-----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, Qc3bGlp1sj+v+vnIVC+qsP9tVWR3D9i5nQeDhlBQHWlJ8xudWjIKInkEbU/Xxipe zWRWTbO4mcnMRgL1qmaxVw== 0001047469-98-042525.txt : 19981201 0001047469-98-042525.hdr.sgml : 19981201 ACCESSION NUMBER: 0001047469-98-042525 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREENBRIER COMPANIES INC CENTRAL INDEX KEY: 0000923120 STANDARD INDUSTRIAL CLASSIFICATION: RAILROAD EQUIPMENT [3743] IRS NUMBER: 930816972 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13146 FILM NUMBER: 98761245 BUSINESS ADDRESS: STREET 1: ONE CENTERPOINTE DR STREET 2: STE 200 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 BUSINESS PHONE: 5036847000 MAIL ADDRESS: STREET 1: ONE CENTERPOINTE DR STREET 2: STE 200 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to ___________ Commission File No. 1-13146 ___________________________ THE GREENBRIER COMPANIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 93-0816972 (State of Incorporation) (IRS Employer Identification No.) ONE CENTERPOINTE DRIVE, SUITE 200 LAKE OSWEGO, OREGON 97035 (Address of principal executive offices) (503) 684-7000 (Registrant's telephone number, including area code) ____________________________ Securities registered pursuant to Section 12(b) of the Act: (Title of Each Class) (Name of Each Exchange COMMON STOCK, on Which Registered) PAR VALUE $0.001 PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / X / Aggregate market value of the Registrant's Common Stock held by non-affiliates on October 30, 1998 (based on the closing price of such shares on such date) was approximately $87,000,000. The number of shares outstanding of the Registrant's Common Stock on October 30, 1998 was 14,254,132 shares of Common Stock, par value $0.001 per share. DOCUMENTS INCORPORATED BY REFERENCE Parts of Registrant's 1998 Annual Report to Stockholders and of Registrant's Proxy Statement dated November 30, 1998 prepared in connection with the Annual Meeting of Stockholders to be held on January 12, 1999 are incorporated by reference into Parts II and III of this Report. THE GREENBRIER COMPANIES, INC. FORM 10-K TABLE OF CONTENTS PART I PAGE Item 1. BUSINESS 1 Item 2. PROPERTIES 8 Item 3. LEGAL PROCEEDINGS 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 Item 6. SELECTED FINANCIAL DATA 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 9 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 9 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 9 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 10 Item 11. EXECUTIVE COMPENSATION 10 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 10 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 11 SIGNATURES 18 (i) PART I. FORWARD-LOOKING STATEMENTS From time to time, The Greenbrier Companies, Inc. ("Greenbrier" or the "Company") or its representatives have made or may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements as to expectations, beliefs and strategies regarding the future. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The following are among the factors that could cause actual results or outcomes to differ materially from the forward-looking statements: general political, regulatory or economic conditions; changes in interest rates; business conditions and growth in the surface transportation industry, both domestic and international; currency and other risks associated with international operations; shifts in market demand; a delay or failure of acquisitions, products or services to compete successfully; changes in product mix and the mix between manufacturing and leasing and services revenue; transportation labor disputes or operating difficulties which might disrupt the flow of cargo; competitive factors, including increased competition, new product offerings by competitors and price pressures; actual future costs and availability of materials and a trained workforce; labor disputes; production difficulties and product delivery delays in the future as a result of, among other matters, changing process technologies and increasing production; lower than expected customer orders; the ability to consummate expected sales; delays in receipt of orders or cancellation of orders; financial condition of principal customers; and the impact of year 2000 compliance by the Company or by its customers, suppliers or service partners. Any forward-looking statements should be considered in light of these factors. ITEM 1. BUSINESS INTRODUCTION Greenbrier is a leading supplier of transportation equipment and services to the railroad and related industries. The Company's manufacturing segment produces double-stack intermodal railcars, conventional railcars and marine vessels, and provides repair and refurbishment for both intermodal and conventional railcars at locations throughout North America and more recently Europe. In addition to manufacturing, Greenbrier is engaged in complementary leasing and services activities. The lease fleet consists of 27,748 owned or managed railcars as of August 31, 1998. Greenbrier believes this fleet is among the larger non-railroad owned fleets in the United States. In September 1998, Greenbrier acquired a majority interest in a railcar and specialty container manufacturer located in Swidnica, Poland. Polish investors will maintain a significant ownership interest in the manufacturer. This acquisition establishes a European manufacturing base and is expected to provide access to the European markets, particularly the market in Poland. Initially, the Polish facility is not expected to have a material impact on Greenbrier's overall financial condition or results of operations, and the investment will be funded through existing cash balances. This expansion will require the development of a sales and marketing force knowledgeable about the European market. Also in September 1998, Greenbrier entered into a joint venture to build railroad freight cars at an existing manufacturing facility in Sahagun, Mexico. Each party will maintain a 50 percent interest in the joint venture. The facility will serve the North American marketplace and provide better access to the growing market in Mexico. Operations are expected to commence in the first quarter of 1999 and capacity is anticipated to grow to 3,000 new cars annually. Required capital expenditures and working capital needs are expected to be funded by existing operating cash flow and cash balances. Subsequent to year end, Greenbrier entered into the following maintenance and refurbishment agreements: - - A long-term contract to manage maintenance on 7,000 covered hopper cars owned by Burlington Northern Santa Fe ("BNSF") that is anticipated to begin in December 1998. - - An agreement with Canadian Pacific Railway to refurbish and re-market certain of their used freight cars under a pilot program. - - An agreement to refurbish and re-market surplus railcars in Europe. 1 A plan was adopted in 1997 to discontinue the third party transportation logistics segment, as well as to sell the trailer and container leasing operation, in order to focus on core railcar operations. The expansion of the logistics segment during 1996 and 1997 was based on expected complementary advantages of bringing assets and services together which did not develop. Industry fundamentals for both businesses were strong; however, rates of return on capital invested were less than desired. In July and October 1997, Greenbrier divested its fleet of domestic containers, intermodal and highway trailers and chassis. In December 1997 the sale of the intermodal marketing and truck brokerage operations of the logistics business segment was completed. These operations constituted the majority of the logistics operations. In August 1998 the sale of the remainder of the logistics operation was completed. Greenbrier is a Delaware corporation formed in 1981. The Company's principal executive offices are located at One Centerpointe Drive, Lake Oswego, Oregon 97035, and its telephone number is (503) 684-7000. PRODUCTS AND SERVICES Greenbrier operates in two primary business segments: the manufacture of railcars and marine vessels and the refurbishment and repair of railcars; and the leasing and management of surface transportation equipment and related services. A summary of selected consolidated financial information for these two business segments as well as domestic and foreign operations is set forth in Note 16 of the Notes to Consolidated Financial Statements. INTERMODAL PRODUCTS Intermodal transportation is the movement of cargo in standardized containers or trailers. Intermodal containers and trailers are generally freely interchangeable among railcar, truck or ship, making it possible to move cargo in a single container or trailer from a point of origin to its final destination without the repeated loading and unloading of freight required by traditional shipping methods. A major innovation in intermodal transportation has been the articulated double-stack railcar which transports stacked containers on a single platform. An articulated railcar is a unit comprised of up to five platforms, each of which is linked by a common set of wheels and axles. DOUBLE-STACK RAILCARS. The double-stack railcar provides significant operating and capital savings over other types of intermodal railcars. These savings are the result of (i) increased train density (two containers are carried within the same longitudinal space conventionally used to carry one trailer or container); (ii) a railcar weight reduction per container of approximately 50 percent; (iii) easier terminal handling characteristics; (iv) reduced equipment costs of approximately 30 percent over the cost of providing the same carrying capacity with conventional equipment; (v) better ride quality leading to reduced damage claims; and (vi) increased fuel efficiency resulting from weight reduction and improved aerodynamics. Greenbrier is the leading manufacturer of double-stack railcars with an estimated cumulative North American market share of 60 percent. In 1998, 4,800 double-stack railcars were manufactured and sold by the Company, which it believes represents 52 percent of the North American market during such period. Greenbrier's comprehensive line of articulated and non-articulated double-stack railcars offers varying load capacities and configurations. Current double-stack products include: MAXI-STACK -Registered Trademark-- The Maxi-Stack is a series of double-stack railcars that features the ride-quality and operating efficiency of articulated stack cars. The Maxi-Stack III is a five-platform railcar that features the ability to carry containers up to 53 feet in length, the longest shipping containers presently in use. The Maxi-Stack AP is a three-platform all-purpose railcar that is more versatile than other intermodal cars because it allows the loading of either trailers or double-stack containers on the same platform. HUSKY-STACK -Registered Trademark- - The Husky-Stack is a non-articulated (stand-alone) or draw bar connected series of double-stack railcars with the capability of carrying containers up to 42 percent heavier than a single Maxi-Stack platform. The All-Purpose Husky-Stack is a non-articulated version of the Maxi-Stack AP. Husky-Stack 2+2 is a 56-foot railcar that allows the double-stack loading of up to four 28-foot containers. Husky-Stack also provides a means to extend double-stack economics to small load segments and terminals. 2 AUTOSTACK. Autostack is a proprietary system developed and licensed by the Company to transport vehicles intermodally in standard domestic or international shipping containers and, unlike conventional multi-level railcars, can be used in standard rail, ship and highway intermodal corridors. In 1997, Greenbrier recorded a $7 million write-down of the carrying value of the Autostack operating equipment to approximate the anticipated net realizable value of the assets based on projected future performance under existing contracts. Greenbrier believes Autostack will remain a niche player in the vehicle transportation industry. The Autostack system transported approximately 74,000 vehicles in 1998. CONVENTIONAL RAILCARS Greenbrier is the leading manufacturer of boxcars in North America. A wide variety of 100-ton capacity boxcars, primarily used in the forest products industry, are offered as well as custom built high capacity railcars for special applications such as automotive parts or canstock movement. In addition to boxcars, center-partition cars for lumber and other building materials, flatcars for auto-rack service, high cubic capacity covered hopper railcars for grain transportation, gondolas for scrap steel services and various other conventional railcar types are manufactured. In 1998, approximately 3,000 conventional railcars were manufactured and sold. The recently acquired facility in Swindica, Poland will initially produce pressurized tank cars for liquid petroleum gas, non-pressurized tank cars for light oil products and an articulated flat car. Each of these products have been produced in the recent past at this facility. The need for expansion and upgrading of the railcar manufacturing and refurbishing facilities is continually evaluated in order to take advantage of increased market opportunities for new railcar designs. RAIL SERVICES Greenbrier is actively engaged in the repair and refurbishment of railcars for third parties as well as its own lease fleet. In certain situations, repair and refurbishment of the Company's lease fleet is performed in unaffiliated facilities. Refurbishing and repair facilities are located in Portland and Springfield, Oregon; Cleburne, Texas and Finley, Washington. The Springfield facility has a long-term contract with a third-party primarily for the repair of railcars. Greenbrier believes it is one of only a few railcar lessors with its own refurbishing capabilities. In addition, Greenbrier operates wheel shops in Portland, Oregon; Pine Bluff, Arkansas and Tacoma, Washington. MARINE VESSEL FABRICATION The Portland, Oregon manufacturing facility is located on a deep water port on the Willamette River. Until 1984, the Company's predecessor designed and built ocean-going barges and other types of marine vessels for maritime shipping companies. In 1995, Greenbrier re-entered the marine vessel market and expanded and upgraded the marine facilities, which includes the largest side-launch ways on the West Coast. The upgraded marine facilities also enhance steel plate burning and fabrication capacity providing flexibility for railcar production. Since 1995 vessels manufactured include conventional deck barges for aggregates and other heavy industrial products and ocean-going dump barges. LEASING AND SERVICES Greenbrier currently manages a lease fleet of railcars of which 53 percent are owned and the remainder are managed for institutional investors, railroads and other leasing companies. Management services include equipment marketing and re-marketing, maintenance management and administration. Greenbrier participates in both the finance and the operating lease segments of the market. The aggregate rental payments over the operating lease terms do not fully amortize the acquisition costs of the leased equipment. As a result, the Company is subject to the customary risk that it may not be able to sell or re-lease equipment after the operating lease term expires. However, the Company believes it can effectively manage the risks typically associated with operating leases due to its railcar expertise and its refurbishing and re-marketing capabilities. Most of the leases are "full service" leases, whereby Greenbrier is responsible for maintenance, taxes and administration. The fleet is maintained, in part, through Greenbrier's own facilities and engineering and technical staff. Assets from the owned lease fleet are periodically sold to take advantage of market conditions, manage risk and maintain liquidity. Railcar equipment held for sale consists mainly of hulks that will either be refurbished or sold. 3 The following table summarizes the lease fleet:
