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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-54754
General American Transportation Corporation
Incorporated in the IRS Employer Identification Number
State of New York 36-2827991
500 West Monroe Street
Chicago, Illinois 60661-3676
(312) 621-6200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorte period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Registrant had 1,000 shares of common stock outstanding (all owned by GATX
Corporation) as of March 6, 1998.
General American Transportation Corporation meets the conditions set forth
in General Instruction J(1) of Form 10-K and, therefore, is filing this form
with the reduced disclosure format.
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<PAGE>
PART I
Item 1. Business
General American Transportation Corporation (GATC) is a wholly-owned subsidiary
of GATX Corporation (GATX) and is engaged in the leasing and management of
railroad tank cars and specialized freight cars and through a wholly-owned
subsidiary owns and operates tank storage terminals, pipelines and related
facilities.
Industry Segments
Railcar Leasing and Management
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The Railcar Leasing and Management segment (Transportation), headquartered in
Chicago, Illinois, is principally engaged in leasing specialized railcars,
primarily tank cars, under full service leases. As of December 31, 1997, its
North American fleet consisted of approximately 81,100 railcars, including
62,900 tank cars and 18,200 specialized freight cars, including conventional and
Airslide(TM) covered hopper cars. In addition to roughly 70,700 railcars in the
United States, Transportation has approximately 9,200 railcars in its Canadian
fleet and 1,200 railcars in its Mexican fleet. Transportation has upgraded its
fleet over time by adding new larger capacity cars and retiring older smaller
capacity cars. Transportation's railcars have a useful life of approximately 30
to 33 years. The average age of the railcars in Transportation's fleet is
approximately 16 years.
The following table sets forth the car types comprising Transportation's North
American fleet.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Tank cars 62,900 60,400 53,900 50,700 48,000
Freight, covered hopper,
and plastic pellet cars 18,200 17,100 11,000 9,100 7,800
------ ------ ------ ------- -------
North American fleet 81,100 77,500 64,900 59,800 55,800
====== ====== ====== ====== ======
</TABLE>
In addition to the North American fleet, Transportation's investments in
affiliates result in ownership interests in other fleets. During 1997
Transportation purchased a 40% interest in KVG Kesselwaggon Vermietgesellschaft
mbH ("KVG"), a German and Austrian-based tank car and specialty railcar leasing
company that owns and operates approximately 9,400 railcars in Europe, to
complement its existing 12-1/2% interest in European-based AAE Cargo.
Transportation's customers use its railcars to ship over 700 different
commodities, primarily chemicals, petroleum, and food products. For 1997,
approximately 51% of railcar leasing revenue was attributable to shipments of
chemical products, 20% to petroleum products, and 16% to food products. Many of
these products require cars with special features; Transportation offers a wide
variety of sizes and types of cars to meet these needs. Transportation leases
railcars to over 700 customers, including major chemical, oil, food and
agricultural companies. No single customer accounts for more than 4% of total
railcar leasing revenue.
Transportation typically leases new railcars to its customers for a term of five
years or longer, whereas renewals or leases of existing cars are typically for
periods ranging from less than a year to seven years with an average lease term
of about three years. The utilization rate of Transportation's railcars as of
December 31, 1997 was approximately 96%.
Under its full service leases, Transportation maintains and services its
railcars, pays ad valorem taxes, and provides many ancillary services. Through
its GATX Conductor web site, for example, Transportation provides customers with
timely analysis and performance statistics about their leased cars to enhance
and maximize the utilization of this equipment. Transportation also maintains a
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network of major service centers consisting of four domestic, three Canadian and
one Mexican facility. To supplement the eight major service centers,
Transportation utilizes a fleet of mobile trucks and also utilizes independent
third-party repair shops.
Transportation purchases most of its new railcars from Trinity Industries, Inc.
(Trinity), a Dallas-based metal products manufacturer, under a contract entered
into in 1984 and extended from time to time thereafter, most recently in 1992.
Transportation anticipates that through this contract it will continue to be
able to satisfy its customers' new car lease requirements. Transportation's
engineering staff provides Trinity with design criteria and equipment
specifications, and works with Trinity's engineers to develop new technology
where needed in order to upgrade or improve car performance or in response to
regulatory requirements.
The full-service railcar leasing industry is comprised of Transportation, Union
Tank Car Company, General Electric Railcar Services Corporation, Shippers Car
Line division of ACF Industries, Incorporated, Procor Limited, and many smaller
companies. Of the approximately 218,000 tank cars owned and leased in the United
States at December 31, 1997, Transportation had approximately 57,000. Principal
competitive factors include price, service and availability.
Terminals and Pipelines
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GATX Terminals Corporation (Terminals) is engaged in the storage, handling and
intermodal transfer of petroleum and chemical commodities at key points in the
bulk liquid distribution chain. All of its terminals are located near major
distribution and transportation points and most are capable of receiving and
shipping bulk liquids by ship, rail, barge and truck. Many of the terminals also
are linked with major interstate pipelines. In addition to storing, handling and
transferring bulk liquids, Terminals provides blending and testing services at
most of its facilities. Terminals, headquartered in Chicago, Illinois, owns and
operates 23 terminals in 10 states, and seven terminals in the United Kingdom.
Terminals also has joint venture interests in 14 international facilities.
Additionally, Terminals owns or holds interests in four refined product pipeline
systems.
As of December 31, 1997, Terminals had a total storage capacity of 68 million
barrels. This includes 48 million barrels of bulk liquid storage capacity in the
United States, 8 million barrels in the United Kingdom, and an equity interest
in another 12 million barrels of storage capacity in Europe, Mexico and the Far
East. Terminals' smallest bulk liquid facility has a storage capacity of 95,000
barrels while its largest facility, located in Pasadena, Texas, has a capacity
of over 12 million barrels. Capacity utilization at Terminals' wholly-owned
facilities averaged 91% during 1997; throughput, or deliveries to customers, for
the year was 639 million barrels.
In 1997, a strategic decision was made to sell or close the Staten Island
terminal and the seven storage facilities which make up GATX Terminals Limited
in the United Kingdom. The decision included analyses of the related customer
base, industry served, and profitability outlook related to each facility. The
Staten Island terminal serves the petroleum market while the United Kingdom
facilities serve both the petroleum and chemical markets in approximately the
same proportion. Other smaller facilities are also being evaluated for possible
sale or closure.
For 1997, 54% of Terminals' revenue was derived from petroleum storage, 23% from
chemical storage, 22% from pipelines, and 1% from other products. Demand for
Terminals' facilities depends in part upon demand for petroleum and chemical
products and is also affected by refinery output, foreign imports, availability
of other storage facilities, and the expansion of its customers into new
geographical markets.
Terminals serves over 450 customers, including major oil and chemical companies
as well as trading firms and larger independent refiners. No single customer
accounts for more than 6% of Terminals' revenue. Customer service contracts are
both short term and long term.
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Terminals along with two Dutch companies, Pakhoed N.V. and Van Ommeren N.V., are
the three major international public terminaling companies. Pakhoed carries out
its operations under the name of Paktank. On March 2, 1998, Pakhoed and Van
Ommeren announced a proposed merger (VOPAK), subject to approval by the European
Commission.) The domestic public terminaling industry consists of Terminals,
Paktank Corporation, International-Matex Tank Terminals (a joint venture in
which Van Ommeren participates), and many smaller independent terminaling
companies. In addition to public terminaling companies, oil and chemical
companies also have significant storage capacity and compete with Terminals in a
number of markets. Terminals' pipelines compete with rail, trucks and other
pipelines for movement of liquid petroleum products. Principal competitive
factors include price, location relative to distribution facilities, and
service.
Customer Base
GATC and its subsidiaries are not dependent upon a single customer or a few
customers. The loss of any one customer would not have a material adverse effect
on any segment or GATC as a whole.
Employees
GATC and its subsidiaries have approximately 1,800 active employees, of whom 35%
are hourly employees covered by union contracts.
Item 2. Properties
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Information regarding the location and general character of certain properties
of GATC is included in Item 1, Business, of this document. The major portion of
Terminals' land is owned; the balance, including some of its dock facilities, is
leased.
Item 3. Legal Proceedings
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A Final Judgment has been entered by the U.S. District Court for the Northern
District of Illinois in favor of General American Transportation Corporation
("GATC") in the previously reported matter of General American Transportation
Corporation v. Cryo-Trans, Incorporated (Case No. 91 C 1305), a case involving
an alleged patent infringement by GATC in the construction and use of its
ArcticarTM cryogenically cooled railcar. A Petition for Writ of Certiorari filed
on behalf of Cryo-Trans, Incorporated was denied by the United States Supreme
Court.
Various lawsuits have been filed in the Superior Court for the State of
California, County of San Bernardino, and served upon GATX Terminals Corporation
("GTC"), Calnev Pipe Line Company, or another GATC subsidiary seeking an
unspecified amount of damages arising out of the May 1989 explosion in San
Bernardino, California. All of those suits have all been resolved except for:
Aguilar, et al, v. Calnev Pipe Line Company, et al filed February 1990 in the
County of Los Angeles (No. 0751026); Pearson v. Calnev Pipe Line Company, et al,
filed May 1990 in the County of San Bernadino (No. 256206); and Davis v. Calnev
Pipe Line Company, et al, filed May 1990 (No. 256207). As GTC's insurance
carriers have assumed the defense of these lawsuits without a reservation of
rights and have paid all of the settlements entered into between the parties to
date, GATC believes that the likelihood of a material adverse effect on GATC's
consolidated financial position or results of operations is remote.
In September 1997, judgment was entered against General American Transportation
Corporation ("GATC"), its wholly owned subsidiary, GATX Terminals Corporation
("GTC") and seven other defendants not related to GATC for compensatory damages
of approximately $1.9 million plus interest from the date of the incident to
twenty individuals in a class action suit filed in the Civil District Court for
the Parish of New Orleans, Louisiana, In Re New Orleans Train Car Leakage Fire
Incident (No. 87-16374). The judgment allocated responsibility for twenty
percent of the compensatory damages to GATC and ten percent to GTC. The judgment
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also provided for punitive damages of $3.4 billion in the aggregate against five
of the nine named defendants, including $190 million against GTC. The litigation
arose out of an incident which began on September 9, 1987, when butadiene leaked
from a tank car owned by GATC and caught fire. The incident resulted in no
deaths or significant injuries and only minimal property damage, but caused the
overnight evacuation of a number of residents from the immediate area.
