 By /s/ A. Douglas Shattuck By /s/ David M. Edwards - -- ----------------------- -- -------------------- A. Douglas Shattuck David M. Edwards Principal Accounting Officer Director and Corporate Controller Dated: March 30, 1998 Dated: March 30, 1998 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 30, 1998 Dated: March 30, 1998 12 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, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Francisco, California January 26, 1998 13 EX-12 2 Exhibit 12 GATX Capital Corporation Ratio of Earnings to Fixed Charges Year Ended December 31, 1997 (in thousands) 1997 1996 1995 1994 1993 ----- ---- ---- ---- ---- Fixed Charges: Interest on indebtedness and amortization of debt discount and expense $96,800 $86,106 $68,396 $62,744 $65,454 Capitalized interest 1,575 3,074 1,601 292 279 Portion of rents representing interest factor (assumed to approximate 33%) 13,703 10,849 6,574 5,122 3,012 -------- -------- ------- ------- ------- Total fixed charges $112,078 100,029 76,571 68,158 68,745 ======== ======= ====== ====== ======= Earnings available for fixed charges: Net income 53,564 45,855 32,604 24,851 21,525 Add (deduct): Income taxes (benefit) 36,628 32,636 22,740 18,785 21,361 Equity in net earnings of joint ventures, net of dividends received 39,031 8,740 13,522 14,322 16,222 Fixed charges (excluding capitalized interest) 110,503 96,955 74,970 67,864 68,466 -------- -------- ------- -------- -------- Total earnings available for fixed charges $239,726 $184,186 $143,836 $125,822 $127,574 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.14 1.84 1.88 1.85 1.86 ======== ======== ======== ======== ======== 14 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW - -------- GATX Capital Corporation and its subsidiaries ("GATX Capital" or the "Company") engage in two main activities: 1) we are actively involved in asset-based investment and finance, and 2) we provide a wide range of technology services enabling their customers to acquire, construct and finance information networks. The Company's technology solutions business was significantly expanded with the October 1996 acquisition of the 50% of Centron which it did not already own. Centron's financial results were consolidated in the Company's financial statements subsequent to the October 1996 acquisition. Revenue from asset-based investment and finance activities is generated from financing equipment (either for the Company's own account or through partnerships and joint ventures); from the remarketing of assets; from managing the equipment related investment portfolios of others; and from brokering or arranging asset financing transactions. These types of revenue are included in investment and asset management revenue, including revenue earned from financing alternatives related to technology solutions. Sales and service revenue related to technology service is included in technology sales and service revenue. INVESTMENT PORTFOLIO Stacked pie charts presenting the following: As of December 31, 1997 1996 - ------------------ ---- ---- Commercial Aircraft 26% 33% Rail 25% 20% Technology 15% 12% Diversified Portfolios 34% 35% In 1997, 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 lease portfolios; in the operating lease of a wide variety of assets; and in successfully arbitraging between asset and financial markets. Going forward, the Company's response to tightening market conditions will include: (i) risk-sharing via partnerships 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 GATX Capital, our partners and our customers, and (iii) selectively adapting and exporting our skills internationally. The worldwide commercial aviation industry continued to perform well again in 1997. All of the major indices, from load factors to capacity, showed upward growth. Industry profitability reached an all time high as well, notwithstanding difficulties experienced by certain airlines. The Company had a successful year remarketing aircraft coming off lease, placing new aircraft deliveries with highly regarded airlines, and selling aircraft opportunistically out of its portfolio both to airlines and financial buyers. Lease terminations of its operating lease aircraft are staggered so that the Company is not overly exposed to a downturn in any single year. 15 GATX Capital and its partners have emphasized single aisle passenger aircraft in recent aircraft acquisitions. The Airbus Industrie A320 family and Boeing 737 and 757 have wide user bases with proven lease values. GATX Capital will continue to examine all commercial aircraft for acquisition, ranging in size from regional jets to intercontinental twin aisle aircraft, to ensure that it is aware of advantageous purchase opportunities. The Company will continue to sell portfolio aircraft in 1998 that either do not meet, or marginally comply with, noise and emission restrictions that will be enacted in developed countries commencing in 2000. In addition, the Company will take delivery of three new Airbus A321 aircraft in 1998 as well as commence acceptance of its order for the Next Generation Boeing 737's. The Company believes the airline market will be especially receptive to the delivery dates of its Next Generation 737 aircraft since there is no new availability of these aircraft from the manufacturer during the scheduled delivery period. The North American rail equipment leasing marketplace continues to be characterized by relatively high demand for equipment and active competition among leasing companies and financial institutions. Railroad consolidations and serious service problems created some unsettled market conditions during 1997, with varied impacts on GATX Capital's operating lease fleet. Generally, the demand for leased locomotives was very strong, and most freight car types similarly experienced solid demand. The year-end utilization of GATX Capital's operating lease fleet was approximately 97% for both rail cars and 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 on a global basis. GATX Capital continues to believe the market for information technology and communications equipment and services will provide opportunities for substantial growth. 