FLEET PROFILE AS OF AUGUST 31, 1998(1) ---------------------------------------------------- Percent Average of Owned Age of Owned Managed Total Units on Owned Units Units Units Lease Units (Yrs.) ----- ------- ----- -------- ----------- Railcars Available for Revenue Service 14,125 13,011 27,136 98.1 20.0 Railcar Equipment Held for Sale 612 - 612 ------ ------ ------ 14,737 13,011 27,748 ------ ------ ------ ------ ------ ------ Lessee Profile: Class I Railroads 10,993 9,147 20,140 Non-Class I Railroads 1,345 1,290 2,635 Shipping Companies 1,309 2,243 3,552 Leasing Companies 215 121 336 Off-Lease 263 210 473 ------ ------ ------ Total Revenue Units 14,125 13,011 27,136 ------ ------ ------ ------ ------ ------
__________ (1) Each platform of an articulated car is treated as a separate car. A substantial portion of the equipment in the lease fleet has been acquired through an agreement entered into in August 1990 with Southern Pacific Transportation Company, which has since merged with Union Pacific Corporation ("Union Pacific"), to purchase, refurbish and re-market over 10,000 railcars. The railcars were refurbished to predetermined specifications by Greenbrier or unaffiliated contract shops after satisfactory re-marketing arrangements were in place. RAW MATERIALS AND COMPONENTS Manufactured products require a supply of raw materials including steel plate and numerous specialty components such as brakes, wheels and axles. Approximately 50 percent of the cost of each freight car represents specialty components purchased from third-parties. Customers often specify particular components and suppliers of such components. Although the number of alternative suppliers of certain specialty components has declined in recent years, there are at least two suppliers for most such components. Inventory levels are continually monitored to ensure adequate support of production. Advance purchases are periodically made to avoid possible shortages of material due to capacity limitations of component suppliers and possible price increases. Binding long-term contracts with suppliers are not typically entered into as the Company relies on established relationships with major suppliers to ensure the availability of raw materials and specialty items. Fluctuations in the price of components and raw materials have not had a material effect on earnings and are not anticipated to have a material effect in the foreseeable future. In 1998, approximately 71 percent of the Company's Canadian requirements for steel plate were purchased from Algoma Steel Inc. and approximately 47 percent of the domestic requirements were purchased from Oregon Steel Mills, Inc. No other suppliers accounted for in excess of 10 percent of total purchases in 1998, and the top ten suppliers (including Oregon Steel Mills, Inc. and Algoma Steel Inc.) accounted for approximately 34 percent of total purchases. The Company maintains good relationships with its suppliers and has not experienced any significant interruptions in recent years in the supply of raw materials or specialty components. A member of the TrentonWorks Limited board of directors serves as Chairman of the board of directors of Algoma Steel Inc. 4 MARKETING AND PRODUCT DEVELOPMENT A fully integrated marketing and sales effort is utilized whereby Greenbrier seeks to leverage relationships developed in each of its manufacturing and leasing and services operations to provide customers with a diverse range of equipment and financing alternatives designed to satisfy a customer's unique needs. These custom programs may involve a combination of railcar products and financing, leasing, refurbishing and re-marketing services, depending on whether the customer is buying new equipment or refurbishing existing equipment. Through customer relationships, insights are derived into the potential need for new products and services. Marketing and engineering personnel collaborate to evaluate opportunities and identify and develop new products. Research and development costs incurred for new product development during 1998, 1997 and 1996 were $1,470,000, $1,097,000 and $597,000, respectively. During 1997, Greenbrier completed the prototype and began commercial testing of Auto-Max-Registered Trademark- , a two-unit articulated railcar that can be configured for either tri-level or bi-level vehicle transportation service. Auto-Max was originally expected to be produced in late 1998, but production was delayed due to demand for manufacturing line space. The first order has been received and Auto-Max production is anticipated to begin in late 1999. CUSTOMERS AND BACKLOG The manufacturing customer base includes every transportation company that utilizes double-stack or conventional railcars as well as financial institutions that provide equipment to the transportation industry. A portion of the customer base includes TTX Company, BNSF, Union Pacific, Canadian National Railway Company, First Union Rail, NorRail, Inc., General Electric Railcar Services, and Norfolk Southern Railway Company. The following table lists the Company's backlog in units and dollars for new railcars at the dates shown:
August 31, ------------------------- 1998 1997 1996 ---- ---- ---- New railcar backlog(1) 6,200 2,600 2,200 Estimated value (in thousands) $375,000 $133,000 $123,000
__________ (1) Each platform of an articulated car is treated as a separate car. The backlog is based on customer purchase or lease orders that the Company believes are firm. Customer orders, however, are subject to cancellation and other customary industry terms and conditions. Historically, little variation has been experienced between the number of railcars ordered and the number of railcars actually sold. The backlog is not necessarily indicative of future results of operations. Payment for railcars manufactured is typically received when the cars are completed and accepted by a third-party customer. Leasing customers include Class I Railroads, regional and short line railroads, other leasing companies, shippers and carriers such as Union Pacific, BNSF, Railtex, Oregon Steel Mills, and First Union Rail. In 1998, sales to the two largest customers, TTX Company and BNSF, accounted for 25 percent and 16 percent of total revenues. No other customers accounted for more than 10 percent of total revenues. COMPETITION Greenbrier is affected by a variety of competitors in each of its principal business activities. There are currently seven major railcar manufacturers competing in North America. Two of these producers build railcars principally for their own fleets and five producers - Trinity Industries, Inc., Thrall Car Manufacturing Co., Johnstown America Corp., National Steel Car, Ltd. and the Company - compete principally in the general railcar market. Some of these producers have substantially greater resources than the Company. Greenbrier competes on the basis of type of product, reputation for quality, price, reliability of delivery and customer service and support. 5 In railcar leasing, principal competitors include The CIT Group, DJ Joseph, First Union Rail, GATX Corporation, General Electric Railcar Services, NorRail, Inc. and Helm Financial Corp. PATENTS AND TRADEMARKS Greenbrier pursues a proactive program for protection of intellectual property resulting from its research and development efforts. Greenbrier has obtained patent and trademark protection for significant intellectual property as it relates to its business. The Company holds several United States and foreign patents and has several patent applications pending. ENVIRONMENTAL MATTERS The Company is subject to federal, state, provincial and local environmental laws and regulations concerning, among other matters, air emissions, waste water discharge, solid and hazardous waste disposal and employee health and safety. Greenbrier maintains an active program of environmental compliance and believes that its current operations are in material compliance with all applicable federal, state, provincial and local environmental laws and regulations. REGULATION The Federal Railroad Administration (the "FRA") in the United States and Transport Canada in Canada administer and enforce laws and regulations relating to railroad safety. These regulations govern equipment and safety appliance standards for freight cars and other rail equipment used in interstate commerce. The Association of American Railroads (the "AAR") also promulgates a wide variety of rules and regulations governing safety and design of equipment, relationships among railroads with respect to railcars in interchange and other matters. The AAR also certifies railcar builders and component manufacturers that provide equipment for use on North American railroads. The effect of these regulations is that the Company must maintain its certifications with the AAR as a car builder and component manufacturer, and products sold and leased by the Company must meet AAR, Transport Canada and FRA standards. 6 EXECUTIVE OFFICERS OF THE COMPANY The following are the executive officers of the Company. ALAN JAMES, 68, is Chairman of the Board of Directors of Greenbrier, a position he has held since May 1994. Mr. James was President of Greenbrier from 1974 to 1994. WILLIAM A. FURMAN, 54, is President, Chief Executive Officer and a director of Greenbrier, positions he has held since May 1994. Mr. Furman is also Chief Executive Officer of Gunderson, Inc. and Managing Director of TrentonWorks, Limited. Mr. Furman was Vice President of Greenbrier from 1974 to 1994. Mr. Furman serves as a director of Schnitzer Steel Industries, Inc., a steel recycling and manufacturing company. ROBIN D. BISSON, 44, has been Senior Vice President Marketing and Sales since January 1996 and President of Greenbrier Railcar, Inc., a subsidiary that engages in railcar leasing, since 1991. Mr. Bisson was Vice President of Greenbrier Railcar, Inc. from 1987 to 1991 and has been Vice President of Greenbrier Leasing Corporation, a subsidiary that engages in railcar leasing, since 1987. LARRY G. BRADY, 59, is Senior Vice President and Chief Financial Officer of the Company. Prior to becoming Senior Vice President in January 1998 he was Vice President and Chief Financial Officer since May 1994. Mr. Brady has been Senior Vice President of Greenbrier Leasing Corporation since he joined Greenbrier in 1991. From 1974 to 1990, he was a partner with Touche Ross & Co. (which subsequently became Deloitte & Touche LLP). A. DANIEL O'NEAL, 62, has been Chairman of Autostack Corporation, a subsidiary that engages in vehicle transportation, since 1992; a director of Gunderson, Inc. since 1985 and serves as a director of the Company. From 1973 until 1980, Mr. O'Neal served as a commissioner of the Interstate Commerce Commission, and from 1977 until 1980 served as its Chairman. From 1989 until 1996 he was chief executive officer and owner of a freight transportation services company. He is currently Chairman of Powertech Toolworks, Inc., a computer services and training company. MARK J. RITTENBAUM, 41, is Vice President and Treasurer of the Company, a position he has held since May 1994. Mr. Rittenbaum is also Vice President of Greenbrier Leasing Corporation and Greenbrier Railcar, Inc., positions he has held since 1993 and 1994. TIMOTHY A. STUCKEY, 48, has been President of Autostack Corporation since 1992, prior to which he served as Executive Vice President of Autostack since 1990, and Assistant Vice President of Greenbrier Leasing Corporation since 1987. NORRISS M. WEBB, 59, is Executive Vice President and General Counsel of the Company, a position he has held since May 1994. He is also Vice President, Secretary and a director of Gunderson, Inc. Mr. Webb was Vice President of the Company from 1981 to 1994. L. CLARK WOOD, 56, has been President of Manufacturing Operations since April 1998, President of Gunderson, Inc. since 1990 and Chief Executive Officer of TrentonWorks Limited since June 1995. Mr. Wood was Vice President and Director of Railcar Sales at Trinity Industries, Inc., a railroad freight car manufacturer from 1985 to 1990. Executive officers are elected by the Board of Directors. There are no family relationships between any of the executive officers of the Company. Alan James, Chairman of the Board of Directors, and Mr. Furman have entered into a Stockholders' Agreement pursuant to which they have agreed, among other things, to vote as directors to elect Mr. Furman as President and Chief Executive Officer of the Company, Mr. James as Chairman, and certain persons as executive officers and each to vote for the other and for the remaining existing directors in electing directors of the Company. 7 EMPLOYEES As of August 31, 1998, Greenbrier had 2,865 full-time employees, consisting of 2,743 employees engaged in railcar and marine manufacturing, and railcar services, and 122 employees engaged in leasing and services activities. A total of 1,017 employees at the manufacturing facility in Trenton, Nova Scotia, Canada are covered by collective bargaining agreements which expire in 2000. A stock incentive plan and a stock purchase plan are available for all employees. A discretionary bonus program is maintained for salaried and most hourly employees not covered by collective bargaining agreements. Greenbrier believes that its relations with its employees are generally good. ITEM 2. PROPERTIES The Company operates at the following facilities as of August 31, 1998:
- -------------------------------------------------------------------------------------------------------------------------------- DESCRIPTION SIZE LOCATION STATUS - -------------------------------------------------------------------------------------------------------------------------------- Railcar and marine 75 acres including 774,000 sq. ft. of Portland, Oregon Owned manufacturing facility covered manufacturing space and a 750- foot side-launch ways for launching ocean-going vessels - -------------------------------------------------------------------------------------------------------------------------------- Railcar manufacturing and 100 acres with 414,000 sq. ft. of Trenton, Nova Scotia Owned forge facility manufacturing space as well as a forge shop - -------------------------------------------------------------------------------------------------------------------------------- Railcar repair facility 70 acres Cleburne, Texas Leased through 2002 with an option to purchase - -------------------------------------------------------------------------------------------------------------------------------- Railcar repair facility 40 acres Finley, Washington Leased through 2015 with an option to purchase - -------------------------------------------------------------------------------------------------------------------------------- Railcar repair facility 5.4 acres Springfield, Oregon Leased through 2004 Wheel shop 4.6 acres Tacoma, Washington Leased through 2003 with extensions through 2071 - -------------------------------------------------------------------------------------------------------------------------------- Wheel shop 20,000 sq. ft. Pine Bluff, Arkansas Leased through 1999 - -------------------------------------------------------------------------------------------------------------------------------- Executive offices, 23,000 sq. ft. Lake Oswego, Oregon Leased through 2001 including railcar marketing and leasing activities - --------------------------------------------------------------------------------------------------------------------------------
