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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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-54754
GATX Rail Corporation
(formerly known as General American Transportation Corporation)
Incorporated in the IRS Employer Identification Number
State of New York 36-2827991
500 West Monroe Street
Chicago, IL 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 shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
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Registrant had 1,000 shares of common stock outstanding (all owned by
GATX Corporation) as of March 15, 2000.
GATX Rail Corporation meets the conditions set forth in General
Instruction I (1)(a) and (b) of Form 10-K and, therefore, is filing this form
with the reduced disclosure format.
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PART I
Item 1. Business
GATX Rail Corporation ("GRC"), a wholly owned subsidiary of GATX Corporation
("GATX"), is engaged in the leasing and management of railroad tank cars and
specialized freight cars, and through a wholly owned subsidiary ("GATX Terminals
Corporation") owns and operates tank storage terminals, pipelines and related
facilities.
Industry Segments
GATX Rail
GATX Rail ("Rail"), formerly the railcar leasing and management segment,
headquartered in Chicago, Illinois, is principally engaged in leasing
specialized railcars, primarily tank cars, under full service leases. As of
December 31, 1999, its North American fleet consisted of approximately 87,800
railcars, comprised of 67,900 tank cars and 19,900 specialized freight cars,
including conventional and Airslide(TM) covered hopper cars. In addition to
76,000 railcars in the United States, Rail has 9,200 railcars in its Canadian
fleet and 2,600 railcars in its Mexican fleet. The utilization rate of Rail's
North American railcar fleet as of December 31, 1999 was approximately 95%.
Rail's railcars have a depreciable life of 20 to 33 years and an average age of
approximately 16 years.
In addition to the North American fleet, Rail's investments in affiliated
companies result in ownership interests in two European fleets. Rail owns a 46%
interest in KVG Kesselwagen Vermietgesellschaft mbH, a German and Austrian-based
tank car and specialty railcar leasing company, and an 18.8% interest in AAE
Cargo, headquartered in Switzerland.
Rail's customers use its railcars to ship over 700 different commodities,
primarily chemicals, petroleum, and food products. For 1999, approximately 47%
of railcar leasing revenue was attributable to shipments of chemical products,
31% to food and other products, and 22% to petroleum products. Rail leases
railcars to over 700 customers, including major chemical, oil, food and
agricultural companies. No single customer accounts for more than 3% of total
railcar leasing revenue.
Rail 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. Rail purchases most of its new railcars from Trinity Industries,
Inc., a Dallas-based metal products manufacturer. Under its full service leases,
Rail maintains and services its railcars, pays ad valorem taxes, and provides
many ancillary services. Through its Internet website, Rail provides customers
with timely analysis, performance statistics, and mechanical record information
to enhance and maximize the utilization of their leased railcars. Rail also
maintains a network of major service centers consisting of four domestic, four
Canadian and one Mexican facility. To supplement the nine major service centers,
Rail utilizes a fleet of mobile trucks and also utilizes independent third-party
repair shops.
The full-service railcar leasing industry is comprised of Rail, Union Tank Car
Company, General Electric Railcar Services Corporation, and many smaller
companies. As of the end of 1999, Rail had 23% of the 266,000 tank cars owned
and leased in the United States. Principal competitive factors include price,
service and availability.
Terminals and Pipelines
GATX Terminals Corporation ("Terminals") is engaged in the storage, handling and
transfer of petroleum and chemical commodities at key points in the bulk liquid
distribution chain. Terminals' facilities, which are located near major
transportation points, 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 15
terminal sites throughout the
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United States, and also has interests in European, Asian, and Mexican
facilities. In addition to storage facilities, Terminals owns or holds interests
in four refined product pipeline systems.
For 1999, 49% of Terminals' revenue was derived from petroleum storage, 24% from
chemical storage, and 27% from pipelines. 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 500 customers, including major oil and chemical companies
as well as trading firms and larger independent refiners. No single customer
accounts for more than 8% of Terminals' gross income.
Within the worldwide public petroleum and chemical terminaling industry,
Koninkliijke Vopak ("Vopak") is the largest in terms of capacity followed by
Terminals. During 1999, the merger of two Dutch companies, PAKHOED N.V. and Van
Ommeren N.V formed Vopak. Additionally, smaller terminaling companies as well as
oil and chemical companies that have significant storage capacity compete with
Terminals in a number of markets. Terminals' pipelines compete with rail,
trucks, and other pipelines for movement of liquid petroleum products. In early
2000, Terminals purchased Vopak's ownership interests in Gamatex N.V., located
in Belgium, and in Tankstore Ltd., located in Singapore. The result gave
Terminals 100% ownership in both Gamatex N.V. and Tankstore Ltd. In turn,
Terminals sold to Vopak its 50% ownership interest in Tees Storage Company Ltd.,
a terminal facility in Middlesborough, England.
Other
External and intercompany financing activities are included in the Other
segment.
Customer Base
GRC 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 GRC as a whole.
Employees
GRC and its subsidiaries have approximately 2,200 active employees, of whom 40%
are hourly employees covered by union contracts.
Item 2. Properties
Information regarding the location and general character of certain properties
of GRC 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
GATX Rail Corporation ("GRC") and GATX Terminals Corporation ("Terminals"), each
subsidiaries of GATX Corporation, are two of the nine defendants named in In re
New Orleans Tank Car Leakage Fire Litigation, Civil Action No. 87-16374, Civil
District Court for the Parish of Orleans, State of Louisiana (the "Tank Car
Litigation"). The litigation arises from the September 1987 leak of butadiene
from a tank car owned by GRC and the subsequent fire. The butadiene was loaded
into the tank car at a facility owned and operated by Terminals. Discovery taken
to date has shown the leak and fire did not cause any deaths or serious personal
injuries, but did result in an approximate thirty-six hour evacuation of persons
in the effected area.
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The Tank Car Litigation was certified as a class action in 1993. A trial of the
compensatory damage claim of twenty selected plaintiffs and of the punitive
damage claims of the class was conducted in 1997. In September 1997, the jury
awarded approximately $1,900,000 plus interest as compensatory damages to the
twenty plaintiffs and $3.4 billion as punitive damages in favor of the class
including $190,000,000 against Terminals. GRC is not liable for punitive
damages. In July 1999, the Court conducted a trial on the compensatory claims of
an additional twenty plaintiffs; the jury awarded a total of $344,300 in
compensatory damages.
In October 1999, GRC, Terminals, three other defendants and the Plaintiffs'
Management Committee acting on behalf of the Class executed a settlement
agreement (the "Preliminary Settlement Agreement") which provides for the
release of any and all claims against the five defendants, including GRC or
Terminals arising out of the tank car incident, including all of the claims
asserted by the class. In November 1999, the Court gave preliminary approval to
the settlement and directed that notice of the proposed settlement be given to
all class members and other interested persons. The Court also ordered that a
final hearing on the settlement will be conducted on March 22, 2000, (the
"Fairness Hearing"). A sixth defendant has entered into a separate settlement
agreement with the class.
At the Fairness Hearing, the Court will consider objections to the settlement
and determine whether the settlement is fair, adequate and reasonable to the
class. Should the settlement be approved, the Tank Car Litigation will be
dismissed with prejudice as to GRC, Terminals and the settling defendants; GRC
and Terminals will be released of any and all claims arising out of or relating
to the tank car incident including all claims of the class and of the class
members for compensatory and punitive damages; and GRC and Terminals will be
indemnified with respect to all such claims.
GRC and Terminals believe that should the Preliminary Settlement Agreement be
approved, the amounts required to be paid by GRC and Terminals in connection
therewith would not be material to the GRC and Terminals' consolidated financial
position or results of operations. In the event the proposed settlement is not
approved, GRC and Terminals will aggressively defend any future trials and
pursue post-judgment review of the compensatory and punitive awards and, if
necessary, appeal of any final judgment.