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, provides customers with a range of integrated and stand-alone financial, consultative, implementation, operational and information services in North America and Europe. RESULTS OF OPERATIONS - --------------------- 1997 was another outstanding year, as evidenced by several key financial highlights: net income of $53.6 million was 16.8% higher than 1996 and a new GATX Capital record; the Company earned a 23.3% return on common equity; new investments of $862.4 million exceeded 1996's record investment by 31%. Net income increased during the year primarily as a result of increases in income from asset remarketing and from brokering and arranging financing transactions. 1996's net income exceeded 1995's net income due to increases in income from asset remarketing and from the Company's investment portfolio (excluding asset remarketing income). INVESTMENT AND ASSET MANAGEMENT Bar graph presenting the following (in millions): Year ended December 31, 1997 1996 1995 - ----------------------- ----- ----- ----- Total investment and asset management revenue $406.5 $324.1 $236.5 Investment and asset management revenue increased over 25% in 1997 to an all-time high of $406.5 million, following a 37% increase during 1996 to $324.1 million. Growth of the Company's investment portfolio during both 1997 and 1996 was the primary driver of the increase during both years. 16 AVERAGE TOTAL INVESTMENTS Bar graph presenting the following (in billions): Year ended December 31, 1997 1996 1995 - ----------------------- ---- ---- ---- Average total investments $1.9 $1.7 $1.3 Total average investments, before the allowance for possible losses, increased 14% during 1997 to a year-end balance of $2.2 billion. 1997's increase is significant given that average investments grew nearly 24% during 1996. Revenues from investments are offset by interest expense on borrowings used to fund new investments and operating lease expense, which includes depreciation of operating lease equipment and rent expense from off-balance sheet financing. The increases in average investments during both 1997 and 1996 are also the primary causes of the increase in interest expense and operating lease expense. Increases in asset remarketing income during both 1997 and 1996 and an increase in fee income in 1997 also contributed to the increases in investment and asset management revenue during 1997 and 1996. Asset remarketing income totaled $83.2 million in 1997 and $57.0 million in 1996. These amounts are comprised of gains on sale ($68.9 million and $35.5 million in 1997 and 1996, respectively) and residual sharing fees ($14.3 million and $21.5 million in 1997 and 1996, respectively). Fee income primarily includes fees earned from managing the equipment-related investment portfolios of others and fees earned from brokering or arranging transactions. The 1997 increase in fee income ($4.7 million) is due to increases in both management fees and arranger fees. Asset remarketing income includes gains on the sales of the Company's owned assets and 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. Although it is not necessarily consistent from year to year, and it may be composed of different mixes of gains on sales and fees, income from asset remarketing is a core component of the Company's business and has historically been a significant contributor to income. ASSET REMARKETING Bar graph presenting the following (in millions): Gains on Residual Year ended December 31, sale sharing fees Total - ---------------------- -------- ------------ ----- 1988 $ 25.9 $ 2.3 $ 28.2 1989 35.6 1.1 36.7 1990 48.6 1.5 50.1 1991 52.3 1.8 54.1 1992 22.3 1.7 24.0 1993 44.4 0.3 44.7 1994 21.4 2.9 24.3 1995 33.1 9.4 42.5 1996 35.5 21.5 57.0 1997 68.9 14.3 83.2 1997's asset remarketing income highlights the Company's ability to capitalize on market opportunities by selling assets at other than their lease termination and to realize the value of assets by arbitraging between the end user equipment markets and the financial markets. As mentioned previously, the Company opportunistically sold aircraft from its portfolio during the year to both airlines and financial buyers. Gains generated from these sales were a significant contributor to the increase in asset remarketing income. 17 TECHNOLOGY EQUIPMENT SALES AND SERVICE REVENUE AND RELATED COST 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, as well as provides financing for the hardware it markets. Centron's sales and earnings are seasonal in nature, with a disproportionately positive impact in the fourth quarter. During 1997 the Company expanded its sales operations into Europe via a 60% owned subsidiary. The increase in technology equipment sales and service revenue ($170.5 million) and related cost ($136.8 million) during 1997 is a combination of a full year of revenues in 1997 versus two months in 1996 and the 1997 growth of this portion of the Company's business. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses include costs incurred to support all types of activities discussed in the overview section. Selling, general and administrative costs increased in both 1997 and 1996 due primarily to higher human resource and other administrative costs resulting from a growth in business activity, including expansion of the technology portion of the business. The technology business has grown over the past two years primarily through the October 1996 acquisition of Centron and the November 1995 acquisition of Sun Financial. 1997 expenses also included those costs incurred to establish the necessary infrastructure to grow GATX Capital's technology solutions presence in Europe. PROVISION FOR LOSSES ON INVESTMENTS The provision for losses on investments is based on the Company's estimate for 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 $7.5 million in 1997 as a result of a $11.0 million provision for losses and $2.7 million of recoveries of previously written off investments, offset by $6.2 million of write-downs. At December 31, 1997 the allowance for losses on investments was 5.8% of investments, including off-balance sheet assets and after deducting nonrecourse debt, and is at an appropriate level given the current quality of the investment portfolio. This compares with 6.6% of investments as of December 31, 1996. CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES - ------------------------------------------ NEW INVESTMENT Bar graph presenting the following (in millions): Year ended December 31, 1997 1996 1995 - ----------------------- ------- ------- ------- New investment $862.4 $656.7 $385.9 The Company generates cash from operations and portfolio proceeds and has certain facilities for borrowing. During 1997 the Company invested a record $862.4 million in new investments, up over 31% from 1996. This new investment was funded with a $350.0 million note issuance, $179.4 million of nonrecourse debt borrowings, $139.1 million of short-term debt borrowings and a portion of the $513.7 million of cash generated from portfolio proceeds and operations. 