Marketing and administrative offices are also leased in various locations throughout the U.S. and Europe. Greenbrier believes that its facilities are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate to meet its operating needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. Litigation has been initiated by former shareholders of Interamerican Logistics Inc. ("Interamerican"), which was acquired in the fall of 1996. The plaintiffs allege that Greenbrier violated the agreements pursuant to which it acquired ownership of Interamerican and seek damages aggregating $4 million Canadian. Management contends the claim to be without merit and intends to vigorously defend its position. Management believes that any ultimate liability resulting from litigation will not materially affect the financial position, results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the information set forth in the section entitled "Common Stock" on page 40 of the 1998 Annual Report to Stockholders, which section is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the information set forth in the section entitled "Selected Financial Information" on page 18 of the Company's 1998 Annual Report to Stockholders, which section is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information set forth in the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 19 to 23 of the 1998 Annual Report to Stockholders, which section is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Greenbrier has assessed its exposure to market risk for its variable rate debt and foreign currency exposures and believes that exposures to such risks are not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and report of independent auditors set forth in the 1998 Annual Report to Stockholders are incorporated herein by reference: Consolidated Balance Sheets as of August 31, 1998 and 1997, and the Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity and Consolidated Statements of Cash Flows for each of the years ended August 31, 1998, 1997 and 1996, on pages 25 to 28, the Notes to Consolidated Financial Statements on pages 29 to 37, the report of independent auditors thereon on page 24 and the section entitled Quarterly Results of Operations-Unaudited on page 38. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT There is hereby incorporated by reference the information under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant's year ended August 31, 1998, and the information under the caption "Executive Officers of the Company" in Part I, Item 1, "Business," of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference the information under the caption "Executive Compensation" in Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant's year ended August 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information under the captions "Voting" and "Stockholdings of Certain Beneficial Owners and Management" in Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant's year ended August 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information under the caption "Certain Relationships and Related Party Transactions" in Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant's year ended August 31, 1998. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The Consolidated Financial Statements, together with the report thereon of Deloitte & Touche LLP, dated October 23, 1998, appearing on pages 24 to 37 of the 1998 Annual Report to Stockholders are incorporated by reference into this Annual Report on Form 10-K. With the exception of the aforementioned information and that which is specifically incorporated in Parts I and II, the 1998 Annual Report to Stockholders is not to be deemed filed as part of this Annual Report on Form 10-K. Annual Report Page No. ------------ (a) (1) Financial Statements of the Company - Index 17 Independent Auditors' Report 24 Consolidated Balance Sheets as of August 31, 1998 and 1997 25 Consolidated Statements of Operations for each of the years ended August 31, 1998, 1997 and 1996 26 Consolidated Statements of Stockholders' Equity for each of the years ended August 31, 1998, 1997 and 1996 27 Consolidated Statements of Cash Flows for each of the years ended August 31, 1998, 1997 and 1996 28 Notes to Consolidated Financial Statements 29 This Filing Page No. ----------- (2) The following financial statement schedule should be read in conjunction with the Consolidated Financial Statements in the 1998 Annual Report to Stockholders. All other schedules have been omitted because they are inapplicable, not required or because the information is given in the Consolidated Financial Statements or related Notes to Consolidated Financial Statements. Independent Auditors' Report 15 Schedule I - Condensed Financial Information of Registrant 16 (3) List of Exhibits 3.1. Registrant's Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 3.2. Registrant's Amended and Restated By-laws, as amended on November 9, 1994 is incorporated herein by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended August 31, 1994. 9.1. Form of Stockholders' Agreement dated July 1, 1994, between Alan James and William A. Furman is incorporated herein by reference to Exhibit 9.1 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 9.2. Amendment No. 1 dated as of December 23, 1994 to Stockholders' Agreement dated July 1, 1994 between Alan James and William A. Furman is incorporated herein by reference to Exhibit 9.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995. 11 10.1.* Employment Agreement dated as of July 1, 1994, between Alan James and Registrant is incorporated herein by reference to Exhibit 10.2 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1994. 10.2.* Employment Agreement dated as of July 1, 1994, between William A. Furman and Registrant is incorporated herein by reference to Exhibit 10.3 filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1994. 10.3* Employment Agreement dated June 1, 1996 between Greenbrier Logistics, Inc. and A. Daniel O'Neal Jr. is incorporated herein by reference to Exhibit 10.33 to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.4.* Form of Registrant's Split-Dollar Agreement is incorporated herein by reference to Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the year ended August 31, 1995. 10.5* Greenbrier Leasing Corporations Manager Owned Target Benefit Plan dated as of January 1, 1996 is incorporated herein by reference to Exhibit 10.35 to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997. 10.6.* James-Furman Supplemental 1994 Stock Option Plan is incorporated herein by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended August 31, 1994. 10.7. Form of Registrant's 1994 Stock Incentive Plan, dated July 1, 1994 is incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.8. Amendment No. 1 to the 1994 Stock Incentive Plan, dated July 14, 1998. 10.9. Form of Agreement concerning Indemnification and Related Matters (Directors) between Registrant and its directors is incorporated herein by reference to Exhibit 10.18 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.10. Form of Option with Right of First Refusal and Agreement of Purchase and Sale among William A. Furman, Alan James and Registrant is incorporated herein by reference to Exhibit 10.13 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.11. Railcar Management Agreement between Greenbrier Leasing Corporation and James-Furman & Company, dated as of December 31, 1989 is incorporated herein by reference to Exhibit 10.9 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.12. Form of Amendment No. 1 to Railcar Management Agreement between Greenbrier Leasing Corporation and James-Furman & Company dated as of July 1, 1994 is incorporated herein by reference to Exhibit 10.11 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.13. Railcar Maintenance Agreement between Greenbrier Leasing Corporation and James-Furman & Company, dated as of December 31, 1989 is incorporated herein by reference to Exhibit 10.10 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 12 10.14. Form of Amendment No. 1 to Railcar Maintenance Agreement between Greenbrier Leasing Corporation and James-Furman & Company dated as of July 1, 1994 is incorporated herein by reference to Exhibit 10.12 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.15. Lease of Land and Improvements dated as of July 23, 1992 between the Atchison, Topeka and Santa Fe Railway Company and Gunderson Southwest, Inc. is incorporated herein by reference to Exhibit 10.4 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.16. First amendment dated September 26, 1994 to the Lease of Land and Improvements dated as of July 23, 1992 between The Atchison, Topeka and Santa Fe Railway Company and Gunderson Southwest, Inc. is incorporated herein by reference to Exhibit 10.24 to Registrant's Quarterly Report on form 10-Q for the quarter ended November 30, 1994. 10.17. Re-marketing Agreement dated as of November 19, 1987 among Southern Pacific Transportation Company, St. Louis Southwestern Railway Company, Greenbrier Leasing Corporation and Greenbrier Railcar, Inc. is incorporated herein by reference to Exhibit 10.5 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.18. Amendment to Re-marketing Agreement among Southern Pacific Transportation Company, St. Louis Southwestern Railway Company, Greenbrier Leasing Corporation and Greenbrier Railcar, Inc. dated as of November 15, 1988 is incorporated herein by reference to Exhibit 10.6 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.19. Amendment No. 2 to Re-marketing Agreement among Southern Pacific Transportation Company, St. Louis Southwestern Railway Company, Greenbrier Leasing Corporation and Greenbrier Railcar, Inc. is incorporated herein by reference to Exhibit 10.7 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.20. Amendment No. 3 to Re-marketing Agreement dated November 19, 1987 among Southern Pacific Transportation Company, St. Louis Southwestern Railway Company, Greenbrier Leasing Corporation and Greenbrier Railcar, Inc. dated as of March 5, 1991 is incorporated herein by reference to Exhibit 10.8 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.21 Credit Agreement dated as of September 1, 1997 among Greenbrier Leasing Corporation, Greenbrier Capital Corporation, Greenbrier Partners Inc., Greenbrier Railcar, Inc., Autostack Corporation, Greenbrier Transportation Limited Partnership, Autostack General Partner, Inc. and Greenbrier Rental Services, Inc. with Bank of America National Trust and Savings Association and Union Bank of California, N.A. is incorporated herein by reference to Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended August 31, 1997. 10.22. Note Agreement dated as of May 31, 1994 among Greenbrier Leasing Corporation, Greenbrier Railcar, Inc. and The Prudential Insurance Company of America is incorporated herein by reference to Exhibit 10.22 to Registrant's Registration Statement No. 33-78852, dated July 11, 1994. 10.23. Loan Agreement dated as of March 9, 1995 between 2361025 Nova Scotia Limited and Canadian Imperial Bank of Commerce is incorporated herein by reference to Exhibit 10.27 to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 13 13. 1998 Annual Report 21.1 List of the subsidiaries of the Registrant 23. Consent of Deloitte & Touche LLP, independent auditor 27. Financial Data Schedule _____________ * Management contract or compensatory plan or arrangement (b) Reports on Form 8-K None 14 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Greenbrier Companies, Inc. We have audited the financial statements of The Greenbrier Companies, Inc. and Subsidiaries as of August 31, 1998 and 1997, and for each of the three years in the period ended August 31, 1998, and have issued our report thereon dated October 23, 1998; such financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of The Greenbrier Companies, Inc. and Subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Portland, Oregon October 23, 1998 SCHEDULE I THE GREENBRIER COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In thousands)
BALANCE SHEETS August 31, ---------------------- 1998 1997 ---- ---- ASSETS Cash and cash equivalents $ 169 $ 21 Accounts receivable 2,623 48 Due from affiliates 13,972 11,832 Investment in subsidiaries 119,246 95,370 Prepaid expenses and other 2,764 1,582 --------- --------- $ 138,774 $ 108,853 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities $ 3,259 $ 1,115 Due to affiliates 12,457 3,077 Deferred income taxes 2,216 589 Stockholders' equity 120,842 104,072 --------- --------- $ 138,774 $ 108,853 --------- --------- --------- ---------
STATEMENTS OF OPERATIONS Year ended August 31, ----------------------------- 1998 1997 1996 -------- -------- -------- Interest and other income $ 612 $ 1,044 $ 2,624 Expenses Selling and administrative 8,859 4,571 5,325 Interest 326 26 37 ------- -------- -------- 9,185 4,597 5,362 ------- -------- -------- Loss before income tax benefit and equity in earnings of subsidiaries (8,573) (3,553) (2,738) Income tax benefit 3,601 1,496 1,153 ------- -------- -------- Loss before equity in earnings (loss) of subsidiaries (4,972) (2,057) (1,585) Equity in earnings (loss) of subsidiaries 25,304 (2,114) 19,860 ------- -------- -------- Net earnings (loss) $20,332 $ (4,171) $ 18,275 ------- -------- -------- ------- -------- --------
15 SCHEDULE I (CONTINUED) THE GREENBRIER COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (In thousands)
STATEMENTS OF CASH FLOWS Year ended August 31, ----------------------------- 1998 1997 1996 ------- -------- ------- Cash flows from operating activities: Net earnings (loss) $20,332 $ (4,171) $18,275 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Deferred income taxes 1,627 978 (679) Equity in earnings of subsidiary (25,304) (8,564) (19,860) Other 54 56 185 Decrease (increase) in assets: Accounts and notes receivable (2,575) 10 (22) Due from affiliates (2,140) 14,827 10,613 Prepaid expenses and other (1,182) (644) 309 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 2,144 (1,740) 1,480 Due to affiliates 9,380 2,477 53 ------- ------- ------- Net cash provided by operating activities 2,336 3,229 10,354 Cash flows from investing activities: Investment in subsidiary - - (7,472) ------- ------- ------- Net cash used in investing activities - - (7,472) Cash flows for financing activities: Dividends (3,409) (3,399) (3,399) Proceeds from stock options 1,221 - - Proceeds from subsidiary redemption of preferred stock - 68 111 ------- ------- ------- Net cash used in financing activities (2,188) (3,331) (3,288) Increase (decrease) in cash 148 (102) (406) Cash and cash equivalents: Beginning of year 21 123 529 ------- ------- ------- End of year $ 169 $ 21 $ 123 ------- ------- ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 326 $ 26 $ 37
