-----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, SiKENx/x/6EbSmF4jGdaeJpXuxgn5NPZe2JrbmNGSYcFfvZcQW1dI3mhI5F0Z+Wi 41JUTlrz1X0IHgYRVkCJig== 0000950137-02-006149.txt : 20021112 0000950137-02-006149.hdr.sgml : 20021111 20021112171429 ACCESSION NUMBER: 0000950137-02-006149 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATX CORP CENTRAL INDEX KEY: 0000040211 STANDARD INDUSTRIAL CLASSIFICATION: TRANSPORTATION SERVICES [4700] IRS NUMBER: 361124040 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02328 FILM NUMBER: 02817915 BUSINESS ADDRESS: STREET 1: 500 W MONROE ST CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3126216200 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICAN TRANSPORTATION CORP DATE OF NAME CHANGE: 19750722 10-Q 1 c72981e10vq.txt QUARTERLY REPORT DATED 9/30/02 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended Commission File Number September 30, 2002 1-2328 ---------- GATX CORPORATION Incorporated in the IRS Employer Identification No. State of New York 36-1124040 500 West Monroe Street Chicago, IL 60661-3676 (312) 621-6200 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Registrant had 48,969,958 shares of common stock outstanding as of October 31, 2002. ================================================================================ PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GATX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- GROSS INCOME Revenues $ 323.5 $ 363.9 $ 957.8 $1,142.5 Gain on extinguishment of debt 1.4 -- 15.9 -- Share of affiliates' earnings 17.9 4.9 57.7 34.0 -------- -------- -------- -------- TOTAL GROSS INCOME 342.8 368.8 1,031.4 1,176.5 OWNERSHIP COSTS Depreciation and amortization 91.0 102.9 276.0 315.0 Interest, net 59.4 63.5 172.6 192.5 Operating lease expense 47.6 51.8 140.0 148.5 -------- -------- -------- -------- TOTAL OWNERSHIP COSTS 198.0 218.2 588.6 656.0 OTHER COSTS AND EXPENSES Operating expenses 62.5 54.5 167.2 178.6 Selling, general and administrative 47.4 55.1 141.0 178.7 Provision for possible losses 2.4 24.4 29.3 61.9 Asset impairment charges 9.2 39.3 15.6 69.9 Reversal of litigation provision -- (13.1) -- (13.1) Fair value adjustments for derivatives (.7) 1.9 3.0 2.3 -------- -------- -------- -------- TOTAL OTHER COSTS AND EXPENSES 120.8 162.1 356.1 478.3 -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME 24.0 (11.5) 86.7 42.2 TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE INCOME TAXES (BENEFIT) 4.9 (4.2) 28.3 22.6 -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE 19.1 (7.3) 58.4 19.6 CUMULATIVE EFFECT OF ACCOUNTING CHANGE DISCONTINUED OPERATIONS Operating results, net of taxes -- -- -- 1.5 Gain on sale of portion of segment, net of taxes -- -- 6.2 163.9 -------- -------- -------- -------- TOTAL DISCONTINUED OPERATIONS -- -- 6.2 165.4 -------- -------- -------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 19.1 (7.3) 64.6 185.0 CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- -- (34.9) -- -------- -------- -------- -------- NET INCOME (LOSS) $ 19.1 $ (7.3) $ 29.7 $ 185.0 ======== ======== ======== ========
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THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- ----------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- PER SHARE DATA Basic: Income (loss) from continuing operations before cumulative effect of accounting change $ .39 $ (.15) $ 1.20 $ .41 Income from discontinued operations -- -- .12 3.41 ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change .39 (.15) 1.32 3.82 Cumulative effect of accounting change -- -- (.71) -- ---------- ---------- ---------- ---------- Total $ .39 $ (.15) $ .61 $ 3.82 ========== ========== ========== ========== Average number of common shares (in thousands) 48,927 48,615 48,857 48,455 Diluted: Income (loss) from continuing operations before cumulative effect of accounting change $ .39 $ (.15) $ 1.20 $ .40 Income from discontinued operations -- -- .12 3.35 ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change .39 (.15) 1.32 3.75 Cumulative effect of accounting change -- -- (.71) -- ---------- ---------- ---------- ---------- Total $ .39 $ (.15) $ .61 $ 3.75 ========== ========== ========== ========== Average number of common shares and common share equivalents (in thousands) 49,127 48,615 49,172 49,317 Dividends declared per common share $ .32 $ .31 $ .96 $ .93
The accompanying notes are an integral part of these consolidated financial statements. 2 GATX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
SEPTEMBER 30 DECEMBER 31 2002 2001 ------------ ------------ (Unaudited) ASSETS CASH AND CASH EQUIVALENTS $ 248.3 $ 222.9 RESTRICTED CASH 123.2 124.4 RECEIVABLES Rent and other receivables 150.5 144.2 Finance leases 729.5 868.3 Secured loans 461.7 557.4 Less -- allowance for possible losses (87.3) (94.2) --------- --------- 1,254.4 1,475.7 OPERATING LEASE ASSETS, FACILITIES AND OTHER Railcars and service facilities 2,883.7 2,958.2 Operating lease investments and other 2,144.9 1,794.0 Less -- allowance for depreciation (2,042.3) (2,028.3) --------- --------- 2,986.3 2,723.9 Progress payments for aircraft and other equipment 182.2 281.1 --------- --------- 3,168.5 3,005.0 INVESTMENTS IN AFFILIATED COMPANIES 918.6 953.0 RECOVERABLE INCOME TAXES 98.5 34.1 GOODWILL, NET 38.9 63.3 OTHER ASSETS 443.3 265.4 --------- --------- $ 6,293.7 $ 6,143.8 ========= =========
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SEPTEMBER 30 DECEMBER 31 2002 2001 ------------ ----------- (Unaudited) LIABILITIES, DEFERRED ITEMS AND SHAREHOLDERS' EQUITY ACCOUNTS PAYABLE $ 291.2 $ 293.6 ACCRUED EXPENSES 65.6 70.9 DEBT: Short-term 41.0 328.5 Long-term: Recourse 3,400.9 2,897.3 Nonrecourse 604.2 728.2 Capital lease obligations 142.5 163.0 --------- --------- 4,188.6 4,117.0 DEFERRED INCOME TAXES 577.8 464.5 OTHER DEFERRED ITEMS 314.8 316.0 --------- --------- TOTAL LIABILITIES AND DEFERRED ITEMS 5,438.0 5,262.0 SHAREHOLDERS' EQUITY Preferred stock -- -- Common stock 35.5 35.4 Additional capital 389.0 384.7 Reinvested earnings 647.7 664.9 Accumulated other comprehensive loss (87.4) (74.1) --------- --------- 984.8 1,010.9 Less -- cost of common shares in treasury (129.1) (129.1) --------- --------- TOTAL SHAREHOLDERS' EQUITY 855.7 881.8 --------- --------- $ 6,293.7 $ 6,143.8 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 GATX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- OPERATING ACTIVITIES Income (loss) from continuing operations $ 19.1 $ (7.3) $ 23.5 $ 19.6 Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations: Realized gains on remarketing of leased equipment (3.9) (17.7) (31.3) (67.2) Gains on sales of securities (2.3) (7.5) (3.4) (35.1) Depreciation and amortization 91.0 102.9 276.0 315.0 Provision for possible losses 2.4 24.4 29.3 61.9 Asset impairment charges 9.2 39.3 15.6 69.9 Deferred income taxes 69.2 3.5 107.3 113.5 Gain on extinguishment of debt (1.4) -- (15.9) -- Cumulative effect of accounting change -- -- 34.9 -- Reversal of litigation provision -- (13.1) -- (13.1) Payments related to litigation settlement -- (44.6) -- (141.0) Other, including working capital (128.5) (38.9) (213.1) (86.8) -------- -------- -------- -------- Net cash provided by continuing operations 54.8 41.0 222.9 236.7 INVESTING ACTIVITIES Additions to equipment on lease, net of nonrecourse financing for leveraged leases, operating lease assets and facilities (148.7) (228.5) (662.3) (732.1) Secured loans extended (35.6) (50.3) (90.9) (253.7) Investments in affiliated companies (4.4) (42.0) (31.0) (197.2) Progress payments (25.8) (100.8) (84.7) (183.3) Other investments (1.9) (.2) (18.5) (112.6) -------- -------- -------- -------- Portfolio investments and capital additions (216.4) (421.8) (887.4) (1,478.9) Portfolio proceeds and asset sales 249.5 260.5 734.9 982.7 -------- -------- -------- -------- Net cash provided by (used in) investing activities of continuing operations 33.1 (161.3) (152.5) (496.2) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 144.4 90.8 1,304.7 481.9 Repayment of long-term debt (319.3) (135.9) (990.7) (787.8) Net (decrease) increase in short-term debt (.8) 89.8 (287.5) (282.5) Net decrease in capital lease obligations (5.6) (4.8) (20.5) (16.1) Issuance of common stock and other .1 3.5 4.4 17.6 Cash dividends (15.7) (15.0) (46.9) (45.1) -------- -------- -------- -------- Net cash (used in) provided by financing activities of continuing operations (196.9) 28.4 (36.5) (632.0) NET TRANSFERS TO DISCONTINUED OPERATIONS (.8) (21.7) (12.9) (29.3) -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (109.8) (113.6) 21.0 (920.8) PROCEEDS FROM SALE OF PORTION OF SEGMENT -- 40.9 3.2 1,185.0 TAXES PAID ON GAIN FROM SALE OF SEGMENT -- -- -- (148.2) NET DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS -- -- -- (12.6) -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (109.8) $ (2.7) $ 24.2 $ 103.4 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 GATX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ---------------------- 2002 2001 2002 2001 ------ ------ ------ ------- NET INCOME (LOSS) $ 19.1 $ (7.3) $ 29.7 $ 185.0 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Foreign currency translation adjustment (6.4) (13.5) (8.8) (3.3) Unrealized gain (loss) on securities, net of reclassification adjustments (a) -- (5.2) (2.1) (25.6) Unrealized gain (loss) on derivatives 1.0 (2.4) (2.4) (2.3) ------ ------ ------ ------- OTHER COMPREHENSIVE LOSS (5.4) (21.1) (13.3) (31.2) ------ ------ ------ ------- COMPREHENSIVE INCOME (LOSS) $ 13.7 $(28.4) $ 16.4 $ 153.8 ====== ====== ====== ======= (a) Reclassification adjustments: Unrealized gain (loss) on securities $ 1.5 $ (.6) $ -- $ (4.2) Less -- reclassification adjustment for realized gains included in net income (1.5) (4.6) (2.1) (21.4) ------ ------ ------ ------- Unrealized gain (loss) on securities, net of reclassification adjustments $ -- $ (5.2) $ (2.1) $ (25.6) ====== ====== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 6 GATX CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date. All other consolidated financial statements are unaudited but include all adjustments, consisting only of normal recurring items, which management considers necessary for a fair statement of the consolidated