1997's new investment volume included $368.0 million related to the acquisition of leased assets from Pitney Bowes, of which $174.6 million was contributed to a newly formed partnership with Pitney Bowes. The Company also paid $26.5 million of dividends in 1997. Historically, dividends have been paid on the Company's common stock at the rate of 50% of net income. The $350.0 million of notes was issued under the Company's new Series E $532 million shelf registration which was filed during 1997. The Company's commercial paper and bankers' acceptances are backed by credit agreements from a syndicate of domestic and international commercial banks. 18 As of December 31, 1997 the Company had the following borrowing capacity: $182.0 million remaining under the Series E shelf registration, $142.2 million of unused capacity under its commercial paper and bankers' acceptances credit agreements and $31.2 million remaining capacity under various stand-alone bank facilities maintained by two of the Company's subsidiaries. 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 and Poor's and Baa2 by Moody's Investors Service. During 1997 total debt financing grew at a faster rate than equity, increasing the Company's debt to equity ratio to 3.73:1 at year-end 1997 from 2.79:1 at year-end 1996. At December 31, 1997 GATX Capital can borrow an additional $196.7 million and still meet the 4:1 leverage ratio defined in its credit agreements. Also during 1997 the Company placed the proceeds from the sale of certain assets (approximately $35.7 million) in trust with a qualified intermediary pending the identification and acquisition of qualified replacement assets in order to affect a like-kind exchange for federal income tax purposes. The amounts in trust are classified as cash and cash equivalents in the accompanying balance sheet. As of December 31, 1997 the Company has approved unfunded transactions totaling $259.2 million, of which $150.9 million is expected to fund in 1998 and the remaining $108.3 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's capital structure includes both fixed and floating rate debt. The Company ensures a stable margin over its cost of funds by managing the relationship of its fixed and floating rate 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 it considers financially sound and by avoiding concentrations of risk with a single counterparty. YEAR 2000 DISCLOSURE - -------------------- The Company has evaluated its internal computer systems and has determined that it does not have any significant exposure to potential computer system failures caused by the Year 2000. The Company is currently in the process of assessing its exposure to the failure of the systems of its customers and suppliers. It is not anticipated that this assessment will identify significant exposure. 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, that could cause actual results to differ materially from those projected. 19 GATX CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (in thousands) Year ended December 31, 1997 1996 1995 -------- -------- -------- REVENUES: Investment and asset management $ 406,481 $ 324,077 $ 236,509 Technology equipment sales and service 206,802 36,286 --------- -------- -------- 613,283 360,363 236,509 --------- -------- -------- EXPENSES: Interest 96,800 86,106 68,396 Operating leases 118,096 77,289 50,424 Cost of technology equipment sales and service 169,826 32,991 Selling, general & administrative 118,849 68,298 43,517 Provision for losses on investments 11,033 12,744 18,000 Other 8,487 4,444 828 --------- -------- -------- 523,091 281,872 181,165 --------- -------- -------- Income before income taxes 90,192 78,491 55,344 Provision for income taxes 36,628 32,636 22,740 --------- -------- -------- NET INCOME 53,564 45,855 32,604 Reinvested earnings at beginning of year 185,686 162,400 146,036 Dividends paid to stockholder (26,500) (22,569) (16,240) --------- -------- -------- Reinvested earnings at end of year $ 212,750 $ 185,686 $ 162,400 ========= ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 20 GATX CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) December 31, December 31, 1997 1996 -------------- ---------------- ASSETS: Cash and cash equivalents $ 61,990 $ 18,482 Investments: Direct financing leases 666,524 461,757 Leveraged leases 170,555 257,039 Operating lease equipment- net of depreciation 524,523 429,880 Secured loans 180,331 222,602 Investment in joint ventures 549,596 308,934 Assets held for sale or lease 15,398 12,393 Other investments 52,690 65,506 Investment in future residuals 19,693 21,457 Allowance for losses on investments (121,576) (114,096) --------------- ---------------- Total investments 2,057,734 1,665,472 --------------- ---------------- Due from GATX Corporation 35,904 45,147 Other assets 161,515 119,528 --------------- ---------------- TOTAL ASSETS $ 2,317,143 $ 1,848,629 =============== ================ LIABILITIES AND STOCKHOLDER'S EQUITY: Accrued interest $ 16,070 $ 15,821 Accounts payable and other liabilities 167,825 138,660 Debt financing: Commercial paper and bankers' acceptances 127,832 13,772 Notes payable 74,161 63,114 Obligations under capital leases 9,754 12,429 Senior term notes 1,155,600 935,600 ---------------- ---------------- Total debt financing 1,367,347 1,024,915 ---------------- ---------------- Nonrecourse obligations 329,820 268,044 Deferred income 13,556 5,786 Deferred income taxes 55,600 51,726 Stockholder's equity: Convertible preferred stock, par value $1.00, and additional paid-in capital 125,000 125,000 Authorized--4,000,000 shares Issued and outstanding--1,027,050 shares in both years Common stock, par value $1.00, and additional paid-in capital 28,960 28,960 Authorized--2,000,000 shares Issued and outstanding--1,031,250 shares in both years Foreign currency translation adjustment (4,404) (1,543) Unrealized gain on available-for-sale securities 4,619 5,574 Reinvested earnings 212,750 185,686 ---------------- ---------------- Total stockholder's equity 366,925 343,677 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,317,143 $ 1,848,629 ================ ================ The accompanying notes are an integral part of these consolidated financial statements. 