On October 31, 1997, the Louisiana Supreme Court ruled that the trial Court
erred in rendering a judgment awarding damages prior to rendering a judgment
adjudicating all liability issues in the case. Accordingly, it vacated the trial
Court's September 1997 judgment which had awarded both compensatory and punitive
damages, and remanded the case back to the trial Court for further proceedings
not inconsistent with its ruling. The plaintiffs have filed a motion asking that
the trial Court refrain from signing a judgment until all remaining 8,000 claims
are tried. The defendants have filed motions asking the Court (1) to enter a
judgment on liability as to compensatory damages and as to the conduct of the
defendants giving rise to punitive damages, and (2) to vacate the verdict
awarding punitive damages. If a judgment is entered as suggested by the
defendants, the Company will be in a position to seek appropriate judicial
review of the liability determinations made to date and of the finding as to the
conduct on which punitive damages were based. The Company will evaluate any
further ruling of the trial Court, and if appropriate ask the Court for post
judgment relief. If necessary, the Company will appeal any judgment against it.
Although more than 8,000 claims have been made, the Company believes that the
damages, if any, that may be awarded to the remaining claimants should average
substantially less than those awarded to the initial twenty plaintiffs. The
Company also believe that the award of compensatory damages to the twenty
plaintiffs was excessive, and that the punitive damages judgment as to GTC was
unwarranted and excessive.
GATC and its subsidiaries are engaged in various matters of litigation including
but not limited to those matters described above, and have a number of
unresolved claims pending, including proceedings under governmental laws and
regulations related to environmental matters. While the amounts claimed are
substantial and the ultimate liability with respect to such litigation and
claims cannot be determined at this time, it is the opinion of management that
damages, if any, required to be paid by GATC and its subsidiaries in the
discharge of such liability are not likely to be material to GATC's consolidated
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
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Not required.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
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GATX Corporation owns all of the outstanding common stock of GATC.
Item 6. Selected Financial Data
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Not required.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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1997 RESULTS OF OPERATIONS COMPARED TO 1996
OVERVIEW GATC on a consolidated basis reported a net loss of $41 million, after
restructuring charges, for 1997 compared to net income of $80 million for 1996.
Before the restructuring charge, GATC's income for 1997 was $83 million:
1997 1996
---- ----
Income before restructuring $ 82.6 $80.3
Restructuring (123.8) -
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Net (loss) income $ (41.2) $80.3
======== =====
Terminals recorded a $123.8 million after-tax charge in the fourth quarter of
1997. The changed market environment which Terminals serves required aggressive
action to revitalize operations and includes the sale or closure of the Staten
Island terminal as well as seven terminals in the United Kingdom. Additionally,
adjustments were made to the carrying costs of other smaller facilities.
Aside from the restructuring charge, the comparison of 1997 to 1996 is
influenced by Transportation's mid-1996 acquisition of the remaining 55%
interest in CGTX, whereupon this Canadian railcar company became a wholly-owned
subsidiary, with all financial results fully consolidated. Prior to the
acquisition, Transportation's non-controlling 45% interest had been accounted
for as an investment in an affiliate.
GROSS INCOME Consolidated gross income for 1997 of $799 million exceeded 1996
revenue of $754 million by 6%.
Transportation's gross income of $477 million increased by $49 million from
1996. The full year effect of the mid-1996 CGTX acquisition accounted for $28
million of the revenue increase with the balance attributable to a larger U.S.
fleet and improved rental rates. Railcar additions continued to be strong in
1997 with 4,800 cars added to the North American fleet. Of the total North
American fleet of 81,100 cars, about 78,000 were on lease at year end, for a
utilization of 96%, up from 95% at the end of 1996. Fleet additions in 1998 are
expected to remain strong. In addition to the North American fleet, during 1997
Transportation purchased a 40% interest in KVG Kesselwaggon Vermietgesellschaft
mbH ("KVG"), a German and Austrian-based tank car and specialty railcar leasing
company that owns and manages approximately 9,400 railcars in Europe.
Terminals' gross income for 1997 of $293 million was 2% less than 1996 primarily
due to the continued softness in both the domestic and international petroleum
markets. In general, the petroleum market was characterized by competitive
pricing pressures as refineries continued to produce on a just-in-time basis
thereby reducing the demand for storage. Gross income related to services
provided to the chemical market remained steady with 1996 while pipeline
revenues improved slightly.
Terminals' pipelines serve the growing Nevada and Florida markets.
While Terminals' throughput of petroleum products remained strong, rates further
declined from the 1996 levels. Throughput for 1997, defined as barrels delivered
to customers, of 639 million barrels at wholly-owned locations remained steady
with 1996. Average storage utilization for the year was 91%, an improvement from
86% last year.
COSTS AND EXPENSES Operating expenses in 1997 increased $11 million or 3% over
1996. Transportation's operating expenses of $192 million increased $15 million
over 1996 as a result of increased operating lease expense, as well as increased
fleet repair costs due to the expanded fleet size, including CGTX railcars.
Transportation continued to utilize sale- leasebacks to finance its railcar
additions, though for the first time in 1997, the financing was structured as
nonrecourse to GATC; prior sale-leasebacks were recourse to GATC. The leaseback
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is recorded as an operating lease which removes the asset and related liability
from the balance sheet; the payments under the operating leases are recorded as
operating lease expense. Fleet repair costs increased 7% due to the expanded
fleet size and full year consolidation of CGTX, but decreased as a percentage of
revenue from 1996 due, in part, to the mix of cars and the types of repairs
completed. Terminals' 1997 operating expenses of $149 million were $5 million
lower than 1996, in part reflecting certain nonrecurring expenses related to
last year.
Interest expense increased $9 million in 1997 to $118 million as the result of
higher average debt balances to fund the growth of the business. Interest
expense at Transportation increased due to the CGTX acquisition and growth of
the U.S. fleet. Interest expense increased at Terminals as the result of the
full year impact of the additional debt incurred to finance maintenance,
regulatory, business development and environmental expenditures in 1996.
Business development in 1996 included completing the Central Florida Pipeline
expansion. Environmental and maintenance spending continue to be significant in
keeping with GATC's commitment to improve terminaling assets and to operate its
facilities in an environmentally responsible manner.
The company continues to utilize interest rate swaps to better match the
duration of the debt portfolio to the terms of the railcar leases. The effect of
the swaps was to reduce interest expense in 1997 and 1996.
The provision for depreciation and amortization increased $14 million from 1996.
Depreciation expense increased as a result of the continued growth in assets and
the full year consolidation of CGTX.
Selling, general and administrative expenses of $77 million increased $8 million
from 1996 due to increased employee costs, information systems initiatives, and
consulting expenses, as well as the consolidation of CGTX.
Income tax expense of $41 million before the restructuring charge was at about
the same level as for 1996. The effective tax rate before the charge was 38% for
1997 compared to 39% for 1996. The effective tax rate for both years was higher
than the 35% federal statutory rate because of state taxes, foreign income, and
nondeductible items.
EQUITY IN NET EARNINGS OF AFFILIATED COMPANIES of $14 million in 1997 decreased
$1 million from the prior year primarily because CGTX was no longer accounted
for as an affiliate in 1997, offset in part by increased equity earnings at
Terminals. Transportation recorded $3 million of equity earnings for CGTX in the
first half of 1996, prior to it becoming fully consolidated. Transportation's
European railcar joint ventures, AAE and the newly-acquired KVG, added $1
million compared to 1996. Terminals' nine joint ventures produced $13 million of
equity earnings in 1997, a $1 million increase from 1996. European chemical
market partnerships showed improved results. Asian results approximated last
year, with improvement in the chemical market offset by foreign exchange rate
variances.
EARNINGS Consolidated GATC earnings of about $83 million before restructuring
charges increased $3 million from 1996.
Transportation's net income of $74 million increased by 10% over 1996,
reflecting higher revenues and the full year impact of CGTX, partially offset by
higher repair costs and other operating and asset ownership expenses. Operating
margin improved by 14% as the growth in revenues exceeded the increase in repair
costs.
Terminals' net loss for 1997 was $116 million, including the effects of a $124
million after-tax restructuring charge. On an operating basis, Terminals' 1997
income of $8 million declined from last year's $13 million. The difficult
petroleum market conditions resulted in a 4% decrease in operating margin from
last year. Overall operating costs and SG&A expenses decreased by 1% from 1996.
Fixed asset ownership costs, which include interest and depreciation, increased
to 38% of revenue from 35% last year primarily due to the full year impact of
significant facility and infrastructure investments made in 1996.
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During the fourth quarter of 1997, Terminals recorded an after-tax provision of
$124 million reflecting the results of a strategic review. Initial steps were
taken to sell or close certain locations including the Staten Island terminal
and seven storage facilities which make up GATX Terminals Limited in the United
Kingdom. Additionally, adjustments were made to the carrying cost of certain
other locations where conditions indicated that asset values were impaired.
1996 RESULTS OF OPERATIONS COMPARED TO 1995
GATC on a consolidated basis reported net income of $80 million for 1996
compared to $94 million in 1995. The decrease was due to sharply lower earnings
at Terminals, offset in part by record earnings at Transportation. Terminals'
results were down primarily as the result of historically low petroleum
inventory levels and lower pricing due to increased competition. Transportation
benefited from a record number of railcars on lease and the mid-1996 acquisition
of the remaining interest in CGTX, Transportation's Canadian railcar affiliate.
Consolidated gross income for 1996 of $754 million exceeded 1995 revenue of $703
million. Transportation's gross income of $428 million increased $67 million
from 1995. The acquisition of the remaining 55% interest in CGTX accounted for
$27 million of the increase. The remainder of the revenue increase is due to the
full year effect of a record number of railcar additions in 1995, another strong
year of fleet additions in 1996, and an increase in average rental rates. In
addition to the 8,700 cars at CGTX, over 4,400 cars were added in 1996. At the
end of 1996, Transportation had 73,200 railcars on lease in North America. With
a total fleet of 77,500 cars, utilization ended the year at 95%, up from 94%
utilization at the end of 1995. Terminals' gross income for 1996 of $298 million
was 5% less than 1995 resulting from general softness in both the domestic and
international petroleum markets. The petroleum business environment since the
second half of 1995 has been characterized by backwardated markets, historically
low petroleum inventory levels, and lower pricing due to increased competition.