statements of income, balance sheets and cash flows for the respective periods. Operating results for the nine months ended September 30, 2002 should not be regarded as necessarily indicative of the results that may be expected for the entire year. For further information, refer to GATX Corporation's (GATX or the Company) annual report on Form 10-K for the year ended December 31, 2001. (2) Certain amounts in the 2001 financial statements have been reclassified to conform to the current presentation. (3) Discontinued operations -- Operating results for the former Integrated Solutions Group (ISG) segment are shown net of taxes of zero and $2.1 million, respectively, for the three and nine month periods ended September 30, 2001. The 2002 gain on sale of portion of segment represents the sale of GATX's interest in a bulk-liquid storage facility located in Mexico and is net of taxes of $3.0 million. The 2001 gain on sale of portion of segment primarily reflects the sale of substantially all of the Company's interest in GATX Terminals Corporation and its subsidiary companies and is net of taxes of $195.7 million. (4) GATX and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, it is the opinion of management that amounts, if any, required to be paid by GATX and its subsidiaries in the discharge of such liabilities, are not likely to be material to GATX's consolidated financial position or results of operations. (5) Effective January 1, 2002, GATX adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Under these new rules, goodwill is no longer amortized, but rather subject to an annual impairment test in accordance with the Statements. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. In accordance with FAS 142, the company completed a review of all recorded goodwill. Fair values were established using discounted cash flows. Based on this review, the Company determined that all of the goodwill related to its Polish railcar reporting unit, Dyrekcja Eksploatacji Cystern (DEC) was in excess of its fair market value at January 1, 2002. As a result, the Company recorded a one-time, non-cash impairment charge of $34.9 million. Such charge is non-operational in nature and is recognized as a cumulative effect of an accounting change as of January 1, 2002 in the consolidated statements of income. The impairment charge was due primarily to more conservative expectations based on current market conditions and a lower long-term growth rate projected for DEC. 7 Changes in the carrying amount of goodwill by segment during the first nine months of 2002 are as follows (in millions):
FINANCIAL GATX SERVICES RAIL TOTAL --------- ------ ------ BALANCE AT DECEMBER 31, 2001 $ 21.4 $ 41.9 $ 63.3 Purchase accounting adjustments -- 10.5 10.5 Cumulative effect of accounting change -- (34.9) (34.9) ------ ------ ------ BALANCE AT SEPTEMBER 30, 2002 $ 21.4 $ 17.5 $ 38.9 ====== ====== ======
Application of the non-amortization of goodwill provisions of the Statement, including equity method goodwill, will result in an increase in net income of approximately $6.8 million for the full year 2002, compared to the full year 2001. As required by SFAS No. 142, the results of operations for periods prior to adoption have not been restated. Following is a reconciliation of net income and earnings per share, as reported, to net income and earnings per share, as adjusted, for the three and nine month periods ended September 30, 2001, computed as if SFAS No. 142 had been adopted effective January 1, 2001 (in millions, except for per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ NET (LOSS) INCOME, AS REPORTED $ (7.3) $ 185.0 Adjusted for: Goodwill amortization, net of tax 1.3 3.4 Amortization of equity method goodwill, net of tax 0.9 2.5 ------- ------- NET (LOSS) INCOME, AS ADJUSTED $ (5.1) $ 190.9 ======= ======= BASIC EARNINGS PER SHARE, AS REPORTED $ (.15) $ 3.82 ======= ======= BASIC EARNINGS PER SHARE, AS ADJUSTED $ (.10) $ 3.94 ======= ======= DILUTED EARNINGS PER SHARE, AS REPORTED $ (.15) $ 3.75 ======= ======= DILUTED EARNINGS PER SHARE, AS ADJUSTED $ (.10) $ 3.87 ======= =======
(6) In the fourth quarter of 2001, GATX recorded a pre-tax charge of $13.4 million related to a reduction in workforce. This action was part of GATX's initiative to reduce selling, general and administrative costs in response to economic conditions and the divestiture of the ISG operations. This charge included involuntary employee separation and benefit costs for 147 employees company wide, as well as legal fees, occupancy and other costs. The employees terminated included professional and administrative staff, including corporate personnel. At the end of 2001, the remaining accrual was $10.1 million. As of September 30, 2002, all of the employee terminations were substantially completed. The amount of termination benefits paid in the first nine months of 2002 totaled $4.0 million. Occupancy and other costs of $1.3 million were also paid in the first nine months of 2002. Remaining cash payments of $4.8 million will be funded from ongoing operations and are not expected to have a material impact on GATX's liquidity position. (7) Restricted cash of $123.2 million at September 30, 2002 is comprised of cash and cash equivalents which are restricted as to withdrawal or usage. GATX's restricted cash primarily includes an amount designated to fund the construction of railcars for a customer and additional amounts maintained as required by contract for three bankruptcy remote, special-purpose corporations that are wholly owned by GATX's principal subsidiary, GATX Financial Corporation (GFC). (8) The Company's effective tax rate from continuing operations was 33% for the nine months ended September 30, 2002 compared to 54% for the nine months ended September 30, 2001. The 2002 rate is favorably impacted by Extraterritorial Income (ETI) benefits related to cross-border leases. The 2001 rate included a provision for the anticipated tax settlement related to the Company's corporate-owned life insurance (COLI) program. The Company anticipates showing a net operating loss on its 2002 U.S. consolidated income tax return. This loss may be carried back to offset taxable income in prior years, resulting in a tax refund. As of September 30, 2002, the recoverable income tax was $98.5 million. On July 1, 2002, the Company reached a $27 million settlement agreement with the IRS resolving all disputes over the tax deductibility of interest on loans taken out against its COLI programs. At September 30, 2002, this amount was fully accrued based on provisions made in prior years. 8 (9) The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ----------------------- 2002 2001 2002 2001 ------- ------- ------- ------- NUMERATOR: Income (loss) from continuing operations before cumulative effect of accounting change $ 19.1 $ (7.3) $ 58.4 $ 19.6 Income from discontinued operations -- -- 6.2 165.4 Less: dividends paid and accrued on preferred stock -- -- -- -- Cumulative effect of accounting change -- -- (34.9) -- ------- ------- ------- ------- NUMERATOR FOR BASIC EARNINGS PER SHARE -- INCOME AVAILABLE TO COMMON SHAREHOLDERS 19.1 (7.3) 29.7 185.0 Effect of dilutive securities: Add: dividends paid and accrued on preferred stock -- -- -- -- After-tax interest expense on convertible securities (a) -- -- -- -- ------- ------- ------- ------- NUMERATOR FOR DILUTED EARNINGS PER SHARE -- INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 19.1 $ (7.3) $ 29.7 $ 185.0 DENOMINATOR: DENOMINATOR FOR BASIC EARNINGS PER SHARE -- WEIGHTED AVERAGE SHARES 48.9 48.6 48.9 48.5 Effect of dilutive securities: Stock options .1 -- .2 .7 Convertible preferred stock .1 -- .1 .1 Convertible securities (a) -- -- -- -- ------- ------- ------- ------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE -- ADJUSTED WEIGHTED AVERAGE AND ASSUMED CONVERSION 49.1 48.6 49.2 49.3 BASIC EARNINGS PER SHARE (b): Income (loss) from continuing operations before cumulative effect of accounting change $ .39 $ (.15) $ 1.20 $ .41 Income from discontinued operations -- -- .12 3.41 ------- ------- ------- ------- Income (loss) before cumulative effect of accounting change .39 (.15) 1.32 3.82 Cumulative effect of accounting change -- -- (.71) -- ------- ------- ------- ------- TOTAL BASIC EARNINGS PER SHARE $ .39 $ (.15) $ .61 $ 3.82 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE Income (loss) from continuing operations before cumulative effect of accounting change $ .39 $ (.15) $ 1.20 $ .40 Income from discontinued operations -- -- .12 3.35 ------- ------- ------- ------- Income (loss) before cumulative effect of accounting change .39 (.15) 1.32 3.75 Cumulative effect of accounting change -- -- (.71) -- ------- ------- ------- ------- TOTAL DILUTED EARNINGS PER SHARE $ .39 $ (.15) $ .61 $ 3.75 ======= ======= ======= =======
(a) Conversion of convertible securities (issued February 2002) was excluded from the calculations of diluted earnings for the three and nine-month periods ended September 30, 2002 because of antidilutive effects. (b) Quarterly earnings per share results may not be additive, as per share amounts are computed independently for each quarter. 9 (10) The following financial data conforms to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and depicts the profitability, identifiable assets and cash flow of each of GATX's continuing business segments. Segment profitability is presented to reflect operating results inclusive of estimated allocated support expenses from the parent company and estimated applicable interest costs. Discontinued operations and the cumulative effect of accounting change are not included in the financial data presented below. GATX provides its services and products through two operating segments: Financial Services and GATX Rail. In prior years, the Financial Services segment included a rail business unit that leases freight cars and locomotives under operating and finance leases. During 2001, GATX combined the rail business unit of Financial Services with GATX Rail, a full service lessor of railcars, into one rail segment. The financial data for Financial Services and GATX Rail has been restated for all periods presented to reflect the change in the composition of each operating segment.