21 GATX CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 53,564 $ 45,855 $ 32,604 Reconciliation to net cash provided by operating activities: Provision for losses on investments 11,033 12,744 18,000 Depreciation expense 79,381 44,579 28,404 Provision for deferred income taxes 10,323 18,932 15,065 Gain on sale of assets (68,899) (35,533) (33,123) Changes in assets and liabilities: Other assets (40,678) (12,613) (2,436) Due from GATX Corporation 9,243 (810) (1,822) Accrued interest, accounts payable and other liabilities 29,414 29,951 (40,219) Deferred income 7,770 1,394 (205) Other - net (7,364) 18,265 9,612 ---------- ----------- ----------- Net cash flows provided by operating activities 83,787 122,764 25,880 ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in leased equipment, net of nonrecourse borrowings for leveraged leases (536,388) (376,276) (256,137) Loans extended to borrowers (35,126) (117,052) (84,050) Other investments (290,916) (163,334) (45,751) ------------ ----------- ----------- Total investments (862,430) (656,662) (385,938) ------------ ----------- ----------- Lease rents received, net of earned income and leveraged lease nonrecourse debt service 110,023 100,350 51,960 Loan principal received 62,377 121,952 56,042 Proceeds from sale of assets 218,493 164,169 188,333 Joint venture investment recovery, net of earned income 39,031 8,740 13,522 ------------ ----------- ----------- Recovery of investments 429,924 395,211 309,857 ------------ ----------- ----------- Net cash flows used in investing activities (432,506) (261,451) (76,081) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase(decrease)in short-term borrowings 139,107 (133,014) 13,425 Proceeds from issuance of long-term debt 350,000 368,000 170,000 Proceeds from nonrecourse obligations 179,409 109,328 13,646 Repayment of long-term debt (130,000) (112,000) (104,000) Repayment of nonrecourse obligations (117,113) (68,665) (12,423) Dividends paid to stockholder (26,500) (22,569) (16,240) Other financing activities (2,676) (3,816) (3,709) ---------- ----------- ----------- Net cash flows provided by financing activities 392,227 137,264 60,699 --------- ----------- ----------- Net increase(decrease) in cash and cash equivalents 43,508 (1,423) 10,498 Cash and cash equivalents at beginning of period 18,482 19,905 9,407 --------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,990 $ 18,482 $ 19,905 ========= =========== ============ 22 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid to parent $ 17,720 $ 14,402 $ 13,473 ========== ========== =========== Interest paid $ 98,126 $ 88,560 $ 68,645 Interest capitalized (1,575) (3,074) (1,601) ------------ ---------- ----------- Net interest paid $ 96,551 $ 85,486 $ 67,044 ============ =========== =========== The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) - ------------------------------------------ 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. 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 remaining lease term. 23 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. These warrants, as well as common stock obtained by exercising these warrants, are classified as available-for-sale and are 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. Changes to the fair value of these securities are reflected in stockholder's equity until realized. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate and currency swap agreements to manage its exposure to interest rate and currency exchange rate risk on existing or anticipated transactions. These derivative financial instruments are specifically identified with the instruments creating the interest and currency risk and qualify for hedge accounting. Interest rate differentials to be paid or received as a result of the interest rate swap agreements are accrued and recognized as an adjustment to interest expense and net amounts paid or received under the currency swap agreements are recognized over the term of the contract as an adjustment to the hedged investment. The fair values of these hedge contracts are not recognized in the financial statements. ACQUISITIONS 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. However, in September 1997 the term of the agreement was accelerated and the Company paid $9.0 million to acquire the remaining 20% of Sun Financial. The Company also paid additional performance related compensation to key employees of Sun Financial upon acquisition. Goodwill of approximately $3.9 million was recorded in connection with the acquisition of the remaining 20%, which is being amortized on a straight-line basis over the remaining ten year life of the original acquisition goodwill. Assets with a book value of $134.2 million were acquired and liabilities of $126.7 million were assumed in 1995. 24 In October 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. 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 on the balance sheet. Unaudited pro forma consolidated revenue of the Company, including Centron, 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 including the results of Centron is $48.9 million and $34.8 million for 1996 and 1995, respectively. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. 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. 25 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. 