16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE GREENBRIER COMPANIES, INC. Dated: November 23, 1998 By: /s/ William A. Furman --------------------------------- William A. Furman President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Date - --------- ---- /s/ Alan James November 23, 1998 - --------------------------------- Alan James, Chairman of the Board /s/ William A. Furman November 23, 1998 - --------------------------------- William A. Furman, President and Chief Executive Officer, Director /s/ Victor G. Atiyeh November 23, 1998 - --------------------------------- Victor G. Atiyeh, Director /s/ Peter K. Nevitt November 23, 1998 - --------------------------------- Peter K. Nevitt, Director /s/ A. Daniel O'Neal November 23, 1998 - --------------------------------- A. Daniel O'Neal, Director /s/ C. Bruce Ward November 23, 1998 - --------------------------------- C. Bruce Ward, Director /s/ Benjamin R. Whiteley November 23, 1998 - --------------------------------- Benjamin R. Whiteley, Director /s/ Larry G. Brady November 23, 1998 - --------------------------------- Larry G. Brady, Sr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 17 EX-10.8 2 EXHIBIT 10.8 Exhibit 10.8 AMENDMENT NO. 1 to 1994 STOCK INCENTIVE PLAN Pursuant to the authority conferred by Article XI of the 1994 Stock Incentive Plan of The Greenbrier Companies, Inc. (the "Plan"), Article VII.G.3 of the Plan is amended in its entirety to read as follows: "3. In the event of the death of a Holder of an Option while employed by, or providing service to, the Company or any Affiliate, such Option shall become immediately exercisable in its entirety and may be exercised at any time prior to the expiration date of the Option, but only by the person or persons to whom such Holder's rights under the Option shall pass by the Holder's will or by the laws of descent and distribution of the state or country of domicile at the time of death." Except as modified by this Amendment No. 1, the Plan shall remain in full force and effect and be unamended. Adopted by the Board of Directors on July 14, 1998. /s/ Kenneth D. Stephens ---------------------------------------- Kenneth D. Stephens, Secretary EX-13 3 EXHIBIT 13 TABLE OF CONTENTS
Selected Financial Information 18 Management's Discussion and Analysis of Results of Operations and Financial Condition 19 Reports of Management and Independent Auditors 24 Consolidated Balance Sheets 25 Consolidated Statements of Operations 26 Consolidated Statements of Stockholders' Equity 27 Consolidated Statements of Cash Flows 28 Notes to Consolidated Financial Statements 29 Quarterly Results of Operations 38 Directors & Officers 39 Investor Information 40 Locations 41
[PHOTO] [PHOTO] [PHOTO] [PHOTO] [PHOTO] GUNDERSON'S TTX EXCELLENT SUPPLIER AWARDS -- SEVEN CONSECUTIVE YEARS FOR FREIGHT CAR MANUFACTURING AND SIX CONSECUTIVE YEARS FOR WHEEL SERVICES. Financial Review The Greenbrier Companies 1998 Annual Report 17 SELECTED FINANCIAL INFORMATION YEARS ENDED AUGUST 31
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Revenue: Manufacturing $ 451,706 $ 325,501 $ 421,456 $ 295,216 $ 234,439 Leasing and services 88,655 105,419 98,484 92,510 87,250 ----------------------------------------------------------------------------- $ 540,361 $ 430,920 $ 519,940 $ 387,726 $ 321,689 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Earnings from continuing operations $ 20,332(1) $ 6,021(2) $ 18,613 $ 16,665 $ 11,277 Discontinued operations: Loss on operations(3) $ -- $ (2,512) $ (338) $ -- $ -- Estimated loss on disposal(4) $ -- $ (7,680) $ -- $ -- $ -- Net earnings (loss) $ 20,332 $ (4,171) $ 18,275 $ 16,665 $ 10,777(5) ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Basic earnings per share: From continuing operations $ 1.43 $ 0.43 $ 1.31 $ 1.18 $ 1.02 Net earnings (loss) $ 1.43 $ (0.29) $ 1.29 $ 1.18 $ 0.98(5) ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Diluted earnings per share: From continuing operations $ 1.42 $ 0.43 $ 1.31 $ 1.17 $ 1.02 Net earnings (loss) $ 1.42 $ (0.29) $ 1.29 $ 1.17 $ 0.97(5) ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Weighted average shares outstanding: Basic 14,203 14,160 14,160 14,160 11,049 Diluted 14,346 14,160 14,170 14,230 11,065 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Cash dividends paid per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ -- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Balance Sheet Data Assets: Cash(6) $ 57,909 $ 21,744 $ 12,483 $ 14,014 $ 56,980 Manufacturing inventories 73,639 87,233 75,989 86,280 31,518 Leased equipment(7) 256,509 284,541 364,701 327,063 296,515 All other 117,432 187,000 162,315 105,032 86,896 ----------------------------------------------------------------------------- $ 505,489 $ 580,518 $ 615,488 $ 532,389 $ 471,909 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Debt: Revolving $ -- $ 57,709 $ 27,814 $ 27,313 $ -- Term 147,876 201,786 216,278 190,754 217,453 ----------------------------------------------------------------------------- $ 147,876 $ 259,495 $ 244,092 $ 218,067 $ 217,453 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Subordinated debt $ 37,932 $ 38,089 $ 44,554 $ 37,762 $ 34,142 Minority interest 9,783 18,183 38,154 38,040 28,823 Stockholders' equity 120,842 104,072 111,736 96,818 82,786 ----------------------------------------------------------------------------- Capital base $ 168,557 $ 160,344 $ 194,444 $ 172,620 $ 145,751 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
(1) Includes a gain of $2,250 resulting from exiting the trailer and container leasing operation more favorably than anticipated. (2) Includes $8,348 of special charges related to an adjustment to the carrying value of vehicle transportation equipment and the divestiture of the trailer and container lease fleet. (3) Net of income taxes of $1,784 in 1997 and $244 in 1996. (4) Net of income taxes of $5,120. (5) Includes extraordinary charge for debt prepayment penalties. (6) Includes restricted cash and investments. (7) Includes both operating and direct finance leases. 18 The Greenbrier Companies 1998 Annual Report Financial Review MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Greenbrier operates in two primary business segments: manufacturing and leasing and services. The two business segments are operationally integrated. The manufacturing segment produces double-stack intermodal railcars, conventional railcars, marine vessels and forged steel products and performs railcar refurbishment and maintenance activities, a portion of which is for the leasing operation. The leasing and services segment owns or manages a fleet of approximately 28,000 railcars for railroads, institutional investors and other leasing companies. Railcars are generally manufactured under firm orders from third parties, and revenue is recognized when the cars are completed and accepted by the customer. From time to time Greenbrier commits to manufacture railcars prior to receipt of firm orders to maintain continuity of manufacturing operations and may also build cars for its own lease fleet. Revenues do not include sales of new railcars to, or refurbishment services performed for, the leasing operation since intercompany transactions are eliminated in preparing the consolidated financial statements. The margin generated from such sales or refurbishment activity is realized by the leasing segment over the term of the related lease or upon sale of the equipment. EXPANSION AND ACQUISITIONS MANUFACTURING FACILITIES In September 1998, Greenbrier acquired a majority interest in a railcar and specialty container manufacturer located in Swidnica, Poland. Polish investors will maintain a significant ownership interest in the manufacturer. This acquisition establishes a European manufacturing base and is expected to provide access to the European markets, particularly the market in Poland. Initially, the Polish facility is not expected to have a material impact on Greenbrier's overall financial condition or results of operations, and the investment will be funded through existing cash balances. This expansion will require the development of a sales and marketing force knowledgeable about the European market. Also in September 1998, Greenbrier entered into a joint venture to build railroad freight cars at an existing manufacturing facility in Sahagun, Mexico. Each party will maintain a 50% interest in the joint venture. Operations are expected to commence in the first quarter of 1999, and capacity is anticipated to grow to 3,000 new cars annually. Required capital expenditures and working capital needs are expected to be funded by existing operating cash flow and cash balances. MAINTENANCE AND REFURBISHMENT PROGRAMS Subsequent to year end, Greenbrier entered into the following maintenance and refurbishment agreements: - - A long-term contract to manage the maintenance of 7,000 covered hopper cars owned by Burlington Northern Santa Fe that is anticipated to begin in December 1998. - - An agreement with Canadian Pacific Railway to refurbish and re-market certain of their used freight cars under a pilot program. - - An agreement to refurbish and re-market surplus railcars in Europe. MINORITY INTEREST In February 1998, the unaffiliated investors' interest in the automobile transportation business was acquired for $8 million through the use of restricted cash. In December 1996, a minority investor's interest in the trailer and container operation was acquired for $16 million utilizing operating cash flow and available lines of credit. [PHOTO] TECHNOLOGY OF THE AUTO-MAX RAILCAR ALLOWS A HIGHER CAPACITY MIX OF VEHICLES IN EVERY LOAD. Financial Review The Greenbrier Companies 1998 Annual Report 19 DISCONTINUED OPERATIONS AND DIVESTITURES A plan was adopted in 1997 to discontinue the third party transportation logistics segment, as well as to sell the trailer and container leasing operation, in order to focus on core railcar operations. The divestiture of the logistics segment was accounted for as a discontinued operation. Accordingly, the results of logistics operations have been excluded from continuing operations in the consolidated statements of operations for all applicable periods. An estimated loss on disposal of approximately $13 million ($7.7 million net of income taxes), which included an adjustment of assets to market value, estimated closedown expenses and anticipated operating losses through final disposal, was included in the 1997 consolidated statements of operations. In 1998, the disposition of the operating assets was concluded. The determination of the adequacy of the remaining reserve will not be known until certain litigation is resolved. A portion of the trailer and container fleet was sold during the fourth quarter of 1997. In 1998, the sale of the remaining trailer and container fleet, which was included in leasing equipment held for refurbishment or sale as of August 31, 1997, was completed. The aggregate proceeds from all of the sales amounted to approximately $86 million. Trailer and container leasing operations have been included in leasing and services continuing operations. RESULTS OF OPERATIONS MANUFACTURING Manufacturing revenues of $452 million, $326 million and $421 million for the years ended 1998, 1997 and 1996 resulted from railcar and marine production, forging, and refurbishment and maintenance activities. Revenues resulted primarily from new railcar deliveries which were 7,800 in 1998, 4,500 in 1997 and 6,400 in 1996. Increased revenues in 1998 are due to a rebound in the intermodal transportation industry and overall strong market demand for freight cars. Revenue in 1997 decreased due to fewer railcar deliveries in a softer market environment, partially offset by higher per unit sales value. Intermodal products comprised over 50% of 1998 deliveries while 1997 deliveries were virtually all conventional equipment. As of August 31, 1998, the firm order backlog of new railcars for sale or lease amounted to approximately 6,200 units with an estimated sales value of $375 million compared to 2,600 units valued at $133 million as of August 31, 1997. The factors influencing cost of revenue and gross margin in a given period include order size (which affects economies of plant utilization), product mix, changes in manufacturing costs, product pricing and currency exchange rates. The gross margin of 9% in 1998 compares favorably to 7% in 1997 as a result of the efficiencies of longer production runs and strong market demand for railcars. The gross margin in 1997 declined from the 10% achieved in 1996, reflecting a highly competitive market, a less favorable product mix and shorter production runs. LEASING AND SERVICES Leasing and services revenue includes revenue from the trailer and container fleet that was sold in October 1997, but excludes revenue from logistics services which was classified as a discontinued operation. Revenue decreased $17 million, or 16%, in 1998 from 1997 primarily due to the sale of the trailer and container leasing operation. Revenue increased $7 million, or 7%, in 1997 over 1996 as a result of additional railcars placed in lease service, as well as gains realized on the sale of railcar leasing equipment. Assets from Greenbrier's lease fleet are [CHART] TOTAL REVENUE (IN MILLIONS) - - LEASING & SERVICES - - MANUFACTURING [CHART] GREENBRIER RAILCAR PRODUCTION - - CONVENTIONAL - - INTERMODAL [CHART] GREENBRIER RAILCAR BACKLOG (DOLLARS IN MILLIONS) 20 The Greenbrier Companies 1998 Annual Report Financial Review periodically sold in the normal course of business in order to take advantage of market conditions, manage risk and maintain liquidity. Pre-tax earnings realized on the disposition of leased equipment amounted to $9 million during 1998, compared to $7 million during 1997, and $5 million during 1996. Leasing and services operating margin as a percentage of revenue improved to 60% in 1998 compared to 56% in both 1997 and 1996. The improvement resulted primarily from the sale of the trailer and container leasing assets which generally operated at a higher expense ratio than the railcar leasing assets. The improvement was offset somewhat by higher vehicle transportation operating costs. OTHER COSTS Selling, administrative and other expense amounted to $38 million in 1998, $37 million in 1997 and $38 million in 1996. The increase in 1998 compared to 1997 is primarily due to international business development, sales and marketing expenses and incentive compensation offset by the reduction resulting from the sale of the trailer and container leasing operations. The decrease in 1997 compared to 1996 relates to lower incentive compensation offset somewhat by increased research and development costs. Interest expense declined $6 million to $21 million in 1998 from $27 million in 1997 due to increased liquidity resulting from equipment sales and improved earnings. Interest expense increased slightly in 1997 compared