GRC 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 GRC and its subsidiaries in the
discharge of such liability are not likely to be material to GRC's consolidated
results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not required.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
GATX Corporation owns all of the outstanding common stock of GRC.
Item 6. Selected Financial Data
Not required.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GROSS INCOME for 1999 of $891 million exceeded 1998's gross income of $873
million by 2.0%.
Rail's gross income of $571 million increased 6.7% over the prior year period
primarily due to a larger active North American fleet, a slight increase in
rental rates, and a gain from the sale of 1,700 grain cars that did not provide
an acceptable level of long-term economic value. Rail added 5,400 railcars
during 1999 and at year end had 83,300 railcars on lease in North America.
Utilization ended the year at 95% on a total fleet of 87,800 railcars, which was
comparable to utilization at the end of 1998. The railcar leasing market has
become more competitive due to lower demand. Rail congestion problems resulted
in strong car demand in the chemical markets and contributed to the historically
high demand in the prior year. Although Rail anticipates continuing to invest
aggressively in railcars in 2000, the total investment will be reflective of
market conditions.
Terminals' gross income of $294 million decreased $17 million from the prior
year period. Comparisons between periods are affected by terminal locations sold
or closed that were part of the 1997 strategic realignment plan. As part of this
plan, Terminals divested three domestic terminals and six foreign terminals in
1999. Additionally in 1999, one other domestic and one United Kingdom terminal
were closed. Gross income from continuing operations increased 7.7% over the
prior year period. Terminals benefited from generally strong markets in 1999,
which resulted in an increase in volume and average pricing. Throughput and
capacity utilization improved to 537 million barrels and 95% in 1999 compared to
531 million barrels and 94% in 1998.
Intercompany interest income in the Other segment of $26 million for 1999 was
comparable to the prior year period. This interest income was generated from
intercompany loans to GATX.
Share of Affiliates' Earnings of $25 million grew 6.8% over 1998. Rail's share
of earnings of its two European affiliates was $4 million in 1999 compared to $3
million in 1998. Rail invested an additional $28 million in these affiliates'
freight and tank car fleets in 1999. Terminals' share of affiliates' earnings of
$21 million increased slightly from the prior year. Terminals' Asian joint
ventures improved significantly over the prior year period due to the
improvement in the Asian economy. This was offset by lower results at Olympic
Pipeline Company ("Olympic"). On June 10, 1999, a rupture and explosion occurred
on the pipeline owned by Olympic, causing three fatalities and property damage
as well as damage to the environment. The cause of the incident is being
investigated by a number of state and federal agencies. Terminals owns 25.1% of
the common shares of Olympic. Management is presently unable to determine the
impact, if any, of this incident on GRC.
COSTS AND EXPENSES: Ownership costs in 1999 increased 4.1% over 1998. Rail's
asset ownership costs increased 7.9% over last year primarily due to an increase
in operating lease expense. Depreciation and interest did not change appreciably
from last year due to Rail's continued use of sale-leaseback financing. In 1999,
$143 million of new railcars were sold and leased back and the resultant cost is
included in operating lease expense. Ownership costs at Terminals decreased $4
million in 1999 primarily due to lower operating lease expense.
Operating expenses of $257 million decreased $20 million from 1998 due to the
sale and closure of several Terminal locations. At Rail, repair costs as a
percentage of revenues decreased from 1998 as a result of lower material costs
and fewer labor hours incurred.
Selling, general and administrative expenses were $82 million and $80 million
for 1999 and 1998, respectively. Terminals' lower expenses were offset by higher
expenses at Rail to support business development and information systems
initiatives.
Income taxes of $71 million in 1999 represent an effective tax rate of 38.7%,
comparable with 1998's rate of 38.3%.
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Net income of $112 million increased $12 million or 12% from 1998. Record net
income at Rail of $73 million increased $6 million from the prior year period,
reflecting higher revenues, including the gain related to the grain car sale,
partially offset by higher selling, general and administrative costs. Terminals'
net income of $26 million for 1999 increased $6 million from 1998 primarily due
to stronger market conditions and the impact of nonrecurring items, including a
gain on the sale of rights along the Central Florida Pipeline and discontinued
locations.
BALANCE SHEET assets of $3.1 billion increased $224 million from 1998.
Additionally, Rail utilizes railcars which are financed through off-balance
sheet operating leases and, therefore, are not included on the balance sheet.
Operating lease assets and facilities of $2.1 billion increased by $79 million
from 1998. Capital additions, excluding investments in affiliated companies,
were $52 million lower in 1999 primarily due to fewer railcar additions.
Investments in affiliated companies increased $75 million; approximately $43
million was invested in joint ventures and $25 million of equity income was
recognized. Total debt increased by $154 million in 1999 primarily due to the
increase in short-term debt.
GRC generates significant cash from its operating activities which is used to
service debt, pay dividends, and fund capital additions. Most of the capital
requirements are considered discretionary and represent additions to the railcar
fleet, joint ventures, and terminal and pipeline facilities. As a result, the
level of capital spending and investments can be adjusted as conditions in the
economy or GRC's businesses warrant. However, the nondiscretionary level of
Terminals' capital program continues to be significant due to environmental and
regulatory requirements of the terminaling business.
CASH PROVIDED BY OPERATING ACTIVITES generated $208 million of cash flow in
1999, a $64 million decrease from 1998. Changes in other include the settlement
of litigation subject to final court approval.
CAPITAL ADDITIONS totaled $447 million, a decrease of $9 million from 1998.
Rail's capital additions in 1999 were $387 million, including $344 million to
acquire 5,400 railcars throughout North America. Rail also acquired additional
interests in both of its European rail joint ventures. In 1998, Rail's additions
were $385 million, including $366 million for railcars. Terminals' expenditures
in 1999 were $60 million, a $10 million decrease from the prior year. This
decrease is primarily due to the timing of various terminal improvement
projects, partially offset by a $15 million investment in a distillate and
distribution affiliate.
PROCEEDS FROM OTHER ASSET SALES of $251 million in 1999 included the receipt of
$143 million from the sale-leaseback of railcars at Rail. Additional asset sales
activity included Rail's sale of 1,700 grain cars and Terminals' sale of its
United Kingdom and Port Everglades terminals. In 1998, Rail sold and leased back
$208 million of railcars and Terminals sold its Vancouver terminal.
CASH PROVIDED BY FINANCING ACTIVITIES was $19 million in 1999 compared to $48
million of cash used in financing activities in 1998. GRC finances its capital
additions through cash generated from operating activities, debt financings, and
sale-leasebacks. During 1999, $145 million of long-term debt was issued and $124
million was repaid.
LIQUIDITY AND CAPITAL RESOURCES: GRC has a $350 million revolving credit
facility which expires in 2003. GRC 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 program and rating agency guidelines, GRC
must keep unused revolving credit capacity at least equal to the amount of
commercial paper outstanding. At December 31, 1999, GRC had $133 million of
commercial paper outstanding, resulting in $217 million of the credit facility
remaining available.
GRC has a $650 million shelf registration for pass through trust certificates
and debt securities of which $220 million of notes and $106 million of pass
through certificates have been issued at year end. At year end, GRC had $208
million of commitments to acquire assets, principally railcars, all of which is
scheduled to fund in 2000.
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At December 31, 1999, approximately $203 million of subsidiary net assets were
restricted, which limits the ability of GRC to transfer assets to the parent
company, GATX, in the form of loans, advances or dividends. The majority of net
asset restrictions relate to GRC's revolving credit agreement.