Backwardation indicates that the economics in the petroleum futures market, as
characterized by the spread between spot and future prices, are not providing an
incentive to store product. While throughput of petroleum products remained
strong, rates declined. Throughput for 1996 of 634 million barrels at
wholly-owned locations increased 5% from 602 million barrels last year. Average
utilization for the year was 86%, down from 1995's average of 88%, though 1996
year-end utilization was 89%. Balanced against the difficult petroleum
terminaling markets were continued steady chemical demand as well as good
pipeline results. Terminals' pipelines serve the growing Nevada and Florida
markets, and those pipelines continue to be enhanced and expanded.
Operating expenses in 1996 increased $18 million or 6% over 1995.
Transportation's operating expenses of $177 million increased $29 million over
1995 as a result of increased operating lease expense, as well as increased
fleet repair costs due to the expanded fleet size, including the newly-acquired
CGTX railcars. Fleet repair costs increased 10% due to the expanded fleet size,
but decreased as a percentage of revenue from 1995, in part due to the
efficiencies from the major service center upgrade program completed last year.
The percentage of cars repaired at Transportation's service centers increased to
71% from 65% last year, indicating a decreased dependence on outside contract
repair shops. Throughput days, the time it takes a railcar to be repaired
through the Transportation service center network, declined from an average
of 38 days in 1995 to 32 days in 1996. Terminals' 1996 operating expenses of
$153 million were $11 million lower than 1995, in part reflecting its reduced
gross income.
Interest expense increased $16 million in 1996 to $109 million as the result of
higher average debt balances to fund the growth of the business. Interest
expense at Transportation increased primarily due to the CGTX acquisition.
Interest expense grew at Terminals to finance maintenance, regulatory and
environmental expenditures, as well as the expansion of CFPL and the acquisition
of a 65% interest in an existing terminal in Mexico. Environmental and
maintenance spending were significant in keeping with GATC's commitment to
improve terminaling assets and to operate its facilities in an environmentally
responsible manner. The company's use of interest rate swaps resulted in
reduced interest expense in 1996 and 1995. The provision for depreciation and
amortization increased $17 million from 1995 also as a result of the continued
growth in assets, including the acquisition and consolidation of CGTX.
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Selling, general and administrative expenses of $69 million increased $14
million from 1995 due to increased employee costs, information systems
initiatives, and consulting expenses, as well as the consolidation of CGTX's
operations for the second half of 1996 and Terminals' rationalization costs.
Income tax expense of $41 million decreased $6 million from 1995 as the result
of lower pretax income. The effective tax rate for both 1996 and 1995 was 39%.
The effective tax rate for both years was higher than the statutory rate
primarily because of state taxes, foreign income, and nondeductible items.
Equity in net earnings of affiliated companies of $15 million decreased $5
million from 1995. Transportation's equity in net earnings of affiliates
decreased due to CGTX being fully consolidated starting in July 1996; for 1995
and the first half of 1996, Transportation accounted for their 45% interest
under the equity method. Terminals' equity in earnings of affiliates decreased
$3 million from 1995 primarily from the effects of lower petroleum storage,
particularly in Singapore, partially offset by higher earnings form a Japanese
affiliate which completed its rebuilding from the 1995 Kobe earthquake.
Consolidated net income of $80 million in 1996 decreased $14 million from 1995.
Transportation's net income of $68 million increased 8% over 1995, reflecting
the higher revenues and the impact of CGTX partially offset by higher repair
costs and other operating and ownership expenses. Operating margins improved
slightly as growth in revenues exceeded the increase in fleet repair costs and
SG&A expenses.
Terminals' net income of $13 million in 1996 declined from the prior year's $31
million. The difficult petroleum terminaling markets resulted in decreased
operating margins at a number of key locations, including New York harbor,
United Kingdom, Houston, Los Angeles, and Singapore. Although Terminals has been
able to reduce its overall cost base, results have been impacted by
rationalization costs and consulting charges. Overall operating costs decreased
$5 million or 3% from 1995. Fixed asset ownership costs, which include
depreciation and interest, increased to 34% of revenue from 29% in 1995 due to
significant facility and infrastructure investments. Terminals' transformation
initiatives to address cost reduction and productivity enhancements led to
increased expense for consulting studies and rationalization costs.
ASSETS
Total assets at year end of $2.8 billion were $234 million lower than 1996
primarily due to asset revaluations at Terminals, depreciation and amortization,
sale-leaseback of railcars, and asset sales and retirements. Transportation
utilizes railcars which are financed through off-balance sheet operating leases
and, therefore, are not included on the balance sheet. Partially offsetting this
decrease is a continued strong level of capital spending.
Net operating lease assets and facilities decreased $240 million to $2.0
billion. Transportation's capital additions for 1997 were $337 million,
including almost $300 million for expanding the North American railcar fleet as
well as an investment in a 40% interest in KVG, a German railcar company.
Offsetting these additions were $167 million of railcar sale-leasebacks.
Transportation's additions totaled $387 million in 1996 including $84 million to
acquire the remaining interest in CGTX. Investments in the fleet remained
in-line with last year as 4,800 new and used cars were added to the fleet in
1997 versus over 4,400 in 1996. Terminals' asset revaluations represent a
majority of the $186 million pre-tax restructuring charge taken to write down
certain asset carrying values, primarily the Staten Island terminal and the
seven storage facilities which make up GATX Terminals Limited in the United
Kingdom. The written-down value of GATX Terminals Limited was reclassified as
assets held for disposition and is included in other assets. Terminals' capital
additions of $68 million decreased from $130 million in 1996 due to the changing
market conditions and last year's expenditures related to completing the Central
Florida Pipeline expansion.
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Investment in affiliates increased $11 million reflecting Transportation's
investment in KVG partially offset by the reclass of GATX Terminals Limited's
affiliates to other assets.
LIABILITIES AND EQUITY
Total debt decreased by $94 million as operating cash flow and the proceeds from
railcar sale-leasebacks were sufficient to fund capital additions and certain
debt maturities.
Consolidated equity decreased by $110 million attributable to the 1997 loss of
$41 million, inclusive of the $124 after-tax restructuring charge, and dividends
paid to GATX Corporation of $43 million. The balance of the change is
attributable to foreign currency translation adjustments.
LIQUIDITY AND CAPITAL RESOURCES
GATC generates significant cash flows from its operating activities. Most of its
capital requirements are considered discretionary and represent additions to the
railcar fleet, terminal and pipeline facilities, and joint ventures. The level
of discretionary capital spending can be adjusted as conditions in the economy
or GATC's businesses warrant. However, the nondiscretionary level of Terminals'
capital program continues to be significant due to regulatory and environmental
requirements of the terminaling business.
Cash provided by operating activities in 1997 of $245 million increased $14
million, or 6%, compared to 1996. Net income, adjusted for non-cash items
(provision for restructuring, depreciation, and deferred taxes) generated $259
million, a $22 million increase from last year.
Cash provided by operating activities in 1996 of $231 million increased $20
million, or 9%, compared to 1995. Net income, adjusted for non-cash items
(depreciation and deferred taxes) generated $237 million, a small increase from
1995.
Net cash used in investing activities for 1997 decreased by $151 million from
1996 as capital additions decreased by $111 million and proceeds from asset
dispositions, which includes sale-leaseback proceeds, increased by $40 million.
Transportation's capital additions for 1997 were $337 million, including almost
$300 million for expanding the North American railcar fleet as well as an
investment in a 40% interest in KVG, a German railcar company. Offsetting these
additions were railcar sale-leasebacks and asset dispositions. Sale-leaseback
proceeds were $167 million in 1997 compared to $150 million in 1996. 1997's
asset disposition activity included Terminals' sale of its Norco, Louisiana
facility and Transportation's sale and scrapping of over 1,000 railcars.
Transportation's additions totaled $387 million in 1996 including $84 million to
acquire the remaining interest in CGTX. Investments in the fleet remained
in-line with last year as 4,800 new and used cars were added to the fleet in
1997 versus over 4,400 in 1996. Terminals' capital additions of $68 million
decreased from $130 million in 1996 due to the changing market conditions as
well as last year's expenditures related to completing the Central Florida
Pipeline expansion. In total, Transportation's and Terminal's capital additions
for 1998 are expected to approximate the level of additions in 1997, though both
investments in the United States and foreign countries, and especially the
latter, are subject to significant change due to economic and other factors
beyond GATC's control.
Net cash used in investing activities for 1996 increased $61 million from 1995.
Capital additions decreased $25 million from 1996. Transportation invested
approximately $300 million in its North American fleet and $84 million to
acquire the remaining interest in CGTX. Terminals' capital additions of $130
million in 1996, 13% lower than in 1995, included the expansion of the Central
Florida Pipeline. Proceeds from asset dispositions of $185 million in 1996,
including $150 million of sale-leasebacks of certain railcars at Transportation,
declined $86 million from 1995.
-9-
<PAGE>
Net cash used in financing activities was $72 million in 1997 compared to cash
provided of $108 million in 1996. GATC finances its capital additions through
cash generated from operating activities, debt financings, and sale-leasebacks.
In 1997, operating cash flow and sale-leaseback proceeds provided a majority of
the funding for investing activities and long-term obligations.
Cash provided by financing activities was $108 million in 1996 compared to $58
million in 1995. During 1996, $280 million of long-term debt was issued and $101
million of long-term obligations was repaid.
GATC has a $300 million revolving credit facility that expires in 2001. GATC
also has a commercial paper program and uncommitted money market lines which are
used to fund operating needs. Under the covenants of the commercial paper
programs and rating agency guidelines, GATC must keep unused revolver capacity
at least equal to the amount of commercial paper outstanding. At December 31,
1997, GATC had $27 million of commercial paper outstanding, resulting in unused
committed lines of credit of $273 million. Also, GATC had $125 million of
borrowings under unsecured money market lines at December 31, 1997. CGTX had
other uncommitted short-term borrowings of $55 million Canadian dollars.