FINANCIAL GATX CORPORATE INTER- (IN MILLIONS) SERVICES RAIL AND OTHER SEGMENT TOTAL --------- -------- --------- ------- -------- THREE MONTHS ENDED SEPTEMBER 30, 2002 PROFITABILITY Revenues $ 162.2 $ 161.6 $ .1 $ (.4) $ 323.5 Gain on extinguishment of debt 1.3 -- .1 -- 1.4 Share of affiliates' earnings 15.2 2.7 -- -- 17.9 -------- -------- -------- -------- -------- Total gross income 178.7 164.3 .2 (.4) 342.8 Depreciation 62.4 28.9 (.3) -- 91.0 Interest, net 37.5 14.9 7.4 (.4) 59.4 Operating lease expense 4.8 42.7 .1 -- 47.6 Income (loss) before income taxes 16.9 18.7 (11.6) -- 24.0 Income (loss) 12.2 14.7 (7.8) -- 19.1 SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2002 Investments in affiliated companies 715.8 202.8 -- -- 918.6 Identifiable assets 3,861.5 2,230.5 251.8 (50.1) 6,293.7 ITEMS AFFECTING CASH FLOW Net cash provided by (used in) continuing operations 86.3 15.4 (50.6) 3.7 54.8 Portfolio proceeds and asset sales 238.9 10.6 -- -- 249.5 -------- -------- -------- -------- -------- Total cash provided (used) 325.2 26.0 (50.6) 3.7 304.3 Portfolio investments and capital additions 197.2 19.2 -- -- 216.4 THREE MONTHS ENDED SEPTEMBER 30, 2001 PROFITABILITY Revenues $ 196.7 $ 165.0 $ .6 $ 1.6 $ 363.9 Share of affiliates' earnings 4.3 .6 -- -- 4.9 -------- -------- -------- -------- -------- Total gross income 201.0 165.6 .6 1.6 368.8 Depreciation and amortization 73.2 29.9 .2 (.4) 102.9 Interest, net 43.4 15.1 4.7 .3 63.5 Operating lease expense 6.6 42.5 .8 1.9 51.8 (Loss) income before income taxes (22.1) 21.1 (10.5) -- (11.5) (Loss) income (13.3) 13.1 (7.1) -- (7.3) SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2001 Investments in affiliated companies 752.4 200.6 -- -- 953.0 Identifiable assets 3,721.6 2,280.9 198.0 (56.7) 6,143.8 ITEMS AFFECTING CASH FLOW Net cash provided by (used in) continuing operations 28.2 22.4 (21.9) 12.3 41.0 Portfolio proceeds and asset sales 240.7 15.7 4.1 -- 260.5 -------- -------- -------- -------- -------- Total cash provided (used) 268.9 38.1 (17.8) 12.3 301.5 Portfolio investments and capital additions 323.0 98.8 -- -- 421.8
10
FINANCIAL GATX CORPORATE INTER- (IN MILLIONS) SERVICES RAIL AND OTHER SEGMENT TOTAL --------- -------- --------- ------- -------- NINE MONTHS ENDED SEPTEMBER 30, 2002 PROFITABILITY Revenues $ 460.9 $ 497.9 $ .2 $ (1.2) $ 957.8 Gain on extinguishment of debt 15.8 -- .1 -- 15.9 Share of affiliates' earnings 49.0 8.7 -- -- 57.7 -------- -------- -------- -------- -------- Total gross income 525.7 506.6 .3 (1.2) 1,031.4 Depreciation 188.9 86.8 .3 -- 276.0 Interest, net 109.7 47.8 16.3 (1.2) 172.6 Operating lease expense 10.5 129.2 .3 -- 140.0 Income (loss) before income taxes 52.6 65.2 (31.1) -- 86.7 Income (loss) 34.3 44.9 (20.8) -- 58.4 SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2002 Investments in affiliated companies 715.8 202.8 -- -- 918.6 Identifiable assets 3,861.5 2,230.5 251.8 (50.1) 6,293.7 ITEMS AFFECTING CASH FLOW Net cash provided by (used in) continuing operations 129.0 136.9 (36.8) (6.2) 222.9 Portfolio proceeds and asset sales 714.0 20.9 -- -- 734.9 -------- -------- -------- -------- -------- Total cash provided (used) 843.0 157.8 (36.8) (6.2) 957.8 Portfolio investments and capital additions 828.8 58.6 -- -- 887.4 NINE MONTHS ENDED SEPTEMBER 30, 2001 PROFITABILITY Revenues $ 640.9 $ 498.8 $ 1.7 $ 1.1 $1,142.5 Share of affiliates' earnings 28.9 5.1 -- -- 34.0 -------- -------- -------- -------- -------- Total gross income 669.8 503.9 1.7 1.1 1,176.5 Depreciation and amortization 226.5 87.4 1.0 .1 315.0 Interest, net 143.3 51.4 (2.5) .3 192.5 Operating lease expense 22.3 121.9 3.0 1.3 148.5 Income (loss) before income taxes 18.0 37.7 (13.5) -- 42.2 Income (loss) 10.9 22.0 (13.3) -- 19.6 SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2001 Investments in affiliated companies 752.4 200.6 -- -- 953.0 Identifiable assets 3,721.6 2,280.9 198.0 (56.7) 6,143.8 ITEMS AFFECTING CASH FLOW Net cash provided by continuing operations 103.1 123.3 4.1 6.2 236.7 Portfolio proceeds and asset sales 740.8 237.7 4.2 -- 982.7 -------- -------- -------- -------- -------- Total cash provided 843.9 361.0 8.3 6.2 1,219.4 Portfolio investments and capital additions 1,146.8 331.8 .3 -- 1,478.9
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FIRST NINE MONTHS OF 2002 TO FIRST NINE MONTHS OF 2001 GATX Corporation's (GATX or the Company) net income for the first nine months of 2002 was $29.7 million, a $155.3 million decrease from the $185.0 million reported for the same period in 2001. Earnings per share on a diluted basis decreased to $.61 in 2002 from $3.75 in the 2001 period. Comparisons between periods are affected by gains on the sale of discontinued operations and various non-comparable items in both periods, primarily telecommunications (telecom) related charges, costs associated with the closing of a railcar repair facility in the first nine months of 2001 and charges related to goodwill impairment under SFAS 142 in 2002. RESULTS OF CONTINUING OPERATIONS GATX's gross income for the first nine months of 2002 of $1,031.4 million was $145.1 million lower than the prior year primarily as a result of a decrease in lease income and lower gains with respect to asset remarketing and sales of securities. Income from continuing operations before cumulative effect of accounting change for the first nine months of 2002 was $58.4 million compared to $19.6 million in the prior year period. The 2002 period was favorably impacted by reduced selling, general and administrative (SG&A) expense as a result of a reduction in workforce implemented last year and lower operating costs, largely due to the costs associated with the closure of a GATX Rail service facility in 2001. Also contributing to the increase in income from continuing operations was a decrease in pre-tax asset impairment charges of $54.3 million compared to the prior year period due to the absence of telecom charges. Diluted earnings per share from continuing operations increased to $1.20 from $.40 in the prior year period. FINANCIAL SERVICES Financial Services' gross income of $525.7 million included $15.8 million attributable to gains on extinguishment of debt, as discussed below. Excluding these gains, gross income decreased $159.9 million from the prior year period principally due to decreases in lease and interest income and lower gains with respect to asset remarketing and the sale of securities. Lease income of $307.4 million declined $91.9 million from the prior year period due to lower average finance lease balances, lower technology operating lease assets and lower lease rates. Interest income of $44.0 million decreased $11.4 million due to lower average secured loan balances as well as a decrease in annualized yield compared to the prior year period. Asset remarketing income includes gains from the sale of assets from Financial Services' own portfolio as well as residual sharing fees from the sale of managed assets. Asset remarketing income of $36.1 million decreased $46.7 million from the prior year period primarily due to decreased residual sharing fees from managed portfolios, partially offset by an increase in technology asset remarketing activity. The prior year period also included a gain of $25.4 million on the sale of a steel manufacturing facility and $9.4 million from the sale of marine investments. Gains on the sale of securities, which are derived from warrants received as part of financing transactions with non-public companies, were $3.4 million, down significantly from the $35.1 million recorded in the prior year. Decreases in gains on the sale of securities are indicative of limited initial public offering activity compared to 2001. Because the timing of such sales is dependent on changing market conditions, gains on the sale of securities and asset remarketing income do not occur evenly from period to period. In addition, based on current valuations on early stage companies, it is unlikely that gains on the sale of securities will approach 2001 levels in the near future. Share of affiliates' earnings of $49.0 million was $20.1 million higher than 2001. The increase is primarily due to higher income from certain specialty finance affiliates and the absence of losses from telecom affiliates compared to the prior year period. 12 Ownership costs of $309.1 million decreased $83.0 million compared to the prior year. Depreciation expense of $188.9 million decreased $37.6 million from 2001, reflecting lower average technology operating lease balances, partially offset by higher average air operating leases. Operating lease expense of $10.5 million decreased $11.8 million from the prior year period partly due to the reversal of a previously recorded sublease liability resulting from the disposition of the related transaction. Interest expense of $109.7 million decreased $33.6 million from 2001 primarily due to lower borrowing rates. SG&A expense of $72.3 million decreased $27.3 million compared to the prior year due to lower human resource expenses as a result of the fourth quarter 2001 reduction in workforce and reduced legal expenses attributable to litigation in 2001. The provision for possible losses is Financial Services' estimate of possible credit losses inherent in the investment portfolio based on a review of credit, collateral and market risks. The provision for possible losses of $28.4 million decreased $33.0 million from the prior year. Approximately $10.0 million of the current year provision and $2.3 million of the asset impairment loss were related to one technology leasing investment, which was largely offset by a gain on extinguishment of nonrecourse debt of $13.0 million associated with this same investment. Financial Services frequently utilizes nonrecourse debt to finance its technology portfolio. The prior year provision for possible losses reflected the deterioration of certain steel, venture and telecom investments. Asset impairment charges of $15.6 million decreased $54.3 million from the prior year, which included charges of $67.3 million related to the telecom portfolio. Future provision for possible losses will depend on the size of the portfolio and business and economic conditions. The allowance for possible losses of $71.2 million decreased $15.3 million from December 31, 2001 and was approximately 6.0% of reservable assets, consistent with 6.0% at year end. Reservable assets are defined as operating lease rent receivables, direct financing leases, leveraged leases and secured loans. Net charge-offs of reservable assets totaled $43.7 million for the nine-month period primarily related to venture and technology investments, including $12.0 million related to the technology investment discussed