RISK MANAGEMENT AND MARKET SENSITIVE INSTRUMENTS: GRC, like most other
companies, is exposed to certain market risks, including changes in interest
rates and currency exchange rates. To manage these risks, GRC, pursuant to
preestablished and preauthorized policies, enters into certain derivative
transactions, predominantly interest rate swaps. These interest rate swaps and
other derivative instruments are entered into for hedging purposes only; GRC
does not hold or issue derivative financial instruments for speculative
purposes.
GRC's interest expense is affected by changes in interest rates as a result of
its use of variable rate debt instruments, including commercial paper and other
floating rate debt. Based on GRC's variable rate debt at December 31, 1999, if
market rates were to increase by 10% of GRC's weighted average floating rate,
after-tax interest expense would increase by approximately $2 million in 2000.
Changes in certain currency exchange rates would affect GRC's reported earnings.
Based on 1999 reported earnings, a uniform and hypothetical 10% strengthening in
the U.S. dollar versus those foreign currencies would decrease after-tax income
in 2000 by approximately $3 million.
The interpretation and analysis of the results from the hypothetical changes to
interest rates and currency exchange rates should not be considered in
isolation; such changes would typically have corresponding offsetting changes.
Offsetting effects are present, for example, to the extent that floating rate
debt is associated with floating rate assets.
ENVIRONMENTAL MATTERS: Certain operations of GRC and its subsidiaries
(collectively "GRC") 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, GRC is committed to
protecting the environment as well as complying with applicable environmental
protection laws and regulations. GRC, 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, GRC's foreign operations are subject to
environmental laws in effect in each respective jurisdiction.
GRC's policy is to monitor and actively address environmental concerns in a
responsible manner. GRC 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 13 sites under the requirements of the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("Superfund"). Under these Acts and comparable state laws, GRC may be required
to share in the cost to clean-up various contaminated sites identified by the
EPA and other agencies. GRC has also received notice that it is a PRP at one
site to undertake a Natural Resource Damage Assessment. In all instances, GRC is
one of a number of financially responsible PRPs 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 or restoration
and participation in clean-up or restoration efforts by others, GRC's total
clean-up costs at these sites cannot be predicted with certainty; however, GRC'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, GRC 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
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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, GRC has provided indemnities for environmental issues to the buyers of
two divested companies and a number of divested terminals facilities for which
GRC believes it has adequate reserves.
GRC's environmental reserve at the end of 1999 was $72 million and reflects
GRC's best estimate of the cost to remediate known environmental conditions.
Additions to the reserve were $12 million in both 1999 and 1998. Expenditures
charged to the reserve amounted to $8 million and $9 million in 1999 and 1998,
respectively.
In 1999, GRC made capital expenditures of $8 million for environmental and
regulatory compliance compared to $5 million in 1998. 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 planned would require
capital expenditures of approximately $11 million in 2000. GRC anticipates it
will make annual expenditures at approximately the same level over each of the
next three years.
YEAR 2000 READINESS DISCLOSURE: GRC's program to resolve the Year 2000 issue on
a timely basis was successful. All affected systems were remediated or replaced
as planned. There were no significant interruptions to customer service and
there was no significant disruption to internal systems as a result of the year
2000 changeover. The total Year 2000 cost was approximately $5 million, with
approximately $2 million expensed in 1999. GRC will continue to monitor its
significant computer systems throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
FORWARD-LOOKING STATEMENTS: Certain statements in 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 GRC such as the petroleum,
chemical, and rail industries.
1998 RESULTS OF OPERATIONS COMPARED TO 1997
OVERVIEW: The comparison of 1998 to 1997 results is heavily influenced by the
$124 million after-tax restructuring charge taken in 1997.
GROSS INCOME for 1998 of $873 million exceeded 1997 gross income of $836 million
by 4%.
Rail's gross income of $535 million increased 8% from 1997, with approximately
4,000 more railcars on lease throughout North America. Average rental rates in
1998 were also slightly higher. At year end 1998, there were 81,600 railcars on
lease, representing 95% utilization of the total North American fleet of 85,700
cars.
Utilization at the end of 1997 was almost 96%, with 77,700 cars on lease.
Terminals' gross income of $311 million decreased $2 million from 1997,
primarily due to the sale of the Norco, Louisiana, facility in 1997. For both
petroleum and chemical customers, demand at Terminals' U.S. facilities was
stronger in 1998 which resulted in improved revenues. Petroleum pricing in the
futures market provided incentive to store product, while a favorable U.S.
economy kept demand for chemical storage at a relatively high level.
During 1997, Terminals identified certain nonstrategic locations and recorded a
$124 million after-tax charge for the sale or closure of those and other
impaired facilities. On a continuing basis, throughput and capacity utilization
were 531 million barrels and 94% in 1998 compared to 527 million barrels and 92%
in 1997.
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Intercompany interest income in the Other segment of $27 million for 1998 was $2
million lower than the prior year. This interest income was generated from
intercompany loans to GATX.
Share of Affiliates' Earnings of $24 million in 1998 increased 10% from 1997.
Rail's share of its two European affiliates' earnings was $3 million in 1998
compared to $1 million in 1997. The majority of the increase was attributable to
a full year of affiliate earnings from KVG, a German-based railcar joint venture
acquired by Rail in 1997. Terminals' joint ventures, which primarily serve the
European and Asian markets, contributed $21 million in affiliate earnings in
1998. Results in 1998 were hampered by unfavorable foreign exchange of
approximately $1 million compared to 1997, but overall were comparable to 1997.
EARNINGS in 1998 of approximately $100 million increased $17 million from 1997's
operating income earnings before restructuring. Based on the strength of its
growing revenue base, Rail's net income increased 7% to $67 million in 1998.
Terminals' net income of $20 million for 1998 increased significantly from
1997's operating earnings of $8 million (before restructuring charges), based
primarily on improving market conditions and benefits from the restructuring.
Net income in the Other segment increased $2 million in 1998, primarily due to
lower interest expense.
COSTS AND EXPENSES: Ownership costs of $354 million decreased $7 million from
1997. Depreciation and amortization decreased 9.4% in 1998. Terminals'
depreciation was $14 million lower in1998, in large part due to the asset
write-downs taken as part of the 1997 restructuring. Rail's depreciation and
amortization expense was comparable to 1997. Interest expense decreased 4.7% in
1998. Terminals' interest expense was $4 million lower primarily due to using
asset sale proceeds to pay down debt. Though Rail's fleet grew substantially,
interest expense did not change appreciably from 1997, primarily because of
Rail's continued use of sale-leaseback financing. In 1998, $208 million of
railcars were sold and leased back, and the resultant cost is included in
operating lease expense. Interest expense in the Other segment decreased by $4
million reflecting both lower debt levels and favorable rates.
Operating expenses increased $9 million in 1998. Rail's operating expenses
increase was primarily related to repairs supporting the growing railcar fleet.
Terminals' operating expenses were lower in 1998 primarily due to the 1997 sale
of the Norco, Louisiana facility.
Selling, general and administrative expenses of $80 million increased $4 million
from 1997 due to increased expenditures for employee costs, information systems,
and new business development, partially offset by cost control benefits.
Income taxes of $62 million in 1998 represent an effective tax rate of 38.3%
comparable to the 1997 effective tax rate of 37.1% (before restructuring
charges).
Item 7a. Quantitative and Qualitative Disclosures About Market Risks
Information regarding quantitative and qualitative disclosures about market
risks is included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, in this document.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted under Item 14 (a)(1) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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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.
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PART IV
Item 14. Financial Statement Schedules, Reports on Form 8-K and Exhibits.
<TABLE>
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(a) 1. Financial Statements
The Consolidated Financial Statements of GATX Rail
Corporation and its subsidiaries which are
required in Item 8 are listed below:
<CAPTION>
Page
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Consolidated Statements of Operations - Years Ended December 31,
1999, 1998 and 1997 16
Consolidated Balance Sheets - December 31, 1999 and 1998 17
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997 18
Consolidated Statements of Changes in Shareholder's Equity -
December 31, 1999, 1998 and 1997 19
Notes to Consolidated Financial Statements 20
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts 37
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) No report on Form 8-K was filed during the reporting period.