GATC has a $650 million shelf registration for pass through trust certificates
and debt securities of which $100 million of notes and $236 million of pass
through certificates have been issued at year end. At year end, GATC had $209
million of commitments to acquire assets, all of which are scheduled to fund in
1998.
ENVIRONMENTAL MATTERS
Certain operations of GATC and its subsidiaries (collectively GATC) present
potential environmental risks principally through the transportation or storage
of various commodities. Recognizing that some risk to the environment is
intrinsic to its operations, GATC is committed to protecting the environment, as
well as complying with applicable environmental protection laws and regulations.
GATC, as well as its competitors, is subject to extensive regulation under
federal, state and local environmental laws which have the effect of increasing
the costs and liabilities associated with the conduct of its operations. In
addition, GATC's foreign operations are subject to environmental regulations
in effect in each respective jurisdiction.
GATC's policy is to monitor and actively address environmental concerns in a
responsible manner. GATX has received notices from the U.S. Environmental
Protection Agency (EPA) that it is a potentially responsible party (PRP) for
study and clean-up costs at 12 sites under the requirements of the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(Superfund) and the National Resource Damage Assessment. Under Superfund and
comparable state laws, GATC may be required to share in the cost to clean-up
various contaminated sites identified by the EPA and other agencies. In all
instances, GATC is one of a number of financially responsible PRP's and has been
identified as contributing only a small percentage of the contamination at each
of the sites. Due to various factors such as the required level of remediation
and participation in clean-up efforts by others, GATC's total clean-up costs at
these sites cannot be predicted with certainty; however, GATC's best estimates
for remediation and restoration of these sites have been determined and are
included in its environmental reserves.
Future costs of environmental compliance are indeterminable due to unknowns such
as the magnitude of possible contamination, the timing and extent of the
corrective actions that may be required, the determination of the company's
liability in proportion to other responsible parties, and the extent to which
such costs are recoverable from third parties including insurers. Also, GATC may
incur additional costs relating to facilities and sites where past operations
followed practices and procedures that were considered acceptable at the time
but in the future may require investigation and/or remedial work to ensure
adequate protection to the environment under current or future standards. If
future laws and regulations contain more stringent requirements than presently
anticipated, expenditures may be higher than the estimates, forecasts, and
assessments of potential environmental costs provided below. However, these
costs are expected to be at least equal to the current level of expenditures. In
addition, GATC has provided indemnities for environmental issues to the buyers
of two divested companies for which GATC believes it has adequate reserves.
-10-
<PAGE>
GATC's environmental reserve at the end of 1997 was $60 million and reflects
GATC's best estimate of the cost to remediate known environmental conditions.
Additions to the reserve were $11 million in 1997 and $12 million in 1996.
Expenditures charged to the reserve amounted to $14 million and $18 million in
1997 and 1996, respectively.
In 1997, GATC made capital expenditures of $13 million for environmental and
regulatory compliance compared to $17 million in 1996. These projects included
marine vapor recovery systems, discharge prevention compliance, waste water
systems, impervious dikes, tank modifications for emissions control, and tank
car cleaning systems. Environmental projects authorized or currently under
consideration would require capital expenditures of approximately $14 million in
1998. GATC anticipates it will make annual expenditures at a similar level over
each of the next three years.
IMPACT OF YEAR 2000
GATC utilizes in-house developed software as well as vendor-produced software.
Certain computer software GATC uses was written using two digits rather than
four to define the applicable year. This software is time-sensitive, which could
cause a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
GATC has completed an assessment and has begun modifying and replacing its
in-house developed software as well as upgrading its vendor-supported software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. If these steps were not taken, or are not completed
timely, the Year 2000 Issue could have a significant impact on the operations of
the Company.
The project is estimated to be completed during 1999, which is prior to any
anticipated impact on its operating systems. The Company believes that with
modifications to existing software, upgrading vendor-supported software, and
conversions to new software, the Year 2000 Issue should not pose significant
operational problems. The total Year 2000 project cost is estimated to be
immaterial to GATC's results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements in the Management's Discussion and Analysis constitute
forward-looking statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. This information may involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. Although the company believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, unanticipated changes
in the markets served by GATC such as the petroleum, chemical, and rail
industries.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The response to this item is submitted under Item 14 (a)(1) of this report.
-11-
<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
- ------------------------------------------------------------
Not required.
Item 11. Executive Compensation
- --------------------------------
Not required.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Not required.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Not required.
PART IV
Item 14. Financial Statement Schedules, Reports on Form 8-K and Exhibits Page
- --------------------------------------------------------------------------------
(a) 1. Financial Statements
The consolidated financial statements of General American
Transportation Corporation and its subsidiaries which are
required in Item 8 are listed below:
Statements of Consolidated Operations and Reinvested Earnings--
years ended December 31, 1997, 1996 and 1995................... 17
Consolidated Balance Sheets--December 31, 1997 and 1996........ 18
Statements of Consolidated Cash Flows--
years ended December 31, 1997, 1996 and 1995................... 20
Notes to Consolidated Financial Statements..................... 21
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts............. 38
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(b) Report on Form 8-K - GATC filed a report on Form 8-K on
December 8, 1997, under Item 5., Other Events.
-12-
<PAGE>
(c) Exhibit Index
Exhibit
Number Exhibit Description Page
3A. Certificate of Incorporation of General American
Transportation Corporation, incorporated by reference to the
GATC Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, file number 2-54754.
3B. By-Laws of General American Transportation Corporation, as
amended and restated as of June 15, 1994, incorporated by
reference to the GATC Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, file number 2-54754.
4A. Indenture dated October 1, 1987, incorporated by reference to
Exhibit 4.1 to the GATC Registration Statement on Form S-3 filed
October 8, 1987, file number 33-17692; Indenture Supplement dated
May 15, 1988, incorporated by reference to the GATC Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988, file
number 2-54754. Second Supplemental Indenture dated as of
March 15, 1990, incorporated by reference to GATC Quarterly
Report on Form 10-Q for the quarter ended March 30, 1990, file
number 2-54754. Third Supplemental Indenture dated as of
June 15, 1990, incorporated by reference to GATC Quarterly Report
on Form 10-Q for the quarter ended June 30, 1990, file
number 2-54754. Fourth Supplemental Indenture dated as of
January 15, 1996 filed with the SEC on Current Report on Form 8-K
on January 26, 1996, file number 2-54754.
4B. General American Transportation Corporation Notices 5 and 6
dated March 28, 1988 and April 12, 1988 defining the rights of
holders of GATC's Medium-Term Notes Series A issued during
that period, incorporated by reference to the GATC Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988, file
number 2-54754.
4C. General American Transportation Corporation Notice 1 dated
October 17, 1988 and Notices 4 through 6 dated from November
7, 1988 through March 3, 1989 defining the rights of holders
of GATC's Medium-Term Notes Series B issued during those
periods, Notices 1 through 3 incorporated by reference to
the GATC Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, and Notices 4 through 6 incorporated
by reference to the GATC Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, file number 2-54754.
4D. General American Transportation Corporation Notices 3 through 5
dated from April 4, 1989 through May 16, 1989, Notice 7 dated
June 19, 1989 and Notice 12 dated July 21, 1989 defining the
rights of the holders of GATC's Medium-Term Notes Series C
issued during those periods. Notices 3 through 5 and Notice 7
is incorporated by reference to the GATC Quarterly Reports on
Form 10-Q for the quarter ended June 30, 1989 and Notice 12
incorporated by reference to the GATC Quarterly Report on Form
10-Q for the quarter ended September 30, 1989, file number
2-54754.
Exhibit
Number Exhibit Description Page
4E. General American Transportation Corporation Notice 1 dated
February 27, 1992, and Notices 7 and 10 dated May 18, 1993 and
May 25, 1993 defining the rights of the holders of GATC's
Medium-Term Notes Series D issued during those periods. Notice
1 is incorporated by reference to the GATC Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992, Notices 7 and
10 are incorporated by reference to the GATC Quarterly Report
on Form 10-Q for the quarter ending June 30, 1993, file number
2-54754.
-13-
<PAGE>
4F. General American Transportation Corporation Notices 1 and 2
dated June 8, 1994 and Notices 3 dated June 17, 1994, and
Notices 7 through 11 dated July 18, 1994, defining the rights
of the holders of GATC's Medium-Term Notes Series E issued
during those periods. Notices 1 through 3 are incorporated by
reference to the GATC Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and Notices 7 through 11 are
incorporated herein by reference to the Form 424(b)(5) dated
July 18, 1994, file number 2-54754.
4G. General American Transportation Corporation Notices 12 through
14 dated February 24, 1995, Notices 15 through 20 dated May 11,
1995, amended May 24, 1995, and Notices 21 through 30 dated
from November 8, 1995 through November 13, 1995 defining the
rights of the holders of GATC's Medium-Term Notes Series E
issued during those periods. Notices 12 through 14 are
incorporated by reference to the Form 424(b)(5) dated
February 24, 1995, Notices 15 through 20 are incorporated
by reference to the Form 424(b)(5) dated May 11, 1995, and
Notices 21 through 30 are incorporated by reference to the
Form 424(b)(5) dated from November 8, 1995 through
November 13, 1995, file number 2-54754.
4H. Form of 8-5/8% Note due December 1, 2004 filed with the SEC on
Current Report on Form 8-K on December 7, 1994, file number
2-54754.
4I. Form of 6-3/4% Note due March 1, 2006 filed with the SEC on
Current Report on Form 8-K on March 4, 1996, file number
2-54754.
10A. Revolving Credit Facility Agreement for GATC as borrower dated
as of May 9, 1996, incorporated by reference to GATC's
Quarterly Report on Form 10-Q for the period ended June 30,
1996, file number 2-54754.
12. Statement regarding computation of ratios of earnings to
fixed charges 39
23. Consent of Independent Auditors 40
27. Financial Data Schedule for GATC for the fiscal year ended
December 31, 1997, file number 2-54754. Submitted to the SEC
along with the electronic submission of this report on Form 10-K.
Any instrument defining the rights of security holders with
respect to nonregistered long-term debt not being filed on the
basis that the amount of securities authorized does not exceed
10 percent of the total assets of the company and subsidiaries
on a consolidated basis will be furnished to the Commission
upon request.
-14-
<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.
