<PAGE>
1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the year ended December 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 number: 1-5666
UNION TANK CAR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3104688
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 W. Washington Street, Chicago, Illinois 60606
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 372-9500
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- --------------------
None -
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
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 ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the 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. [ ].
There is no voting stock held by non-affiliates of the registrant. This Annual
Report is being filed by the registrant as a result of undertakings made
pursuant to Section 15(d) of the Securities Exchange Act of 1934.
<PAGE>
UNION TANK CAR COMPANY
FORM 10-K
Year Ended December 31, 1998
CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
Part I.
Item 1 Business...................................................................................... 2
Item 2 Properties.................................................................................... 9
Item 3 Legal Proceedings............................................................................. 10
Item 4 Submission of Matters to a Vote of Security Holders........................................... 10
Part II.
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters............................................................. 11
Item 6 Selected Financial Data....................................................................... 11
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 11
Item 7A Disclosures about Market Risk................................................................. 16
Item 8 Financial Statements and Supplementary Data................................................... 16
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................................... 37
Part III.
Item 10 Directors and Executive Officers of the Registrant............................................ 37
Item 11 Executive Compensation........................................................................ 39
Item 12 Security Ownership of Certain Beneficial Owners and Management................................ 40
Item 13 Certain Relationships and Related Transactions................................................ 40
Part IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 41
Signatures .............................................................................................. 42
</TABLE>
-1-
<PAGE>
PART I
ITEM 1. BUSINESS
General
UNION TANK CAR COMPANY (with its wholly-owned subsidiaries herein collectively
referred to, unless the context otherwise requires, as the "Company") was
organized under the laws of Delaware on September 23, 1980 and is the successor
to a business which was originally incorporated in New Jersey in 1891. The
Company is a wholly-owned subsidiary of Marmon Industrial LLC, a wholly-owned
subsidiary of Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock
of Holdings is owned, directly or indirectly, by trusts for the benefit of
certain members of the Pritzker family. As used herein, "Pritzker family" refers
to the lineal descendants of Nicholas J. Pritzker, deceased.
Railcar Leasing, Services and Sales
The principal activity of the Company is the leasing of railway tank cars and
other railcars to North American manufacturers and other shippers of chemical
products, including liquid fertilizers, petroleum products, including liquefied
petroleum gas, food products and bulk plastics. The Company owns and operates
one of the largest fleets of privately-owned railway tank cars in the world.
As of December 31, 1998, the Company's fleet was comprised of 60,573 tank cars
and 16,001 railway cars of other types. A total of 31,132 cars were added to the
lease fleet during the ten years ended December 31, 1998. These cars accounted
for approximately 41% of total railcar lease revenues during 1998. Most of the
Company's cars were built by the Company or to its specifications and the
balance was purchased from other sources.
Management estimates that tank cars carrying chemicals and acids account for the
greatest portion of total leasing revenues, followed in order by compressed
gases (particularly liquefied petroleum gas and anhydrous ammonia), refined
petroleum products (such as gasoline, fuel oils and asphalt), food products and
liquid fertilizers.
A significant portion of the revenues from the Company's non-tank car fleet
derives from hopper cars carrying bulk plastics. The remaining non-tank car
revenues are attributable to cars which serve the lumber, dry bulk chemical and
coal industries.
The Company builds tank cars primarily for use in its leasing business. In
addition, the Company builds cars for sale to others. Generally, the Company
only manufactures a car following the receipt of a firm order for the lease or
sale of such car.
-2-
<PAGE>
Substantially all of the Company's cars are leased directly to several hundred
manufacturers and other shippers under leases covering from one to several
thousand cars and for periods ranging from one to twenty years. The average term
of leases entered into during 1998 for newly-manufactured railcars was
approximately six years. The average term of leases entered into during 1998 for
used tank cars and other railcars was approximately four years. Under the terms
of most leases the Company agrees to provide a full range of services, including
car repair and maintenance. The Company supplies relatively few cars directly to
railroads. The Company markets its cars through regional sales offices located
throughout the United States and Canada and through a sales agent in Mexico. To
ensure optimum utilization of the North American lease fleets, the Company
maintains fleet data processing systems which contain information relative to
each car, including its mechanical specifications, maintenance and repair data
and lease terms.
The Company employs a variety of methods to meet its railcar financing needs.
During 1998 the Company entered into a sale-leaseback transaction for $130.0
million and issued $80.0 million of unsecured notes. Prior to 1994, the Company
had relied primarily on equipment trust certificates to finance railcar lease
fleet additions. The Company expects that future railcar financing needs will be
met primarily with a combination of secured and unsecured borrowings and
sale-leaseback transactions.
Approximately 27% of the Company-owned fleet of railcars is pledged to secure
equipment obligations. The remaining cars are free of liens.
The Company maintains repair facilities located at strategic points throughout
the United States and Canada. In addition to the work performed by the Company,
certain maintenance and repair work is performed for the Company's account by
railroads when railroad inspection determines the need for such work under the
code of the Association of American Railroads ("AAR").
The Company is not a common carrier and is not subject to regulation or
supervision as such. The Company's railcars are subject to regulations governing
construction, safety and maintenance promulgated by the Department of
Transportation and various other government agencies and by the AAR. These
regulations have required and may in the future require the Company to make
significant modifications to certain of its cars from time to time.
The Company's facilities for manufacturing and assembling tank cars are located
in East Chicago, Indiana; Oakville, Ontario, Canada; and Sheldon, Texas. The
Company also operates the largest network of shops in North America for
repairing and servicing railcars, as well as a fleet of specially equipped
trucks to perform repairs at customer plant sites. The principal shops are
located in Valdosta, Georgia; Muscatine, Iowa; El Dorado, Kansas; Ville Platte,
Louisiana; Marion, Ohio; Altoona, Pennsylvania; Cleveland, Longview and Sheldon,
Texas; Evanston, Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario;
Montreal, Quebec; and Regina, Saskatchewan.
-3-
<PAGE>
Other Activities
The Company is engaged in several other activities, as described below.
Sulphur Processing
A subsidiary of the Company provides sulphur producers in Canada and the
Netherlands with various services, including the processing of liquefied sulphur
into crystalline slates and granules and the storage and shipping of the
product. The subsidiary also designs, manufactures and sells sulphur processing
plants worldwide. The subsidiary is also engaged in the manufacturing and
distribution of sulphur bentonite products and micronutrients to the
agricultural industry.
Fasteners
The Company's fastener business, which is conducted through several wholly-owned
subsidiaries, consists of manufacturing and distributing a wide range of
fasteners worldwide to the construction industry and manufacturers of furniture,
household appliances, industrial and agricultural equipment.
Containment Vessel Head Manufacturing
A subsidiary of the Company manufactures and distributes metal containment
vessel heads, primarily made of steel, to the metal containment vessel
construction industry.
Liquefied Petroleum Gas Storage
A subsidiary of the Company operates several underground liquefied petroleum gas
storage caverns in Canada as a service to producers and sellers of liquefied
petroleum gas.
Other Railway Equipment and Services
A subsidiary of the Company manufactures mobile railcar moving vehicles for
in-plant and yard switching and provides contract switching services to
companies with on-site rail yards.
-4-
<PAGE>
Segment Information
The principal activity of the Company's primary industry segment is railcar
leasing, services and sales. Other activities of the Company, as described
above, plus corporate headquarters items, are shown as All Other in the
following table:
<TABLE>
<CAPTION>
Consolidated
Railcar All Other Totals
---------------- ----------------- -----------------
(Dollars in Millions)
<S> <C> <C> <C>
1998
----
Revenues from external customers $ 715.3 $ 161.3 $ 876.6
Interest income 0.1 13.2 13.3
Interest expense 70.5 0.6 71.1
Depreciation and amortization 113.3 8.7 122.0
Income before income taxes 175.3 25.6 200.9
Segment assets 1,992.5 219.7 2,212.2
Expenditures for long-lived assets 254.3 4.7 259.0
1997
----
Revenues from external customers $ 710.0 $ 132.4 $ 842.4
Interest income 0.2 13.0 13.2
Interest expense 74.7 0.7 75.4
Depreciation and amortization 107.9 5.8 113.7
Income before income taxes 142.4 16.0 158.4
Segment assets 1,897.9 331.8 2,229.7
Expenditures for long-lived assets 253.6 7.7 261.3
1996
----
Revenues from external customers $ 560.8 $ 119.8 $ 680.6
Interest income 0.5 10.6 11.1
Interest expense 71.7 0.4 72.1
Depreciation and amortization 101.4 5.3 106.7
Income before income taxes 135.9 26.3 162.2
Segment assets 1,764.2 242.6 2,006.8
Expenditures for long-lived assets 283.8 4.2 288.0
</TABLE>
-5-
<PAGE>
Geographic Information
The following table presents geographic information for the Company. Revenues
are attributed to countries based on the location of customers.