above. Financial Services previously provided financing to start-up telecom service providers as an activity in its venture finance business unit. Venture finance discontinued this financing activity in 2001 and its remaining telecom exposure was $10.2 million, or approximately 0.3% of Financial Services' total assets at September 30, 2002. Separately, Financial Services also leases various types of equipment to established telecom service providers through its technology business unit. Non-performing assets of $93.3 million, excluding assets within joint ventures, decreased by $3.1 million from year end. Net income of $34.3 million, although $23.4 million higher than last year, reflects a decline in lease income, asset remarketing income, and gains on the sale of securities compared to the 2001 period, consistent with current economic conditions. The favorable increase over the prior year is primarily due to lower SG&A expense and the absence of losses related to telecom investments in 2002. Financial Services continues to be negatively impacted by the weak economic environment and challenging market conditions, which has resulted in lower lease rates and lower investment volume in its core markets. In particular, the aircraft leasing market has been negatively impacted as most lessors have aggressively attempted to maintain high utilization. As a result, aircraft lease rates remain under pressure. Currently, there are leases in place with respect to all of the company's 16 new aircraft scheduled for delivery in 2002. Of the six new aircraft scheduled for delivery in 2003, the Company has signed leases for three aircraft. In addition, the Company has either signed leases or signed letters of intent for all 2002 scheduled renewals for owned aircraft for which the Company has direct remarketing responsibility. The Company also has eight renewals of owned aircraft for which it has direct remarketing responsibility scheduled for 2003, one of which has a signed letter of intent in place as of September 30, 2002. The airline industry remains in a weakened condition and GATX continues to monitor closely its air portfolio due to the greater potential for credit losses and asset impairment. 13 In addition, over the last 18 months several aircraft operators have announced their intention to phase out their Fokker-100 fleets. For example, on August 13, 2002, American Airlines announced it would phase out its fleet of 74 Fokker-100 aircraft from 2003 through 2005. American Airlines also took an unspecified impairment charge on its Fokker-100 aircraft. The well-publicized difficulties in the airline industry have also adversely affected the Fokker-50 market. This environment has caused GATX to examine its exposure, through its 50% interest in Pembroke Group Limited (Pembroke), an aircraft leasing and management company, to Fokker-100 jet and Fokker-50 turboprop aircraft. As of September 30, 2002, an indirect wholly-owned subsidiary of Pembroke, Aircraft Finance and Trading BV (AFT) owned six Fokker-100 and 22 Fokker-50 aircraft and a second subsidiary of Pembroke owned two Fokker-100's. AFT currently has four F-50's in storage. Pembroke's book value of these Fokker aircraft is $190 million. In light of these developments, Pembroke is currently examining these aircraft for impairment. It intends to finalize this analysis in the fourth quarter of 2002. The determination of any impairment charge will be dependent on a number of factors, including expectations on future rental rates and the ultimate economic life of the aircraft. However, after giving consideration to these variables, GATX currently estimates that its proportionate share of impairment loss, if any, will be in the range of $0 to $25 million. As of September 30, 2002, GATX has not recognized any impairment loss with respect to its investment in Pembroke. GATX RAIL (RAIL) Rail's gross income of $506.6 million for the first nine months of 2002 increased $2.7 million over the prior year period. Rental revenue of $458.5 million decreased $9.7 million from the prior year period. In March 2001, Rail acquired Dyrekcja Eksploatacji Cystern (DEC), Poland's national tank car fleet. Excluding DEC, North American rental revenue of $435.8 million was down $16.0 million compared to last year. Difficult economic conditions, combined with aggressive competition, increased railroad efficiency and railcar surpluses have resulted in continued softness in railcar demand and pressure on lease rates. Asset remarketing income of $4.3 million increased $1.9 million from the prior year period primarily due to the sale of a portfolio of residual sharing investments in the first quarter of 2002. Share of affiliates' earnings of $8.7 million increased $3.6 million from the prior year period due to higher earnings at European affiliates. The prior year period included a purchase accounting correction for a European affiliate. Rail's North American fleet, excluding railcars managed for others or owned by affiliates, totaled 109,000 cars at the end of the third quarter compared to 110,000 at the end of the prior year period. In May 2002, Rail, acquired 2,700 railcars in Mexico through its Mexican subsidiary. Approximately 99,000 railcars were on lease throughout North America at the end of the third quarter, comparable with the active fleet in the prior year period. Rail's North American utilization was 91% at September 30, 2002. The Railworthiness Directive (Directive) issued by the Federal Railroad Administration (FRA), discussed below, impacted utilization as existing idle cars were deployed to replace affected cars and cars taken out of service were scrapped. Railcar demand remains soft, negatively impacting utilization; this condition is expected to continue at least through the remainder of 2002. In response to current rail market conditions, Rail has retired excess cars and, generally, limited orders of new railcars to specific customer lease commitments. However, consistent with Rail's commitment to meeting the needs of its customers on a long-term basis and to replace cars to be retired from the existing fleet, the Company has initiated a railcar purchase program. Subsequent to September 30, 2002, the Company entered into supply agreements to acquire 7,500 railcars over the next five years with two manufacturers. Ownership costs of $263.8 million increased $3.1 million from last year primarily due to the purchase of DEC. Operating costs were $122.2 million, down $16.2 million from the prior year. Excluding DEC, operating costs were $109.8 million, a decrease of $21.1 million from the prior year. In the prior year period, Rail's operating costs included $24.5 million of non-comparable items. Of this amount, $19.7 million related to the closing of its East Chicago repair facility. Excluding the non-comparable items, operating costs were higher in 2002 compared to the prior year due to the impact of the Directive and additional car repairs. SG&A expenses decreased $11.8 million from the prior year period to $54.2 million primarily due to the fourth quarter 2001 reduction in workforce. 14 Rail is continuing to address the Directive issued by the FRA in April 2002 relating to a certain class of tank cars that were built or modified with reinforcing bars by GATX Rail prior to 1974. In its Directive, the FRA indicated that cars within this class must be inspected, and repaired if necessary, according to an FRA approved maintenance plan. Approximately 4,200 of Rail's owned railcars with a net book value of approximately $4.0 million are affected by this Directive. In accordance with the Directive, nearly all the subject tank cars have been removed from service. The impact of this Directive on Rail's operating results for the first nine months of 2002 was approximately $1.6 million after tax and includes lost revenue, inspection, cleaning and replacement car costs, partially offset by gains on the accelerated scrapping of affected cars that would otherwise have been retired and scrapped over the next several years. As discussed in footnote (5) to the financial statements, Rail completed its transitional goodwill impairment testing in the third quarter and recorded a $34.9 million impairment charge related to its 2001 acquisition of DEC. Rail's net income of $10.0 million was $12.0 million lower than the prior year primarily due to the cumulative effect of accounting change of $34.9 million related to goodwill impairment in 2002, offset by the absence of 2001 closure costs related to its East Chicago repair facility. Excluding these items, net income increased $6.7 million primarily due to higher asset remarketing income, lower SG&A expense and a lower effective tax rate driven by an exemption for income related to certain railcars on lease outside the United States, offset by lower rental revenue. CORPORATE AND OTHER Corporate and other net expense was $20.8 million for the first nine months of 2002 compared to $13.3 million for the prior year period, with the variance primarily due to additional interest expense from the issuance of $175.0 million of convertible notes. The 2001 period included interest income on the proceeds received from the sale of ISG and a $4.0 million tax charge related to the Company's COLI program. RESULTS OF DISCONTINUED OPERATIONS In the first quarter 2002, GATX completed the divestiture of the ISG segment. The ISG segment was comprised of GATX Terminals Corporation (Terminals), GATX Logistics, Inc. (Logistics), and minor business development efforts. Financial data for the ISG segment has been segregated as discontinued operations for all periods presented. In the first quarter of 2002, GATX sold its interest in a bulk-liquid storage facility located in Mexico and recognized a $6.2 million after-tax gain. In the first quarter of 2001, GATX sold the majority of Terminals' operations and recognized a net after-tax gain of $163.9 million. Operating results for the first nine months of 2002 were zero, down $1.5 million from the prior year period. Comparisons between periods were affected by the timing of the sale of ISG assets. CASH FLOW AND LIQUIDITY Net cash provided by operating activities of continuing operations for the first nine months of 2002 was $222.9 million, or $13.8 million less than the prior year period. Excluding the $141.0 million payments related to the Airlog settlement in the prior period, cash flow was lower due to contributions made to the Company's pension plans and the deferral to 2003 of anticipated tax refunds generated by the current year tax NOL. Portfolio proceeds and asset sales were $734.9 million, down $247.8 million from $982.7 million in the 2001 period. The decrease was due to lower proceeds from