to 1996 due to greater usage of revolving credit lines for interim financing of railcar production. Special charges - leasing and services in 1997 represented a $7 million adjustment to writedown the carrying value of vehicle transportation equipment to its anticipated net realizable value and anticipated costs associated with the divestiture of the trailer and container leasing operations. The sale of the trailer and container fleet was completed in 1998, and the results associated with the sale of the operations were more favorable than originally anticipated resulting in a $2 million benefit in 1998. The increase in minority interest reflects the improved contribution from the Canadian operation offset by the effects of the acquisitions of minority investors' ownership interests in 1998 and 1997. The income tax provision represents an effective tax rate of 42% on U.S. operations. Foreign operations reflect varying effective rates resulting in a consolidated effective tax rate of 41.8%, 39.5% and 38.4% for 1998, 1997 and 1996. In 1997 and 1996, the effective tax rate was reduced by the utilization of Canadian operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Greenbrier's growth has been financed through cash generated from operations, borrowings from banks and other financial institutions, issuance of subordinated debt and capital from minority investors. Overall liquidity has improved as a result of the disposition of the trailer and container lease fleet, improved operating results and the sale from manufacturing inventory of assets held for sale. As a result, cash and restricted cash increased $36 million to $58 million and revolving notes of $58 million at August 31, 1997 were repaid in 1998. In addition, $31 million of term notes payable were retired in 1998 from a portion of the proceeds of the sale of the trailer and container lease fleet. Credit facilities aggregated $120 million as of August 31, 1998. A $60 million revolving line of credit is available through May 2000 to provide working capital and interim financing of equipment for the leasing and services operations. A $40 million operating line of credit to be used for working capital is available through February 2001 for U.S. manufacturing operations. Advances under both the revolving and operating lines of credit bear interest at rates which vary depending on the type of borrowing and certain defined ratios. A $16 million (at the August 31, 1998 exchange rate) operating line of credit, bearing interest primarily at Canadian prime plus .75%, is available through March 1999 for working capital and certain capital expenditures for Canadian operations. An additional $4 million, five-year term loan facility is available for Canadian capital expenditures. There were no borrowings outstanding under any of the operating lines or the term facility as of August 31, 1998. [CHART] GREENBRIER CASH AND RESTRICTED CASH (IN MILLIONS) Financial Review The Greenbrier Companies 1998 Annual Report 21 In 1999, management anticipates refinancing $22 million of leasing term debt which, when completed, will result in a pre-tax prepayment penalty estimated to be $1.3 million to $1.8 million. Capital expenditures totaled $51 million, $80 million, and $129 million in 1998, 1997 and 1996. Of these, approximately $39 million, $70 million and $122 million in 1998, 1997 and 1996 were attributable to leasing and services operations. Significant leasing and services capital expenditures in 1996 included additions to the railcar lease fleet in association with a refurbishment program. Capital expenditures for additions to the lease fleet in 1999 are expected to be approximately $28.5 million. Greenbrier regularly sells assets from its lease fleet, some of which may have been purchased within the current year and included in capital expenditures. Approximately $12 million, $10 million and $7 million of the total capital expenditures for 1998, 1997 and 1996 were attributable to manufacturing operations. Capital expenditures included improvements to plants and purchases of new equipment to improve efficiency and increase capacity of the railcar facilities and to expand and upgrade marine facilities. Capital expenditures for manufacturing are expected to be approximately $33.4 million in 1999 and will include plant improvements and equipment acquisitions to further increase capacity and enhance efficiency. Operations in Canada give rise to market risks from changes in foreign currency exchange rates. Forward exchange contracts are utilized to hedge a portion of the risk of foreign currency fluctuations related to a Canadian subsidiary. As of August 31, 1998, forward exchange contracts outstanding for the purchase of Canadian dollars were $58 million maturing at various dates through March 1999. Realized and unrealized gains and losses from such off-balance sheet contracts are deferred and recognized in income concurrent with the hedged transaction. The difference between the contract rates and the spot rate at August 31, 1998 amounted to $3.6 million. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains which may affect operating results. Dividends of $.06 per share have been paid quarterly since 1995. A quarterly dividend of $.06 per share was declared in November 1998, to be paid in December. Future dividends are dependent upon earnings, capital requirements and financial condition. Certain loan covenants restrict the transfer of funds from subsidiaries to the parent company in the form of cash dividends, loans, or advances. The restricted net assets of subsidiaries amounted to $79 million as of August 31, 1998. Consolidated retained earnings of $30 million at August 31, 1998 were restricted as to the payment of dividends. Management expects existing funds and cash generated from operations, together with borrowings under existing credit facilities, to be sufficient to fund dividends, working capital needs, planned capital expenditures and expected debt repayments for the coming year. Management anticipates long-term financing will be required and will continue to be available for the purchase of equipment to expand Greenbrier's lease fleet. YEAR 2000 The "Year 2000" issue refers to computer programs which use two rather than four digits to define a given year and which therefore might read a date using "00" as the year 1900 rather than the year 2000. This could result in the computer shutting down or performing incorrect computations in programs that have date-sensitive software. A variety of computer systems, applications and automated equipment are utilized in daily operations and may be affected by the Year 2000 issue. Greenbrier is currently assessing the impact of the Year 2000 issue on both its information systems and embedded manufacturing control technology. The phases of this project include inventorying affected technology and assessing the impact of the Year 2000 issue; developing remediation plans; modification; testing; and implementation. All components of software and hardware are in various phases of this process. The company expects to have its information and manufacturing systems tested and compliant by August 1999. Greenbrier has key relationships with a number of vendors and suppliers, including banks and other providers of goods and services. The company has requested vendors to supply Year 2000 compliance documentation, but it has not been determined whether all of the vendors and suppliers are Year 2000 compliant. Reliance on single vendor source suppliers, however, is minimal, and the company seeks to limit sole source supply relationships. The company could be adversely impacted if its suppliers and vendors do not make necessary changes to their own systems and products successfully or timely. [CHART] CAPITAL EXPENDITURES (IN MILLIONS) - - LEASING & SERVICES - - MANUFACTURING 22 The Greenbrier Companies 1998 Annual Report Financial Review The costs to be incurred in responding to Year 2000 computer system deficiencies, together with the cost of any required modifications to the company's systems, beyond ongoing hardware replacements and software upgrades performed in the normal course of business, cannot be accurately estimated at this time. Monies spent to date in assessing and remediating Year 2000 issues have not been material. If the remaining elements of the company's plan to address the Year 2000 issue are not successfully or timely implemented, more time will need to be devoted to the process and additional costs may be incurred. In addition, significant disruptions to operations, including slowing the manufacturing process, resulting in potential revenue loss and increased costs, could result. Any of these eventualities could have a material adverse effect on the financial position, results of operations or cash flows of the company. A contingency plan has not been established, but one is expected to be formulated by August 1999 to address unavoided or unavoidable risks. PROSPECTIVE ACCOUNTING CHANGES Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, establishes requirements for disclosure of comprehensive income. The new standard becomes effective in fiscal year 1999. There are not expected to be any substantial changes to disclosure at the time SFAS No. 130 is adopted. SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for disclosure about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim financial reports. The new standard becomes effective in fiscal year 1999. There are not expected to be any substantial changes to disclosures at the time SFAS No. 131 is adopted. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that all derivatives be recognized as either assets or liabilities measured at fair value. Greenbrier has not fully evaluated the effect of this statement. The new standard becomes effective in fiscal year 2000. The company did not elect early adoption of SFAS No. 130, SFAS No. 131 or SFAS No. 133. FORWARD-LOOKING INFORMATION From time to time, Greenbrier or its representatives have made or may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements as to expectations, beliefs and strategies regarding the future. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the company with the Securities and Exchange Commission. The following are among the factors that could cause actual results or outcomes to differ materially from the forward-looking statements: general political, regulatory or economic conditions; changes in interest rates; business conditions and growth in the surface transportation industry, both domestic and international; currency and other risks associated with international operations; shifts in market demand; a delay or failure of acquisitions, products or services to compete successfully; changes in product mix and the mix between manufacturing and leasing and services revenue; transportation labor disputes or operating difficulties which might disrupt the flow of cargo; competitive factors, including increased competition, new product offerings by competitors and price pressures; actual future costs and availability of materials and a trained workforce; labor disputes; production difficulties and product delivery delays in the future as a result of, among other matters, changing process technologies and increasing production; lower than expected customer orders; the ability to consummate expected sales; delays in receipt of orders or cancellation of orders; financial condition of principal customers; and the impact of year 2000 compliance by the company or by its customers, suppliers or service partners. Any forward-looking statements should be considered in light of these factors. [PHOTO] PLASMA CUTTER USED TO CUT STEEL IN THE MANUFACTURING PROCESS. Financial Review The Greenbrier Companies 1998 Annual Report 23 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS REPORT OF MANAGEMENT Board of Directors and Stockholders The Greenbrier Companies, Inc. The consolidated financial statements and other financial information of The Greenbrier Companies, Inc. and Subsidiaries in this report were prepared by management, which is responsible for their content. They reflect amounts based upon management's best estimates and informed judgments. In management's opinion, the financial statements present fairly the financial position, results of operations and cash flows of the company in conformity with generally accepted accounting principles. The company maintains a system of internal controls and procedures, which is designed, consistent with reasonable cost, to provide reasonable assurance that transactions are executed as authorized, that they are properly recorded to produce reliable financial records, and that accountability for assets is maintained. The controls and procedures are supported by careful selection and training of personnel and a continuing management commitment to the integrity of the system. The financial statements have been audited, to the extent required by generally accepted auditing standards, by Deloitte & Touche LLP, independent auditors. In connection therewith, management has considered the recommendations made by the independent auditors in connection with their audit and has responded in an appropriate, cost-effective manner. The Board of Directors has appointed an Audit Committee composed entirely of directors who are not employees of the company. The Audit Committee meets with representatives of management and the independent auditors, both separately and jointly. The Committee reports to the Board on its activities and findings. /s/ William A. Furman /s/ Larry G. Brady William A. Furman Larry G. Brady President Senior Vice President Chief Executive Officer Chief Financial Officer INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Greenbrier Companies, Inc. We have audited the accompanying consolidated balance sheets of The Greenbrier Companies, Inc. and Subsidiaries as of August 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Greenbrier Companies, Inc. and Subsidiaries as of August 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Portland, Oregon October 23, 1998 [PHOTO] TRENTONWORKS EMPLOYEES. 24 The Greenbrier Companies 1998 Annual Report Financial Statements CONSOLIDATED BALANCE SHEETS
AUGUST 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 --------------------------------------------- ASSETS Cash and cash equivalents $ 41,912 $ 14,384 Restricted cash and investments 15,997 7,360 Accounts and notes receivable 47,537 61,024 Manufacturing inventories 73,639 87,233 Leasing equipment held for refurbishment or sale 6,210 64,358 Investment in direct finance leases 160,940 182,421 Equipment on operating leases 95,569 102,120 Property, plant and equipment 49,452 44,925 Prepaid expenses and other 14,233 16,693 --------------------------------------------- $ 505,489 $ 580,518 --------------------------------------------- --------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Revolving notes $ -- $ 57,709 Accounts payable and accrued liabilities 132,121 107,738 Deferred participation 45,243 39,032 Deferred income taxes 11,692 13,909 Notes payable 147,876 201,786 Subordinated debt 37,932 38,089 Minority interest 9,783 18,183 Commitments and contingencies (Notes 3, 18 & 19) Stockholders' equity Preferred stock -- $0.001 par value; 25,000 shares authorized; none outstanding -- -- Common stock -- $0.001 par value; 50,000 shares authorized; 14,253 and 14,160 outstanding at August 31, 1998 and 1997 14 14 Additional paid-in capital 50,416 49,135 Retained earnings 71,612 54,689 Foreign currency translation adjustment (1,200) 234 --------------------------------------------- 120,842 104,072 --------------------------------------------- $ 505,489 $ 580,518 --------------------------------------------- ---------------------------------------------