GENERAL AMERICAN TRANSPORTATION CORPORATION
(Registrant)
/s/D. Ward Fuller
-----------------
D. Ward Fuller
President, Chief Executive Officer
and Director
March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/D. Ward Fuller /s/David M. Edwards
----------------------------------- ----------------------------
D. Ward Fuller David M. Edwards
President, Chief Executive Officer Director
and Director March 19, 1998
March 19, 1998
/s/Donald J. Schaffer /s/David B. Anderson
--------------------------------- ---------------------------
Donald J. Schaffer David B. Anderson
Vice President, Finance and Chief Director
Financial Officer March 19, 1998
March 19, 1998
/s/John Schorman
--------------------------------
John Schorman
Controller
March 19, 1998
-15-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
General American Transportation Corporation
We have audited the consolidated financial statements and related schedule of
General American Transportation Corporation (a wholly-owned subsidiary of GATX
Corporation) and subsidiaries listed in Item 14(a)(1) and (2) of the Annual
Report on Form 10-K of General American Transportation Corporation for the year
ended December 31, 1997. These financial statements and related schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and related schedule 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 and related schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of General American
Transportation Corporation and subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, it is our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 27, 1998
-16-
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS AND REINVESTED EARNINGS
(In Millions)
Year Ended December 31
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Gross income $ 798.6 $ 753.8 $ 703.0
Costs and expenses
Operating expenses 340.6 330.0 312.2
Interest 118.4 109.1 93.2
Provision for depreciation and amortization 152.7 138.7 121.4
Selling, general and administrative 77.0 69.2 55.2
Provision for restructuring 185.8 - -
-------- -------- -------
874.5 647.0 582.0
-------- -------- -------
(Loss) income before income taxes and equity in net
earnings of affiliated companies (75.9) 106.8 121.0
Income taxes (benefit) (20.7) 41.3 47.2
-------- -------- --------
(Loss) income before equity in net earnings of
affiliated companies (55.2) 65.5 73.8
Equity in net earnings
of affiliated companies 14.0 14.8 20.1
-------- -------- --------
Net (loss) income (41.2) 80.3 93.9
Reinvested earnings at beginning of year 431.4 392.7 346.9
Dividends paid to GATX Corporation (43.0) (41.6) (48.1)
-------- -------- --------
Reinvested earnings at end of year $ 347.2 $ 431.4 $ 392.7
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
December 31
-----------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 14.0 $ 20.7
Trade receivables--net 52.7 83.7
Operating Lease Assets and Facilities:
Railcars and support facilities 2,480.5 2,436.5
Tank storage terminals and pipelines 1,128.9 1,377.8
---------- ----------
3,609.4 3,814.3
Less - Allowance for depreciation (1,593.8) (1,558.7)
---------- ----------
2,015.6 2,255.6
Due from GATX Corporation 392.1 408.3
Investments in affiliated companies 200.1 189.2
Other assets 153.7 104.8
---------- ----------
TOTAL ASSETS $ 2,828.2 $ 3,062.3
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
-------- --------
LIABILITIES, DEFERRED ITEMS
AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Accounts payable $ 140.5 $ 128.8
Accrued expenses 44.7 40.8
Debt
Short-term debt 190.5 166.9
Long-term debt 1,120.5 1,230.0
Capital lease obligations 100.2 108.1
---------- ----------
1,411.2 1,505.0
Deferred income taxes 315.7 352.1
Other deferred items 251.4 261.3
---------- ----------
Total liabilities and deferred items 2,163.5 2,288.0
Shareholder's equity
Common Stock--par value $1 per share,
1,000 shares authorized, issued and
outstanding (owned by GATX Corporation) - -
Additional capital 335.0 335.0
Reinvested earnings 347.2 431.4
Cumulative foreign currency translation adjustment (17.5) 7.9
---------- ----------
Total shareholder's equity 664.7 774.3
---------- ----------
TOTAL LIABILITIES, DEFERRED ITEMS
AND SHAREHOLDER'S EQUITY $ 2,828.2 $ 3,062.3
========== ==========
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
Year Ended December 31
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (41.2) $ 80.3 $ 93.9
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Provision for depreciation
and amortization 152.7 138.7 121.4
Provision for restructuring, net of tax 123.8 - -
Deferred income taxes 23.6 17.9 18.2
Other (includes working capital) (13.5) (6.2) (22.3)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 245.4 230.7 211.2
INVESTING ACTIVITIES
Additions to operating lease assets and facilities:
Railcars and support facilities (293.4) (299.6) (382.0)
Tank storage terminals and pipelines (61.7) (129.2) (128.9)
Investments in affiliated companies (49.8) (4.4) (30.3)
Other investments - (83.1) -
-------- -------- --------
Capital additions (404.9) (516.3) (541.2)
Proceeds from asset dispositions 224.6 184.7 270.7
NET CASH USED IN INVESTING ACTIVITIES (180.3) (331.6) (270.5)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 40.5 280.0 200.4
Repayment of long-term debt (146.3) (101.1) (91.5)
Net increase in short-term debt 68.7 11.9 15.4
Repayment of capital lease obligations (7.9) (6.6) (6.5)
Cash dividends paid to GATX Corporation (43.0) (41.6) (48.1)
Net decrease (increase) in amount due from
GATX Corporation 16.2 (34.4) (11.5)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (71.8) 108.2 58.2
-------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ (6.7) $ 7.3 $ (1.1)
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-20-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of General American Transportation Corporation
(GATC) and its consolidated subsidiaries are discussed below.
Consolidation: The consolidated financial statements include the accounts of
GATC and its majority-owned subsidiaries. Investments in 20 to 50 percent-owned
companies and joint ventures are accounted for under the equity method and are
shown as investments in affiliated companies. Less than 20 percent-owned
affiliated companies are recorded using the cost method.
Cash Equivalents: GATC considers all highly liquid investments with a maturity
of three months or less when purchased to
be cash equivalents.
Operating Lease Assets and Facilities: Operating lease assets and facilities are
stated principally at cost. Assets acquired under capital leases are included in
operating lease assets and facilities and the related obligations are recorded
as liabilities. Provisions for depreciation include the amortization of the cost
of capital leases and are computed by the straight-line method which results in
equal annual depreciation charges over the estimated useful lives of the assets.
The estimated useful lives of depreciable assets are as follows:
Railcars 20-33 years
Buildings, leasehold improvements,
storage tanks, and pipelines 5-40 years
Machinery and related equipment 3-25 years
Goodwill: GATC has classified the cost in excess of the fair value of net assets
acquired as goodwill. Goodwill, which is included in other assets, is being
amortized on a straight-line basis over 40 years. GATC continually evaluates the
existence of goodwill impairment on the basis of whether the goodwill is
recoverable from projected undiscounted net cash flows of the related business,
and in that regard adjusted certain carrying amounts in 1997, as explained in
Note O. Goodwill, net of accumulated amortization of $3.8 million and $3.4
million, was $34.1 million and $41.9 million as of December 31, 1997 and 1996,
respectively. Amortization expense was $1.2 million, $.8 million and $.5 million
for 1997, 1996 and 1995, respectively.
Income Taxes: United States income taxes have not been provided on the
undistributed earnings of foreign subsidiaries and affiliates which GATC intends
to permanently reinvest in these foreign operations. The cumulative amount of
such earnings was $148.8 million at December 31, 1997.
Other Deferred Items: Other deferred items include the accrual for
postretirement benefits other than pensions; environmental, general liability
and workers' compensation reserves; and other deferred credits.
-21-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Off-Balance-Sheet-Financial Instruments: GATC uses interest rate and currency
swaps, forwards and similar contracts to set interest and exchange rates on
existing or anticipated transactions. These instruments qualify for hedge
accounting. Fair values of GATC's off-balance-sheet financial instruments
(futures, swaps, forwards, options and purchase commitments) are based on
current market prices, settlement values or fees currently charged to enter into
similar agreements. The fair values of the hedge contracts are not recognized in
the financial statements. Net amounts paid or received on such contracts are
recognized over the term of the contract as an adjustment to interest expense or
the basis of the hedged financial instrument.
Environmental Liabilities: Expenditures that relate to current or future
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are charged to environmental reserves.
Reserves are recorded in accordance with accounting guidelines to cover work at
identified sites when GATC's liability for environmental clean-up is both
probable and reasonably estimable; adjustments to initial estimates are recorded
as further information develops or circumstances change.
Revenue Recognition: The majority of GATC's gross income is derived from the
rentals of railcars and terminals and other services.
Foreign Currency Translation: The assets and liabilities of GATC operations
located outside the United States are translated at exchange rates in effect at
year end, and income statements are translated at the average exchange rates for
the year. Gains or losses resulting from the translation of foreign currency
financial statements are deferred and recorded as a separate component of
consolidated shareholder's equity. Incremental unrealized translation losses
recorded in the cumulative foreign currency translation adjustment account were
$25.4 million, $5.2 million and $8.4 million during 1997, 1996, and 1995,
respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as revenues and expenses during the reporting
period. Actual amounts when ultimately realized could differ from those
estimates.
Reclassifications: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation.
-22-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE B--ACCOUNTING FOR LEASES
The following information pertains to GATC as a lessor:
Operating leases: Railcar and tankage assets included in operating lease assets
and facilities are classified as operating leases.
Minimum future receipts: Minimum future rental receipts from noncancelable
operating leases by year at December 31, 1997 were (in millions):
1998 $ 507.9
1999 373.1
2000 267.8
2001 176.4
2002 101.5
Years thereafter 232.7
---------
$1,659.4
The following information pertains to GATC as a lessee:
Capital leases: Certain railcars are leased by GATC under capital lease
agreements. Operating lease assets and facilities includes cost and related
allowances for depreciation of $152.0 million and $89.1 million, respectively,
at December 31, 1997 and $152.2 million and $82.7 million, respectively, at
December 31, 1996 for these railcars. The cost of these assets is amortized on
the straight-line basis with the charge included in depreciation expense.
Operating leases: GATC has financed railcars through sale-leasebacks
substantially all of which are accounted for as operating leases. In addition,
GATC leases certain other assets and office facilities. Total rental expense for
the years ended December 31, 1997, 1996, and 1995 was $90.0 million, $81.3
million, and $65.1 million, respectively.