disposals of leased equipment, security sales and cash distributions from joint venture investments, partially offset by an increase in finance lease and loan principal payments received. The prior year period also included $189.2 million from the sale-leaseback of railcars at Rail. 15 Portfolio investments and capital additions for the first nine months of 2002 totaled $887.4 million, a decrease of $591.5 million from the first nine months of 2001. Portfolio investments and capital additions at Financial Services of $828.8 million were $317.9 million lower than the prior year period, primarily due to lower volume in technology, specialty and venture, partially offset by higher volume in air. In the first quarter of 2001, Financial Services acquired a portfolio of technology leases from El Camino Resources for $129.8 million (net of the assumption of $255.6 million of nonrecourse debt). Rail invested $58.6 million in the first nine months of 2002, a decrease of $273.2 million from the prior year. Current year investments include a fleet acquisition of 2,700 railcars in Mexico. The prior year period included $95.8 million for the acquisition of DEC. Indicative of current market conditions, Rail's capital spending for its railcar fleet was $158.0 million lower than the prior year period. Railcar additions are not anticipated to exceed prior year activity. In the current nine-month period, GATX issued $175.0 million of long-term convertible debt. Including the financing activity of its wholly-owned subsidiary, GATX Financial Corporation (GFC), GATX repaid $990.7 million and issued $1,304.7 million of long-term debt. Significant financings in the first nine months of 2002 included the issuance of $250.0 million of senior unsecured term notes, $210.9 million of U.S. Export-Import Bank aircraft financing, a $142.2 million aircraft warehouse facility, $206.6 million of European Credit Agency aircraft financing, an $86.6 million secured railcar financing, a $75.0 million aircraft bridge loan which has been repaid, and $169.5 million of technology non-recourse financing. Debt issuance costs related to 2002 financings were approximately $18.4 million. GATX funds asset investment and meets debt and lease obligations through cash flow from operations, portfolio proceeds and asset sales, uncommitted money market lines, committed revolving credit facilities, the issuance of unsecured debt, and a variety of secured borrowings. GATX utilizes both the domestic and international bank and capital markets. The availability of these funding options may be adversely impacted by certain factors, including the global economic environment and outlook as well as GFC's financial performance and outlook. Access to capital markets at competitive rates is partly dependent on GFC's credit rating as determined by rating agencies such as Standard & Poor's (S&P) and Moody's Investors Service (Moody's). On March 13, 2002, Moody's downgraded GFC's long-term unsecured debt to Baa3 from Baa2 and GFC's commercial paper to Prime-3 from Prime-2. Moody's currently maintains a stable outlook on GFC's ratings. On March 14, 2002, S&P downgraded GFC's long-term unsecured debt from BBB+ to BBB and GFC's commercial paper from A-2 to A-3. S&P also placed GFC's long-term unsecured debt on credit watch with negative implications. In May 2002, S&P removed GATX from credit watch but maintained the negative outlook. Due to these rating agency actions, GFC's access to the commercial paper market has been seriously constrained and GFC is experiencing more difficulty accessing the long-term capital markets on a cost efficient basis. As of September 30, 2002, GFC had revolving credit facilities totaling $778.3 million. GFC's credit facilities included three agreements for $350.0 million, $283.3 million, and $145.0 million expiring in 2003, 2004 and 2005 respectively. The $145.0 million facility is intended to be utilized by GFC for short-term funding requirements. At September 30, 2002, all credit facilities were unused and available. The revolving credit facilities contain various restrictive covenants, including requirements to maintain a defined minimum net worth and certain financial ratios. At September 30, 2002, GFC was in compliance with all of the covenants and conditions of the credit agreements. GFC has a shelf registration for $1.0 billion of debt securities of which $850.0 million had been issued through September 30, 2002. GATX has unconditional purchase obligations of $1,130.6 million, consisting primarily of committed aircraft deliveries and railcar orders, including the recently announced railcar supply agreement, scheduled as follows: $237.4 million in the remainder of 2002, $370.1 million in 2003, $252.0 million in 2004, $89.4 million in 2005, $90.3 million in 2006, and $91.4 million in 2007. 16 COMPARISON OF THIRD QUARTER 2002 TO THIRD QUARTER 2001 In the third quarter 2002, GATX reported net income of $19.1 million or $.39 per diluted share compared to a loss of $7.3 million or $.15 per share on a diluted basis in the prior year period. FINANCIAL SERVICES Financial Services' gross income of $178.7 million decreased $22.3 million from the prior year period due to lower lease income, asset remarketing income, and gains on the sale of securities. Lease income of $102.8 million was down $19.3 million primarily due to lower average finance lease balances and lower lease rates. Asset remarketing income of $10.2 million was lower than the prior year period by $9.6 million due to lower technology asset remarketing activity. The prior year period also included a gain of $6.9 million from the sale of marine investments. Gains on the sale of securities were $2.3 million, down $5.2 million from the prior year period. Share of affiliates' earnings of $15.2 million increased $10.9 million from last year primarily due to the absence of losses from telecom joint ventures. Prior period earnings from telecom affiliates were negatively impacted by $14.7 million of provision for possible losses and asset impairment charges. Ownership costs of $104.7 million decreased $18.5 million compared to the prior year period due to lower depreciation and interest expense. Depreciation and amortization expense of $62.4 million decreased $10.8 million from 2001 reflecting the lower level of investment in technology operating lease assets, partially offset by higher air operating lease assets. Interest expense of $37.5 million decreased $5.9 million from 2001 due primarily to lower borrowing rates. SG&A expense decreased $3.0 million compared to the prior year due to lower human resource expenses as a result of the fourth quarter 2001 reduction in workforce and reduced outside consulting fees. The provision for possible losses of $2.1 million decreased $22.1 million from 2001. The prior year quarter included a significant provision for telecom investments. Net charge-offs of reservable assets totaled $9.0 million for the current three-month period and included write-offs of venture and specialty finance investments. Asset impairment charges of $9.2 million were $30.1 million lower than the prior year quarter primarily due to the absence of telecom losses. The current year quarter included charges related to technology and specialty finance investments. Net income for the current three-month period was $12.2 million, compared to a loss of $13.3 million in the prior year period. The increase from last year was principally the result of a decrease to the loss provision and asset impairment charges, partially offset by lower lease income, asset remarketing income, and gains on the sale of securities. RAIL Rail's gross income of $164.3 million for the third quarter of 2002 was $1.3 million lower than the prior year. Rental revenue of $146.6 million was down $9.5 million from the prior year period. The decrease in rental revenue is due to ongoing unfavorable market conditions which resulted in lower average rental rates. Share of affiliates' earnings of $2.7 million increased $2.1 million from the prior year period due to higher earnings at European affiliates. The prior year period included a purchase accounting correction for a European affiliate. Ownership costs of $86.5 million were comparable to the prior year. Rail's operating costs of $41.0 million increased by $5.5 million from the prior year period mainly due to increased repair costs resulting from the impact of the Directive and additional car repairs. SG&A expense of $17.3 million decreased $3.9 million from the prior year period due to the fourth quarter 2001 reduction in workforce. 17 Rail's net income of $14.7 million in the third quarter of 2002 was favorable to the prior year period by $1.6 million. 2002 results included the $2.2 million recognition of tax incentives and other favorable items, offset by lower rental revenue and the impact of the FRA Directive of $1.1 million. The impact of the Directive includes lost revenue, inspection, cleaning and replacement car costs, partially offset by gains on the accelerated scrapping of affected cars that would otherwise have been retired and scrapped over the next several years. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002 GATX adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. For further information refer to footnote (5) to the financial statements. Effective January 1, 2002, GATX adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Although the new rules retain many of the fundamental recognition and measurement provisions of SFAS No. 121, they modify the criteria required to classify an asset as held-for-sale. SFAS No. 144 also supersedes certain provisions of APB Opinion 30 with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be separately reported in discontinued operations during the period in which the losses are incurred (rather than as of the measurement date as presently required by APB 30). GATX does not expect this Statement to have a material impact on GATX's consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for fiscal years beginning after May 15, 2002, with early application encouraged. The provisions of this Statement update, clarify and simplify certain existing accounting pronouncements. For the period ended September 30, 2002, GATX applied the provisions of SFAS No. 145. Specifically, SFAS No. 145 rescinds SFAS No. 4, which previously required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effects. In accordance with the Statement, GATX's gain on extinguishment of debt of $15.9 million recognized in the nine month period ended September 30, 2002, is not considered an extraordinary item, and was therefore included in results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the commitment date of an exit or disposal plan. The statement covers costs, including certain types of employee severance, associated with a restructuring, discontinued operations, or other exit or disposal activities. The statement is to be applied prospectively for such activities initiated after December 31, 2002. The adoption of this statement will not have a material effect on the Company's results of operations or consolidated financial position. FORWARD LOOKING STATEMENTS Certain statements in Management's Discussion and Analysis may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as "anticipate," "believe," "estimate," "expects," "intend," "predict," or "project" and similar expressions. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. 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 that could cause actual results to differ materially from those projected. Risks and uncertainties include, but are not limited to, general economic conditions; aircraft and railcar lease rates and utilization levels; conditions in the capital markets and the potential for a downgrade in our credit rating, either of which could have an effect on our borrowing costs or our ability to access the markets for commercial paper or secured and 18 unsecured debt; dynamics affecting customers within the chemical, petroleum and food industries; unanticipated costs or issues arising from the Federal Railroad Administration's Railworthiness Directive HM-04 or subsequent regulatory rulings that impact the economic value of assets; competitors in the rail and air markets who may have access to capital at lower costs than GATX; additional potential write-downs and/or provisions within GATX's portfolio; impaired asset charges; and general market conditions in the rail, air, technology, venture, and other large-ticket leasing markets. ITEM 4. CONTROLS AND PROCEDURES GATX management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of disclosure controls and procedures in accordance with Exchange Act Rule 13a-14. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the CEO and CFO completed their evaluation. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS GATX and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, it is the opinion of management that amounts, if any, required to be paid by GATX and its subsidiaries in the discharge of such liabilities are not likely to be material to GATX's consolidated financial position or results of operations. ITEM 5. OTHER INFORMATION On July 26, 2002, the Company amended its bylaws to change the advance notice requirement for shareholders who intend to present an item of business at an annual meeting of shareholders (other than a proposal submitted for inclusion in the Company's proxy materials). Section 11 of the bylaws, as amended, now requires shareholders to provide notice of an intention to present such an item of business not less than 120 or more than 150 days in advance of the anniversary of the date that proxy materials were mailed to shareholders in the previous year. As a result, shareholders who intend to present such an item of business at the 2003 Annual Meeting of Shareholders must provide notice of such business to the Company no earlier than October 25, 2002 and no later than November 26, 2002, and must furnish such specified information as set forth more fully in the Company's bylaws. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Reference is made to the exhibit index which is included herewith and is incorporated by reference hereto. Employment Agreement effective as of October 11, 2002, between GATX Corporation and Ronald H. Zech Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO Certification) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO Certification) (b) Reports on Form 8-K: Form 8-K filed on October 24, 2002 reporting third quarter 2002 results. Form 8-K filed on October 24, 2002 reporting the initiation and completion of the first phase of a new railcar order program. Form 8-K filed on November 7, 2002, reporting the completion of the second phase of a new railcar order program. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GATX CORPORATION (Registrant) /s/ Brian A. Kenney --------------------------- Brian A. Kenney Senior Vice President and Chief Financial Officer (Duly Authorized Officer) 20 CERTIFICATIONS CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Ronald H. Zech, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GATX Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/ Ronald H. Zech ----------------------------------------------- Ronald H. Zech Chairman, President and Chief Executive Officer 21 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Brian A. Kenney, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GATX Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/ Brian A. Kenney ---------------------------------------------------- Brian A. Kenney Senior Vice President and Chief Financial Officer 22 EXHIBIT LISTING The following exhibits are filed as part of this quarterly report:
EXHIBIT - ------- 10(iii)(A) Employment Agreement effective as of October 11, 2002 between GATX Corporation and Ronald H. Zech 99.1 Certification Pursuant to 18 U.S.C. Section 1350 (CEO Certification) 99.2 Certification Pursuant to 18 U.S.C. Section 1350 (CFO Certification)
23 EX-10.(III)(A) 3 c72981exv10wxiiiyxay.txt EMPLOYMENT AGREEMENT FOR RONALD H. ZECH EXHIBIT 10(iii)(A) EMPLOYMENT AGREEMENT THIS AGREEMENT ("AGREEMENT"), by and between GATX Corporation, a New York corporation (the "COMPANY"), and Ronald H. Zech (the "EXECUTIVE") is effective as of October 11, 2002 (the "EFFECTIVE DATE"). In consideration of the mutual covenants set forth herein, the Company and the Executive hereby agree as follows: 1. PERIOD OF EMPLOYMENT. In accordance with the terms and conditions of this Agreement, the Company hereby agrees to employ the Executive, and the Executive agrees to serve the Company, in the capacities described herein during the Period of Employment. The term "PERIOD OF EMPLOYMENT" shall mean the period which commences on the Effective Date and, unless earlier terminated pursuant to Section 4, ends on the third anniversary of the Effective Date. 2. DUTIES. 2.1 DUTIES. During the Period of Employment, the Executive shall be employed as the President and Chief Executive Officer of the Company with overall charge and responsibility for the business and affairs of the Company. The Executive shall report directly to the Company's Board of Directors (the "BOARD") and shall perform such duties as the Executive shall reasonably be directed to perform by the Board. During the Period of Employment, the Company shall cause the Executive to be elected as a member of the Board and as Chairman of the Board; provided, however, the Executive shall not be the Chairman of the Board if his holding such position is contrary to then-applicable law or, in the reasonable judgment of the Board, is contrary to the interests of the Company given the then-current business and/or investor relations environment. 2.2 SCOPE. During the Period of Employment, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote substantially all of his business time and attention to the business and affairs of the Company. It shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach occasional courses or seminars at educational institutions, or (iii) manage personal investments, so long as such activities under clauses (i), (ii) and (iii) do not interfere, in any substantial respect, with the Executive's responsibilities hereunder. 3. COMPENSATION AND OTHER PAYMENTS. 3.1 SALARY. During the Period of Employment, the Company shall pay the Executive a base salary of not less than seven hundred, seventy-five thousand dollars ($775,000) per year (the "BASE SALARY"). The Base Salary shall be reviewed by the Compensation Committee of the Board (the "COMMITTEE") no less frequently than the Company's normal salary review schedule as it exists from time to time. Based upon such reviews, the Committee may increase the Base Salary. The Base Salary, as it exists from time to time, may not be decreased, unless such decrease is consistent with a decrease to the base salaries of senior management generally. 3.2 ANNUAL BONUS. For calendar years 2002 and 2003, the Executive shall participate in the Executive Incentive Plan of the Company (the "EIP") and have the opportunity to earn an annual cash incentive award thereunder. For calendar years thereafter through the end of the Period of Employment, the Executive shall participate in the Management Incentive Plan of the Company (the "MIP") or the successor to such plan, with annual cash incentive awards as determined by the Board. 3.3 ANNUAL STOCK OPTION GRANTS. For calendar years 2002 and 2003, the Executive shall participate in the EIP and shall have the opportunity for stock option grants as provided thereunder. For calendar years thereafter through the end of the Period of Employment, the Executive shall receive stock option grants as determined by the Board in accordance with the Company's then-applicable stock plan. Such grants shall be made at the same time during the calendar year as grants are generally made to senior executives of the Company, and shall be consistent with competitive pay practices generally and appropriate relative to awards made to other senior executives of the Company. 3.4 LONG-TERM INCENTIVE. For calendar years 2002 and 2003, the Executive shall participate in the EIP and shall have the opportunity for long-term incentive awards thereunder. For calendar years thereafter through the end of the Period of Employment, the Executive shall receive awards as determined by the Board in accordance with the Company's then-applicable long-term incentive plan. Such awards shall be made at the same time during the calendar year as awards are generally made to senior executives of the Company, and shall be consistent with competitive pay practices generally and appropriate relative to awards made to other senior executives of the Company. 3.5 NON-QUALIFIED PENSION PLAN. During the Period of Employment, the Executive shall continue to participate in the Company's non-qualified pension plan as it may exist from time to time. Benefits paid to the Executive under the Company's non-qualified pension plan may be subject to reduction pursuant to subsection 3.6.2 below. Upon either (A) termination of the Executive's employment during the Period of Employment due to: (i) termination by the Company without Cause (as defined below), (ii) the Executive's resignation for Good Reason (as defined below), (iii) death, or (iv) Disability (as defined below); or (B) the end of the Period of Employment, and continuing thereafter, upon eligibility to receive a benefit under any non-qualified plan of the Company, the Executive may elect to receive his benefit in the form of a single lump-sum to be actuarially equivalent to his benefit under such plan. The actuarial factors shall be the same as in subsection 6(a)(i)(D) of the March 15, 2002 Amended Agreement for Employment following a Change of Control between the Executive and the Company ("COC AGREEMENT") or, if more favorable to Executive, the actuarial factors used in any successor agreement to the COC Agreement. 