(c) Exhibit Index
Exhibit
Number Exhibit Description Page
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3A. Certificate of Incorporation of GATX Rail
Corporation, incorporated by reference to the GATX
Rail Corporation Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, file
number 2-54754.
3B. By-Laws of GATX Rail Corporation, as amended and
restated as of June 15, 1994, incorporated by
reference to the GATX Rail Corporation Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994, file number 2-54754.
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- -------------- ------------------------------------------------------------------------------ ----------
<S> <C> <C>
4A. Indenture dated October 1, 1987, incorporated by reference to Exhibit 4.1 to
the GATX Rail Corporation 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 GATX Rail 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 GATX Rail Corporation 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 GATX Rail Corporation
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. GATX Rail Corporation Notices 5 and 6 dated March 28, 1988 and April 12, 1988
defining the rights of holders of GATX Rail's Medium-Term Notes Series A
issued during that period, incorporated by reference to the GATX Rail
Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1988,
file number 2-54754.
4C. GATX Rail 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 GATX Rail Corporation's Medium-Term Notes Series B issued during
those periods, Notices 1 through 3 incorporated by reference to the GATX
Rail Corporation Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, and Notices 4 through 6 incorporated by reference to the
GATX Rail Corporation Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, file number 2-54754.
4D. GATX Rail 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 GATX Rail Corporation's Medium-Term
Notes Series C issued during those periods. Notices 3 through 5 and Notice
7 is incorporated by reference to the GATX Rail Corporation Quarterly
Reports on Form 10-Q for the quarter ended June 30, 1989 and Notice 12
incorporated by reference to the GATX Rail Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989, file number 2-54754.
4E. GATX Rail 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 GATX Rail Corporation's Medium-Term Notes Series D issued during those
periods. Notice 1 is incorporated by reference to the GATX Rail
Corporation Quarterly Report on Form 10-Q for the quarter ended March 31,
1992, Notices 7 and 10 are incorporated by reference to the GATX Rail
Corporation Quarterly Report on Form 10-Q for the quarter ending June 30,
1993, file number 2-54754.
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- -------------- ------------------------------------------------------------------------------ ----------
<S> <C> <C>
4F. GATX Rail 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 GATX Rail Corporation's Medium-Term Notes Series E
issued during those periods. Notices 1 through 3 are incorporated by
reference to the GATX Rail Corporation 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. GATX Rail 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 GATX Rail Corporation'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. $350,000,000 Credit Agreement dated as of May 14, 1998 among GATX Rail
Corporation, the banks listed therein, The First National Bank of Chicago as
Administrative Agent and Morgan Guaranty Trust Company of New York as
Documentation Agent, incorporated by reference to GATX Rail Corporation's
Quarterly Report on Form
10-Q for the period ended June 30, 1998, file number 2-54754.
10B. Form of 6 3/4% Note due March 1, 2006 filed in connection with and
incorporated by reference into, the Registration Statement on Form S-3
(File No. 33-64697) of GATX Rail Corporation, declared effective on
December 7, 1995. Submitted to the SEC on GATX Rail Corporation's
Quarterly Report on Form 10-Q for the period ended March 31, 1999,
file number 2-54754.
12. Statement regarding computation of ratios of earnings to fixed charges. 38
23. Consent of Independent Auditors. 39
27.1 Financial Data Schedule for GATX Rail Corporation for the fiscal year ended
December 31, 1999, file number 2-54754. Submitted to the SEC along with the
electronic submission of this Report on Form 10-K.
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
27.2 Restated Financial Data Schedule for GATX Rail Corporation for the year to
date periods ended March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1997
27.3 Restated Financial Data Schedule for GATX Rail Corporation for the year to
date periods ended March 31, 1998, June 30, 1998, September 30, 1998 and
December 30, 1998.
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>
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GATX RAIL CORPORATION
(Registrant)
/s/ D. Ward Fuller
------------------------------------------------------
D. Ward Fuller
President, Chief Executive Officer
and Director
March 17, 2000
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/ Brian A. Kenney
- ---------------------------------- -----------------------------------
D. Ward Fuller Brian A. Kenney
President, Chief Executive Officer Director
and Director March 17, 2000
March 17, 2000
/s/ Donald J. Schaffer /s/ David B. Anderson
- ---------------------------------- -----------------------------------
Donald J. Schaffer David B. Anderson
Vice President, Finance and Director
Chief Financial Officer March 17, 2000
March 17, 2000
/s/ Deborah A. House
- ----------------------------------
Deborah A. House
Controller
March 17, 2000
14
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GATX Rail Corporation
We have audited the consolidated financial statements and related schedule of
GATX Rail 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 GATX Rail Corporation and subsidiaries for the year ended December 31, 1999.
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
related schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of GATX
Rail Corporation and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in 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
January 25, 2000
Chicago, Illinois
15
<PAGE> 17
GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
GROSS INCOME
Lease and financing services 567.1 532.3 493.0
Distribution services 272.6 290.4 292.8
Other income 26.4 27.2 28.9
------------- ------------ -------------
REVENUES 866.1 849.9 814.7
Share of affiliates' earnings 25.1 23.5 21.3
------------- ------------ -------------
TOTAL GROSS INCOME 891.2 873.4 836.0
OWNERSHIP COSTS
Depreciation and amortization 142.6 138.3 152.7
Interest 108.8 112.8 118.4
Operating lease expense 117.1 102.8 89.6
------------- ------------ -------------
TOTAL OWNERSHIP COSTS 368.5 353.9 360.7
OTHER COSTS AND EXPENSES
Operating expenses 257.1 277.4 268.0
Selling, general and administrative 82.4 80.2 76.1
Provision for restructuring - - 185.8
------------- ------------ -------------
INCOME (LOSS) BEFORE TAXES 183.2 161.9 (54.6)
INCOME TAXES (BENEFIT) 70.9 62.0 (13.4)
------------- ------------ -------------
NET INCOME (LOSS) $ 112.3 $ 99.9 $ (41.2)
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 18
GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 52.3 $ 21.2
TRADE RECEIVABLES - NET 82.2 59.8
OPERATING LEASE ASSETS AND FACILITIES
Railcars and service facilities 2,698.7 2,567.1
Tank storage terminals and pipelines 1,221.7 1,168.2
------------ -------------
3,920.4 3,735.3
Less - Allowance for depreciation (1,775.2) (1,669.3)
------------ -------------
2,145.2 2,066.0
DUE FROM GATX CORPORATION 418.5 389.1
INVESTMENTS IN AFFILIATED COMPANIES 287.2 212.3
OTHER ASSETS 135.3 148.7
------------ -------------
$ 3,120.7 $ 2,897.1
============ =============
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDER'S EQUITY
ACCOUNTS PAYABLE $ 164.3 $ 146.7
ACCRUED EXPENSES 60.2 49.6
DEBT
Short-term debt 248.0 145.7
Long-term debt:
Recourse 1,159.5 1,093.5
Nonrecourse 66.0 70.5
Capital lease obligations 81.9 91.3
------------ -------------
1,555.4 1,401.0
DEFERRED INCOME TAXES 360.9 347.9
OTHER DEFERRED ITEMS 223.7 249.0
------------ -------------
TOTAL LIABILITIES AND DEFERRED ITEMS 2,364.5 2,194.2
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 447.0 400.1
Accumulated other comprehensive loss (25.8) (32.2)
------------ -------------
TOTAL SHAREHOLDER'S EQUITY 756.2 702.9
------------ -------------
$ 3,120.7 $ 2,897.1
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 19
GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 112.3 $ 99.9 $ (41.2)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 142.6 138.3 152.7
Deferred income taxes 24.6 47.3 30.9