The accompanying notes are an integral part of these statements. Financial Statements The Greenbrier Companies 1998 Annual Report 25 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 ------------------------------------------------------------------ REVENUE Manufacturing $ 451,706 $ 325,501 $ 421,456 Leasing and services 88,655 105,419 98,484 ------------------------------------------------------------------ 540,361 430,920 519,940 COST OF REVENUE Manufacturing 410,553 301,408 378,829 Leasing and services 35,349 46,317 43,019 ------------------------------------------------------------------ 445,902 347,725 421,848 MARGIN 94,459 83,195 98,092 OTHER COSTS Selling, administrative and other expense 38,359 36,640 37,525 Interest expense 20,946 27,148 25,670 Special charges -- leasing and services (2,250) 8,348 -- ------------------------------------------------------------------ 57,055 72,136 63,195 Earnings before income tax expense and minority interest 37,404 11,059 34,897 Income tax expense (15,643) (4,366) (13,414) ------------------------------------------------------------------ Earnings before minority interest 21,761 6,693 21,483 Minority interest (1,429) (672) (2,870) ------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS 20,332 6,021 18,613 Discontinued operations: Loss on operations (net of tax benefit of $1,784 in 1997 and $244 in 1996) -- (2,512) (338) Estimated loss on disposal (net of tax benefit of $5,120 in 1997) -- (7,680) -- ------------------------------------------------------------------ Net earnings (loss) $ 20,332 $ (4,171) $ 18,275 ------------------------------------------------------------------ ------------------------------------------------------------------ BASIC EARNINGS PER SHARE: From continuing operations $ 1.43 $ 0.43 $ 1.31 Discontinued operations -- (0.72) (0.02) ------------------------------------------------------------------ Net earnings (loss) $ 1.43 $ (0.29) $ 1.29 ------------------------------------------------------------------ ------------------------------------------------------------------ DILUTED EARNINGS PER SHARE: From continuing operations $ 1.42 $ 0.43 $ 1.31 Discontinued operations -- (0.72) (0.02) ------------------------------------------------------------------ Net earnings (loss) $ 1.42 $ (0.29) $ 1.29 ------------------------------------------------------------------ ------------------------------------------------------------------ WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 14,203 14,160 14,160 Diluted 14,346 14,160 14,170
The accompanying notes are an integral part of these statements. 26 The Greenbrier Companies 1998 Annual Report Financial Statements CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Foreign Common Stock Additional Currency Total ------------------- Paid-in Retained Translation Stockholders' Shares Amount Capital Earnings Adjustment Equity --------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1995 14,160 $ 14 $ 48,894 $ 47,383 $ 527 $ 96,818 Compensation relating to non- qualified stock option plan -- -- 185 -- -- 185 Cash dividends ($.24 per share) -- -- -- (3,399) -- (3,399) Foreign currency translation adjustment -- -- -- -- (143) (143) Net earnings -- -- -- 18,275 -- 18,275 --------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1996 14,160 14 49,079 62,259 384 111,736 Compensation relating to non- qualified stock option plan -- -- 56 -- -- 56 Cash dividends ($.24 per share) -- -- -- (3,399) -- (3,399) Foreign currency translation adjustment -- -- -- -- (150) (150) Net loss -- -- -- (4,171) -- (4,171) --------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1997 14,160 14 49,135 54,689 234 104,072 Stock options exercised 93 -- 1,221 -- -- 1,221 Compensation relating to non- qualified stock option plan -- -- 60 -- -- 60 Cash dividends ($.24 per share) -- -- -- (3,409) -- (3,409) Foreign currency translation adjustment -- -- -- -- (1,434) (1,434) Net earnings -- -- -- 20,332 -- 20,332 --------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1998 14,253 $ 14 $ 50,416 $ 71,612 $ (1,200) $ 120,842 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. Financial Statements The Greenbrier Companies 1998 Annual Report 27 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31 (IN THOUSANDS) 1998 1997 1996 ---------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ 20,332 $ (4,171) $ 18,275 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Deferred income taxes (2,217) (8,217) 6,396 Deferred participation 6,211 6,716 4,487 Depreciation and amortization 14,527 27,869 24,895 Discontinued operations -- 9,300 -- Special charges (2,250) 8,348 -- Gain on sales of equipment (9,994) (9,815) (5,324) Other 1,537 (1,035) 215 Decrease (increase) in assets: Accounts and notes receivable 13,197 16,504 (38,377) Inventories 10,110 (11,244) 10,291 Prepaid expenses and other 1,910 (6,074) (2,817) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 22,509 (9,619) 16,830 ---------------------------------------------------------------- Net cash provided by operating activities 75,872 18,562 34,871 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries, net of cash acquired -- -- (1,960) Principal payments received under direct finance leases 15,102 11,226 8,402 Investment in direct finance leases (856) (11,856) (26,430) Proceeds from sales of equipment 117,945 58,081 58,328 Purchase of property and equipment (50,345) (64,381) (94,880) Investment in restricted cash and investments (8,637) (960) (2,736) ---------------------------------------------------------------- Net cash provided by (used in) investing activities 73,209 (7,890) (59,276) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 13,157 47,479 48,912 Repayments of borrowings (124,750) (30,118) (25,375) Dividends (3,409) (3,399) (3,399) Purchase of minority interest (7,772) (16,333) -- Proceeds from stock options 1,221 -- -- ---------------------------------------------------------------- Net cash provided by (used in) financing activities (121,553) (2,371) 20,138 ---------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,528 8,301 (4,267) Cash and cash equivalents Beginning of period 14,384 6,083 10,350 ---------------------------------------------------------------- End of period $ 41,912 $ 14,384 $ 6,083 ---------------------------------------------------------------- ---------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 20,526 $ 27,451 $ 26,166 Income taxes 13,626 2,914 11,038 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of minority interest $ 1,580 $ 2,044 $ -- Repayment of borrowings through return of railcars held for refurbishment or sale 96 11,574 2,433 Equipment obtained through borrowings -- 4,024 7,581
The accompanying notes are an integral part of these statements. 28 The Greenbrier Companies 1998 Annual Report Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Years Ended August 31, 1998 (Dollars in thousands, except per share amounts) NOTE 1 -- NATURE OF OPERATIONS The Greenbrier Companies, Inc. and Subsidiaries ("Greenbrier" or the "company") currently operates in two primary business segments: manufacturing and leasing and services. The two business segments are operationally integrated. The manufacturing segment produces double-stack intermodal and conventional railcars, marine vessels and forged steel products and performs railcar refurbishment and maintenance activities, a portion of which is for the leasing operation. The leasing and services segment owns or manages a fleet of approximately 28,000 railcars for railroads, institutional investors and other leasing companies. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The financial statements include the accounts of the company and its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated upon consolidation. The financial statements and transactions of the Canadian subsidiaries are maintained in their functional currency and translated into U.S. dollars for purposes of consolidation. Translation adjustments are accumulated as a separate component of stockholders' equity. CASH AND INVESTMENTS -- Cash is temporarily invested primarily in bankers' acceptances, U.S. Treasury bills, commercial paper and money market funds. Restricted cash and investments may only be used for equipment acquisitions in accordance with loan agreements. All highly-liquid investments with a maturity of three months or less are considered cash equivalents. MANUFACTURING INVENTORIES -- Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process includes material, labor and overhead. LEASING EQUIPMENT HELD FOR REFURBISHMENT OR SALE -- Railcars held for refurbishment or sale are hulks that will either be refurbished and placed on lease or sold and are carried at the cost of the hulks and any refurbishment costs incurred. As discussed in Note 3, the operating assets of the trailer and container leasing business were included in Leasing equipment held for refurbishment or sale as of August 31, 1997. EQUIPMENT ON OPERATING LEASES -- Equipment on operating leases is stated at cost. Depreciation to estimated salvage value is provided on the straight-line method over the estimated useful lives of the equipment. Management evaluates the remaining life and recoverability of equipment in light of current conditions. If business conditions change, such estimates could also change. PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost. Depreciation is provided on the straight-line method over estimated useful lives of three to twenty years. PREPAID EXPENSES AND OTHER ASSETS -- Loan fees are capitalized and amortized as interest expense over the life of the related borrowings. Goodwill is generally amortized over twelve years on the straight-line method. MAINTENANCE AND WARRANTY RESERVES -- Maintenance reserves are estimated and provided over the term of the underlying lease agreement. Warranty reserves are estimated and charged to operations in the period provided. INCOME TAXES -- The liability method is used to account for income taxes. Deferred income taxes are provided for the effects of temporary differences arising from differences in the recognition of revenues and expenses for financial statement and income tax reporting purposes. MINORITY INTEREST -- Minority interest represents unaffiliated investors' capital investment and interest in the undistributed earnings and losses of consolidated entities. REVENUE RECOGNITION -- Revenue from manufacturing operations is recognized at the time products are completed and accepted by unrelated customers. Direct finance lease revenue is recognized over the lease term in a manner which produces a constant rate of return on the net investment in the lease. Certain interim rentals are based on estimated costs. Operating lease revenue is recognized as earned under the lease terms. Payments received in advance are deferred until earned. [PHOTO] CENTER-PARTITION LUMBER CAR. Financial Statements The Greenbrier Companies 1998 Annual Report 29 FORWARD EXCHANGE CONTRACTS -- Operations in Canada give rise to market risks from changes in foreign currency exchange rates. Forward exchange contracts are utilized to hedge a portion of the risk of foreign currency fluctuations. Realized and unrealized gains and losses are deferred and recognized in earnings concurrent with the hedged transaction. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains, which may affect operating results. INTEREST RATE INSTRUMENTS -- Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. The net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. NET EARNINGS PER SHARE -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which requires disclosure of basic earnings per share ("EPS") and diluted EPS for periods ending after December 15, 1997. Basic EPS excludes potential dilution which would occur if additional shares were issued upon exercise of outstanding stock options, while diluted EPS takes this potential dilution into account. All EPS amounts have been restated to conform to the new requirements. STOCK-BASED COMPENSATION -- Compensation expense for stock-based employee compensation continues to be measured using the method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. If material, pro forma disclosures of net earnings and earnings per share will be made as if the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS -- Certain reclassifications have been made to prior years' consolidated financial statements to conform with the 1998 presentation. PROSPECTIVE ACCOUNTING CHANGES -- SFAS No. 130, Reporting Comprehensive Income, establishes requirements for disclosure of comprehensive income. The new standard becomes effective in fiscal year 1999. There are not expected to be any substantial changes to disclosure at the time SFAS No. 130 is adopted. SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for disclosure about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim financial reports. The new standard becomes effective in fiscal year 1999. There are not expected to be any substantial changes to disclosures at the time SFAS No. 131 is adopted. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that all derivatives be recognized as either assets or liabilities measured at fair value. Greenbrier has not fully evaluated the effect of this statement. The new standard becomes effective in fiscal year 2000. The company did not elect early adoption of SFAS No. 130, SFAS No. 131 or SFAS No. 133. NOTE 3 -- DISCONTINUED OPERATIONS AND DIVESTITURES In 1997, a plan was adopted to discontinue the third-party transportation logistics segment, as well as to sell the trailer and container leasing operation, in order to focus on core railcar operations. DISCONTINUED OPERATIONS -- Under the plan, the third-party transportation logistics segment was to be discontinued and, accordingly, the results of operations for logistics have been excluded from continuing operations in the Consolidated Statements of Operations for all applicable periods. An estimated pre-tax loss on disposal of $12,800, which included an adjustment of assets to market value, estimated closedown expenses and anticipated operating losses through final disposal, was reflected as an anticipated loss on discontinued operations in 1997. In 1998, the disposition of the operating assets was concluded. The determination of the adequacy of the remaining reserve will not be known until certain litigation is resolved. Information relating to the operating results for the discontinued operations for the years ended August 31, 1997 and 1996 are as follows:
1997 1996 ---------------------------- Revenue $ 53,249 $ 10,070 Costs and expenses 57,545 10,652 ---------------------------- Loss before income taxes (4,296) (582) Less income tax benefit 1,784 244 ---------------------------- Net loss $ (2,512) $ (338) ---------------------------- ----------------------------