<TABLE>
<CAPTION>
Revenues Long-lived
Assets
----------------- -----------------
(Dollars in Millions)
<S> <C> <C>
1998
----
United States $ 676.6 $ 1,549.3
Canada 167.8 254.7
Other foreign countries 32.2 34.5
----------------- -----------------
Consolidated total $ 876.6 $ 1,838.5
================= =================
1997
----
United States $ 653.5 $ 1,467.3
Canada 171.1 291.5
Other foreign countries 17.8 35.4
----------------- -----------------
Consolidated total $ 842.4 $ 1,794.2
================= =================
1996
----
United States $ 495.0 $ 1,305.9
Canada 173.3 314.3
Other foreign countries 12.3 49.4
----------------- -----------------
Consolidated total $ 680.6 $ 1,669.6
================= =================
</TABLE>
Major Customers
Revenues from any one customer did not exceed 5% of consolidated or industry
segment revenues.
Raw Materials
The Company purchases raw materials from a variety of suppliers, with no one
supplier being significant. In the opinion of management, the Company will have
adequate availability of raw materials in the future.
-6-
<PAGE>
Foreign Operations
The Company does not believe that there are other than normal business risks
attendant to its foreign operations.
Competition
All the activities of the Company are in competition with similar activities
carried on by other companies. In particular, there are several companies
engaged in the business of leasing tank cars in the United States and Canada.
The principal competitors are General American Transportation Corporation
(including its Canadian affiliate, Canadian General Transit Company, Limited),
General Electric Railcar Services Corporation, and ACF Industries, Incorporated.
The principal competitive factors are price, service and product design. The
Company's integration of its North American engineering, manufacturing, repair
and leasing activities has enhanced its ability to provide competitive products
and services to its customers.
Railcar Supply and Demand
The demand for tank cars and bulk plastic hopper cars is generally met with a
combination of the industry's existing fleet and new car additions. The
industry's generally high overall utilization of the tank car and bulk plastic
covered hopper car fleets is evidence of an appropriate level and mix of
equipment to meet existing car demands. New railcars are needed to satisfy
growth, specialized requirements, or the desire of certain customers to utilize
newer equipment. Since railcars are generally built to customer order, the
supply of new railcars generally stays in reasonable balance with demand.
The major underlying factors affecting demand for new railcars are: (a) the rate
of growth of the overall economy, (b) growth of certain industry segments,
manufacturers, or shippers, particularly involving significant new or expanded
production operations, and (c) replacement of aged, obsolete, or worn out
railcars.
Manufacturing Backlog
The Company builds tank cars primarily for use in its leasing business and the
number of cars added in any one year is a small percentage of the Company's
lease fleet. Additionally, for tank cars built for sale to customers, the
Company delivers against orders within a relatively brief period of time.
Therefore, backlog is not material to the Company's business or an understanding
thereof.
Employees
As of December 31, 1998, the Company had approximately 4,960 employees.
-7-
<PAGE>
Environmental Matters
The Company believes that all of its facilities are in substantial compliance
with applicable laws and regulations relating to environmental protection. Over
the past several years the Company has attempted to identify and remediate
potential problem areas. In 1998 the Company spent approximately $5.7 million on
remediation and related matters, compared with $7.8 million and $3.5 million in
1997 and 1996, respectively. The Company expects to spend approximately $9.9
million in 1999 on similar activities.
In October 1990, the Pennsylvania Office of Attorney General ("OAG") and the
Pennsylvania Department of Environmental Resources ("DER") commenced an
investigation of alleged violations of the Pennsylvania Solid Waste Management
Act ("Act") with respect to the handling of solid and hazardous waste material
at the Company's railcar repair facility in Altoona, Pennsylvania. At the
request of the DER, the Company cooperated voluntarily in a site assessment of
areas of potential environmental contamination at the facility. The Company and
the OAG reached a plea agreement in connection with the investigation, which was
approved by the Court of Common Pleas of Blair County, Pennsylvania, on November
20, 1998. Pursuant to the agreement, the Company was charged with four
third-degree misdemeanor violations of the Act. The Company agreed to make
contributions totaling $455,735 to three local government agencies to remediate
the site, to reimburse $82,077 in investigation and grand jury costs, and to
cooperate with the OAG's continuing investigation. The Company was also placed
on probation for six months. The Company believes that current operations at the
facility are in substantial compliance.
The Company has been designated as a Potentially Responsible Party ("PRP") by
the EPA at two sites: Auto Ion Chemical Company, Kalamazoo, Michigan and
Whitehouse Waste Oil Pits Site, Jacksonville, Florida. Costs incurred to date
have not been material, either individually or in the aggregate. Because of the
level of the Company's involvement at these sites, management believes that
future costs related to these sites will not be material, either individually or
in the aggregate. The Company has not entered into any cost sharing arrangements
with other PRP's that make it reasonably possible the Company will incur
material costs beyond its pro rata share. Further, management does not believe
that any problems or uncertainties as to the financial liabilities of other
PRP's make it reasonably possible the Company will incur material costs beyond
its pro rata share at these sites. The Company's accruals for these sites are
based on the amount it reasonably expects to pay with respect to the sites.
Management believes that amounts accrued for remedial activities and
environmental liabilities (which in the aggregate are not material) are
adequate.
-8-
<PAGE>
ITEM 2. PROPERTIES
In the opinion of management, the Company's properties are in good condition,
substantially utilized and adequate to meet the Company's current and reasonably
anticipated future needs.
The Company estimates that its plant facilities were utilized during the year at
an average of approximately 85% of productive capacity for railcar
manufacturing, 75% for railcar servicing and repair, 80% for sulphur processing,
85% for fastener production, 85% for containment vessel head manufacturing, and
95% for liquefied petroleum gas storage.
Railcars
The Company owns approximately 86 percent of its total lease fleet of 76,574
railcars, of which 60,573 are tank cars and 16,001 are other railway freight
cars. Of the approximately 65,670 owned cars, 48,140 are free of liens. Cars
which are not owned are leased from others under long-term net leases.
Railcar Manufacturing and Assembling Facilities
The facilities for the manufacturing and assembling of railcars are located at
East Chicago, Indiana; Oakville, Ontario, Canada; and Sheldon, Texas, together
occupying approximately 170 acres.
Car Servicing and Repair Shops
The Company operates a network of shops for repairing and servicing railcars.
The principal shops owned by the Company are located at Valdosta, Georgia;
Muscatine, Iowa; El Dorado, Kansas; Ville Platte, Louisiana; Marion, Ohio;
Altoona, Pennsylvania; Cleveland, Longview, and Sheldon, Texas; Evanston,
Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario; Montreal, Quebec; and
Regina, Saskatchewan. Several other repair shops and small repair points are
strategically located throughout the United States and Canada.
Sulphur Processing
A subsidiary of the Company owns facilities in Canada and the Netherlands which
process liquefied sulphur into crystalline slates and granules and handle the
formed product. The Company also owns facilities in North America for the
manufacture and distribution of sulphur bentonite products and micronutrients.
Fasteners
The Company owns (either directly or through its subsidiaries) fastener
manufacturing facilities in Ashland, Ohio; Milton, Ontario; Montreal, Quebec;
and Gaffney, South Carolina. In addition, the Company leases several small
plants in the United States, Canada and Sweden.
Containment Vessel Head Manufacturing Facilities
A subsidiary of the Company owns a metal containment vessel head manufacturing
facility in Sheldon, Texas.
Liquefied Petroleum Gas Storage Facilities
A subsidiary of the Company owns several underground liquefied petroleum gas
storage caverns in Canada.
-9-
<PAGE>
Other Railway Equipment Facilities
A subsidiary of the Company owns a mobile railcar moving vehicle manufacturing
facility in LaGrange, Georgia.
Other Properties
The Company and its subsidiaries maintain numerous sales and business offices
and warehouses, most of which are leased, throughout the United States and
Canada.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries have been named as defendants in a number of
lawsuits and certain claims are pending. The Company has accrued what it
reasonably expects to pay to resolve such claims, including legal fees, and, in
the opinion of management, the ultimate resolution of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity. See discussion of Environmental Matters in Item 1 of
this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- -------------- --------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Services and net sales $ 876,643 $ 842,354 $ 680,642 $ 725,712 $ 595,327
Net income 127,421 101,250 102,583 84,465 63,378
Ratio of earnings to
fixed charges 3.23 x 2.74 x 2.84 2.41 x 2.05 x
At year end:
Total assets $ 2,212,175 $ 2,229,664 $ 2,006,820 $ 2,003,346 $ 2,017,772
Long-term obligations 821,470 858,656 528,344 732,207 807,029
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This annual report on Form 10-K for the year ended December 31, 1998 contains
forward-looking statements that involve substantial risks and uncertainties.