Provision for restructuring, net of tax - - 123.8
Other, including working capital (71.9) (14.0) (20.8)
------------ ----------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 207.6 271.5 245.4
INVESTING ACTIVITIES
Additions to operating lease assets and facilities:
Railcars and service facilities (358.7) (384.8) (293.4)
Tank storage terminals and pipelines (45.3) (70.9) (61.7)
Investments in affiliated companies (42.8) - (49.8)
------------ ----------- -------------
Capital additions (446.8) (455.7) (404.9)
Proceeds from asset sales 251.1 239.1 224.6
------------ ----------- -------------
NET CASH USED IN INVESTING ACTIVITIES (195.7) (216.6) (180.3)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 145.0 136.0 40.5
Repayment of long-term debt (123.9) (109.8) (146.3)
Net increase (decrease) in short-term debt 102.3 (21.4) 68.7
Repayment of capital lease obligations (9.4) (8.5) (7.9)
Cash dividends paid to GATX Corporation (65.4) (47.0) (43.0)
Net (increase) decrease in amount due from
GATX Corporation (29.4) 3.0 16.2
------------ ----------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 19.2 (47.7) (71.8)
------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 31.1 $ 7.2 $ (6.7)
============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 20
GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON ADDITIONAL REINVESTED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------------- --------------- -------------- -------------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ - $ 335.0 $ 431.4 $ 7.9 $ 774.3
Comprehensive loss:
Net loss (41.2) (41.2)
Foreign currency translation loss (25.4) (25.4)
----------
Comprehensive loss (66.6)
Dividends declared (43.0) (43.0)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ - $ 335.0 $ 347.2 $ (17.5) $ 664.7
Comprehensive income:
Net income 99.9 99.9
Foreign currency translation loss (14.7) (14.7)
----------
Comprehensive income 85.2
Dividends declared (47.0) (47.0)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ - $ 335.0 $ 400.1 $ (32.2) $ 702.9
Comprehensive income:
Net income 112.3 112.3
Foreign currency translation gain 6.4 6.4
----------
Comprehensive income 118.7
Dividends declared (65.4) (65.4)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ - $ 335.0 $ 447.0 $ (25.8) $ 756.2
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 21
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
GATX Rail Corporation ("GRC") is a wholly owned subsidiary of GATX Corporation
("GATX"). Significant accounting policies of GRC and its consolidated
subsidiaries are discussed below.
Consolidation: The consolidated financial statements include the accounts of GRC
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, with pretax operating results
shown as share of affiliates' earnings.
Cash Equivalents: GRC 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 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:
<TABLE>
<S> <C>
Railcars 20 - 33 years
Buildings, leasehold improvements,
storage tanks and pipelines 5 - 40 years
Machinery and related equipment 3 - 20 years
</TABLE>
Goodwill: GRC has classified the cost in excess of the fair value of net assets
acquired as goodwill. Goodwill, which is included in other assets, is amortized
on a straight-line basis over 40 years. GRC 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 $5.9 million and $5.1 million, was
$25.3 million and $26.1 million as of December 31, 1999 and 1998, respectively.
Amortization expense was $.8 million, $.9 million and $1.2 million for 1999,
1998 and 1997, respectively.
Income Taxes: United States income taxes have not been provided on the
undistributed earnings of foreign subsidiaries and affiliates which GRC intends
to permanently reinvest in these foreign operations. The cumulative amount of
such earnings was $189.4 million at December 31, 1999.
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.
Off-Balance Sheet Financial Instruments: GRC uses off-balance sheet financial
instruments such as interest rate and currency swaps, forwards and similar
contracts to set interest and exchange rates on existing or anticipated
transactions. Fair values of GRC's off-balance sheet financial instruments
(futures, swaps, forwards, 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.
20
<PAGE> 22
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 GRC's liability for environmental clean-up is both
probable and a minimum estimate of associated costs can be made; adjustments to
initial estimates are recorded as necessary.
Revenue Recognition: The majority of GRC's gross income is derived from the
rentals of railcars and terminals and other services.
Foreign Currency Translation: The assets and liabilities of GRC 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. Adjustments resulting from the translation of foreign currency
financial statements are deferred and recorded as a separate component of
accumulated other comprehensive income (loss). The cumulative foreign currency
translation loss recorded in accumulated other comprehensive income (loss) was
$(25.8) million and $(32.2) million at the end of 1999 and 1998, 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.
New Accounting Pronouncements: The Financial Accounting Standards Board issued
Statement No. 133 - Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133). This new accounting standard will require that all derivatives
be recorded on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in the fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. GRC utilizes fundamental derivatives to hedge changes in
interest rates and foreign currencies. In July 1999, Statement No. 137 was
issued which deferred the effective date of SFAS No. 133 for one year. SFAS No.
133 is now required to be adopted in years beginning after June 15, 2000.
Management is currently assessing the impact that the adoption of SFAS No. 133
will have on the company's financial position, results of operations, and cash
flows. GRC expects to adopt SFAS No. 133 effective January 1, 2001.
Reclassifications: Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 presentation.
21
<PAGE> 23
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - ACCOUNTING FOR LEASES
The following information pertains to GRC 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, 1999 were (in millions):
<TABLE>
<S> <C>
2000 $ 572.7
2001 441.3
2002 331.6
2003 216.8
2004 131.0
Years thereafter 378.2
========
$2,071.6
========
</TABLE>
The following information pertains to GRC as a lessee:
Capital leases: GRC leases certain railcars under capital lease agreements.
Operating lease assets and facilities includes cost and related allowances for
depreciation of $150.0 million and $100.8 million, respectively, at December 31,
1999 and $151.1 million and $95.1 million, respectively, at December 31, 1998
for these railcars. The cost of these assets is amortized on the straight-line
basis with the charge included in depreciation expense.
Operating leases: GRC has financed railcars through sale-leasebacks which are
accounted for as operating leases. In addition, GRC leases certain other assets
and office facilities. Total operating lease expense for the years ended
December 31, 1999, 1998 and 1997 was $117.1 million, $102.8 million and $89.6
million, respectively.
22
<PAGE> 24
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - ACCOUNTING FOR LEASES (CONTINUED)
Minimum future rental payments: Future minimum rental payments due under
noncancelable leases at December 31, 1999 were (in millions):
<TABLE>
<CAPTION>
NONRECOURSE
CAPITAL OPERATING OPERATING
LEASES LEASES LEASES
---------- ----------- -------------
<S> <C> <C> <C>
2000 $ 16.9 $ 72.7 $ 38.2
2001 16.6 72.9 39.9
2002 16.0 80.4 37.4
2003 15.0 71.2 40.0
2004 12.9 75.5 39.9
Years thereafter 37.0 1,012.7 601.0
------- -------- -------
$ 114.4 $1,385.4 $ 796.4
======== =======
Less - Amount representing interest (32.5)
-------
Present value of future minimum
capital lease payments $ 81.9
=======
</TABLE>
The above capital lease amounts do not include the cost of licenses, taxes,
insurance and maintenance which GRC is required to pay. Subsequent to the
initial lease term, the majority of railcar operating leases allow GRC to renew
the lease at a fixed rate or purchase the railcar at fair market value. Interest
expense on the above capital lease obligations was $7.5 million in 1999, $8.5
million in 1998, and $9.3 million in 1997.
The amounts shown as nonrecourse operating leases reflect rental payments of
three bankruptcy remote special purpose corporations which are wholly owned by
GRC. These rentals are consolidated for accounting purposes but are not
guaranteed by nor are obligations of GRC.