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, 1997 1996 ----------------- ---------------- Lease contracts receivable $ 650,544 $ 469,644 Estimated residual value 261,730 139,205 Unearned income (245,750) (147,092) ----------------- ---------------- Net investment $ 666,524 $ 461,757 ================= ================ 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 and 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, 1997 1996 ------------------ ------------------- Lease contracts receivable $ 276,469 $ 434,182 Nonrecourse debt service (169,045) (242,358) ------------------ ------------------- Net receivable 107,424 191,824 Estimated residual value 122,194 186,042 Unearned income (59,063) (120,827) ------------------ ------------------- Investment in leveraged leases 170,555 257,039 Deferred taxes arising from leveraged leases (42,466) (57,409) ------------------ ------------------- Net investment $ 128,089 $ 199,630 ================== =================== 26 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 $2.8 million, $1.9 million and $3.1 million in 1997, 1996 and 1995, 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 typically 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 $74.5 million, $41.4 million and $27.4 million is included in operating lease expense for 1997, 1996 and 1995, respectively. Major classes of equipment on operating leases are as follows: At December 31, 1997 1996 ---------------- ------------------ Commercial aircraft $ 183,464 $ 212,576 Rail 146,764 123,791 Technology 197,104 82,524 Other 104,639 46,441 ---------------- ------------------ Total cost 631,971 465,332 Accumulated depreciation (119,153) (50,986) ---------------- ------------------ Net book value 512,818 414,346 Accrued rent and other 11,705 15,534 ---------------- ------------------ Net investment $ 524,523 $ 429,880 ================ ================== 27 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 principal is recovered. 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 $19.3 million, $26.7 million and $14.3 million in 1997, 1996 and 1995, respectively. The types of loans in the Company's portfolio are as follows: At December 31, 1997 1996 --------------- --------------- Equipment $ 123,521 $ 122,994 Golf courses 53,959 78,286 Real estate 2,851 21,322 --------------- --------------- Total investment $ 180,331 $ 222,602 ================ =============== Impaired Loans (included in total) $ 9,028 $ 29,600 =============== =============== FUTURE LEASE AND LOAN RECEIVABLES - --------------------------------- As of December 31, 1997, 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 ----------------- ------------------ ----------------- 1998 $ 182,905 $ 166,579 $ 22,411 1999 142,908 136,459 19,664 2000 118,153 88,808 18,370 2001 84,176 46,304 12,729 2002 57,899 27,895 18,014 After 2002 171,927 97,140 89,143 ----------------- ------------------ ----------------- Total $ 757,968 $ 563,185 $ 180,331 ================= ================== ================= 28 INVESTMENT IN JOINT VENTURES - ---------------------------- Investments in joint ventures include commercial aircraft leasing, rail equipment leasing, information technology equipment leasing, and asset residual value guarantee ventures in both the 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. 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 $41.0 million, $30.8 million and $34.2 million in 1997, 1996 and 1995, 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 $730.2 million, $527.9 million and $457.0 million at December 31, 1997, 1996 and 1995, 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, 1997 1996 1995 --------------- ---------------- ---------------- Revenues $ 311,929 $ 175,973 $ 292,989 Pre-tax income 72,728 47,247 51,517 Total assets 2,642,460 1,651,495 1,310,062 Indebtedness 645,605 643,909 442,514 Total liabilities 1,161,724 719,446 585,532 Equity 1,480,736 932,049 724,530 29 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 and golf courses 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 release or sale in the normal course of business. The major classes of assets held for sale or lease are as follows: At December 31, 1997 1996 --------------- --------------- Real estate and golf courses $ 12,666 $ 4,081 Rail 2,216 5,023 Other 516 3,289 --------------- --------------- Net investment $ 15,398 $ 12,393 =============== =============== OTHER INVESTMENTS - ----------------- The components of other investments are as follows: At December 31, 1997 1996 --------------- --------------- Progress payments $ 4,608 $ 15,338 Cogeneration facility 27,068 29,062 Real estate development 13,414 11,935 Equity securities 7,600 9,171 --------------- --------------- Total other investments $ 52,690 $ 65,506 =============== =============== Progress payments include amounts paid, including capitalized interest, toward the construction of steel production equipment at December 31, 1997, and toward the construction of aircraft and steel production equipment at December 31, 1996. 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 disposition. 30 INVESTMENT AND ASSET MANAGEMENT REVENUE - --------------------------------------- The sources of investment and asset management revenue are as follows: Year Ended December 31, 1997 1996 1995 ------------ ------------ ------------ Earned lease income $ 245,523 $ 195,745 $ 139,712 Gain on sale of assets 68,899 35,533 33,123 Fees 29,371 31,840 19,026 Interest 23,271 28,374 23,179 Investment in joint ventures 27,909 22,411 18,594 Other 11,508 10,174 2,875 ------------ ------------ ------------ Total investment and asset management revenue $ 406,481 $ 324,077 $ 236,509 ============ ============ ============ 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: At December 31, 1997 1996 1995 ----------- ----------- ---------- Beginning balance $ 114,096 $ 92,489 $ 82,206 Provision 11,033 12,744 18,000 Charges to allowance (6,250) (5,025) (11,734) Recoveries and other 2,697 13,888 4,017 ------------ ------------ ----------- Balance at end of year $ 121,576 $ 114,096 $ 92,489 ============ ============ =========== 31 OTHER ASSETS - ------------ Other assets consists of the following: At December 31, 1997 1996 -------------- --------------- Trade and other receivables $ 70,277 $ 48,676 Technology equipment inventory 41,534 27,895 Goodwill 22,402 21,093 Other 27,302 21,864 --------------- --------------- Total other assets $ 161,515 $ 119,528 =============== =============== Trade and other receivables consist primarily of trade accounts receivable related to the Company's technology equipment sales and service segment. DEBT AND CAPITAL LEASE FINANCING - -------------------------------- SHORT-TERM BORROWING - -------------------- At December 31, 1997, 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, 1997, these covenants limit the Company's ability to transfer net assets to its parent to no more than $58.8 