Minimum future rental payments: Future minimum rental payments due under
noncancelable leases at December 31, 1997 were (in millions):
Nonrecourse
Capital Operating Operating
Leases Leases Leases
1998 $ 17.3 $ 73.2 $ 8.6
1999 17.3 69.2 10.5
2000 17.2 69.8 14.2
2001 16.8 69.8 14.2
2002 16.2 77.6 11.9
Years thereafter 65.1 1,105.8 207.3
------ -------- -------
149.9 $1,465.4 $ 266.7
======== =======
Less - Amount representing
interest (49.7)
--------
Present value of future
minimum capital lease
payments $ 100.2
=======
The above capital lease amounts do not include the cost of licenses, taxes,
insurance and maintenance which GATC is required to pay. Subsequent to the
initial lease term, the majority of railcar operating leases allow GATC to renew
the lease at a fixed rate or purchase the railcar at
-23-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE B--ACCOUNTING FOR LEASES (CONT'D)
fair market value. Interest expense on the above capital lease obligations was
$9.3 million in 1997, $10.2 million in 1996, and $10.6 million in 1995.
The amounts shown as nonrecourse operating leases reflect rental payments of a
bankruptcy remote special purpose corporation which is wholly owned by GATC.
These rentals are consolidated for accounting purposes but are not guaranteed by
nor are obligations of GATC.
NOTE C--ADVANCES TO PARENT
Interest income on advances to GATX, which is included in gross income on the
income statement, was $28.9 million in 1997, $28.3 million in 1996, and $28.7
million in 1995. These advances have no fixed maturity date. Interest income on
advances to GATX were based on an interest rate which is adjusted annually in
accordance with an estimate of short-term borrowing rates.
NOTE D--INVESTMENTS IN AFFILIATED COMPANIES
GATC has investments in 25 to 50 percent-owned companies and joint ventures
which are accounted for using the equity method. These domestic and foreign
investments are in businesses similar to those of GATC's operations.
Distributions received from such jointly-owned companies were $5.0 million, $5.2
million, and $7.3 million in 1997, 1996, and 1995, respectively.
For all affiliated companies held at the end of the year, operating results, as
if GATC held 100% interest, were (in millions):
For the Year
-------------------------------------
1997 1996 1995
------ ------ ------
Revenues $229.9 $205.9 $233.8
Net income 35.4 30.7 44.0
For all affiliated companies held at the end of the year, summarized balance
sheet data, as if GATC held 100% interest, were (in millions):
December 31
-----------------------
1997 1996
------ ------
Total assets $880.1 $870.3
Long-term liabilities 506.8 442.6
Other liabilities 101.7 121.0
------ ------
Shareholders' equity $271.6 $306.7
====== ======
-24-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE E--FOREIGN OPERATIONS
GATC has a number of investments in subsidiaries and affiliated companies which
are located in or derive income from foreign countries. Foreign entities
contribute significantly to equity in net earnings of affiliated companies. The
foreign identifiable assets represent investments in affiliated companies as
well as fully consolidated assets for a Canadian railcar subsidiary, a United
Kingdom terminaling operation, and a Mexican railcar operation.
Gross Income (in Millions) 1997 1996 1995
- -------------------------- ------- -------- ------
Canada $ 58.7 $ 36.6 $ 4.7
Other Foreign 35.0 29.6 30.8
United States 704.9 687.6 667.5
--------- --------- --------
$ 798.6 $ 753.8 $ 703.0
========= ========= ========
(Loss) Income Before Income Taxes
and Equity in Net Earnings of
Affiliated Companies (in Millions) 1997 1996 1995
- --------------------------------- ------- ------- -------
Canada $ 16.9 $ 8.9 $ .1
Other Foreign (75.9) (9.0) .6
United States (16.9) 106.9 120.3
-------- -------- --------
$ (75.9) $ 106.8 $ 121.0
======== ======== ========
Equity in Net Earnings of
Affiliated Companies (in Millions) 1997 1996 1995
- --------------------------------- ------- ------- -------
Canada $ - $ 2.7 $ 5.2
Other Foreign 13.0 11.3 14.4
United States 1.0 .8 .5
-------- -------- --------
$ 14.0 $ 14.8 $ 20.1
======== ======== ========
Identifiable Assets (in Millions) 1997 1996 1995
- --------------------------------- ------- -------- -------
Canada $ 289.4 $ 319.8 $ 43.1
Other Foreign 241.0 324.7 275.1
United States 2,297.8 2,417.8 2,312.8
-------- -------- --------
$2,828.2 $3,062.3 $2,631.0
======== ======== ========
Foreign cash flows generated are used to meet local operating needs and for
reinvestment. The translation of the foreign balance sheets into U.S. dollars
results in an increase or decrease to the unrealized foreign currency
translation adjustment.
-25-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE F--SHORT-TERM DEBT AND LINES OF CREDIT
Short-term debt and its weighted average interest rate as of year end were (in
millions):
December 31
-------------------------------------------
1997 1996
----------------- ----------------
Amount Rate Amount Rate
------ ---- ------ ----
Commercial paper $ 26.6 6.53% $ 10.0 5.58%
Other short-term borrowings 163.9 6.15 156.9 5.74
------ ------
$190.5 $166.9
====== ======
Under a revolving credit agreement with a group of banks, GATC may borrow up to
$300.0 million. The revolving credit agreement contains various restrictive
covenants which include, among other things, minimum net worth, restrictions on
additional indebtedness, and requirements to maintain certain financial ratios
for GATC. Under the agreement, GATC met these requirements at December 31, 1997.
While at year end no borrowings were outstanding under the agreement, the
available line of credit was reduced by $26.6 million of commercial paper
outstanding. GATC had borrowings of $125.3 million under unsecured money market
lines at December 31, 1997. CGTX, GATC's Canadian railcar subsidiary, had
bankers' acceptances and other uncommitted short-term borrowings of $55.2
million Canadian dollars at December 31, 1997.
Interest expense on short-term debt was $14.7 million in 1997, $11.9 million in
1996, and $8.5 million in 1995.
-26-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE G--LONG-TERM DEBT
Long-term debt (in millions) and the range of interest rates as of the end of
1997 were:
Interest Final December 31
Rates Maturity 1997 1996
----------------------------------------------------
Fixed Rate:
Term notes 6.15%-10.875% 1998-2011 $1,032.6 $1,142.1
Industrial revenue bonds 6.625%-7.30% 2019-2024 87.9 87.9
-------- --------
$1,120.5 $1,230.0
Maturities of GATC's long-term debt as of December 31, 1997 for each of the
years 1998 through 2002 were (in millions):
Year Amount
---- ------
1998 $ 82.3
1999 89.0
2000 102.5
2001 95.8
2002 162.8
Interest cost incurred on long-term debt, net of capitalized interest, was $94.4
million in 1997, $87.0 million in 1996, and $74.1 million in 1995. Interest cost
capitalized as part of the cost of acquisition or construction of major assets
was $.9 million in 1997, $3.7 million in 1996, and $4.6 million in 1995.
-27-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE H--OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, GATC utilizes off-balance sheet financial
instruments to manage financial market risk, including interest rate and foreign
exchange risk.
At December 31, 1997 GATC had the following off-balance sheet financial
instruments (in millions):
Notional Pay Receive
Interest Rate Swaps Amount Rate/Index Rate/Index Maturity
- ------------------- -------- ------------ ------------ ---------
GATC pays fixed, receives floating $725.7 5.097%-7.585% LIBOR 1998-2001
GATC pays floating, receives fixed 500.0 LIBOR 6.230%-7.646% 2003-2006
Currency Swaps Receive Deliver Maturity
- -------------- ------- ------- --------
Canadian dollar swap $115.0 C$156.1 2011
Deutschemark swap $ 40.5 72.5 DM 2002
GATC had the following interest rate hedge activity (in millions):
Pay Pay
Interest Rate Swaps Fixed Floating
Balance at January 1, 1996 $765.5 $850.0
Additions 315.5 62.0
Maturities (200.0) -
------ ------
Balance at December 31, 1996 881.0 912.0
Additions 44.7 -
Maturities (200.0) (412.0)
------ ------
Balance at December 31, 1997 $725.7 $500.0
====== ======
GATC uses interest rate swaps and forwards to manage its assets and liabilities,
to convert floating rate debt to fixed rate debt (or fixed to floating) and to
manage interest rate risk associated with the anticipated issuance of debt.
Interest rate swaps are utilized to better match the cash flow characteristics
of its debt portfolio and its railcar leases. Railcar assets are financed with
long-term fixed rate debt or through sale-leasebacks. However, the railcar
assets are placed on lease with average new lease terms of five years; the
average renewal term is three years. Rents are fixed over these lease terms.
Interest rate swaps effectively convert GATC's long-term fixed rate debt to
fixed rate debt with maturities of three months to three years. Through the swap
program, changes in GATC's interest expense are expected to better reflect
changes in railcar lease rates.
In its swaps, GATC agrees to exchange at specific intervals the difference
between fixed and floating rate interest amounts calculated on an agreed upon
notional principal amount. The swaps have in effect converted $725.7 million of
long-term fixed rate debt into 1-3 year fixed rate debt.
-28-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE H--OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (CONT'D)
The net amount payable or receivable from the interest rate swap agreements is
accrued as an adjustment to interest expense. The fair value of its interest
rate swap agreements is an estimate of the amount the company would receive or
pay to terminate those agreements. At December 31, 1997, GATC would have
received $13.1 million if the swaps were terminated; GATC would have paid $10.4
million if the swaps were terminated at December 31, 1996.
GATC has entered into currency swaps to hedge $115.2 million in debt obligations
at its Canadian subsidiary and $40.5 million in debt obligations at its German
subsidiary. The fair market value of its currency swap agreements is an estimate
of the amount the company would receive or pay to terminate those agreements. At
December 31, 1997, GATC would have received $11.1 million if the swaps were
terminated; GATC would have paid $2.7 million if the swaps were terminated at
December 31, 1996.
In the event that a counterparty fails to meet the terms of the interest rate
swap agreement or a foreign exchange contract, GATC's exposure is limited to the
interest rate or currency differential. GATC manages the credit risk of
counterparties by dealing only with institutions that the company considers
financially sound and by avoiding concentrations of risk with a single
counterparty. GATC considers the risk of nonperformance to be remote.