3.6 CONTRACT BONUS. 3.6.1 As of the Effective Date, the Company shall pay to the Executive seven hundred fifty thousand dollars ($750,000). 3.6.2 If Executive's employment with the Company is terminated during the Period of Employment either (i) by the Company for Cause, or (ii) by Executive's 2 resignation without Good Reason or without Board approval, then the Executive will forfeit payment of his non-qualified pension benefits until such forfeited amounts equal a portion of the Contract Bonus, with such portion equal to five hundred thousand dollars ($500,000) multiplied by a fraction with a numerator equal to thirty-six (36) less the number of full months from the Effective Date to the date of termination and a denominator equal to thirty-six (36). 3.7 PAYMENT OF PROFESSIONAL FEES. The Company shall pay on the Executive's behalf all statements rendered to the Executive by the Executive's attorneys, accountants and other advisors for reasonable fees and expenses in connection with the negotiation and preparation of this Agreement. 3.8 REGULAR REIMBURSED BUSINESS EXPENSES. The Company shall promptly reimburse the Executive for all expenses and disbursements reasonably incurred by the Executive in the performance of his duties hereunder during the Period of Employment. 3.9 BENEFIT PLANS. During the Period of Employment, the Executive and his eligible family members shall be entitled to participate, on terms no less favorable to the Executive than the terms offered to other senior executives of the Company, in any group and/or executive welfare and retirement benefit plans (qualified, non-qualified and supplemental) or other fringe benefits (it being understood that items such as stock options are not fringe benefits) of the Company (collectively referred to as the "BENEFITS"); provided, however, that such Benefits shall be on terms no less favorable than the benefits provided to the Executive as of the Effective Date; and further provided, however, that any part of the Benefits may be subject to decrease if such decrease is consistent with a decrease in such Benefit for senior management of the Company generally. 3.10 PERQUISITES. The Company shall provide the Executive such perquisites of employment as are provided to any other senior executive of the Company, but at a level no less than that provided to the Executive as of the Effective Date; provided, however, that the provision of any perquisite may be decreased if such decrease is consistent with a decrease to senior management of the Company generally. 4. TERMINATION. 4.1 BY THE COMPANY FOR CAUSE. During the Period of Employment, the Company may terminate the Executive's employment immediately for Cause. For purposes of this Agreement, "CAUSE" shall have the same meaning as it does in Section 5(b) of the COC Agreement. A termination by the Company may be a termination for Cause only if the termination is effective within the six (6)-month period immediately following the event constituting Cause. 4.2 BY EXECUTIVE FOR GOOD REASON. During the Period of Employment, the Executive's employment hereunder may be terminated by the Executive for Good Reason upon fifteen (15) days written notice. For purposes of this Agreement, "GOOD REASON" shall have the same meaning as it does in Section 5(c) of the COC Agreement; provided, however, that subsection 5(c)(iii) of the COC Agreement shall be amended to read "the Company requiring the 3 Executive to be based at an office or location outside of the Chicago, Illinois or San Francisco, California metropolitan areas." A resignation by the Executive may be a resignation for Good Reason only if the resignation is effective within the six (6)-month period following the event constituting Good Reason. 4.3 OTHER THAN FOR CAUSE OR GOOD REASON. The Executive or the Company may terminate this Agreement for any reason other than for Good Reason or Cause, respectively, upon thirty (30) days written notice to the Company or Executive, as the case may be. 4.4 DEATH. The Period of Employment shall terminate automatically upon the Executive's death. 4.5 DISABILITY. If Disability of the Executive occurs during the Period of Employment (pursuant to the definition of Disability set forth below), the Company may give to the Executive written notice in accordance with Section 17.2 of this Agreement of its intention to terminate the Executive's employment no sooner than thirty (30) days following such notice. In such event, the Executive's employment with the Company shall terminate effective on the date specified in such notice (the "DISABILITY EFFECTIVE DATE"), provided that the Executive shall not have returned to full-time performance of the Executive's duties prior thereto. For purposes of this Agreement, "DISABILITY" shall mean any disability that (a) entitles the Executive to disability income benefits under the Company's Long-Term Disability Income Plan as in effect on the Disability Effective Date, and (b) prevents the Executive, for the duration of the Period of Employment, from engaging in the same or comparable type of employment as provided for herein. Until the Disability Effective Date, the Executive shall be entitled to all compensation provided for under Section 3 hereof. It is understood that nothing in this Section 4.5 shall serve to limit the Company's obligations under Section 5 hereof. 4.6 NOTICE OF TERMINATION. Any termination by the Company or by the Executive shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 17.2 of this Agreement. For purposes of this Agreement, a "NOTICE OF TERMINATION" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail, if necessary, the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of the basis for termination shall not waive any right of such party hereunder or preclude such party from asserting such fact or circumstance in enforcing his or its rights hereunder. "DATE OF TERMINATION" means a date not later than ninety (90) days after the date of the Notice of Termination, subject to the minimum notice periods, as applicable, stated in Sections 4.2, 4.3 and 4.5 above; provided, however, that in the event of the death, the Date of Termination shall be the date of death, and, in the event of Disability, the Date of Termination shall be the Disability Effective Date. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. The following provisions describe the obligations of the Company to the Executive under this Agreement upon termination of the Period of Employment. However, except as explicitly provided in this Agreement, 4 nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Company, or under any compensation or benefit plan, program, policy or practice of the Company. 5.1 RESIGNATION WITHOUT GOOD REASON; TERMINATION BY THE COMPANY FOR CAUSE. If the Company shall terminate the Executive's employment for Cause or if the Executive shall resign without Good Reason, the Company shall pay to the Executive (x) his Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company (such other amounts and benefits shall be hereinafter referred to as the "ACCRUED OBLIGATIONS") in each case to the extent theretofore unpaid. 5.2 RESIGNATION WITH GOOD REASON; TERMINATION OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If (i) the Company shall terminate the Executive's employment other than for Cause, death or Disability, or (ii) the Executive shall terminate his employment for Good Reason, the Executive shall receive, in addition to the Accrued Obligations, the following: 5.2.1 In a lump sum in cash within thirty (30) days after the Date of Termination, (a) the amount equal to the product of (A) two (2) and (B) the sum of (x) the Executive's then-current Base Salary and (y) the Executive's then-current target bonus under the Company's Management Incentive Plan, or any comparable bonus plan in which the Executive participates and which has a target bonus generally similar to that in the Company's Management Incentive Plan (the "TARGET BONUS"), less amounts, if any, paid to the Executive in accordance with the Company's severance pay policies; and (b) a Prorated Bonus, where "PRORATED BONUS" shall mean, as of the Date of Termination, the product of (x) the Executive's then-current target annual bonus as described in Section 3.2 of this Agreement (annualized for any fiscal year consisting of less than twelve (12) full months or during which the Executive was employed for less than twelve (12) full months) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is three hundred sixty-five (365); 5.2.2 For two (2) years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare benefits to the Executive and/or the Executive's eligible family members at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3.9 of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with 5 respect to other peer executives of the Company and its affiliated companies and their families (collectively, "WELFARE BENEFITS"), provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two (2) years after the Date of Termination and to have retired on the last day of such period. The Company shall continue to provide the Executive with Welfare Benefits at the Executive's own cost until the Executive is eligible for coverage under Medicare; 5.2.3 Continued vesting, through the five (5)-year anniversary of the Date of Termination, of all option awards granted to the Executive on or after the Effective Date; 5.2.4 Continued exercisability, through the first to occur of the five (5)-year anniversary of the Date of Termination or the end of the respective full original term, of all vested options, whether vested as of the Date of Termination or vested pursuant to subsection 5.2.3; and 5.2.5 At a maximum cost to the Company of ten percent (10%) of the Executive's then-current Base Salary, outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion. 5.2.6 Provision of the payments and benefits described in Sections 5.2.1 through 5.2.5 is contingent upon Executive delivering to the Company an executed release of claims in such customary form as supplied to the Executive by the Company, and Executive not revoking such release during any revocation period. 