[PHOTO] REFURBISHED RAILCAR IN GREENBRIER'S LEASE FLEET. 30 The Greenbrier Companies 1998 Annual Report Financial Statements DIVESTITURES -- A portion of the trailer and container lease fleet was sold during the fourth quarter of 1997. In 1998 the sale of the remaining trailer and container lease fleet, which was included in Leasing equipment held for refurbishment or sale as of August 31, 1997, was completed. The aggregate proceeds from all of the sales were approximately $86,000. In 1997, an estimated pre-tax loss of approximately $1,600 was included in the Consolidated Statements of Operations in Special charges -- leasing and services for anticipated results of selling the operation. The results associated with the sale were more favorable than originally anticipated resulting in a $2,250 benefit in 1998. Trailer and container leasing operations contributed revenue of approximately $4,100, $25,800 and $26,800 for the years ended August 31, 1998, 1997 and 1996. NOTE 4 -- MANUFACTURING INVENTORIES
1998 1997 ---------------------------- Manufacturing supplies and raw materials $ 8,750 $ 7,323 Work-in-process 62,267 41,258 Assets held for sale 2,622 38,652 ---------------------------- $73,639 $87,233 ---------------------------- ----------------------------
NOTE 5 -- INVESTMENT IN DIRECT FINANCE LEASES
1998 1997 ------------------------------ Future minimum receipts on lease contracts $ 247,842 $ 303,910 Less amounts for maintenance, insurance and taxes (55,041) (64,264) ------------------------------ Net minimum lease receipts 192,801 239,646 Estimated residual values 52,323 55,405 Unearned finance charges (84,184) (112,630) ------------------------------ $ 160,940 $ 182,421 ------------------------------ ------------------------------
Minimum future receipts on the direct finance lease contracts are as follows:
YEAR ENDING AUGUST 31, 1999 $ 50,693 2000 48,275 2001 47,282 2002 38,820 2003 28,242 Thereafter 34,530 ----------- $247,842 ----------- -----------
NOTE 6 -- EQUIPMENT ON OPERATING LEASES
1998 1997 ------------------------------- Railcar equipment and other $ 132,049 $ 140,701 Marine equipment 7,563 -- ------------------------------- 139,612 140,701 Accumulated depreciation (44,043) (38,581) ------------------------------- $ 95,569 $ 102,120 ------------------------------- -------------------------------
In addition to the above equipment, certain railcar equipment is leased by the company and subleased to customers under noncancelable operating leases. Aggregate minimum future amounts receivable under all noncancelable operating leases and subleases are as follows:
YEAR ENDING AUGUST 31, 1999 $ 15,750 2000 9,792 2001 6,837 2002 5,995 2003 5,156 Thereafter 12,081 ------------- $ 55,611 ------------- -------------
Certain equipment is also operated under daily, monthly or mileage arrangements. Associated revenues amounted to $24,472, $33,611 and $28,460 for the years ended August 31, 1998, 1997 and 1996. In 1997, the carrying value of vehicle transportation equipment was adjusted to the anticipated net realizable value of the assets based on projected future performance under existing contracts. This resulted in a pre-tax charge of $6,775, which was included in Special charges -- leasing and services in the Consolidated Statements of Operations, of which $1,200 was allocated to minority investors. NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
1998 1997 ----------------------------- Land and improvements $ 8,440 $ 8,449 Machinery and equipment 41,944 33,082 Buildings and improvements 15,537 13,257 Other 10,747 13,119 ----------------------------- 76,668 67,907 Accumulated depreciation (27,216) (22,982) ----------------------------- $ 49,452 $ 44,925 ----------------------------- -----------------------------
Financial Statements The Greenbrier Companies 1998 Annual Report 31 NOTE 8 -- REVOLVING NOTES A $40,000 operating line of credit is available through February 2001 to provide working capital for the domestic manufacturing operations based on defined receivables and inventory. Borrowings under this line bear interest at rates which vary depending on the type of borrowing and certain defined ratios. There were no borrowings outstanding as of August 31, 1998. Borrowings outstanding as of August 31, 1997 were $14,775. A $16,000 (at the August 31, 1998 exchange rate) operating line of credit, bearing interest primarily at Canadian prime plus .75%, is available through March 1999 for working capital and certain capital expenditures for the Canadian manufacturing operation based on defined receivables and inventory. An additional $4,000, five-year term loan facility is available for capital expenditures. There were no borrowings outstanding as of August 31, 1998. Borrowings outstanding as of August 31, 1997 were $21,934 under the operating line of credit and a temporary borrowing facility which has expired. A $60,000 revolving line of credit is available to provide working capital and interim financing of leased equipment through May 2000. Borrowings under this line are based on advances against defined leased equipment and bear interest at rates which vary depending upon the type of borrowing and certain defined ratios. There were no borrowings outstanding as of August 31, 1998. This facility replaced a $43,000 agreement which had outstanding borrowings as of August 31, 1997 of $21,000. The applicable prime rate for domestic and Canadian borrowings was 8.5% and 7.5% as of August 31, 1998. NOTE 9 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
1998 1997 --------------------------- Accounts payable and accrued liabilities $ 71,880 $ 49,746 Maintenance reserves 21,698 27,790 Accrued payroll and related liabilities 15,412 12,264 Estimated loss on disposal 4,937 12,800 Warranty reserves 4,125 4,536 Other 14,069 602 --------------------------- $132,121 $107,738 --------------------------- ---------------------------
NOTE 10 -- NOTES PAYABLE
1998 1997 --------------------------- Leasing equipment notes payable $133,192 $187,553 Manufacturing term loan, due in monthly installments through July 2008 collateralized by land and a facility 11,579 -- Manufacturing term loan, interest at 11%, due in monthly installments through 2008 -- 11,741 Other manufacturing notes payable 3,105 2,492 --------------------------- $147,876 $201,786 --------------------------- ---------------------------
Leasing equipment notes payable bear interest at fixed rates of 7.8% to 10.8% and are due in varying installments through May 2004. The weighted average remaining contractual life and weighted average interest rate of the notes as of August 31, 1998 and 1997 was approximately 57 and 58 months and 8.6% for both years. A manufacturing term loan bearing interest at 11% was refinanced with a term loan at LIBOR plus 1.35%. An interest rate swap agreement is being utilized to reduce the risk of fluctuations in interest rates. The swap agreement has a notional amount of $11,600 amortizing consistent with principal payments on the term loan and effectively changes the interest rate exposure from a variable rate to 7.35%. The swap agreement matures in July 2008. At August 31, 1998 the LIBOR rate was 5.64%. Substantially all assets of the company are pledged as collateral for the notes payable and revolving notes. Principal payments on the notes payable are as follows:
YEAR ENDING AUGUST 31, 1999 $ 26,215 2000 27,915 2001 28,665 2002 27,748 2003 17,720 Thereafter 19,613 ----------- $147,876 ----------- -----------
32 The Greenbrier Companies 1998 Annual Report Financial Statements The revolving and operating lines of credit, along with certain equipment notes payable, contain covenants with respect to various subsidiaries, the most restrictive of which limit the payment of dividends by subsidiaries and require certain levels of tangible net worth, ratios of debt to equity and debt service coverage. NOTE 11 -- SUBORDINATED DEBT Subordinated notes, amounting to $37,932 and $38,089 at August 31, 1998 and 1997, were issued for railcars purchased as part of an agreement described in Note 19. The notes bear interest at 11% and 9%, with substantially all of the principal due ten years from the date of the notes, and are subordinated to all other liabilities of a subsidiary. Approximately $256 becomes due in 2001, $10,266 in 2002 and $6,023 in 2003, with the remaining balance due after 2003. NOTE 12 -- STOCKHOLDERS' EQUITY The Chairman and the Chief Executive Officer, who are the founding and majority stockholders, have entered into an agreement whereby they have agreed to vote their shares together to elect each other as directors of the company and with respect to all other matters put to a vote of the stockholders. Certain loan covenants restrict the transfer of funds from the subsidiaries to the parent company in the form of cash dividends, loans, or advances. The restricted net assets of subsidiaries amounted to $78,874 as of August 31, 1998. Consolidated retained earnings of $30,332 at August 31, 1998 were restricted as to the payment of dividends. A stock incentive plan was adopted July 1, 1994 which provides for granting compensatory and non-compensatory options to employees and others. Outstanding options generally vest at 50% two years from grant with the balance five years from grant. The following table summarizes stock option transactions for shares under option and the related weighted average option price:
PRICE SHARES PER SHARE ---------------------- Balance at August 31, 1995 682 $ 14 Granted 162 11 Canceled (56) 14 ---------------------- Balance at August 31, 1996 788 14 Granted 3 11 Canceled (30) 14 ---------------------- Balance at August 31, 1997 761 14 Granted 3 17 Exercised (93) 13 Canceled (24) 14 ---------------------- Balance at August 31, 1998 647 $ 14 ---------------------- ----------------------
Options outstanding at August 31, 1998 have exercise prices ranging from $11 to $17 per share and have a remaining contractual life of 4.3 years. As of August 31, 1998, options to purchase 290 shares were exercisable and 733 shares were available for grant. Options to purchase 619 and 592 shares were available for grant at August 31, 1997 and 1996. As discussed in Note 2, the disclosure-only provisions of SFAS No. 123 have been adopted. Accordingly, no compensation cost has been recognized for stock options granted with an exercise price equal to the fair value of the underlying stock on the date of grant. Had compensation costs been determined based on the estimated fair value of the options at the date of grant, the net earnings (loss) and net earnings (loss) per share for the years ended August 31, 1998, 1997 and 1996 would not have differed materially from the amounts reported. NOTE 13 -- RELATED PARTY TRANSACTIONS In July 1996, the remaining 50% of a subsidiary was acquired from an executive officer and director. The purchase price included $500 cash, a $250 note payable bearing interest at 7% due on or before July 2000 and a contingent amount based on the future value of certain operations. Maintenance, management and other fees received from a related entity under an agreement were $888 for both of the years ended August 31, 1998 and 1997 and $930 for the year ended 1996. [PHOTO] HIGHLY SKILLED WELDERS ARE A KEY TO GREENBRIER'S SUCCESS. Financial Statements The Greenbrier Companies 1998 Annual Report 33 A member of the board of directors of a Canadian subsidiary also serves as a director of the company from which the majority of the Canadian subsidiary's steel requirements are acquired. NOTE 14 -- EMPLOYEE BENEFIT PLANS Defined contribution plans are available to substantially all U.S. employees. Contributions are based on a percentage of employee contributions and amounted to $649, $737 and $651 for the years ended August 31, 1998, 1997 and 1996. A defined benefit pension plan is provided for Canadian employees covered by collective bargaining agreements. The plan provides pension benefits based on years of credited service. Contributions to the plan are actuarially determined and are intended to fund the net periodic pension cost. The plan's assets, obligations and pension cost are not material to the consolidated financial statements. Nonqualified deferred benefit plans exist for certain employees. Expenses resulting from contributions to the plans, which are based on earnings, were $2,393, $845 and $626 for the years ended August 31, 1998, 1997 and 1996. NOTE 15 -- INCOME TAXES Components of income tax expense are as follows:
1998 1997 1996 ----------------------------------------------- Current: Federal $ 13,811 $ 4,547 $ 5,386 State 2,581 284 1,302 Foreign 1,468 715 82 ----------------------------------------------- 17,860 5,546 6,770 Deferred: Federal (491) (1,848) 5,441 State (2,062) 442 1,203 Foreign 336 226 -- ----------------------------------------------- (2,217) (1,180) 6,644 ----------------------------------------------- $ 15,643 $ 4,366 $ 13,414 ----------------------------------------------- -----------------------------------------------
Income tax expense is computed at rates different than statutory rates. The reconciliation between effective and statutory tax rates on continuing operations is as follows:
1998 1997 1996 ------------------------------------- Statutory rates 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.5 4.8 5.1 Impact of foreign taxes 0.6 (1.8) (0.2) Other 1.7 1.5 (1.5) ------------------------------------- 41.8% 39.5% 38.4% ------------------------------------- -------------------------------------
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
1998 1997 ---------------------------- Deferred tax assets: Alternative minimum tax credit carryforward $ (9,427) $(18,409) Deferred participation (18,579) (16,374) Maintenance and warranty reserves (11,790) (12,391) Accrued payroll and related liabilities (5,352) (4,479) Deferred revenue (566) (898) Inventories and other (1,302) (2,533) Net operating loss carryforward -- (2,341) ---------------------------- (47,016) (57,425) Valuation allowance -- 141 ---------------------------- (47,016) (57,284) Deferred tax liabilities: Accelerated depreciation 63,709 74,072 Other 2,317 4,406 ---------------------------- Net deferred tax liability attributable to continuing operations 19,010 21,194 Net deferred tax asset attributable to discontinued operations (7,318) (7,285) ---------------------------- Net deferred tax liability $ 11,692 $ 13,909 ---------------------------- ----------------------------
The valuation allowance as of August 31, 1997 has been eliminated in 1998 as a result of utilizing Canadian net operating loss carryforwards. [PHOTO] TANK CAR IN PRODUCTION AT WAGONYSWIDNICA. 34 The Greenbrier Companies 1998 Annual Report Financial Statements NOTE 16 -- SEGMENT INFORMATION Greenbrier has two reportable segments: manufacturing and leasing and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is evaluated based on gross profit or loss from operations which is presented on the statements of operations. Intersegment sales and transfers are accounted for as if the sales or transfers were to third parties, that is, at market prices. The information in the following tables is derived directly from the segments' internal financial reports used for corporate management purposes. Unallocated assets primarily consist of cash, short-term investments and capitalized loan costs.