NOTE C - ADVANCES TO PARENT
Interest income on advances to GATX, which is included in gross income on the
income statement, was $26.4 million in 1999, $27.2 million in 1998, and $28.9
million in 1997. These advances have no fixed maturity date. Interest income on
advances to GATX was based on an interest rate that is adjusted annually in
accordance with an estimate of short-term borrowing rates.
NOTE D - INVESTMENTS IN AFFILIATED COMPANIES
GRC has investments in 25 to 50 percent-owned companies and joint ventures that
are accounted for using the equity method. These domestic and foreign
investments are in businesses similar to those of GRC's operations.
Distributions received from such jointly owned companies were $4.7 million, $5.1
million and $5.0 million in 1999, 1998 and 1997, respectively.
23
<PAGE> 25
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
For all affiliated companies held at the end of the year, operating results, as
if GRC held 100% interest, were (in millions):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gross income $351.9 $251.0 $229.9
Pretax income 62.7 53.0 48.4
</TABLE>
For all affiliated companies held at the end of the year, summarized balance
sheet data, as if GRC held 100% interest, were (in millions):
<TABLE>
<CAPTION>
December 31
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Total assets $1,478.9 $1,119.4
Long-term liabilities 656.2 623.3
Other liabilities 394.9 172.7
-------- --------
Shareholders' equity $ 427.8 $ 323.4
======== ========
</TABLE>
24
<PAGE> 26
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - FOREIGN OPERATIONS
GRC has a number of investments in subsidiaries and affiliated companies which
are located in or derive revenue from foreign countries. Foreign entities
contribute significantly to share of affiliates' earnings. The foreign
identifiable assets represent investments in affiliated companies as well as
fully consolidated assets for a Canadian railcar subsidiary and a Mexican
railcar operation.
<TABLE>
<CAPTION>
In Millions/Year Ended or at December 31
Revenue 1999 1998 1997
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Canada $ 78.5 $ 69.0 $ 58.7
Other Foreign 44.6 41.8 35.0
United States 743.0 739.1 721.0
-------- -------- --------
$ 866.1 $ 849.9 $ 814.7
======== ======== ========
Share of Affiliates' Earnings
- ----------------------------------------
Canada $ - $ - $ -
Other Foreign 23.3 20.8 19.7
United States 1.8 2.7 1.6
-------- -------- --------
$ 25.1 $ 23.5 $ 21.3
======== ======== ========
Identifiable Assets
- ----------------------------------------
Canada $ 288.8 $ 270.4 $ 289.4
Other Foreign 397.7 277.0 300.8
United States 2,434.2 2,349.7 2,238.0
-------- -------- --------
$3,120.7 $2,897.1 $2,828.2
======== ======== ========
</TABLE>
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, a component of accumulated other comprehensive income
(loss).
25
<PAGE> 27
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - SHORT-TERM DEBT AND LINES OF CREDIT
Short-term debt (in millions) and its weighted average interest rate as of
year-end were:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Amount Rate Amount Rate
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial paper $ 132.6 6.69% $ 35.0 6.32%
Other short-term borrowings 115.4 6.53% 110.7 5.81%
------- -------
$ 248.0 $ 145.7
======= =======
</TABLE>
Under a revolving credit agreement with a group of banks, GRC may borrow up to
$350.0 million. The revolving credit agreement contains various restrictive
covenants that include, among other things, minimum net worth, restrictions on
additional indebtedness, and requirements to maintain certain financial ratios
for GRC. Under the agreement, GRC met these requirements at December 31, 1999.
While at year end no borrowings were outstanding under the agreement, the
available line of credit was reduced by $132.6 million of commercial paper
outstanding. GRC also had borrowings of $115.0 million under unsecured money
market lines at December 31, 1999.
Interest expense on short-term debt was $12.8 million in 1999, $12.9 million in
1998, and $14.7 million in 1997.
NOTE G - LONG-TERM DEBT
Long-term debt (in millions) and the range of interest rates as of year-end
were:
<TABLE>
<CAPTION>
December 31
Interest Final -------------------------------
Rates Maturity 1999 1998
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed Rate:
Term notes 6.16% - 10.45% 2000 - 2011 $ 893.6 $ 829.8
Nonrecourse obligations 7.84% 2008 66.0 70.5
Industrial revenue bonds 6.63% - 7.30% 2019 - 2024 87.9 87.9
-------- --------
1,047.5 988.2
Variable Rate:
Term notes 5.25% - 6.70% 2002 - 2003 178.0 175.8
-------- --------
$1,225.5 $1,164.0
======== ========
</TABLE>
26
<PAGE> 28
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - LONG-TERM DEBT (CONTINUED)
Maturities of GRC's long-term debt as of December 31, 1999 for each of the years
2000 through 2004 were (in millions):
<TABLE>
<CAPTION>
Year Maturities
--------- -------------
<S> <C>
2000 $ 127.5
2001 95.8
2002 162.8
2003 266.0
2004 107.3
</TABLE>
Interest cost incurred on long-term debt, net of capitalized interest, was $88.5
million in 1999, $91.4 million in 1998, and $94.4 million in 1997. Interest cost
capitalized as part of the cost of acquisition or construction of major assets
was $.8 million in 1999, $1.3 million in 1998, and $.9 million in 1997.
NOTE H - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, GRC utilizes off-balance sheet financial
instruments to manage financial market risk, including interest rate and foreign
exchange risk.
At December 31, 1999, GRC had the following off-balance sheet financial
instruments (in millions):
<TABLE>
<CAPTION>
Notional Pay Receive
Interest Rate Swaps Amount Rate/Index Rate/Index Maturity
- ---------------------------------------- ---------- -------------- -------------- --------------
<S> <C> <C> <C>
GRC pays fixed, receives floating $568.5 4.80% - 6.83% LIBOR 2000 - 2003
GRC pays floating, receives fixed $530.0 LIBOR 5.41% - 7.65% 2002 - 2008
Currency Swaps Receive Deliver Maturity
- ---------------------------------------- -------------- --------------- --------------
Canadian dollar swap $115.0 C$156.2 2011
Duetschemark swap $ 40.5 72.5DM 2002
Currency Forwards Receive Deliver Maturity
- ---------------------------------------- -------------- --------------- ---------------
Canadian dollar forward C$ 4.9 $ 3.3 2000
Duetschemark forward $ 6.3 11.8DM 2002
</TABLE>
27
<PAGE> 29
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
GRC had the following interest rate hedge activity (in millions):
<TABLE>
<CAPTION>
Pay Pay
Interest Rate Swaps Fixed Floating
- ---------------------------------------- ------------ ------------
<S> <C> <C>
Balance at January 1, 1998 $ 725.7 $500.0
Additions 370.2 30.0
Maturities (350.0) -
------- ------
Balance December 31, 1998 745.9 530.0
Additions 75.8 -
Maturities (253.2) -
------- ------
Balance at December 31, 1999 $ 568.5 $530.0
======= ======
</TABLE>
GRC 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 GRC's long-term fixed rate debt to debt
with maturities of three months to five years. Through the swap program, changes
in GRC's interest expense are expected to better reflect changes in railcar
lease rates.
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, 1999, GRC would have received
$3.3 million if the swaps were terminated; GRC would have received $29.5 million
if the swaps were terminated at December 31, 1998.
GRC has entered into currency swaps and forwards to hedge $115.0 million in debt
obligations at its Canadian subsidiary and $46.8 million in debt obligations at
its German affiliate. The fair market value of its currency swap and forward
agreements is an estimate of the amount the company would receive or pay to
terminate those agreements. At December 31, 1999, GRC would have received $5.7
million if the swaps and forwards were terminated; GRC would have received $20.9
million if the swaps were terminated at December 31, 1998.
In the event that a counterparty fails to meet the terms of the interest rate
swap agreement or a foreign exchange contract, GRC's exposure is limited to the
interest rate or currency differential. GRC 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. GRC considers the risk of nonperformance to be remote.