Such statements include, without limitation, statements regarding the estimated
costs to resolve the Company's Year 2000 issues, the time frame necessary for
the Company to achieve Year 2000 compliance and the likely results of
non-compliance by the Company or by one or more of the its customers, suppliers
or strategic business partners. Important factors that could cause the Company's
actual results to differ materially from those implied by such forward-looking
statements include: The Company does not know the full scope of its Year 2000
issues because it has not yet completed the assessment phase of its compliance
program. The Company cannot ascertain the magnitude of any Year 2000 problems
that may be resident in the systems of its material suppliers, or the impact any
such problems could have on such suppliers' ability to continue to provide
inventory to the Company on a timely manner. The occurrence of Year 2000 related
failures in the computer and information systems of the Company or any of the
Company's significant suppliers or customers could have a material adverse
effect on the business, results of operations or financial condition of the
Company.
-11-
<PAGE>
1998 versus 1997
Results of Operations
- ---------------------
Services revenues increased $19.9 million, primarily due to the effect of
railcars added to the lease fleet in 1997 and 1998.
Net sales revenues increased $14.4 million. The increase primarily resulted from
the Company's sulphur service processing operations with the remaining increase
primarily due to increased fastener sales, partially offset by lower sales of
covered hopper railcars.
Gain on sale of assets increased due to the sale of certain future income rights
retained as a condition of the May 1996 sale of a storage facility used in the
liquefied petroleum gas storage operations.
Gross margin percentages increased from the comparable period in 1997 due to
decreased railcar maintenance expenses, and improved sale margins for tank cars,
sulphur products and fasteners.
Financial Condition
- -------------------
Operating activities provided $256.0 million of cash in 1998. These funds, along
with the issuance of unsecured debt and the sale-leaseback transaction, were
used to provide financing for railcar additions, service borrowed debt
obligations, advance funds to parent and pay dividends to the Company's
stockholder. It is the Company's policy to pay to its stockholder a quarterly
dividend equal to 70% of net income. To the extent that the Company generates
cash in excess of its operating needs, such funds are advanced to its parent and
bear interest at commercial rates. Conversely, when the Company requires
additional funds to support its operations, prior advances are repaid by its
parent. No restrictions exist regarding the amount of dividends which may be
paid or advances which may be made by the Company to its parent.
In 1998, the Company spent $259.0 million for the construction and purchase of
railcars and other fixed assets and $22.7 million for the purchase of assets
engaged in the manufacturing and distribution of sulphur bentonite and
micronutrients, and other assets.
Of the capital expenditures for construction and purchase of railcars and other
fixed assets over the past five years, approximately 90% have been for railcars.
Since all material capital expenditures for railcars are incurred subsequent to
receipt of firm customer orders, such expenditures are discretionary to the
Company based on its desire to invest in those particular railcars.
In 1998, the Company issued $80.0 million in unsecured notes and entered into a
sale-leaseback transaction for $130.0 million. Other financing activities of the
Company included $188.8 million for principal repayments on borrowed debt and
$48.0 million for cash dividends. Net cash used in financing activities was
$26.2 million.
Management expects that the future cash to be provided by operating activities,
long-term financings, and collection of funds previously advanced to parent will
be adequate to provide for the continued expansion of the Company's business and
enable it to meet its debt service obligations.
-12-
<PAGE>
The following table presents the scheduled cash inflows and outflows over the
next five years based on leases and indebtedness outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
------------- ------------ ------------ ------------ ------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Cash Inflows
------------
Minimum future lease rentals $ 436.9 $ 345.5 $ 263.7 $ 193.9 $ 136.4
Cash Outflows
-------------
Minimum future lease payments 52.1 54.9 58.1 54.8 55.3
Principal amount of obligations 47.0 44.9 79.6 38.6 50.0
------------- ------------ ------------ ------------ ------------
Excess of inflows over outflows $ 337.8 $ 245.7 $ 126.0 $ 100.5 $ 31.1
============= ============ ============ ============ ============
</TABLE>
The minimum future lease rentals above relate to leases in effect at December
31, 1998. Based upon its historical experience, the Company expects that the
railcars (other than those which are retired in the ordinary course of business)
will be re-leased at the expiration of such leases. The rentals under such
future leases cannot be ascertained and are not reflected above.
The Company has consistently maintained high fleet utilization. The Company's
lease fleet utilization has averaged 98% during the last five years. Utilization
rates of the Company's existing railcars are driven by the long-term
requirements of manufacturers and shippers of chemical products, petroleum
products, food products, and bulk plastics, and the suitability of the Company's
fleet to meet such demand. The potential impact of short-term fluctuations in
demand is tempered by the longer-term nature of the leases, which average four
years for existing equipment and longer for new equipment.
The Company has not experienced any significant impact of inflation and changing
prices on its financial position or results of operations over the last several
years.
The Company's Canadian subsidiaries periodically enter into foreign currency
forward contracts to hedge against U. S. dollar exposures. Foreign currency
forward contracts, all with initial maturities of less than one year, amounted
to $3.4 million and $1.5 million at December 31, 1998 and 1997, respectively.
Year 2000
- ---------
Because of the potential importance to the Company of Year 2000 questions, the
Company has established a Year 2000 program to determine the Company's state of
readiness and the costs that it anticipates it will have to incur in light of
the possible problems.
Based on its assessment to date, the Company has determined that its information
processing and delivery systems are not yet capable of handling certain Year
2000 processing tasks. The Company believes its Year 2000 program will mitigate
any material Year 2000 risks. However, if this program is not implemented or
completed on a timely basis, Year 2000 problems could have a material adverse
impact on the operations of the Company.
-13-
<PAGE>
The Company's Year 2000 program involves the following phases: assessment,
remediation, testing, and final implementation. As part of the assessment phase,
the Company reviewed its hardware, software, and operating systems to identify
potential problems and to prioritize remedial actions to be taken. The Company
reviewed the resources, both financial and personnel, necessary to address the
Year 2000 problems, assigned responsibility for implementation of the Year 2000
program to a senior manager, and has provided for regular reporting and
monitoring of the Year 2000 program by senior management.
The Company's Year 2000 assessment indicated that the Company's accounting,
invoicing, general business and fleet management systems would be affected by
Year 2000 problems. The Company has begun the necessary corrective work on these
systems. This work is approximately 85% complete. The Company's timetable calls
for this work to be substantially completed by April 1, 1999, with testing of
the completed systems to be done by July 1, 1999.
The Company does not believe its main products (i.e., tank cars and other rail
cars) have any material Year 2000 exposures. Therefore, the Company does not
believe Year 2000 problems present a material exposure to the Company in this
area.
Similarly, no material problems have been identified in connection with the
Company's production machinery and equipment.
As part of its Year 2000 program, the Company has been gathering information
about how Year 2000 issues might affect its significant suppliers. At this
point, the Company does not know of any Year 2000 problem with any suppliers
that could materially impact the Company's results of operations. However, the
Company cannot be sure this will be true and the potential impact of any
problems is difficult to determine.
The Company's systems interact directly with certain third parties, including
financial institutions. The Company is working with these third parties to
minimize any Year 2000 problems. The Company understands that these third
parties are in the process of addressing their Year 2000 problems and that they
believe their problems will be addressed on a timely basis.
The Company is using both in-house resources and outside consultants to
implement the necessary changes required by its Year 2000 program. The total
cost of the program is estimated to be $4.8 million, which will be funded from
operating cash flow. Through December 31, 1998, the Company has spent
approximately $2.6 million related to its Year 2000 program. Of this amount $2.4
million has been expensed and $0.2 million has been capitalized. Of the
remaining amount, approximately $0.5 million is expected to be capitalized with
the rest being expensed.
While management of the Company believes that its Year 2000 program will be
effective to resolve all material Year 2000 problems in a timely manner, the
Company has not yet completed all phases of its program. If the Company does not
complete its program or if the program is not completed on time, the Company
could experience delays in taking customer orders, invoicing customers, and
other fleet management work. In addition, disruptions in the general economy
resulting from Year 2000 issues could materially adversely affect the Company.
The amount of any potential liability or lost revenue from any of these cannot
be reasonably estimated at this time.
At present, the Company's Year 2000 program does not include contingency plans
in the event that all phases of the Year 2000 program are not timely completed.
The Company will continue to evaluate the need for contingency plans as it
implements its Year 2000 program.
-14-
<PAGE>
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which the Company is required to adopt effective
January 1, 2000. This Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not believe the
effect of adoption will be material to its financial position or results of
operations.
1997 versus 1996
Results of Operations
- ---------------------
Services revenues increased $33.4 million, primarily due to the effect of
railcars added to the lease fleet.
Net sales revenues increased $128.3 million, primarily due to increased railcar
sales.
Gross margin percentages decreased from the comparable period in 1996 due to
increased car maintenance expenses, increased railcar rental expenses from
previous years' sale-leaseback transactions and lower margins on new railcars
sold that were manufactured by a third-party.
Gain on sale of assets decreased $9.7 million, primarily due to a gain on the
sale of a storage facility used in the liquefied petroleum gas storage
operations in 1996. Other income decreased $3.1 million, primarily due to the
receipt of certain fees in connection with the termination of an agreement
pursuant to which a subsidiary of the Company was to acquire Hawker Siddeley
Canada Inc.