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, 1997, the Company had $127.8 million of commercial paper and bankers' acceptances outstanding, meaning that $142.2 million was available. The Company has $74.2 million of notes payable outstanding at December 31, 1997. The weighted average interest rate of short-term borrowings at the end of the period was 6.24% and 5.60% as of December 31, 1997 and 1996, respectively. In addition, two consolidated subsidiaries have bank commitments totaling $103.0 million at December 31, 1997 to finance their operations, of which $31.2 million was available. SENIOR TERM NOTES - ----------------- In October 1997 the Company issued $350 million of notes, $225 million of which is due in 2000 and the balance in 2004. The proceeds of this borrowing were used to repay outstanding commercial paper and other short-term indebtedness. At December 31, 1997 1996 --------------- --------------- Variable Rate Notes, $ 20,000 $ 65,000 due 1999 Fixed Rate Notes, 5.45%-10.20% 1,135,600 870,600 due 1998-2007 --------------- --------------- Total senior term notes $ 1,155,600 $ 935,600 =============== =============== 32 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 characteristic 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 rate 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 reduced by $0.4 million in 1997, was higher by $0.8 million in 1996 and was reduced by $2.2 million in 1995. 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, 1997 was $216.8 million, with termination dates ranging from 1998 to 2006. 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, 1997 is $381.2 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, 1997 1996 ----------------- ------------------ Variable Rate, due 2000-2002 $ 44,606 $ 50,220 Fixed Rate, 5.76%-9.25%, due 1998-2013 285,214 217,824 ----------------- ------------------ Total nonrecourse obligations $ 329,820 $ 268,044 ================= ================== 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 $9.9 million and $12.4 million at December 31, 1997 and 1996, respectively. Minimum future lease payments receivable under the subleases aggregate $13.0 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. 33 MATURITIES - ---------- Maturities of debt financings, obligations under capital leases and nonrecourse obligations are presented in the following table. Imputed interest on capital leases totaled $2.4 million at December 31, 1997. 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 ------------- ---------- ---------- ---------- ------------ 1998 $ 63,141 $ 99,000 $ 1,484 $ 163,625 $ 115,630 1999 138,852 98,600 1,528 238,980 88,193 2000 319,000 1,660 320,660 52,034 2001 90,000 1,832 91,832 30,888 2002 79,000 1,974 80,974 14,305 After 2002 470,000 1,276 471,276 28,770 ------------- ---------- ---------- ----------- ------------ Total $ 201,993 $1,155,600 $ 9,754 $ 1,367,347 $ 329,820 ============= ========== ========== =========== ============ 34 STOCKHOLDER'S EQUITY - -------------------- As of December 31, 1997 and 1996, 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. Additional Convertible Common Paid-In Reinvested (in thousands) Preferred Stock Stock Capital Earnings -------------- -------- -------- ---------- BALANCE AT JANUARY 1, 1995 $1,027 $1,031 $151,902 $146,036 Net income 32,604 Dividends paid to stockholder (16,240) Translation adjustment -------------- -------- -------- ---------- BALANCE AT DECEMBER 31, 1995 1,027 1,031 151,902 162,400 Net income 45,855 Dividends paid to stockholder (22,569) Translation adjustment Unrealized gain on available-for-sale securities -------------- -------- -------- ---------- BALANCE AT DECEMBER 31, 1996 1,027 1,031 151,902 185,686 Net income 53,564 Dividends paid to stockholder (26,500) Translation adjustment Change in unrealized gain on available-for-sale securities -------------- -------- -------- ---------- BALANCE AT DECEMBER 31, 1997 $1,027 $ 1,031 $151,902 $212,750 ============== ======== ======== ========== Unrealized Equity Adj Gain on from Foreign Available- Currency for-sale (in thousands) Translation Securities ------------ -------------- BALANCE AT JANUARY 1, 1995 $ (759) $ 0 Net income Dividends paid to stockholder Translation adjustment 1,399 ------------ -------------- BALANCE AT DECEMBER 31, 1995 640 0 Net income Dividends paid to stockholder Translation adjustment (2,183) Unrealized gain on available-for-sale securities 5,574 ------------ -------------- BALANCE AT DECEMBER 31, 1996 (1,543) 5,574 Net income Dividends paid to stockholder Translation adjustment (2,861) Change in unrealized gain on available-for-sale securities (955) ------------ -------------- BALANCE AT DECEMBER 31, 1997 $ (4,404) $4,619 ============ ============== 35 OPERATING LEASE OBLIGATIONS - --------------------------- The Company is a lessee under certain equipment and facility leases which are classified as operating leases. Total rental expense was $41.5 million, $34.0 million and $20.5 million in 1997, 1996 and 1995, respectively. The equipment under these leases has been subleased, generating operating lease income of $42.7 million, $38.3 million and $23.8 million in 1997, 1996 and 1995, respectively. 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 noncancelable operating leases through 2011 are as follows: Obligations Operating Year Due Under Sublease Lease Receivables - ----------- ------------------- -------------------- 1998 $ 38,343 $ 42,428 1999 38,226 39,978 2000 35,750 26,004 2001 26,905 18,828 2002 25,246 13,219 After 2002 245,339 70,105 ------------------- -------------------- Total $ 409,809 $ 210,562 =================== ==================== 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 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 $10.2 million due to GATX Corporation which consists of amounts owed for dividends, overhead, and taxes pursuant to the intercompany tax agreement. 