5.3 DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Period of Employment, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of the Prorated Bonus and the timely payment or provision of the Accrued Obligations. 5.4 DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Period of Employment, this Agreement shall terminate without further obligations to the Executive, other than for payment of the Prorated Bonus and the timely payment or provision of the Accrued Obligations. 5.5 COBRA RIGHTS. It is understood that the Executive's rights under this Section 5 are in lieu of all other rights which the Executive may otherwise have had upon termination of employment during the Period of Employment; provided, however, that no provision of this Agreement is intended to adversely affect the Executive's rights under the Consolidated Omnibus Budget Reconciliation Act of 1985. 6 6. CHANGE OF CONTROL; CERTAIN PAYMENTS. Upon a Change of Control of the Company (as defined in the COC Agreement), this Agreement shall automatically expire and the Executive shall be treated under the terms of the COC Agreement. In the event that the aggregate of all payments or benefits made or provided to, or that may be made or provided to, the Executive under this Agreement and under all other plans, programs and arrangements of the Company (the "AGGREGATE PAYMENT") is determined to constitute a "parachute payment," as such term is defined in Section 280G(b)(2) of the Internal Revenue Code, the terms of Section 9 of the COC Agreement shall apply. 7. MITIGATION. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. Any severance benefits payable to the Executive shall not be subject to reduction for any compensation received from other employment except as provided for welfare benefits in subsection 5.2.2. 8. INDEMNIFICATION. The Executive shall be indemnified by the Company against liability as an officer and director of the Company and any subsidiary or affiliate of the Company to the maximum extent permitted by the Company's articles and by-laws and applicable law. The Company shall maintain, for the benefit of the Executive, director and officer liability insurance in an amount required to satisfy such indemnification; provided such coverage shall be in a form at least as comprehensive as, and in an amount that is at least equal to, the coverage for members of the Board or other officers of the Company. The Executive's rights under this Section 8 shall continue so long as he may be subject to such liability, whether or not this Agreement may have terminated prior thereto. 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all information, knowledge or data relating to the Company, or any of its affiliates, companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliate companies and which shall have been identified and held by the Company as proprietary and confidential and which is not public knowledge (other than due to acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. NONCOMPETITION. 10.1 The Executive acknowledges that he performs services of a unique nature for the Company that are irreplaceable, and that his performance of such services to a competing business will result in irreparable harm to the Company. Accordingly, during the Executive's employment hereunder and for the "Restricted Period" (as defined hereafter), the Executive agrees that he will not, directly or indirectly, own, manage, operate, control, be employed by (whether as an employee, consultant, independent contractor or otherwise, and whether or not for 7 compensation) or render services to any person, firm, corporation or other entity, in whatever form, engaged in any business of the same type as any business in which the Company or any of its subsidiaries or affiliates is engaged on the Date of Termination or in which they have proposed, on or prior to such date, to be engaged in on or after such date and in which the Executive has been involved to any extent (other than de minimis) at any time during the twelve (12)-month period ending with the Date of Termination, in any locale of any country in which the Company conducts business. This Section 10 shall not prevent the Executive from owning not more than one percent of the total shares of all classes of stock outstanding of any publicly held entity engaged in such business, nor will it restrict the Executive from rendering services to charitable organizations, as such term is defined in Section 501(c) of the Internal Revenue Code. 10.2 "RESTRICTED PERIOD" shall mean a period ending on the earlier of (i) the date two (2) years after the Date of Termination or (ii) April 11, 2006. 11. NONSOLICITATION. During the Executive's employment with the Company and for the Restricted Period, the Executive agrees that he will not, directly or indirectly, individually or on behalf of any other person, firm, corporation or other entity, (i) knowingly solicit, aid or induce any managerial level employee of the Company or any of its subsidiaries or affiliates to leave such employment in order to accept employment with or render services to or with any other person, firm, corporation or other entity unaffiliated with the Company, (ii) knowingly take any action to materially assist or aid any other person, firm, corporation or other entity in identifying or hiring any such employee or (iii) knowingly solicit, aid or induce any customer of the Company or any of its subsidiaries or affiliates to purchase goods or services then sold by the Company or any of its subsidiaries or affiliates from another person, firm, corporation or other entity or knowingly assist or aid any other persons or entity in identifying or soliciting any such customer. 12. REMEDY FOR VIOLATION OF SECTION 9, 10 OR 11. The Executive acknowledges that the Company has no adequate remedy at law and will be irreparably harmed if the Executive breaches or threatens to breach any provision of Section 9, 10 or 11 of this Agreement, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any such Section and that the Company shall be entitled to specific performance of the terms of such Sections in addition to any other legal or equitable remedy it may have. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement. 13. ARBITRATION. Any dispute or controversy between the Company and the Executive, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration administered by the American Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and the Executive, unless the parties are unable to agree to an arbitrator, in which case, the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. 8 However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The Company and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Chicago, Illinois or such other location to which the parties may agree. The Company shall pay the costs of any arbitrator appointed hereunder. 14. REIMBURSEMENT OF LEGAL EXPENSES. In the event that the Executive is successful, whether in mediation, arbitration or litigation, in pursuing any claim or dispute involving the Executive's employment with the Company, including any claim or dispute relating to (a) this Agreement, (b) termination of the Executive's employment with the Company or (c) the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall promptly reimburse the Executive for all costs and expenses (including, without limitation, attorneys' fees) relating solely, or allocable, to such successful claim. In any other case, the Executive and the Company shall each bear all their own respective costs and attorneys' fees. 15. WITHHOLDING. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding, at the time payments are actually made to the Executive and received by him, of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided that it is satisfied that all requirements of law as to its responsibilities to withhold such taxes have been satisfied. 16. SUCCESSORS. 16.1 This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs and legal representatives. 16.2 This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 16.3 The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this 9 Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Company in accordance with the operation of law, and such successor shall be deemed the "Company" for purposes of this Agreement. As used in this Agreement, the term "Company" shall include any successor to the Company's business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 17. MISCELLANEOUS. 17.1 This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to principles of conflicts of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 17.2 All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Ronald H. Zech 770 Heather Lane Winnetka, IL 60093 If to the Company: GATX Corporation 500 W. Monroe Street Chicago, IL 60661 Attn: General Counsel or to such other address as either of the parties shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 17.3 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 17.4 Any party's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision hereof. 17.5 This Agreement supersedes any prior employment agreement or understandings, written or oral between the Company and the Executive and contains the entire understanding of the Company and the Executive with respect to the subject matter hereof. 10 17.6 This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates written below. GATX CORPORATION By: ------------------------------------------- James M. Denny Its: Chairman of the Compensation Committee of the Board of Directors Date: ----------------------------------------- By: ------------------------------------------- Ronald J. Ciancio Its: Vice President, General Counsel and Secretary Date: ----------------------------------------- RONALD H. ZECH ---------------------------------------------- Date: ----------------------------------------- 11 EX-99.1 4 c72981exv99w1.txt CERTIFICATION EXHIBIT 99.1 GATX CORPORATION AND SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GATX Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald H. Zech, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald H. Zech - --------------------------------------- Ronald H. Zech Chairman and Chief Executive Officer November 12, 2002 EX-99.2 5 c72981exv99w2.txt CERTIFICATION EXHIBIT 99.2 GATX CORPORATION AND SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GATX Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian A. Kenney, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Brian A. Kenney - ------------------------------------------- Brian A. Kenney Senior Vice President and Chief Financial Officer November 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----