Financial Condition
- -------------------
Operating activities provided $217.4 million of cash in 1997. These funds, along
with the issuance of unsecured debt, were used to provide financing for railcar
additions, service borrowed debt obligations, advance funds to parent, and pay
dividends to the Company's stockholder.
In 1997, the Company spent $261.3 million for the construction and purchase of
railcars and other fixed assets and $10.6 million for the purchase of assets
engaged in the manufacturing and distribution of sulphur bentonite and
micronutrients.
Of the capital expenditures for construction and purchase of railcars and other
fixed assets over the past five years, approximately 90% have been for railcars.
Since all material capital expenditures for railcars are incurred subsequent to
receipt of firm customer orders, such expenditures are discretionary to the
Company based on its desire to invest in those particular railcars.
In 1997, the Company issued $400.0 million in unsecured notes. Other financing
activities of the Company included $210.1 million for principal repayments on
borrowed debt and $70.0 million for dividends. Net cash provided by financing
activities was $119.9 million.
Management expects that the future cash to be provided by operating activities,
long-term railcar financings, and collection of funds previously advanced to
parent will be adequate to provide for the continued expansion of the Company's
business and enable it to meet its debt service obligations.
-15-
<PAGE>
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments is the potential
loss in fair value arising from adverse changes in interest rates. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes.
The following table provides information about the Company's debt obligations
that are sensitive to changes in interest rates. The table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates and estimated fair value of the Company's debt obligations.
<TABLE>
<CAPTION>
Fair Value
1999 2000 2001 2002 2003 Thereafter Total 12-31-98
---------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 47.0 $ 44.9 $ 79.6 $ 38.6 $ 50.0 $ 608.3 $ 868.4 $ 936.3
Average interest rate 8.98% 8.89% 7.81% 8.95% 8.48% 7.32% 7.68%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors.......................................................................... 17
Financial Statements
Consolidated statement of income for each of the three years in
the period ended December 31, 1998.................................................................. 18
Consolidated balance sheet - December 31, 1998 and 1997............................................... 19
Consolidated statement of stockholder's equity for each of the three
years in the period ended December 31, 1998......................................................... 20
Consolidated statement of cash flows for each of the three
years in the period ended December 31, 1998......................................................... 21
Notes to consolidated financial statements............................................................ 22
</TABLE>
-16-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO UNION TANK CAR COMPANY
We have audited the accompanying consolidated balance sheet of Union Tank Car
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholder's equity and cash flows for each
of the three years in the period ended December 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Union
Tank Car Company and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 1999
-17-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues
Services (leasing and other) $ 580,092 $ 560,174 $ 526,733
Net sales 296,551 282,180 153,909
----------------- ---------------- ----------------
876,643 842,354 680,642
Interest income 13,255 13,234 11,076
Gain on sale of assets 6,383 102 9,784
Other income 7,937 4,963 8,056
----------------- ---------------- ----------------
904,218 860,653 709,558
Costs and expenses
Cost of services 320,280 318,294 290,867
Cost of sales 248,258 250,806 127,266
General and administrative 63,671 57,828 57,098
Interest expense 71,131 75,356 72,138
----------------- ---------------- ----------------
703,340 702,284 547,369
----------------- ---------------- ----------------
Income before income taxes 200,878 158,369 162,189
Provision for income taxes
Current 60,867 51,727 56,378
Deferred income taxes
and investment tax credits 12,590 5,392 3,228
----------------- ---------------- ----------------
73,457 57,119 59,606
----------------- ---------------- ----------------
Net income $ 127,421 $ 101,250 $ 102,583
================= ================ ================
Ratio of earnings to fixed charges 3.23 x 2.74 x 2.84 x
================= ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
-18-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 58,423 $ 99,709
Accounts receivable, primarily due within one year,
less allowance for doubtful accounts of $4,121 in
1998 and $4,019 in 1997 82,729 72,959
Inventories 90,123 71,395
Prepaid expenses and deferred charges 11,411 13,675
Advances to parent company,
principally at LIBOR plus 1% 130,940 177,705
Railcar lease fleet, net 1,575,014 1,578,433
Fixed assets, net 177,055 163,309
Investment in direct financing lease 32,629 35,341
Other assets 53,851 17,138
---------------- -----------------
Total assets $ 2,212,175 $ 2,229,664
================ =================
Liabilities, Deferred Items and Stockholder's Equity
----------------------------------------------------
Accounts payable $ 20,082 $ 18,636
Accrued rent 62,056 51,700
Accrued liabilities 190,841 144,419
Borrowed debt 868,421 925,038
---------------- -----------------
1,141,400 1,139,793
Deferred items
Deferred income taxes and investment tax credits 437,693 494,871
Stockholder's equity
Common stock, no par value; 1,000 shares authorized
and issued 106,689 106,689
Additional capital 6,346 6,346
Retained earnings 520,047 481,965
---------------- -----------------
Total stockholder's equity 633,082 595,000
---------------- -----------------
Total liabilities, deferred items and
stockholder's equity $ 2,212,175 $ 2,229,664
================ =================
</TABLE>
See Notes to Consolidated Financial Statements.
-19-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Capital Earnings Total
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 106,689 $ 4,652 $ 419,132 $ 530,473
Capital contribution - 1,694 - 1,694
Net income - - 102,583 102,583
Cash dividends - - (71,000) (71,000)
---------------- ---------------- ----------------- -----------------
Balance at December 31, 1996 106,689 6,346 450,715 563,750
Net income - - 101,250 101,250
Cash dividends - - (70,000) (70,000)
---------------- ---------------- ----------------- -----------------
Balance at December 31, 1997 106,689 6,346 481,965 595,000
Net income - - 127,421 127,421
Cash dividends - - (48,000) (48,000)
Non-cash dividends - - (41,339) (41,339)
---------------- ---------------- ----------------- -----------------
Balance at December 31, 1998 $ 106,689 $ 6,346 $ 520,047 $ 633,082
================ ================ ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
-20-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 127,421 $ 101,250 $ 102,583
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 121,998 113,663 106,707
Gain on disposition of railcars and other fixed assets (5,699) (4,951) (14,247)
Deferred taxes 12,590 5,392 3,228
Other non-cash income and expenses 799 1,863 1,092
Changes in operating assets and liabilities (1,062) 134 18,206
-------------- -------------- --------------
Net cash provided by operating activities 256,047 217,351 217,569
Cash flows from investing activities:
Construction and purchase of railcars and
other fixed assets (259,007) (261,306) (287,960)
(Increase) decrease in advance to parent (520) (57,105) 61,245
Decrease in other assets and investments 7,679 12,849 3,308
Proceeds from disposals of railcars
and other fixed assets 9,814 9,767 27,426
Purchases of businesses, net of cash acquired (22,731) (10,642) -
Repayments from affiliate - - 12,828
-------------- -------------- --------------
Net cash used in investing activities (264,765) (306,437) (183,153)
Cash flows from financing activities:
Proceeds from issuance of borrowed debt 80,550 400,000 14,231
Proceeds from sale-leaseback transactions 130,018 - 142,382
Principal payments of borrowed debt (188,771) (210,143) (76,782)
Cash dividends (48,000) (70,000) (71,000)
-------------- -------------- --------------
Net cash (used in) provided by financing activities (26,203) 119,857 8,831
Effect of exchange rates on cash and cash equivalents (6,365) (2,977) (113)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (41,286) 27,794 43,134
Cash and cash equivalents at beginning of year 99,709 71,915 28,781
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 58,423 $ 99,709 $ 71,915
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
-21-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Ownership
UNION TANK CAR COMPANY (with its wholly-owned subsidiaries herein collectively
referred to, unless the context otherwise requires, as the "Company") is a
wholly-owned subsidiary of Marmon Industrial LLC ("MIC") and a subsidiary of
Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock of Holdings
is owned, directly or indirectly, by trusts for the benefit of certain members
of the Pritzker family. As used herein, "Pritzker family" refers to the lineal
descendants of Nicholas J. Pritzker, deceased.
2. Summary of Accounting Principles and Practices
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid debt instruments purchased
with an original maturity of three months or less.
Lessor Accounting
Operating Leases - Most of the Company's railcar leases are classified as
operating leases. Aggregate rentals from operating leases are reported as
revenue ratably over the life of the lease. Expenses, including depreciation and
maintenance, are charged as incurred.
Direct Financing Leases - Some of the Company's railcar and other rental
equipment leases are classified as direct financing leases. Gross investment in
leases (minimum lease payments plus estimated residual values) less the cost of
the equipment is designated as unearned income. This unearned income is
recognized over the life of the lease based upon the "constant yield method" or
similar methods which generally result in an approximate level rate of return on
the investment.
Depreciation and Fixed Assets Accounting
Railcars and fixed assets are recorded at cost less accumulated depreciation.