36 Significant components of the Company's deferred tax liabilities and assets are as follows: At December 31, 1997 1996 --------------- -------------- DEFERRED TAX LIABILITIES Leveraged Leases $ 42,466 $ 57,409 Other Leases 91,486 85,250 Investment in joint ventures 37,453 30,725 Alternative minimum tax adjustment 19,483 4,217 Other 11,743 10,647 --------------- -------------- Total deferred tax liabilities 202,631 188,248 --------------- -------------- DEFERRED TAX ASSETS Allowance for losses on investments 47,688 44,754 Loans 11,699 7,235 Other 8,703 5,592 --------------- -------------- Total deferred tax assets 68,090 57,581 --------------- -------------- Net deferred tax liabilities $ 134,541 $ 130,667 =============== ============== TAX ACCOUNT BALANCES Deferred income tax liabilities $ 55,600 $ 51,726 Preferred stock and related additional paid-in capital 125,000 125,000 Due from GATX Corporation (46,059) (46,059) --------------- -------------- Net deferred tax liabilities $ 134,541 $ 130,667 =============== ============== The provision for income taxes consists of the following: Year Ended December 31, 1997 1996 1995 --------------- -------------- ---------------- CURRENT Federal $ 26,086 $ 13,276 $ 7,389 State and local 206 371 1,513 Foreign 13 57 (1,227) --------------- -------------- ---------------- Total current 26,305 13,704 7,675 --------------- -------------- ---------------- DEFERRED Federal 3,069 12,730 10,515 State and local 5,571 4,301 2,175 Foreign 1,683 1,901 2,375 --------------- -------------- ---------------- Total deferred 10,323 18,932 15,065 --------------- -------------- ---------------- Total provision for income taxes $ 36,628 $ 32,636 $ 22,740 =============== ============== ================ 37 A reconciliation between the federal statutory tax rate and the Company's effective tax rate is shown below: Year Ended December 31, 1997 1996 1995 --------------- -------------- ---------------- 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 1.5% 2.5% 2.0% --------------- -------------- ---------------- Effective tax rate 40.6% 41.6% 41.1% =============== ============== ================ The tax expense related to leveraged lease income was $6.6 million, $8.6 million and $9.4 million in 1997, 1996 and 1995, respectively. Income before income taxes from foreign operations was $3.0 million, $4.7 million and $2.5 million in 1997, 1996 and 1995, 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 $20.3 million at December 31, 1997. 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. Year Ended December 31, 1997 1996 1995 --------------- ---------------- ---------------- EARNED INCOME Domestic $ 508,042 $ 306,896 $ 191,343 Export 39,251 28,750 28,537 Foreign 67,129 25,902 17,591 Eliminations (1,139) (1,185) (962) --------------- ---------------- ---------------- $ 613,283 $ 360,363 $ 236,509 =============== ================ ================ NET INCOME United States $ 43,070 $ 37,261 $ 24,246 Foreign 10,494 8,594 8,306 Eliminations - - 52 --------------- ---------------- ---------------- $ 53,564 $ 45,855 $ 32,604 =============== ================ ================ TOTAL ASSETS United States $ 2,046,424 $ 1,613,390 $ 1,318,020 Foreign 281,665 244,729 207,779 Eliminations (10,946) (9,490) (7,416) --------------- ---------------- ---------------- $ 2,317,143 $ 1,848,629 $ 1,518,383 =============== ================ ================ 38 The Company has entered into currency swap agreements to protect itself from 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. BUSINESS SEGMENTS - ----------------- The Company operates in two business segments, as defined by SFAS 14. These segments are: Investment and Asset Management, which includes the Company's lease, loan and joint venture investments as well as the fee generation and asset management businesses; and Technology Equipment Sales and Service, which includes the sale and service of computer network technology equipment, provided primarily by Centron. The following table presents significant financial information related to the Company's two business segments: Technology Investment Equipment and Asset Sales and Management Service Total -------------------------------------------- 1997 Revenue $ 406,481 $ 206,802 $ 613,283 Pre-tax income 89,524 668 90,192 Identifiable assets 2,209,140 108,003 2,317,143 Capital expenditures 862,430 - 862,430 Depreciation 77,651 1,730 79,381 1996 Revenue 324,077 36,286 360,363 Pre-tax income 77,600 891 78,491 Identifiable assets 1,778,699 69,930 1,848,629 Capital expenditures 656,662 - 656,662 Depreciation 44,395 184 44,579 The Technology Equipment Sales and Service segment did not exist in 1995. 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. Independent actuaries determine pension cost for each GATX subsidiary included in the Plan. 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 health care 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. 39 COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK - ------------------------------------------------------------ At December 31, 1997, the Company's investment portfolio, including off-balance sheet assets, consists of 26% commercial jet aircraft, 25% rail equipment, 15% information technology equipment, 8% warehouse and production equipment, 8% marine equipment, and 18% other equipment. The Company's backlog was $259.2 million (unaudited) and $425.0 million (unaudited), at December 31, 1997 and 1996, 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 and affiliates. Guarantees are commitments issued by the Company to (1) guarantee performance of an affiliate to a third party, generally in the form of lease and loan payment guarantees, or (2) guarantee the value of an asset at the end of a lease. Similar to the Company's on-balance sheet investments, these guarantees involve, to varying degrees, elements of credit and market risk which are not recognized in the consolidated balance sheets. Accordingly, the Company uses the same credit and market evaluation practices when making commitments and conditional obligations as it does for funded transactions. 