-29-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE I--FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. The following
table presents the carrying amounts and estimated fair values of GATC's
financial instruments that were recorded on the balance sheet at year end (in
millions):
December 31
-----------------------------------------
1997 1996
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 14.0 $ 14.0 $ 20.7 $ 20.7
Trade receivables-net 52.7 52.7 83.7 83.7
Due from GATX Corporation 392.1 392.1 408.3 408.3
Liabilities:
Accounts payable 140.5 140.5 128.8 128.8
Short-term debt 190.5 190.5 166.9 166.9
Long-term debt - variable 47.5 47.5 - -
Long-term debt - fixed 1,073.0 1,145.8 1,230.0 1,300.4
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
For cash and cash equivalents, trade receivables, accounts payables, and
short-term debt, the carrying amount approximates fair value because of the
short maturity of those instruments.
The carrying amounts reported in the balance sheet for the Due from GATX
Corporation approximate fair value.
The carrying amount of variable rate long-term debt reported in the balance
sheet approximates fair value. The fair value of fixed rate long-term debt was
estimated by performing a discounted cash flow calculation using the note term
and market interest rate for each note based on GATC's current incremental
borrowing rates for similar borrowing arrangements.
-30-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE J--PENSION BENEFITS
GATC and its subsidiaries contributed to several pension plans sponsored by GATX
which cover substantially all employees. Benefits under the plans are based on
years of service and/or final average salary. The funding policy for all plans
is based on an actuarially determined cost method allowable under Internal
Revenue Service regulations. Contributions to these plans were $3.5 million in
1997, $5.0 million in 1996, and $3.5 million in 1995.
Costs pertaining to the GATX plans are allocated to GATC on the basis of payroll
costs with respect to normal cost and on the basis of actuarial determinations
for prior service cost. Net periodic pension cost for 1997, 1996, and 1995 was
$5.6 million, $3.0 million, and $3.1 million, respectively. The net periodic
pension cost for 1997 included a $2.5 million one-time termination expense as a
result of a facility sale. Plan benefit obligations, plan assets, and the
components of net periodic cost for individual subsidiaries of GATX have not
been determined.
NOTE K--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
GATC provides health care, life insurance and other benefits for certain retired
employees who meet established criteria. Most domestic employees are eligible
for health care and life insurance benefits if they retire from GATC with
immediate pension benefits under the GATX pension plan. The plans are either
contributory or non-contributory, depending on various factors. A discount rate
of 7.75% was used to determine the expense (net periodic postretirement benefit
cost) and liability (accrued postretirement benefit liability) for all years
presented below.
Net periodic postretirement benefit cost, which for 1997 reflected termination
expense for a facility sale, included the following components (in millions):
1997 1996 1995
----- ----- -----
Current service cost $ .4 $ .4 $ .4
Interest cost on accumulated
postretirement benefit obligation 3.8 4.1 4.2
Net termination expense 1.1 - -
----- ----- -----
Net periodic postretirement benefit cost $ 5.3 $ 4.5 $ 4.6
===== ===== =====
Discount rate 7.75% 7.75% 7.75%
===== ===== =====
-31-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE K--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONT'D)
The accrued postretirement benefit liability, part of Other Deferred Items on
GATC's balance sheet, included the following components (in millions):
December 31
1997 1996
----- -----
Accumulated postretirement benefit obligation
Retirees $45.6 $47.0
Fully eligible active plan participants 2.3 2.4
Other active plan participants 4.7 5.2
----- -----
Total accumulated postretirement benefit obligation 52.6 54.6
Unrecognized gain 10.0 10.1
----- -----
Accrued postretirement benefit liability $62.6 $64.7
===== =====
The health care cost trend rate assumption has a significant effect on the
amount of the periodic cost and obligation reported. The trend rate currently
assumed for participants under age 65 is 6.0% in 1997 and thereafter. For
participants age 65 and older, the assumed trend rate is 5.0% in 1997 and after.
An increase in the assumed health care cost trend rates by 1% would increase the
net periodic postretirement benefit cost by $.3 million per year, and the
accumulated postretirement benefit obligation by $3.6 million.
-32-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE L--INCOME TAXES
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.
Significant components of GATC's deferred tax liabilities and assets were (in
millions):
December 31
---------------------
1997 1996
------ ------
Deferred tax liabilities:
Book/tax basis differences due to depreciation $347.8 $392.9
Other 45.4 45.8
------ ------
Total deferred tax liabilities 393.2 438.7
Deferred tax assets:
Accruals not currently deductible for tax purposes 31.1 35.9
Postretirement benefits other than pensions 22.0 22.7
Lease accounting 21.4 21.8
Other 3.0 6.2
------ ------
Total deferred tax assets 77.5 86.6
------ ------
Net deferred tax liabilities $315.7 $352.1
====== ======
The results of operations of GATC and its United States subsidiaries are
included in the consolidated federal income tax return of GATX. Current
provisions for federal income taxes represent amounts payable to GATX resulting
from inclusion of GATC's operations in the consolidated federal income tax
return. Amounts shown as currently payable for federal income taxes represent
taxes payable due to the alternative minimum tax. Included in 1997's total
deferred tax credit is a $56.5 million deferred tax benefit resulting from
Terminals' $185.8 million pre-tax restructuring charge.
Income taxes consisted of (in millions):
For the Year
-------------------------------------
1997 1996 1995
------ ------ ------
Current-
Domestic:
Federal $ 8.4 $ 19.4 $ 26.7
State and local - 1.8 2.2
------ ------ ------
8.4 21.2 28.9
Foreign 3.8 2.2 .1
------ ------ ------
12.2 23.4 29.0
Deferred-
Domestic:
Federal (34.6) 16.9 16.7
State and local (3.3) 1.5 1.0
------ ------ ------
(37.9) 18.4 17.7
Foreign 5.0 (.5) .5
------ ------ ------
(32.9) 17.9 18.2
------ ------ -------
Income tax (benefit) expense $(20.7) $ 41.3 $ 47.2
====== ====== ======
Income taxes paid $ 15.0 $ 23.9 $ 26.9
====== ====== ======
-33-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE L--INCOME TAXES (CONT'D)
The reasons for the differences between the effective income tax rate and the
federal statutory income tax rate were:
For the Year
-----------------------------------------
1997 1997(A) 1996 1995
------ ------ ----- -----
Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0%
Add (deduct) effect of:
Foreign income (2.4) 1.6 2.2 1.0
State income taxes (2.3) 1.6 2.0 1.7
Restructuring charges (3.9) - - -
Minority interest - - - 2.0
Other .8 (.5) (.6) (.7)
---- ---- ---- ----
27.2% 37.7% 38.6% 39.0%
==== ==== ==== ====
(A) Before restructuring charges
NOTE M--COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
GATC's revenues are derived from a wide range of industries and companies.
However, approximately 39% of total revenues are generated from the
transportation or storage of products from the chemical industry; for similar
services, 39% of revenues are derived from the petroleum industry.
Under its customer lease agreements, GATC retains legal ownership of the asset
except when such assets have been financed by sale-leasebacks. GATC performs
credit evaluations prior to approval of a lease contract. Subsequently, the
creditworthiness of the customer is monitored on an ongoing basis. GATC
maintains an allowance for possible losses to provide for potential losses
should customers become unable to discharge their obligations to GATC.
At December 31, 1997, GATC had firm commitments to acquire railcars and to
upgrade facilities totaling $209 million.
GATC and its subsidiaries are engaged in various matters of litigation and have
a number of unresolved claims pending, including proceedings under governmental
laws and regulations related to environmental matters. Two of GATC's
subsidiaries are involved in a litigation arising out of a chemical leak and
resulting tank car fire in New Orleans, Louisiana. While the amounts claimed are
substantial, and the ultimate liability with respect to such litigation and
claims cannot be determined at this time, it is the opinion of management that
damages, if any, required to be paid by GATC and its subsidiaries in the
discharge of such liability are not likely to be material to GATC's consolidated
financial position or results of operations.
-34-
<PAGE>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE N--FINANCIAL DATA OF BUSINESS SEGMENTS
GATC is engaged in the following businesses:
Railcar Leasing and Management represents General American Transportation
Corporation and its foreign subsidiaries and affiliates (Transportation), which
lease and manage tank cars and other specialized railcars.
Terminals and Pipelines represents GATX Terminals Corporation and its domestic
and foreign subsidiaries and affiliates (Terminals), which own and operate tank
storage terminals, pipelines and related facilities.
Intersegment sales are not significant in amount or meaningful to an
understanding of GATC's business segments.
The following presentation of segment profitability includes the direct costs
incurred at the segment's operating level plus expenses allocated by GATX. These
allocated expenses represent costs for services provided by GATX which these
operations would have incurred otherwise and are determined on a usage basis;
management believes that this method is reasonable. Such costs do not include
general corporate expense nor interest on debt of GATX.
Interest costs associated with segment indebtedness are included in the
determination of profitability of each segment since
interest expense directly influences any investment decision and the evaluation
of subsequent operational performance. Interest costs by segment have been shown
separately so the reader can ascertain segment profitability before deducting
interest expense.
-35-
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE N--FINANCIAL DATA OF BUSINESS SEGMENTS (CONT'D)
(In millions)
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Gross Income:
Railcar Leasing and Management $ 476.9 $ 427.9 $ 360.9
Terminals and Pipelines 292.8 297.6 313.4
-------- ------- --------
Subtotal 769.7 725.5 674.3
Intersegment amounts with other GATX segments 28.9 28.3 28.7
-------- ------- --------
CONSOLIDATED $ 798.6 $ 753.8 $ 703.0
======== ======= ========
(Loss) Income Before Income Taxes and Equity
in Net Earnings of Affiliated Companies:
Railcar Leasing and Management $ 116.8 $ 103.8 $ 90.7
Terminals and Pipelines (192.7) (A) 3.0 30.3
-------- ------- --------
CONSOLIDATED $ (75.9) $ 106.8 $ 121.0
======== ======= ========
Equity in Net Earnings
of Affiliated Companies:
Railcar Leasing and Management $ .9 $ 2.9 $ 5.4
Terminals and Pipelines 13.1 11.9 14.7
-------- ------- --------
CONSOLIDATED $ 14.0 $ 14.8 $ 20.1
======== ======= ========
Net (Loss) Income:
Railcar Leasing and Management $ 74.4 $ 67.7 $ 62.9
Terminals and Pipelines (115.6) (B) 12.6 31.0
-------- ------- --------
CONSOLIDATED $ (41.2) $ 80.3 $ 93.9
======== ======= ========
<FN>
(A) Pre-tax income includes a $185.8 million provision for restructuring.