28
<PAGE> 30
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value of
financial instruments:
The carrying amount of cash and cash equivalents, trade receivables, accounts
payable, and short-term debt approximates fair value because of the short
maturity of those instruments. Also, the carrying amount of variable rate
long-term debt approximates fair value.
The fair value of fixed rate long-term debt was estimated by performing a
discounted cash flow calculation using the term and market interest rate for
each note based on GRC's current incremental borrowing rates for similar
borrowing arrangements. Portions of fixed rate long-term debt have effectively
been converted to floating rate debt by utilizing interest rate swaps (GRC pays
floating, receives fixed) as described in Note H. In such instances, the
increase (decrease) in the fair value of the fixed rate long-term debt would be
offset in part by the increase (decrease) in the fair value of the interest rate
swap. The following table sets forth the carrying amounts and fair values of the
company's fixed rate debt (in millions):
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Long-term debt - fixed $1,047.5 $1,041.7 $ 988.2 $1,055.9
========= ======== ======= ========
</TABLE>
NOTE J - PENSION AND OTHER POSTRETIREMENT BENEFITS
GRC and its subsidiaries contributed to several pension plans sponsored by GATX
that cover substantially all employees. Benefits payable 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 $.1
million, $2.7 million and $2.5 million in 1999, 1998 and 1997, respectively.
Costs pertaining to the GATX plans are allocated to GRC 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 1999, 1998, and 1997 was
$1.8 million, $1.9 million and $4.9 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.
In addition to the pension plans, GRC 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 GRC with immediate pension benefits under the GATX pension
plan. The plans are either contributory or non-contributory, depending on
various factors.
29
<PAGE> 31
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following tables set forth other postretirement obligations and plan assets
(in millions) as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 51.8 $ 52.6
Service cost .5 .4
Interest cost 3.5 3.6
Actual loss .7 .2
Benefits paid (5.1) (5.0)
------- -------
Benefit obligation at end of period $ 51.4 $ 51.8
======= =======
Change in fair value plan assets:
Plan assets at beginning of period $ - $ -
Company contributions 5.1 5.0
Benefits paid (5.1) (5.0)
------- -------
Plan assets at end of period $ - $ -
======= =======
Reconciliation of accrued and total amount recognized
Funded status of the plan $ (51.4) $ (51.8)
Unrecognized net gain (6.8) (8.0)
------- -------
Accrued cost $ (58.2) $ (59.8)
======= =======
Accrued benefit liability recognized $ (58.2) $ (59.8)
======= ========
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Total costs:
Service cost $ .5 $ .4 $ .4
Interest cost 3.5 3.6 3.8
Amortization of unrecognized net gain (.5) (.6) (.6)
Recognized special termination benefits expense - - 1.1
------- ------- -------
Net periodic cost $ 3.5 $ 3.4 $ 4.7
======= ======= =======
</TABLE>
30
<PAGE> 32
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Assumptions as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Discount rate 7.00% 7.00%
Rate of compensation increases 5.00% 5.00%
</TABLE>
The assumed health care cost trend rate was 5.0% for participants over the age
of 65 and 6.0% for participants under the age of 65 for 1999 and thereafter. The
health care cost trend rate has a significant effect on the amount of the other
postretirement benefit cost and obligation. A 1% increase in the trend rate
would increase the cost by $.2 million and the obligation by $2.9 million. A 1%
decrease in the trend rate would decrease the cost by $.2 million and the
obligation by $2.6 million.
NOTE K - 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 GRC's deferred tax liabilities and assets were (in
millions):
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax liabilities:
Book/tax basis differences due to depreciation $ 355.9 $ 354.7
Other 78.8 61.4
------------ -------------
Total deferred tax liabilities 434.7 416.1
Deferred tax assets:
Accruals not currently deductible for tax purposes 28.3 29.3
Postretirement benefits other than pensions 20.2 20.9
Lease accounting 20.9 12.4
Other 4.4 5.6
------------ -------------
Total deferred tax assets 73.8 68.2
------------ -------------
Net deferred tax liabilities $ 360.9 $ 347.9
============ =============
</TABLE>
31
<PAGE> 33
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - INCOME TAXES (CONTINUED)
The results of operations of GRC 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 GRC'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 pretax
restructuring charge.
Income taxes consisted of (in millions):
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current-
Domestic:
Federal $ 36.0 $ 8.3 $ 8.4
State and local 3.6 .9 -
---------- ---------- -----------
39.6 9.2 8.4
Foreign 6.7 5.5 3.8
---------- ---------- -----------
46.3 14.7 12.2
Deferred-
Domestic:
Federal 15.4 34.9 (34.0)
State and local .4 2.5 (3.3)
---------- ---------- -----------
15.8 37.4 (37.3)
Foreign 8.8 9.9 11.7
---------- ---------- -----------
24.6 47.3 (25.6)
---------- ---------- -----------
Income tax expense (benefit) $ 70.9 $ 62.0 $ (13.4)
========== ========== ===========
Income taxes paid $ 43.6 $ 8.4 $ 15.0
========== ========== ===========
</TABLE>
The reasons for the differences between the effective income tax rate and the
federal statutory income tax rate were:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1999 1998 1997 1997(A)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0% 35.0%
Add (deduct) effect of:
Foreign income 1.1 2.2 (3.0) 1.2
State income taxes 1.4 1.4 (3.3) 1.4
Restructuring charges - - (5.5) -
Other 1.2 (.3) 1.3 (.5)
------------ ------------ ------------ -------------
38.7% 38.3% 24.5% 37.1%
============ ============ ============ =============
</TABLE>
(A) Before restructuring charges.
32
<PAGE> 34
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
GRC's revenues are derived from a range of industries and companies. However,
approximately 37% of total revenues are generated from the transportation or
storage of product from the chemical industry; for similar services, 38% of
revenues are derived from the petroleum industry. GRC also provides services and
products to the chemical and petroleum markets through its affiliates, which are
accounted for under the equity method.
Under its customer lease agreements, GRC retains legal ownership of the asset
except where such assets have been financed by sale-leasebacks. With most loan
financings, the equipment collateralizes the loan. GRC performs credit
evaluations prior to approval of a lease or loan contract. Subsequently, the
creditworthiness of the customer and the value of the collateral are monitored
on an ongoing basis. GRC maintains an allowance for possible losses to provide
for potential losses that could arise should customers become unable to
discharge their obligations to GRC.
At December 31, 1999, GRC had firm commitments to acquire railcars and
facilities totaling $208 million.
GRC issued $143 million of guarantees at December 31, 1999. Guarantees are
commitments issued to guarantee performance of an affiliate to a third party.
Exposure to GRC for certain supplier and loan payment guarantees is mitigated
by, among other things, a third party cross guaranty.
GRC is also a party to letters of credit and bonds totaling $12 million and $6
million at December 31, 1999 and 1998, respectively. In GRC's past experience,
virtually no claims have been made against these financial instruments.
Management does not expect any material losses to result from these off-balance
sheet instruments because performance is not expected to be required and,
therefore, is of the opinion that the fair value of these instruments is zero.
GRC and its subsidiaries are engaged in various matters of litigation and have a
number of unresolved claims pending, including proceedings under governmental
laws and regulations related to environmental matters. While the amounts claimed
are substantial and the ultimate liability with respect to such litigation and
claims cannot be determined at this time, it is the opinion of management that
damages, if any, required to be paid by GRC and its subsidiaries in the
discharge of such liability are not likely to be material to GRC's consolidated
results of operations or financial position.
NOTE M - FINANCIAL DATA OF BUSINESS SEGMENTS
GRC is engaged in the following businesses:
GATX Rail and its domestic and foreign subsidiaries and affiliates ("Rail")
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.