1998 1997 1996 ------------------------------------------- REVENUE: Manufacturing $ 470,025 $ 408,053 $ 491,080 Leasing & services 107,147 113,229 119,242 Intersegment sales (36,811) (90,362) (90,382) ------------------------------------------- $ 540,361 $ 430,920 $ 519,940 ------------------------------------------- ------------------------------------------- ASSETS: Manufacturing $ 162,907 $ 168,878 $ 179,849 Leasing & services 298,811 393,891 425,143 Unallocated 43,771 17,749 10,496 ------------------------------------------- $ 505,489 $ 580,518 $ 615,488 ------------------------------------------- ------------------------------------------- DEPRECIATION AND AMORTIZATION: Manufacturing $ 4,774 $ 4,671 $ 3,997 Leasing & services 9,753 23,198 20,898 ------------------------------------------- $ 14,527 $ 27,869 $ 24,895 ------------------------------------------- ------------------------------------------- CAPITAL EXPENDITURES: Manufacturing $ 11,887 $ 10,173 $ 6,690 Leasing & services 39,314 70,088 122,201 ------------------------------------------- $ 51,201 $ 80,261 $ 128,891 ------------------------------------------- -------------------------------------------
A portion of the manufacturing operations are located in Canada. The following table summarizes selected geographic information:
1998 1997 1996 --------------------------------------------- REVENUE: United States $ 386,064 $ 321,538 $ 345,058 Canada 169,335 156,103 208,246 Sales between geographic areas (15,038) (46,721) (33,364) --------------------------------------------- $ 540,361 $ 430,920 $ 519,940 --------------------------------------------- --------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST: United States $ 29,740 $ 6,298 $ 30,212 Canada 7,664 4,761 4,685 --------------------------------------------- $ 37,404 $ 11,059 $ 34,897 --------------------------------------------- --------------------------------------------- IDENTIFIABLE ASSETS: United States $ 452,323 $ 531,500 $ 570,743 Canada 53,166 49,018 44,745 --------------------------------------------- $ 505,489 $ 580,518 $ 615,488 --------------------------------------------- ---------------------------------------------
NOTE 17 -- CUSTOMER CONCENTRATION Revenues from the two largest customers were 25% and 16% of total revenues for the year ended August 31, 1998. In 1997, revenues from the two largest customers were 20% and 11% of total revenues. In 1996, revenue from the largest customer was 29% of total revenues. No other customers accounted for more than 10% of total revenues in 1998, 1997 or 1996. Three customers had balances that individually exceeded 10% of accounts receivable and, in total, represented 60% of the consolidated balance at August 31, 1998. Financial Statements The Greenbrier Companies 1998 Annual Report 35 NOTE 18 -- LEASE COMMITMENTS Lease expense for railcar equipment leased under non-cancelable leases was $4,966, $3,767 and $3,204 for the years ended August 31, 1998, 1997 and 1996. Aggregate minimum future amounts payable under non-cancelable railcar equipment leases are as follows:
YEAR ENDING AUGUST 31, 1999 $ 5,172 2000 4,053 2001 3,067 2002 2,965 2003 2,485 Thereafter 2,009 -------------- $ 19,751 -------------- --------------
Operating leases for domestic refurbishment facilities expire at various dates through April 2015. Office space and certain manufacturing and office equipment are rented under operating leases which expire at various dates through June 2001. Rental expense for facilities, office space and equipment was $1,887, $2,652 and $2,023 for the years ended August 31, 1998, 1997 and 1996. Aggregate minimum future amounts payable under non-cancelable operating leases are as follows:
YEAR ENDING AUGUST 31, 1999 $ 1,922 2000 1,882 2001 1,679 2002 1,001 2003 645 Thereafter 1,128 -------------- $ 8,257 -------------- --------------
NOTE 19 -- COMMITMENTS AND CONTINGENCIES In 1990 an agreement was entered into for the purchase and refurbishment of over ten thousand used railcars. The agreement includes an option which, under certain conditions, provides for the seller to repurchase the railcars for the original acquisition cost to the company at the date the underlying subordinated notes are due. Should such option be exercised, amounts due under the subordinated notes would be retired from the repurchase proceeds. The agreement also provides that, under certain conditions, the seller will receive a percentage of operating earnings of a subsidiary, as defined. Amounts accrued are referred to as participation and are included as deferred participation in the Consolidated Balance Sheets. Participation expense related to this and a similar, but smaller, agreement was $7,238, $9,345 and $8,670 for the years ended August 31, 1998, 1997 and 1996. Payment of deferred participation is estimated to be $1,141 in 2000, $2,727 in 2001, $4,421 in 2002 and $11,063 in 2003, with the remaining balance due after 2003. Forward exchange contracts are entered into to hedge a portion of the risk of foreign currency fluctuations of U.S. dollar denominated accounts receivable resulting from firm commitments for the sale of railcars to be manufactured in Canada. As of August 31, 1998, forward exchange contracts outstanding for the purchase of Canadian dollars were $58,000 maturing at various dates through March 1999. The difference between the contracted rate and the spot rate at August 31, 1998 amounted to $3,600. No credit loss from counterparty non-performance is anticipated. Environmental studies have been conducted of owned and leased properties which indicate additional investigation and some remediation may be necessary. The outcome of such actions cannot be estimated; however, management believes that any ultimate liability resulting from environmental issues will not materially affect the financial position, results of operations or cash flows of the company. Management believes that its operations adhere to sound environmental practices and applicable laws and regulations. 36 The Greenbrier Companies 1998 Annual Report Financial Statements Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. Litigation has been initiated by former shareholders of Interamerican Logistics Inc. ("Interamerican"), which was acquired in the fall of 1996. The plaintiffs allege that Greenbrier violated the agreements pursuant to which it acquired ownership of Interamerican and seek damages aggregating $4,000 Canadian. Management contends the claim to be without merit and intends to vigorously defend its position. Management believes that any ultimate liability resulting from litigation will not materially affect the financial position, results of operations or cash flows of the company. Employment agreements, which expire August 31, 2004, with the Chairman and the Chief Executive Officer, provide each with a minimum annual salary and a bonus calculated based on operating results, as defined. The minimum annual aggregate defined payment under the agreements is $720 and the maximum is $2,120. NOTE 20 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments and the methods and assumptions used to estimate such fair values, are as follows:
1998 ----------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE ----------------------------- Notes payable and subordinated debt $185,808 $188,768 Deferred participation 45,243 28,580 1997 ----------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE ----------------------------- Notes payable and subordinated debt $239,875 $235,257 Deferred participation 39,032 24,170
The carrying amount of cash and cash equivalents, restricted cash and investments, accounts and notes receivable, revolving notes and accounts payable and accrued liabilities is a reasonable estimate of fair value of these financial instruments. Estimated rates currently available to the company for debt with similar terms and remaining maturities are used to estimate the fair value of notes payable and subordinated debt. The fair value of deferred participation is estimated by discounting the estimated future cash payments using the company's estimated incremental borrowing rate. The estimated fair value of forward exchange contracts outstanding at August 31, 1998 is approximately $3,600 based on the rates available for contracts with similar maturities. NOTE 21 -- SUBSEQUENT EVENTS In September 1998, Greenbrier completed the acquisition of a majority interest in a railcar and specialty container manufacturer located in Swidnica, Poland. Polish investors will maintain a significant ownership interest in the manufacturer. This acquisition establishes a European manufacturing base and is expected to provide access to the European markets, particularly the market in Poland. Initially, the Polish facility is not expected to have a material impact on Greenbrier's overall financial condition or results of operations, and the investment will be funded through existing cash balances. Also in September 1998, Greenbrier entered into a joint venture to build railroad freight cars at an existing manufacturing facility in Sahagun, Mexico. Each party will maintain a 50% interest in the joint venture. Operations are expected to commence in the first quarter of 1999. Required capital expenditures and working capital needs are expected to be funded by existing operating cash flow and cash balances. [PHOTO] SAFETY, QUALITY AND EFFICIENCY ARE PARAMOUNT AT ALL GREENBRIER FACILITIES. Financial Statements The Greenbrier Companies 1998 Annual Report 37 QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Unaudited operating results by quarter for 1998 and 1997 are as follows(1):
First Second Third Fourth Total -------------------------------------------------------------------------- 1998 Revenue Manufacturing $ 114,626 $ 104,349 $ 129,899 $ 102,832 $ 451,706 Leasing and services 23,584 22,443 20,759 21,869 88,655 -------------------------------------------------------------------------- 138,210 126,792 150,658 124,701 540,361 Cost of revenue Manufacturing 106,608 96,580 116,385 90,980 410,553 Leasing and services 9,762 8,487 8,169 8,931 35,349 -------------------------------------------------------------------------- 116,370 105,067 124,554 99,911 445,902 Margin $ 21,840 $ 21,725 $ 26,104 $ 24,790 $ 94,459 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net earnings $ 4,076 $ 4,360 $ 5,508 $ 6,388(3) $ 20,332 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net earnings per share(2): Basic $ 0.29 $ 0.31 $ 0.39 $ 0.45 $ 1.43 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Diluted $ 0.29 $ 0.30 $ 0.38 $ 0.44 $ 1.42 -------------------------------------------------------------------------- -------------------------------------------------------------------------- 1997 Revenue Manufacturing $ 101,879 $ 74,558 $ 55,481 $ 93,583 $ 325,501 Leasing and services 25,472 27,777 27,101 25,069 105,419 -------------------------------------------------------------------------- 127,351 102,335 82,582 118,652 430,920 Cost of revenue Manufacturing 94,121 68,282 52,084 86,921 301,408 Leasing and services 11,303 11,524 11,865 11,625 46,317 -------------------------------------------------------------------------- 105,424 79,806 63,949 98,546 347,725 Margin $ 21,927 $ 22,529 $ 18,633 $ 20,106 $ 83,195 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net earnings (loss) $ 2,920 $ 2,177 $ 780 $ (10,048)(4)$ (4,171) -------------------------------------------------------------------------- -------------------------------------------------------------------------- Net earnings (loss) per share: Basic $ 0.21 $ 0.15 $ 0.06 $ (0.71) $ (0.29) -------------------------------------------------------------------------- -------------------------------------------------------------------------- Diluted $ 0.21 $ 0.15 $ 0.06 $ (0.71) $ (0.29) -------------------------------------------------------------------------- --------------------------------------------------------------------------
(1) Certain amounts differ from the amounts reported previously as a result of discontinued operations. (2) The sum of quarterly earnings per share does not equal annual earnings per share as a result of the computation of quarterly versus annual weighted average shares outstanding more favorably than anticipated. (3) Net earnings for the fourth quarter of 1998 includes $1,300 resulting from exiting the trailer and container leasing operations more favorably than anticipated. (4) Net loss for the fourth quarter of 1997 resulted from the write-down of investments in third-party transportation logistics and vehicle transportation equipment, coupled with exit costs related to trailer and container leasing operations. [PHOTO] MILL GONDOLAS WILL BE PRODUCED IN SAHAGUN, MEXICO. 38 The Greenbrier Companies 1998 Annual Report INVESTOR INFORMATION CORPORATE OFFICES: The Greenbrier Companies, Inc. One Centerpointe Drive, Suite 200 Lake Oswego, Oregon 97035 (503) 684-7000 ANNUAL STOCKHOLDERS' MEETING: January 12, 1999, 2:00 p.m. Benson Hotel 309 SW Broadway Portland, Oregon FINANCIAL INFORMATION: Requests for copies of this annual report and other financial information should be made to: Investor Relations The Greenbrier Companies, Inc. One Centerpointe Drive, Suite 200 Lake Oswego, Oregon 97035 LEGAL COUNSEL: Tonkon Torp LLP Portland, Oregon INDEPENDENT AUDITORS: Deloitte & Touche LLP Portland, Oregon TRANSFER AGENT: First Chicago Trust Company of New York 525 Washington Boulevard, 7th Floor Jersey City, New Jersey 07303 Greenbrier's Transfer Agent maintains stockholder records, issues stock certificates and distributes dividends. Requests concerning these matters should be directed to First Chicago Trust Company of New York. STOCKHOLDER INQUIRIES: Please contact Mark Rittenbaum, Investor Relations (503) 684-7000 COMMON STOCK: Greenbrier's common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 350 holders of record of common stock as of October 31, 1998. The following table shows the reported high and low sales price of Greenbrier's common stock on the New York Stock Exchange.
HIGH LOW ------------------------ 1998 Fourth quarter $ 18.50 $ 14.75 Third quarter $ 19.00 $ 15.75 Second quarter $ 18.38 $ 15.25 First quarter $ 18.00 $ 13.00 1997 Fourth quarter $ 13.38 $ 10.50 Third quarter $ 12.13 $ 8.25 Second quarter $ 11.63 $ 9.38 First quarter $ 11.88 $ 7.75
Cash dividends of $.06 per share have been paid quarterly on the common stock since December 1994. There is no assurance as to future dividends as they are dependent upon future earnings, capital requirements and financial condition. [GRAPH] STOCK PRICES (PER SHARE) - - HIGH - - LOW s The Greenbrier Companies 1998 Annual Report 39 EX-21.1 4 EXHIBIT 21.1 Exhibit 21.1 THE GREENBRIER COMPANIES, INC. LIST OF SUBSIDIARIES
Names Under State of Which Does Name Incorporation Business ---- ------------- -------- 2441001 Nova Scotia Limited Nova Scotia, N/A Canada Autostack Corporation OR N/A Greenbrier Capital Corporation CA N/A Greenbrier Europe B.V. Netherlands N/A Greenbrier Greenbrier Leasing Corporation DE Intermodal Greenbrier Leasing Sp z.o.o. Poland N/A Greenbrier Leasing Limited Nova Scotia, N/A Canada Greenbrier Logistics, Inc. OR N/A Greenbrier Partners, Inc. CA N/A Greenbrier Rail Services, Inc. DE N/A Greenbrier Railcar, Inc. DE N/A Greenbrier Rental Services, Inc. CA N/A Greenbrier Transportation, Inc. DE N/A Greenbrier U.K. Limited United Kingdom N/A Gunderson, Inc. OR N/A Gunderson Leasing, Inc. OR N/A Gunderson Marine, Inc. OR N/A Gunderson Northwest, Inc. (formerly known as Gunderson Springfield, Inc.) OR N/A Gunderson Southwest, Inc. OR N/A Gunderson Wheel Services, Inc. OR N/A InterAmerican Logistics Inc. Ontario, N/A Canada Superior Transportation Systems, Inc. OR N/A Tolan O'Neal Transportation & Logistics, Inc. WA N/A TrentonWorks Limited Nova Scotia, N/A Canada
EX-23 5 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 333-08035, 33-3392, and 33-80869 of The Greenbrier Companies, Inc. on Forms S-8 of our reports dated October 23, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of The Greenbrier Companies, Inc. for the year ended August 31, 1998. DELOITTE & TOUCHE LLP Portland, Oregon November 25, 1998 EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR AUG-31-1998 SEP-01-1997 AUG-31-1998 57,909 0 47,537 0 73,639 0 49,452 0 505,489 0 0 0 0 14 120,828 505,489 0 540,361 445,902 502,957 0 0 20,946 37,404 15,643 20,332 0 0 0 20,332 1.43 1.42 Of this amount $15,997 is restricted
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