These assets are depreciated to salvage value over their estimated useful lives
on the straight-line method. The estimated useful lives are principally:
railcars, 25-30 years; buildings and improvements, 20-30 years; and machinery
and equipment, 3-20 years.
-22-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cost of major conversions and betterments are capitalized and depreciated
over their estimated useful lives or, if shorter, the remaining useful lives of
the related assets. Maintenance and repairs are charged to expense when
incurred.
Gains or losses on disposals are included in other income, except for those
related to railcar disposals which are included in cost of services.
Deferred Income Taxes
The Company provides deferred taxes for temporary differences between pre-tax
accounting income and taxable income (principally related to railcar
depreciation).
Deferred Investment Tax Credits
United States investment tax credits (as generated through 1986 and to the
extent not transferred to lessees) and Canadian investment tax credits result in
a reduction of current or deferred income taxes and are due primarily to
investments in certain new railcars. Investment tax credits retained are
deferred and amortized over the estimated useful lives of the related assets.
Foreign Currency Translation
All assets and liabilities are translated at exchange rates in effect at the
date of translation. Average exchange rates are used for revenues, costs and
expenses and income taxes.
Translation adjustments and transaction gains and losses are assumed by the
Company's parent. For the years ended December 31, 1998, 1997 and 1996, MIC
absorbed a gain of $1,968, a gain of $504, and a loss of $46, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Fair Value of Financial Instruments
All book value amounts for financial instruments approximate the instruments'
fair value except for the borrowed debt discussed in Note 7.
Use of 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 prior year amounts have been reclassified to conform to the current year
presentation.
-23-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Railcar Lease Data
Railcars are leased directly to several hundred shippers, located throughout
North America. The Company leases to a wide variety of customers, and no
customer accounted for more than 5% of consolidated lease revenues. Each lease
involves one to several thousand cars, normally for periods ranging from one to
twenty years. The average term of leases entered into during 1998 for
newly-manufactured cars was approximately six years. The average term of leases
entered into during 1998 for used tank cars and other railcars was approximately
four years. Under the terms of most of the leases the Company agrees to provide
a full range of services including car repair and maintenance.
Minimum future lease rentals to be received on the railcar lease fleet
(including railcars leased from others) were as follows as of December 31, 1998:
<TABLE>
<CAPTION>
Direct
Financing Operating
Leases Leases Total
---------------- ---------------- ----------------
<S> <C> <C> <C>
1999 $ 3,524 $ 433,341 $ 436,865
2000 3,716 341,789 345,505
2001 2,021 261,663 263,684
2002 - 193,911 193,911
2003 - 136,359 136,359
2004 and thereafter - 290,759 290,759
---------------- ---------------- ----------------
Totals $ 9,261 $ 1,657,822 $ 1,667,083
================ ================ ================
</TABLE>
The investment in railcars on direct financing leases is recoverable from future
lease payments and estimated residual values. Details of this investment, which
is classified in the accompanying consolidated balance sheet under railcar lease
fleet, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Minimum future lease rentals $ 9,261 $ 13,664
Estimated residual values 7,785 8,321
---------------- ----------------
Gross investment 17,046 21,985
Less unearned income (1,598) (3,432)
---------------- ----------------
Net investment $ 15,448 $ 18,553
================ ================
Classified as
Railcar lease fleet (cost) $ 25,951 $ 27,736
Less accumulated depreciation (10,503) (9,183)
---------------- ----------------
$ 15,448 $ 18,553
================ ================
</TABLE>
-24-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Railcar Lease Fleet and Fixed Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Railcar lease fleet
Gross cost $ 2,769,163 $ 2,710,175
Less accumulated depreciation (1,194,149) (1,131,742)
---------------- ----------------
$ 1,575,014 $ 1,578,433
================ ================
Fixed assets, at cost
Land $ 7,882 $ 7,426
Buildings and improvements 118,740 102,544
Machinery and equipment 265,306 250,482
---------------- ----------------
391,928 360,452
Less accumulated depreciation (214,873) (197,143)
---------------- ----------------
$ 177,055 $ 163,309
================ ================
</TABLE>
5. Investment in Direct Financing Lease
In 1987, one of the Company's Canadian subsidiaries entered into a Canadian
dollar denominated lease of a passenger airplane to a scheduled commercial air
carrier for an 18 year period.
Minimum future rentals to be received on the lease are as follows at December
31, 1998:
<TABLE>
<S> <C>
1999 $ 3,961
2000 5,483
2001 5,483
2002 5,483
2003 5,483
2004 and thereafter 10,966
------------
Total $ 36,859
============
</TABLE>
-25-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The investment is recoverable from future lease payments and estimated residual
value, as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Minimum future lease rentals $ 36,859 $ 43,627
Estimated residual value 15,533 16,602
---------------- ----------------
Gross investment 52,392 60,229
Less unearned income (19,763) (24,888)
---------------- ----------------
Net investment $ 32,629 $ 35,341
================ ================
</TABLE>
6. Lease Commitments
The Company as lessee has entered into long-term leases for certain railcars and
various manufacturing, office and warehouse facilities.
The railcar lease fleet includes the following capitalized leases:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Capitalized lease cost $ 16,415 $ 16,264
Less accumulated depreciation (8,980) (8,520)
---------------- ----------------
$ 7,435 $ 7,744
================ ================
</TABLE>
In 1998, the Company entered into a sale-leaseback transaction with a trust for
the benefit of an institutional investor pursuant to which it sold and leased
back an aggregate of $130,018 in railcars. The Company has an option to purchase
all or a portion of the railcars at a fixed purchase price on (i) January 2,
2009, (ii) March 30, 2014 (the base term lease expiration date) and (iii) March
30, 2021 (the end of the optional lease renewal term).
In 1996, the Company entered into a sale-leaseback transaction with a trust for
the benefit of an institutional investor pursuant to which it sold and leased
back an aggregate of $142,382 in railcars. The Company has an option to purchase
all or a portion of the railcars at a fixed purchase price on (i) July 2, 2006,
(ii) July 2, 2012 (the base term lease expiration date) and (iii) July 2, 2018
(the end of the optional lease renewal term).
The exercise price of the fixed price purchase options is equal to the projected
future fair market value of the subject railcars, as determined by an
independent appraiser.
-26-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1998, future minimum rental commitments for all noncancelable
leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
-----------------------------------------------
Capitalized Sale- Other Total
Leases Leaseback Operating Operating
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999 $ 109 $ 48,593 $ 3,498 $ 52,091
2000 94 51,803 3,056 54,859
2001 97 56,288 1,807 58,095
2002 - 54,517 273 54,790
2003 - 55,186 122 55,308
2004 and thereafter - 563,755 70 563,825
------------- ------------- ------------- -------------
300 $ 830,142 $ 8,826 $ 838,968
============= ============= =============
Less amount representing interest (64)
-------------
Present value of minimum lease payments 236
Less current portion (77)
-------------
Long-term obligation at December 31, 1998 $ 159
=============
</TABLE>
Minimum future sublease revenue to be received under existing capitalized and
sale-leaseback leases as of December 31, 1998 is presented below. Future
sublease revenue under other existing operating leases is not material and is
primarily included in other income. The Company expects that the subleased
railcars will be re-leased at the expiration of such leases. The rentals under
such future subleases cannot be ascertained and therefore are not reflected in
this table.
<TABLE>
<CAPTION>
Sale-
Capitalized Leaseback
Leases Leases
---------------- ----------------
<S> <C> <C>
1999 $ 1,955 $ 72,499
2000 1,575 62,236
2001 1,046 50,877
2002 - 40,053
2003 - 31,399
2004 and thereafter - 90,989
---------------- ----------------
$ 4,576 $ 348,053
================ ================
</TABLE>
Sublease rentals recorded as revenue for the years ended December 31, 1998, 1997
and 1996 were approximately $71,000, $65,000 and $60,000, respectively.
Rentals charged to costs and expenses were $57,191, $48,101, and $44,581 in
1998, 1997, and 1996, respectively.
-27-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Borrowed Debt
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Unsecured notes, due from 2001-2009 at 5.78%-7.45% (average rate 6.98% as
of December 31, 1998 and 7.14% as of December 31, 1997) $ 480,000 $ 400,000
Equipment obligations, payable periodically through 2009 at 6.50%-13.95%
(average rate 8.29% as of December 31, 1998 and 8.73% as of December
31,1997) 367,627 $ 501,989
Other long-term borrowings, payable periodically through December
31, 2005 (average rate of 12.13% as of December 31, 1998 and 12.20% as of
December 31, 1997) 20,794 23,049
---------------- ----------------
$ 868,421 $ 925,038
================ ================
</TABLE>
Equipment obligations are secured by railcars with an original cost of $941,550
and $1,246,207 at December 31, 1998 and 1997, respectively. The above equipment
obligations include $188 and $232 of capitalized leases at December 31, 1998 and
1997, respectively.