(B) Net loss includes a $123.8 million after-tax provision for restructuring.
</FN>
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE N--FINANCIAL DATA OF BUSINESS SEGMENTS (CONT'D)
(In Millions)
---------------------------------------------
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Railcar Leasing and Management $2,361.5 $2,387.1 $2,041.9
Terminals and Pipelines 936.7 1,193.5 1,101.5
Other 1.1 1.0 1.0
-------- -------- --------
3,299.3 3,581.6 3,144.4
Intersegment amounts (471.1) (519.3) (513.4)
-------- -------- --------
CONSOLIDATED $2,828.2 $3,062.3 $2,631.0
======== ======== ========
Capital Additions:
Railcar Leasing and Management $ 336.9 $ 386.8 $ 392.6
Terminals and Pipelines 68.0 129.5 148.6
-------- -------- --------
CONSOLIDATED $ 404.9 $ 516.3 $ 541.2
======== ======== ========
Provision for Depreciation and Amortization:
Railcar Leasing and Management $ 98.0 $ 86.8 $ 76.1
Terminals and Pipelines 54.7 51.9 45.3
-------- -------- --------
CONSOLIDATED $ 152.7 $ 138.7 $ 121.4
======== ======== ========
Interest Expense:
Railcar Leasing and Management $ 103.7 $ 99.4 $ 86.1
Terminals and Pipelines 57.2 53.5 46.4
-------- -------- --------
160.9 152.9 132.5
Intersegment amounts (42.5) (43.8) (39.3)
-------- -------- --------
CONSOLIDATED $ 118.4 $ 109.1 $ 93.2
======== ======== ========
</TABLE>
NOTE O - RESTRUCTURING CHARGES
During 1997, strategic decisions resulted in a $186 million ($124 million
after-tax) restructuring charge related to GATX Terminals. The restructuring
charge was based on the decision to close, sell or revalue certain domestic and
foreign terminal locations to reflect permanent changes in market conditions.
The carrying values of certain assets, including goodwill, were written down to
fair value as described in Note A.
-37-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
(In Millions)
- -------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -------------------------------------------------------------------------------------------------------------------
ADDITIONS
Charged to
Balance at Charged to Other Balance
Beginning Costs & Accounts- Deductions- at End
of Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for possible losses
in collection of trade
receivables - Note A $ 5.5 $ .3 $ .6 (B) $ .7 (C) $ 5.7
Year ended December 31, 1996:
Allowance for possible losses
in collection of trade
receivables - Note A $ 5.4 $ .3 $ 1.7 (B) $ 1.9 (C) $ 5.5
Year ended December 31, 1995:
Allowance for possible losses
in collection of trade
receivables - Note A $ 5.4 $ .1 $ 1.2 (B) $ 1.3 (C) $ 5.4
<FN>
Note A - Deducted from asset accounts.
Note B - Transfer from other accounts.
Note C - Uncollectible accounts charged off.
</FN>
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Millions Except For Ratios)
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Earnings available for fixed charges:
Net (loss) income ....................................... $ (41.2) $ 80.3 $ 93.9 $ 87.0 $ 74.1
Add (deduct):
Income taxes (benefit) expense .......................... (20.7) 41.3 47.2 42.7 45.1
Equity in net earnings of affiliated
companies, net of distributions received ........... (9.0) (9.6) (12.8) (14.2) (11.5)
Interest on indebtedness and amortization
of debt discount and expense ....................... 118.4 109.1 93.2 76.5 76.6
Amortization of capitalized interest .................... 1.4 1.1 1.1 1.1 1.1
Portion of rents representative of interest
factor (deemed to be one-third) .................... 30.0 27.0 21.7 16.8 13.2
-------- -------- -------- -------- ------
Total earnings available for fixed charges .............. $ 78.9 $ 249.2 $ 244.3 $ 209.9 $198.6
======== ======== ======== ======== ======
Fixed charges:
Interest on indebtedness and amortization
of debt discount and expense ....................... $ 118.4 $ 109.1 $ 93.2 $ 76.5 $ 76.6
Capitalized interest .................................... .9 3.7 4.6 2.7 2.4
Portion of rents representative of interest
factor (deemed to be one-third) .................... 30.0 27.0 21.7 16.8 13.2
-------- -------- -------- -------- ------
Total fixed charges ..................................... $ 149.3 $ 139.8 $ 119.5 $ 96.0 $ 92.2
======== ======== ======== ======== ======
Ratio of earnings to fixed charges (A)....................... .53x (B) 1.78x 2.04x 2.19x 2.15x
<FN>
(A) The ratio of earnings to fixed charges represents the number of times
"fixed charges" are covered by "earnings." "Fixed charges" consist of
interest on outstanding debt and capitalized interest, one-third (the
proportion deemed representative of the interest factor) of rentals, and
amortization of debt discount and expense. "Earnings" consist of
consolidated net income before income taxes and fixed charges, less
equity in net earnings of affiliated companies, net of distributions
received.
(B) In 1997, net loss included restructuring charges of $123.8 million. Excluding the charges, the "ratio of earnings to
fixed charges" was 1.77x. See Note O - Restructuring Charges.
</FN>
</TABLE>
-39-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-48475 on Form S-3 filed July 30, 1992, Registration Statement No. 33-52301 on
Form S-3 filed February 16, 1994, and Registration Statement No. 33-64697 on
Form S-3 filed December 1, 1995 of General American Transportation Corporation
of our report dated January 27, 1998 with respect to the consolidated financial
statements and schedule of General American Transportation Corporation included
in this Annual Report on Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1998
-40-
<PAGE>
EXHIBITS FILED WITH DOCUMENT
12. Statement regarding computation of ratios of earnings to
fixed charges
23. Consent of Independent Auditors
27. Financial Data Schedule for GATC for the fiscal year ended
December 31, 1997, file number 2-54754. Submitted to the SEC
along with the electronic submission of this report on Form 10-K.
Any instrument defining the rights of security holders with
respect to nonregistered long-term debt not being filed on the
basis that the amount of securities authorized does not exceed
10 percent of the total assets of the company and subsidiaries
on a consolidated basis will be furnished to the Commission
upon request.
<TABLE>
<CAPTION>
EXHIBIT 12
GENERAL AMERICAN TRANSPORTATION CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Millions Except For Ratios)
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Earnings available for fixed charges:
Net (loss) income ....................................... $ (41.2) $ 80.3 $ 93.9 $ 87.0 $ 74.1
Add (deduct):
Income taxes (benefit) expense .......................... (20.7) 41.3 47.2 42.7 45.1
Equity in net earnings of affiliated
companies, net of distributions received ........... (9.0) (9.6) (12.8) (14.2) (11.5)
Interest on indebtedness and amortization
of debt discount and expense ....................... 118.4 109.1 93.2 76.5 76.6
Amortization of capitalized interest .................... 1.4 1.1 1.1 1.1 1.1
Portion of rents representative of interest
factor (deemed to be one-third) .................... 30.0 27.0 21.7 16.8 13.2
-------- -------- -------- -------- ------
Total earnings available for fixed charges .............. $ 78.9 $ 249.2 $ 244.3 $ 209.9 $198.6
======== ======== ======== ======== ======
Fixed charges:
Interest on indebtedness and amortization
of debt discount and expense ....................... $ 118.4 $ 109.1 $ 93.2 $ 76.5 $ 76.6
Capitalized interest .................................... .9 3.7 4.6 2.7 2.4
Portion of rents representative of interest
factor (deemed to be one-third) .................... 30.0 27.0 21.7 16.8 13.2
-------- -------- -------- -------- ------
Total fixed charges ..................................... $ 149.3 $ 139.8 $ 119.5 $ 96.0 $ 92.2
======== ======== ======== ======== ======
Ratio of earnings to fixed charges (A)....................... .53x (B) 1.78x 2.04x 2.19x 2.15x
<FN>
(A) The ratio of earnings to fixed charges represents the number of times
"fixed charges" are covered by "earnings." "Fixed charges" consist of
interest on outstanding debt and capitalized interest, one-third (the
proportion deemed representative of the interest factor) of rentals, and
amortization of debt discount and expense. "Earnings" consist of
consolidated net income before income taxes and fixed charges, less
equity in net earnings of affiliated companies, net of distributions
received.
(B) In 1997, net loss included restructuring charges of $123.8 million. Excluding the charges, the "ratio of earnings to
fixed charges" was 1.77x. See Note O - Restructuring Charges.
</FN>
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-48475 on Form S-3 filed July 30, 1992, Registration Statement No. 33-52301 on
Form S-3 filed February 16, 1994, and Registration Statement No. 33-64697 on
Form S-3 filed December 1, 1995 of General American Transportation Corporation
of our report dated January 27, 1998 with respect to the consolidated financial
statements and schedule of General American Transportation Corporation included
in this Annual Report on Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated income statement of GATC
Corporation and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 6
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 3609
<DEPRECIATION> 1594
<TOTAL-ASSETS> 2828
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 1221 <F2>
0
0
<COMMON> 0
<OTHER-SE> 665
<TOTAL-LIABILITY-AND-EQUITY> 2828
<SALES> 0
<TOTAL-REVENUES> 799
<CGS> 0
<TOTAL-COSTS> 341 <F3>
<OTHER-EXPENSES> 153 <F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> (76) <F5>
<INCOME-TAX> (21)
<INCOME-CONTINUING> (41)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Not applicable because GATC has an unclassified balance sheet.
<F2> This value consists of two components: Long-term debt of 1,121 million and
capital lease obligations of 100 million. Short-term debt not included in
this calculation.
<F3> This value represents Operating Expenses on the Consolidated Income
Statement.
<F4> This value consists of the Provision for depreciation and amortization on
the Consolidated Income Statement.
<F5> This value represents (Loss)Income before income taxes and equity in
earnings of affiliates.
</FN>
</TABLE>