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. Lease and loan payment guarantees generally involve guaranteeing repayment of the financing required to acquire assets being leased by an affiliate to third parties, and are in lieu of the Company making direct equity investments in the affiliate. The Company knows of no event of default which would require it to satisfy these guarantees and expects that the affiliated entities will generate sufficient cash flow to satisfy the related lease and loan obligations. At December 31, 1997 the Company had guaranteed $99.2 million of such obligations, having fixed expiration dates ranging from 1998 through 2016. The Company earns fees for providing certain of these guarantees and recognizes the income as earned. Asset value guarantees represent the Company's commitment to a third party that an asset or group of assets will be worth a specified amount at the end of a lease term. In addition to asset value guarantees, the Company also guarantees minimum lease receipts to third party lessors. The Company issues these guarantees either on its own in the normal course of business or through joint venture affiliates which have the sole business purpose of guaranteeing asset values. The Company follows the same practices as it does for its funded transactions when evaluating the amount to guarantee. Based on known and expected market conditions, management does not believe that the asset value guarantees will result in any adverse financial impact to the Company. At December 31, 1997 the Company had guaranteed $71.8 million of asset value, having fixed expiration dates ranging from 1998 through 2018. Fees are earned for providing these asset value guarantees in the form of an initial fee (which is amortized into income over the guarantee period) and by sharing in any proceeds received upon disposition of the asset in excess of the amount guaranteed (which is recorded when earned). The Company is engaged in various matters of litigation and has unresolved claims pending. In one matter, the Company, through an affiliate, is the subject of both litigation and unasserted claims related to the conversion of certain aircraft from passenger to freighter configuration. While the amounts claimed in this matter and other matters are substantial and the ultimate liability with respect to such claims cannot be determined at this time, it is the opinion of management that damages, if any, required to be paid by the Company in the discharge of such liability are not likely to be material to the Company's financial position or results of operations. 40 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 accounted for under SFAS 13. Fair value is a subjective and imprecise measurement that is based on assumptions and market data. The use of different market assumptions and valuation methodologies may have a material effect on the estimated fair value amounts. Accordingly, management 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 assumptions 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 bankers' 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 nonrecourse 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 rate senior term 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. 41 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, 1997 Amount Value ------------------- ------------------- ASSETS Secured Loans $ 180,331 $ 183,641 LIABILITIES Senior term notes 1,155,600 1,176,527 Nonrecourse obligations 329,820 333,293 Interest rate and currency swaps (4) 1,269 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 42 EX-23 3 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, No. 33-64474 on Form S-3 filed June 17, 1993 , No.33-65053 on Form S-3 filed January 5, 1996 and No. 333-34879 on Form S-3 filed August 29, 1997 (as amended by Amendment No. 1 filed October 16, 1997) of GATX Capital Corporation of our report dated January 26, 1998, 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, 1997. ERNST & YOUNG LLP San Francisco, California March 25, 1998 EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 61,990 0 1,017,410 121,576 47,420 0 524,523 0 2,317,143 0 1,495,174 1,031 0 1,027 364,867 2,317,143 206,802 613,283 169,826 0 245,432 11,033 96,800 90,192 36,628 0 0 0 0 53,564 0 0 CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 666,524, LEVERAGED LEASE RECEIVABLES OF 170,555, AND SECURED LOANS OF 180,331. CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 15,398 AND TECHNOLOGY EQUIP- MENT INVENTORY OF 32,022. CONSISTS OF COST OF EQUIPMENT LEASED TO OTHERS UNDER OPERATING LEASES, NET OF DEPRECIATION. GATX CAPITAL CORPORATION HAS AN UNCLASSIFIED BALANCE SHEET. CONSISTS OF SENIOR TERM NOTES OF 1,155,600, OBLIGATIONS UNDER CAPITAL LEASES OF 9,754, AND NONRECOURSE OBLIGATIONS OF 329,820. PAR VALUE ONLY. CONSISTS OF RETAINED EARNINGS OF 212,750, ADDITIONAL PAID-IN CAPITAL OF 151,902, UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX OF 4,619 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (4,404). CONSISTS OF OPERATING LEASE EXPENSE OF 118,096, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF 118,849, AND OTHER EXPENSES OF 8,487.
EX-99 5 Exhibit 99 Medium Term Notes Maturity Interest Principal Date Rate Fixed $5,000,000 01/30/98 10.000% $4,000,000 02/02/98 5.400% $2,000,000 02/25/98 9.760% $7,000,000 03/10/98 10.000% $5,000,000 03/10/98 8.670% $10,000,000 03/16/98 10.000% $6,000,000 03/19/98 10.000% $2,000,000 03/19/98 10.000% $5,000,000 03/20/98 9.930% $10,000,000 04/01/98 10.000% $13,000,000 04/30/98 6.120% $5,000,000 05/07/98 6.110% $10,000,000 06/09/98 6.150% $10,000,000 06/11/98 6.550% $5,000,000 10/15/98 8.780% $5,000,000 02/02/99 5.560% $5,000,000 03/22/99 9.900% $16,000,000 04/15/99 9.900% $32,600,000 05/05/99 9.850% $5,000,000 06/11/99 6.800% $5,000,000 06/11/99 6.760% $10,000,000 11/15/99 6.375% $5,000,000 02/02/00 5.810% $4,000,000 05/10/00 10.200% $30,000,000 06/09/00 6.440% $10,000,000 06/12/00 6.950% $17,000,000 07/26/00 6.210% $10,000,000 10/11/00 6.500% $2,000,000 10/30/00 9.280% $225,000,000 11/01/00 6.500% $6,000,000 11/15/00 9.120% $10,000,000 12/05/00 6.165% $5,000,000 02/02/01 5.880% $15,000,000 03/15/01 6.660% $2,000,000 03/21/01 10.000% $5,000,000 03/22/01 10.000% $16,000,000 04/11/01 10.000% $10,000,000 05/21/01 6.930% $10,000,000 06/09/01 6.535% $10,000,000 10/08/01 9.125% $2,000,000 10/08/01 9.050% $15,000,000 12/05/01 6.270% $10,000,000 01/10/02 9.500% $15,000,000 01/10/02 9.500% $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% $20,000,000 06/03/03 7.200% $6,000,000 02/02/04 6.340% $5,000,000 04/14/04 7.920% $5,000,000 04/14/04 7.920% $5,000,000 05/20/04 7.290% $5,000,000 05/20/04 7.290% $125,000,000 11/01/04 6.875% $3,000,000 02/02/05 6.375% $25,000,000 10/13/05 6.860% $10,000,000 11/30/05 6.690% $15,000,000 11/30/05 6.690% $3,000,000 02/02/06 6.450% $8,000,000 05/10/06 7.640% $10,000,000 05/31/06 7.350% $200,000,000 12/15/06 6.875% $3,500,000 02/02/07 6.480% Floating $20,000,000 02/16/99 ---------------- $1,155,600,000 ================ -----END PRIVACY-ENHANCED MESSAGE-----