In August and September 1998, the Company issued an aggregate total of $80,000
principal amount of unsecured Medium-Term Notes. The notes bear interest at
rates between 5.78% and 6.51% per year, with maturity ranging from three to ten
years. Interest on $55,000 principal amount of notes issued in August 1998 will
be payable semiannually on February 15 and August 15, commencing on February 15,
1999. Interest on $25,000 principal amount of notes issued in September 1998
will be payable semiannually on March 1 and September 1, commencing on March 1,
1999. The notes are non-redeemable and not subject to a sinking fund. These
notes were issued pursuant to a registration statement filed by the Company with
the Securities and Exchange Commission on January 28, 1998, covering an
aggregate $300,000 of debt securities and pass through certificates which may be
issued from time to time.
The Company's Canadian subsidiaries have approximately $12,099 of credit lines
available on a no-fee basis. No amounts were outstanding as of December 31, 1998
and 1997.
Maturities of debt obligations for the years 1999 - 2003 are $260,059 as
follows: $46,951 in 1999, $44,872 in 2000, $79,614 in 2001, $38,574 in 2002 and
$50,048 in 2003.
Subsequent to year end, the Company issued $45,000 principal amount of unsecured
Medium-Term Notes. The notes bear interest at rates between 6.00% and 6.35% with
maturity ranging from three to nine years. Interest will be payable semiannually
on March 1 and September 1, commencing September 1, 1999.
-28-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair value of borrowed debt is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Unsecured notes $ 510,586 $ 417,177
Equipment obligations 399,669 536,235
Other long-term borrowings 26,090 27,784
---------------- ----------------
$ 936,345 $ 981,196
================ ================
</TABLE>
The current fair value of the Company's borrowed debt is estimated by
discounting the future interest and principal cash flows at the Company's
estimated incremental borrowing rate at the respective year-end for debt with
similar maturities. The Company currently anticipates holding all borrowed debt
obligations until maturity.
8. Income Taxes
The Company is included in the consolidated U.S. federal income tax return of
Holdings. Under an arrangement with MIC, federal income taxes, before
consideration of investment tax credits, are computed as if the Company files a
separate consolidated return. For this computation, the Company generally uses
tax accounting methods which minimize the current tax liability (these methods
may differ from those used in the consolidated tax return). Tax liabilities are
remitted to, and refunds are obtained from, MIC on this basis. If deductions and
credits available to Holdings' entire consolidated group exceed those which can
be used on the return, allocation of the related benefits between the Company
and others will be at the sole discretion of Holdings. As a member of a
consolidated federal income tax group, the Company is contingently liable for
the federal income taxes of the other members of the consolidated group.
Undistributed earnings of the Company's non-U.S. subsidiaries reflect full
provision for non-U.S. income taxes. However, since the earnings are
indefinitely reinvested in non-U.S. operations, no provision has been made for
taxes that might be payable upon remittance of such earnings nor is it
practicable to determine the amount of any such liability.
The following summarizes the provision for income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
State
Current $ 2,232 $ 1,221 $ 715
Deferred 277 860 493
Federal
Current 29,760 30,417 35,103
Deferred and investment tax credit 17,587 9,212 4,513
Foreign
Current 28,875 20,089 20,560
Deferred and investment tax credit (5,274) (4,680) (1,778)
----------------- ----------------- -----------------
Total $ 73,457 $ 57,119 $ 59,606
================= ================= =================
</TABLE>
-29-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1998, 1997, and 1996 the Company paid foreign withholding taxes of $2,594,
$1,481, and $844, respectively.
Income tax expense is based upon domestic and foreign income before taxes as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic $ 153,607 $ 125,309 $ 120,348
Foreign 47,271 33,060 41,841
----------------- ----------------- -----------------
Total $ 200,878 $ 158,369 $ 162,189
================= ================= =================
</TABLE>
Income tax effects of significant items which resulted in effective tax rates of
36.6% in 1998, 36.1% in 1997, and 36.8% in 1996 follow:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Federal income taxes at 35% statutory rate $ 70,307 $ 55,429 $ 56,766
Increase (decrease) resulting from:
Amortization of investment tax credits (2,139) (2,275) (2,378)
State income taxes, net of federal income
tax benefit 1,728 1,654 958
Excess tax provided on foreign income 4,408 3,624 3,303
Other, net (847) (1,313) 957
---------------- ---------------- -----------------
Total income taxes $ 73,457 $ 57,119 $ 59,606
================ ================ =================
</TABLE>
The excess tax on foreign income represents differences due to higher foreign
tax rates and foreign tax credits not benefited.
-30-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The December 31, 1998 and
1997 net deferred income tax liabilities of $437,693 and $494,871 shown in the
accompanying consolidated balance sheet are composed of $476,933 and $515,207 in
deferred tax liabilities and deferred investment tax credits of $15,398 and
$17,904, partially offset by $54,638 and $38,240 in deferred tax assets,
respectively. These deferred income tax assets and (liabilities) result from the
following temporary differences:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Excess of tax over book depreciation $ (442,169) $ (480,024)
Other (34,764) (35,183)
----------------- ----------------
Gross liabilities (476,933) (515,207)
Expenses per books not yet deductible for tax 31,326 16,036
Other 23,312 22,204
----------------- ----------------
Gross assets 54,638 38,240
Deferred investment tax credits (15,398) (17,904)
----------------- ----------------
Net deferred income tax liability $ (437,693) $ (494,871)
================= ================
</TABLE>
The above assets exclude certain state deferred income tax assets related to
loss carryforwards (which expire over the next ten years) in the gross amount of
$5,200 at December 31, 1998 and $7,200 at December 31, 1997.
9. Contingencies
The Company and its subsidiaries have been named as defendants in a number of
lawsuits and certain claims are pending. The Company has accrued what it
reasonably expects to pay to resolve such claims, and, in the opinion of
management, their ultimate resolution will not have a material effect on the
Company's consolidated financial position or results of operations.
As part of its risk management plan, the Company self-insures certain levels of
its property damage, general liability and products liability exposures, as well
as certain workers' compensation liabilities in states where it is authorized to
do so. The Company maintains no property damage insurance on its railcars. The
Company has accrued for the estimated costs of reported, as well as incurred but
not reported, self-insured claims. The Company reserves the full estimated value
of claims. It does not discount its claims liability.
The Company has certain environmental matters currently pending, none of which
are significant to the Company's results of operations or financial condition,
either individually or in the aggregate. See further discussion of such matters
under the "Environmental Matters" caption of Item 1 of this Form 10-K.
-31-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Pension Benefits
Substantially all of the Company's employees are covered by discretionary
contribution or defined benefit retirement plans.
Costs of the discretionary contribution pension plans are accrued in amounts
determined on the basis of percentages, generally established annually by the
Company, of employee compensation of the various units covered by such plans.
The contributions are funded as accrued. Discretionary and defined contribution
plan expense for 1998, 1997 and 1996 was $8,175, $6,830 and $6,269,
respectively.
As of December 31, 1998, the Company's defined benefit plans either had their
benefits frozen or were terminated. The benefits are based on payment of a
specific amount, which varies by plan, for each year of service. The Company's
funding policy is to contribute the minimum amount required either by law or
union agreement. Contributions are intended to provide not only for benefits
attributed to service through the plans' termination dates, but also for those
expected to be earned in the future. Benefits are based on both years of service
and compensation. Defined benefit pension plan (income) expense was ($191),
($59) and $56 for 1998, 1997 and 1996, respectively. Accrued defined benefit
pension liability recognized in the consolidated balance sheet was $1,610 and
$2,344 at December 31, 1998 and 1997, respectively.
11. Retirement Health Care and Life Insurance Benefits
The Company provides limited health care and life insurance benefits for certain
retired employees. These benefits are subject to deductible and copayment
provisions, Medicare supplements and other limitations. At December 31, 1998 and
1997, the liability for postretirement health care and life insurance benefits
was $4,003 and $3,937 respectively, and was included in accrued liabilities in
the consolidated balance sheet.
Expense related to these benefits was $422, $333 and $363 in 1998, 1997, and
1996, respectively.
12. Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges represents the number of times that
interest expense, amortization of debt discount and the interest component of
rent expense were covered by income before income taxes and cumulative effect of
a change in accounting principle and such interest, amortization and the
interest component of rentals.
-32-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Summarized Financial Information of Procor Limited
Summarized consolidated financial information for the Company's wholly-owned
subsidiary, Procor Limited, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Balance Sheet:
Railcar lease fleet, net $ 165,270 $ 189,814
All other assets 170,214 215,403
Borrowed debt 94,409 121,009
All other liabilities 109,431 158,143
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statement of Income:
Services and net sales $ 115,791 $ 111,856 $ 122,669
Gross profit 41,088 39,292 38,574
Net income 21,707 18,377 15,951
</TABLE>
Services and net sales in 1998, 1997 and 1996 includes $23,497, $18,795 and
$21,982, respectively, representing the sale of railcars to Procor Limited's
parent.
14. Related Party Transactions
The following table sets forth the major related party transaction amounts
included in the consolidated financial statements.
<TABLE>
<CAPTION>
Interest Management Insurance
Income Expense Billed
----------------- ---------------- -----------------
<S> <C> <C> <C>
1998 $ 9,056 $ 4,435 $ 1,999
1997 9,350 4,415 2,222
1996 8,365 4,428 2,385
</TABLE>
-33-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company from time to time advances funds in excess of its current cash
requirements for domestic operations to MIC or MIC's subsidiaries on an
unsecured demand basis. Such advances, which bear interest principally at LIBOR
plus 1%, amounted to $110,481 and $170,550 at December 31, 1998 and 1997,
respectively.
Certain of the Company's Canadian operations and its affiliates enter into
intercompany loans utilizing their respective excess cash balances. These
advances between the Company and subsidiaries of MIC resulted in receivables of
$20,459 and $7,155 at December 31, 1998 and 1997, respectively, that are
included in advances to parent company.
An administrative services fee is paid to The Marmon Group, Inc. ("Marmon"), a
subsidiary of Holdings and an affiliate of MIC, for certain services provided by
Marmon's officers and employees including services with respect to accounting,
tax, finance, legal and related matters which Marmon provides to certain of
Holdings' divisions, subsidiaries and affiliates. Marmon provides these services
to the Company because it is considered more cost efficient to provide such
services in this manner.
The administrative services fee which Marmon charges to the Company and other
entities to which it provides services is determined in the following manner.
First, budgeted administrative expenses of Marmon for the twelve month period
following the date of computation (including wages, salaries and related
expenses, rent, utilities, travel expenses and other similar expenses, but
excluding extraordinary and non-recurring items) are multiplied by the average
of the following three percentages (each of which is given equal weight): (1)
the percent of the sales and services revenues of the Company to the total sales
and services revenues of all entities, including the Company, to which it
provides services; (2) the percent of the assets of the Company to the assets of
all entities, including the Company; and (3) the percent of the net income of
the Company to the net income of all entities, including the Company. In making
this computation, Marmon uses sales and services revenues and net income from
the beginning of the year to the approximate date of computation and assets at
that date.
Marmon takes the amount derived from this formula and applies discretion to
determine the final administrative services fee to be charged. The factors which
are considered include matters such as the following: any known operating
problems and risks that require or may require additional time to be devoted to
the Company by Marmon; significant expansion programs; significant contracts;
unusual tax or accounting matters; and the experience and length of service of
the Company's management.
Included in the preceding table as insurance billed are $1,128 in 1998, $896 in
1997 and $907 in 1996 for insurance premiums for coverage that was insured or
reinsured with an insurance company which the Company has been advised is
controlled by trusts for the benefit of an individual related by marriage to a
member of the Pritzker family.
During 1998, the Company purchased from an affiliate all of the capital stock of
a company that manufactures mobile railcar moving vehicles and provides contract
switching services to companies with on-site rail yards. The purchase price was
equal to the appraised value of approximately $60,000. Since the historical cost
of the net assets of the company acquired was less than the purchase price and
because the seller was a related party, a non-cash dividend of $41,339 was
recorded.
-34-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1986, the Company entered into a partnership with an affiliate for the
purpose of purchasing used railcars. The Company's investment as of December 31,
1998 and 1997 was $57,614 and $54,014, respectively, which represents 80%
ownership in this partnership. The minority partner's interest in the
partnership at December 31, 1998 and 1997 is $14,403 and $13,503, respectively,
which is included in accrued liabilities. The minority interest in income, $900,
$887 and $912 for the years ended December 31, 1998, 1997 and 1996,
respectively, is reflected in other income.
15. Derivative Financial Instruments
The Company's Canadian subsidiaries periodically enter into foreign currency
forward contracts to hedge against U.S. dollar exposures. Foreign currency
forward contracts, all with initial maturities of less than one year, amounted
to $3,365 and $1,500 at December 31, 1998 and 1997, respectively.
16. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
1998
Net sales and services revenues $ 195,614 $ 215,030 $ 222,579 $ 243,420
Cost of sales and services 122,805 140,925 143,555 161,253
---------------- ---------------- ---------------- -----------------
Gross profit 72,809 74,105 79,024 82,167
Net income $ 30,423 $ 27,476 $ 26,927 $ 42,595
================ ================ ================ =================
1997
Net sales and services revenues $ 185,916 $ 211,908 $ 213,076 $ 231,454
Cost of sales and services 120,185 144,786 145,247 158,882
---------------- ---------------- ---------------- -----------------
Gross profit 65,731 67,122 67,829 72,572
Net income $ 23,630 $ 24,402 $ 24,130 $ 29,088
================ ================ ================ =================
1996
Net sales and services revenues $ 148,687 $ 172,404 $ 173,228 $ 186,323
Cost of sales and services 85,227 107,405 107,563 117,938
---------------- ---------------- ---------------- -----------------
Gross profit 63,460 64,999 65,665 68,385
Net income $ 22,643 $ 29,541 $ 24,543 $ 25,856
================ ================ ================ =================
</TABLE>
-35-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Supplementary Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable $ 4,128 $ 1,419 $ (4,122)
Inventories (8,991) (5,923) 2,126
Prepaid expenses and deferred charges 2,773 (41) (5,652)
Accounts payable and accrued liabilities 1,028 4,679 25,854
---------------- ---------------- -----------------
$ (1,062) $ 134 $ 18,206
================ ================ =================
Cash paid during the year for:
Interest (net of amount capitalized) $ 73,140 $ 72,647 $ 72,178
Income taxes 54,855 54,233 53,974
</TABLE>
Unrealized foreign currency translation gains and losses, which are non-cash
items, are excluded from the change in advances to parent.
18. Industry Segment Information
The Company's industry and geographic data are found under the "Segment
Information" caption of Item 1 of this Form 10-K. The aforementioned data are an
integral part of the Notes to Consolidated Financial Statements.
-36-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
First Elected
Name Age Positions or Offices to Position
- ------------------------------- ----- ---------------------------------------- ---------------
<S> <C> <C> <C>
Kenneth P. Fischl 49 Manager - Tank Car Marketing
and Administration 1979
Vice President Fleet Management 1981
Vice President 1992
Executive Vice President and
General Manager Tank Car Division 1992
President Tank Car Division 1993
Director 1994
Mark J. Garrette 45 Vice President Tank Car Division 1994
Vice President and Senior Vice President 1994
and Controller, Tank Car Division
Robert C. Gluth 74 Director 1981
Executive Vice President 1981
and served as Treasurer between
February, 1986 and January, 1987
and since October, 1989
Robert A. Pritzker 72 Director 1981
President 1981
Robert W. Webb 59 General Counsel 1986
Secretary 1986
</TABLE>
-37-
<PAGE>
Kenneth P. Fischl
Mr. Fischl was elected as a Director in March, 1994, and appointed President of
the Tank Car Division in February, 1993. He was appointed a Vice President of
the Company and Executive Vice President and General Manager of the Tank Car
Division in July, 1992. He joined the Company in 1977 as a Market Analyst. Mr.
Fischl was promoted to Manager of Tank Car Marketing and Administration in 1979
and became Vice President of Fleet Management in 1981. He held this position
until assuming his current responsibilities. Mr. Fischl was appointed a Vice
President of The Marmon Group, Inc. ("Marmon") in May, 1998.
Mark J. Garrette
Mr. Garrette was appointed Senior Vice President and Controller of the Tank Car
Division and Vice President of the Company in August, 1994. He joined the Tank
Car Division as Vice President and Assistant Controller in May, 1994. Prior to
joining the Company, Mr. Garrette was a Division Vice President of AVX
Corporation, a manufacturer of electronic components.
Robert C. Gluth
Mr. Gluth is Executive Vice President and a Director of Marmon Industrial LLC
("MIC"), Vice President, Treasurer and a Director of Holdings, Executive Vice
President and Director of The Marmon Corporation ("TMC"), and Executive Vice
President and a Director of Marmon. Mr. Gluth is also Treasurer of each of TMC,
MIC and Marmon.
Robert A. Pritzker
Mr. Robert A. Pritzker is President and a Director of each of MIC, Holdings, TMC
and Marmon. Mr. Pritzker is also a director of Hyatt Corporation.
Robert W. Webb
Mr. Webb is Secretary and a Vice President of each of MIC, Holdings,TMC, and
Marmon.
There are no family relationships among the directors and executive officers of
the Company.
Directors and executive officers are elected for a term of one year, or until a
successor is appointed.
-38-
<PAGE>
Other Directorships
Mr. Robert A. Pritzker is a Director of Southern Peru Copper Corporation and
Acxiom Corporation. Otherwise, none of the members of the Company's Board of
Directors are members of the board of directors of companies with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934 or subject to the requirements of Section 15(d) of that Act or of a company
registered as an investment company under the Investment Company Act of 1940.
ITEM 11. EXECUTIVE COMPENSATION
Kenneth P. Fischl, Vice President, and Mark J. Garrette, Vice President, were
the only executive officers of the Company who in the year ended December 31,
1998, received salary and bonus in excess of $100,000 from the Company and its
subsidiaries for services in all capacities to the Company.
All other officers of the Company received their 1998 compensation from Marmon
and are primarily involved in the management of MIC and Marmon. The Company,
together with the other subsidiaries of MIC, have been required to pay Marmon a
portion of such compensation which is encompassed in the charge for certain
common services provided by Marmon to the Company and such other subsidiaries.
The amount of such charge has been determined pursuant to a formula based upon
the dollar value of revenues, earnings and assets. See Note 14 to the
consolidated financial statements included in Item 8 of this Form 10-K.
Directors of the Company do not receive any compensation in such capacity.
Shown below is the aggregate of all forms of compensation paid by the Company to
Mr. Fischl and Mr. Garrette:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation All Other
-----------------------------------------
Name and Principal Position Year Salary Bonus Compensation*
- ---------------------------------- ----------------------------------------- -----------------
<S> <C> <C> <C> <C>
Kenneth P. Fischl,
Director and Vice President of 1998 $ 336,800 $ 90,000 $ 41,600
the Company and President and 1997 267,000 72,000 31,500
General Manager of the Tank 1996 225,500 65,000 25,100
Car Division
Mark J. Garrette,
Vice President of the Company 1998 171,700 35,000 20,200
and Senior Vice President of the 1997 164,400 32,000 18,300
Tank Car Division 1996 156,100 29,000 16,000
</TABLE>
* Represents the aggregate amounts of Company contributions to defined
contribution plans on behalf of each of the named individuals.
-39-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MIC, a Delaware single member limited liability company having its principal
executive offices at 225 West Washington Street, Chicago, Illinois, owns 1,000
shares, or 100% of the Company's issued and outstanding common stock. MIC is a
subsidiary of Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 14 to the consolidated financial statements included in Item 8 of this
Form 10-K for a description of certain related party transactions.
-40-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
a) 1. Financial Statements -
Consolidated statement of income for each of the three years
in the period ended December 31, 1998................................... 18
Consolidated balance sheet - December 31, 1998 and 1997................... 19
Consolidated statement of stockholder's equity for each of
the three years in the period ended December 31, 1998................... 20
Consolidated statement of cash flows for each of the three
years in the period ended December 31, 1998............................. 21
Notes to consolidated financial statements................................ 22
2. Schedules
Financial statement schedules are not submitted because they are not
applicable or because the required information is included in the
financial statements or notes thereto.
3. Index to Exhibits............................................................. 43
</TABLE>
b) Reports on Form 8-K
On November 16, 1998, the Company filed a report on Form 8-K
disclosing that on September 10, 1998 the Company had entered into a
Selling Agency Agreement with Salomon Smith Barney Inc. and Morgan
Stanley & Co. Incorporated relating to the issuance and sale by the
Company of up to $70 million principal amount of Medium-Term Notes,
Series C.
-41-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:
UNION TANK CAR COMPANY
(Registrant)
By: /s/ Robert C. Gluth
--------------------------
Robert C. Gluth
Executive Vice President,
Director and Treasurer
Dated: March 8, 1999
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 Title Date
- ------------------------ ------------------------------- ----------------
/s/ Robert A. Pritzker President and Director March 8, 1999
- ------------------------
Robert A. Pritzker (principal executive officer)
/s/ Robert C. Gluth Executive Vice President, March 8, 1999
- ------------------------
Robert C. Gluth Director and Treasurer
(principal financial officer
and principal accounting
officer)
/s/ Kenneth P. Fischl Director and President, Tank March 8, 1999
- ------------------------
Kenneth P. Fischl Car Division
-42-
<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
ITEM 14 (a)(3)
Exhibit 3 Articles of incorporation and by-laws
3(a) Restated Certificate of Incorporation of
the Company, as filed with the
Secretary of State of Delaware on
September 2, 1982 (which was filed as
Exhibit 3(a) to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 1982, and is incorporated
herein by reference)
3(b) By-Laws of the Company, as adopted
November 25, 1987 (which was filed as
Exhibit 3(b) to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 1988, and is incorporated
herein by reference)
Exhibit 12 Statements re computation of ratios
The computation of the Ratio of Earnings
to Fixed Charges (summarized in Note 12
to the consolidated financial statements)........... 44
Exhibit 21 Subsidiaries of the registrant....................... 45
Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors... 46
Exhibit 27 Financial Data Schedule (submitted with the electronic
filing of this document)
Instruments defining the rights of holders of long-term debt are not being filed
herewith pursuant to the provisions of paragraph 4(iii) of Item 601(b) of
Regulation S-K. The Company agrees to furnish a copy of any such instrument to
the Commission upon request.
-43-
<PAGE>
Exhibit 12
UNION TANK CAR COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Line For the year ended December 31,
---------------------------------------------
Number 1998 1997 1996 1995 1994
------ ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income Available for
Fixed Charges:
- ------------------------
Income from continuing
operations 1 $127,421 $101,250 $102,583 $84,465 $ 63,378
Provision for federal income
taxes and foreign taxes 2 70,948 55,038 58,398 44,975 38,435
Provision for state income
taxes 3 2,509 2,081 1,208 1,053 1,706
Fixed charges (line 8) 4 89,966 91,102 88,215 92,764 98,807
-------- -------- -------- ------- --------
Income available for fixed
charges 5 $290,844 $249,471 $250,404 $223,257 $202,326
======== ======== ======== ======== ========
Fixed Charges:
- ------------------------
Interest expenses
(including amortization
of debt discount) as
shown on the
consolidated statement
of income 6 $ 71,131 $ 75,356 $ 72,138 $ 81,179 $ 91,442
Add interest portion of
rent expense 7 18,835 15,746 16,077 11,585 7,365
-------- -------- -------- -------- --------
Total fixed
charges 8 $ 89,966 $ 91,102 $ 88,215 $ 92,764 $ 98,807
======== ======== ======== ======== ========
Number of times fixed
charges were earned
(line 5/line 8) 3.23 x 2.74 x 2.84 x 2.41 x 2.05 x
======== ======== ======== ======== ========
</TABLE>
-44-
<PAGE>
Exhibit 21
UNION TANK CAR COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
as of December 31, 1998
Jurisdiction Under
Which Organized
---------------
Atlas Bolt & Screw Company Delaware
Atlas Bolt & Screw Company of Canada (1995) Ltd. Canada
Deerwood Fasteners International, Inc. North Carolina
Enersul Holdings Inc. Alberta
Enersul Inc. Alberta
E. S. Investments Inc. Alberta
The Marmon Group of Canada Ltd. Canada
McKenzie Valve & Machining Company Delaware
Procor Alberta Inc. Alberta
Procor LPG Storage Inc. Alberta
Procor Limited Canada
Procor Sulphur Services Inc. Alberta
Rail Car Associates Limited Partnership Illinois
Railserve, Inc. Delaware
Railserve Inc. Canada
Robertson Inc. Canada
Tiger Industries (1997) Inc. Alberta
Tiger-Sunbelt Industries, Inc. Delaware
Trackmobile, Inc. Georgia
Trans Union Fastener Corporation Delaware
Uni-Form Components Co. Delaware
Union Tank Car Rail Services Company Delaware
All subsidiaries listed above are wholly-owned, except for Rail Car Associates
Limited Partnership of which the Company is the general partner and has an 80%
ownership interest, and are included in the consolidated financial statements
incorporated herein.
-45-
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-45105) of Union Tank Car Company and in the related Prospectus and
Prospectus Supplement of our report dated March 8, 1999 with respect to the
consolidated financial statements of Union Tank Car Company included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Chicago, Illinois
March 18, 1999
-46-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1998, AND THE NOTES THERETO, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 58,423
<SECURITIES> 0
<RECEIVABLES> 86,850
<ALLOWANCES> 4,121
<INVENTORY> 90,123
<CURRENT-ASSETS> 0<F1>
<PP&E> 3,161,091
<DEPRECIATION> 1,409,022
<TOTAL-ASSETS> 2,212,175
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 868,421
0
0
<COMMON> 106,689
<OTHER-SE> 526,393
<TOTAL-LIABILITY-AND-EQUITY> 2,212,175
<SALES> 296,551
<TOTAL-REVENUES> 904,218<F2>
<CGS> 248,258
<TOTAL-COSTS> 568,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,131
<INCOME-PRETAX> 200,878
<INCOME-TAX> 73,457
<INCOME-CONTINUING> 127,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,421
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0
<FN>
<F1>The Company issues financial statements utilizing a non-classified balance
sheet.
<F2>The Company's revenues are derived primarily from railcar leasing.
<F3>The Company is a wholly-owned subsidiary.
</FN>
</TABLE>