Other represents external and intercompany financing activities.
33
<PAGE> 35
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M - FINANCIAL DATA OF BUSINESS SEGMENTS (CONTINUED)
The financial data presented on this and the following page conform to Statement
of Financial Accounting Standards No. 131 - Disclosures About Segments of an
Enterprise and Related Information, and depict the profitability, financial
position and cash flow for each of GRC's business segments. Segment
profitability is presented to reflect operating results inclusive of allocated
support expenses from the parent company and interest costs
based upon the debt levels shown below.
<TABLE>
<CAPTION>
TERMINALS AND
IN MILLIONS GATX RAIL PIPELINES OTHER TOTAL
- ---------------------------------------- ------------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
1999
PROFITABILITY
Revenues $ 567.1 $ 272.6 $ 26.4 $ 866.1
Share of Affiliates' Earnings 3.8 21.3 - 25.1
Gross Income 570.9 293.9 26.4 891.2
Interest expense (52.6) (50.5) (5.7) (108.8)
Depreciation and amortization (100.1) (42.5) - (142.6)
Income before taxes 117.5 45.2 20.5 183.2
Net income 72.9 26.1 13.3 112.3
FINANCIAL POSITION
Identifiable assets 1,693.8 997.9 429.0 3,120.7
ITEMS AFFECTING CASH FLOW
Net cash provided by operating 141.4 53.5 12.7 207.6
activities
Capital additions 386.6 60.2 - 446.8
</TABLE>
34
<PAGE> 36
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M - FINANCIAL DATA OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
TERMINALS
IN MILLIONS GATX RAIL AND PIPELINES OTHER TOTAL
- --------------------------------------------------- ------------------ -------------- -------------- -------------
1998
<S> <C> <C> <C> <C>
PROFITABILITY
Revenues $ 532.3 $ 290.4 $ 27.2 $ 849.9
Share of Affiliates' Earnings 2.7 20.8 - 23.5
Gross Income 535.0 311.2 27.2 873.4
Interest expense (52.9) (53.6) (6.3) (112.8)
Depreciation and amortization (97.3) (41.0) - (138.3)
Income before taxes 108.5 32.9 20.5 161.9
Net income (loss) 67.1 19.5 13.3 99.9
FINANCIAL POSITION
Identifiable assets 1,539.9 958.4 398.8 2,897.1
ITEMS AFFECTING CASH FLOW
Net cash provided by operating activities 166.1 84.5 20.9 271.5
Capital additions 384.8 70.9 - 455.7
1997
PROFITABILITY
Revenues $ 493.0 $ 292.8 $ 28.9 $ 814.7
Share of Affiliates' Earnings 1.0 20.3 - 21.3
Gross Income 494.0 313.1 28.9 836.0
Interest expense (51.0) (57.3) (10.1) (118.4)
Depreciation and amortization (98.0) (54.7) - (152.7)
Income before taxes and restructuring 99.8 13.3 18.1 131.2
Operating income before restructuring (A) 62.7 8.1 11.8 82.6
Net income 62.7 (115.7) 11.8 (41.2)
FINANCIAL POSITION
Identifiable assets 1,504.5 937.1 386.6 2,828.2
ITEMS AFFECTING CASH FLOW
Net cash provided by operating activities 158.3 69.2 17.9 245.4
Capital additions 336.9 68.0 - 404.9
</TABLE>
(A) Pretax income excludes a $185.8 million charge for restructuring related to
Terminals and Pipelines. The after-tax impact was $123.8 million.
35
<PAGE> 37
GATX RAIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - RESTRUCTURING CHARGES
During 1997, strategic decisions resulted in a $186 million ($124 million
after-tax) restructuring charge related to 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 charge
primarily represents the write-down of asset values with minor costs related to
closure activities. The carrying values of certain assets were written down to
fair value as described in Note A. During 1999 and 1998, Terminals acted upon
its restructuring plan by divesting certain domestic and foreign terminal
locations, most notably the sale of six of its wholly owned terminal sites in
the United Kingdom.
36
<PAGE> 38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GATX RAIL CORPORATION AND SUBSIDIARIES
(IN MILLIONS)
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------- -------------- -------------------- ----------------- -----------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------- ---------------- -------------- -------------------- ----------------- -----------------
Additions
-----------------------------------
DESCRIPTION Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts- Deductions at End of
of Period Expenses Describe Describe Period
- ---------------------------------------- ---------------- -------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for possible losses
in collection of trade
receivables - Note A $ 5.1 $ .3 $ - (B) $ (.9) (C) $ 4.5
Year ended December 31, 1998:
Allowance for possible losses
in collection of trade
receivables - Note A $ 5.7 $ .6 $ (.7) (B) $ (.5) (C) $ 5.1
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
</TABLE>
Note A - Deducted from asset accounts.
Note B - Transfer from other accounts.
Note C - Uncollectible accounts charged off.
37
<PAGE> 1
EXHIBIT 12
GATX RAIL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earnings available for fixed charges:
Net income (loss) $112.3 $ 99.9 $(41.2) $80.3 $93.9
Add (deduct):
Income taxes expense (benefit) 70.9 62.0 (13.4) 50.6 59.1
Share of affiliates' earnings, net of (20.4) (18.4) (18.4) (20.8) (29.5)
distributions received
Interest on indebtedness and amortization of
debt discount and expense 108.8 112.8 118.4 109.1 93.2
Amortization of capitalized interest 1.4 1.4 1.4 1.1 1.1
Portion of operating lease expense
representative of interest factor (deemed to
be one-third) 39.0 34.3 29.9 26.3 20.9
----------- ------------ ------------- ----------- -----------
Total earnings available for fixed charges $312.0 $292.0 $76.7 $246.6 $238.7
=========== ============ ============= =========== ===========
Fixed charges:
Interest on indebtedness and amortization of
debt discount and expense $108.8 $112.8 $118.4 $109.1 $93.2
Capitalized interest .8 1.3 .9 3.7 4.6
Portion of operating lease expense
representative of interest factor (deemed to
be one-third) 39.0 34.3 29.9 26.3 20.9
----------- ------------ ------------- ----------- -----------
Total fixed charges $148.6 $148.4 $149.2 $139.1 $118.7
=========== ============ ============= =========== ===========
Ratio of earnings to fixed charges (A) 2.10x 1.97x .51x (B) 1.77x 2.01x
</TABLE>
(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 amortization of debt discount and
expense, adjusted for capitalized interest and one-third (the proportion
deemed representative of the interest factor) of operating lease expense.
"Earnings" consist of consolidated net income before income taxes and
fixed charges, less share of affiliates' earnings, 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 1.34x.
See Note N - Restructuring Charges.
38
<PAGE> 1
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 GATX Rail Corporation of our report dated
January 25, 2000, with respect to the consolidated financial statements and
schedule of GATX Rail Corporation included in this Annual Report on Form 10-K
for the year ended December 31, 1999.
ERNST & YOUNG LLP
March 15, 2000
Chicago, Illinois
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS OF GRC 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 87
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 3,920
<DEPRECIATION> 1,775
<TOTAL-ASSETS> 3,121
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 1,307<F2>
0
0
<COMMON> 0
<OTHER-SE> 756
<TOTAL-LIABILITY-AND-EQUITY> 3,121
<SALES> 0
<TOTAL-REVENUES> 866<F3>
<CGS> 0
<TOTAL-COSTS> 257<F4>
<OTHER-EXPENSES> 260<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 183
<INCOME-TAX> 71
<INCOME-CONTINUING> 112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Not applicable because GRC has an unclassified balance sheet.
<F2>This value consists of three components: Recourse Long-term debt of 1,159
million, Nonrecourse Long-term Debt of 66 million, and Capital Lease
Obligations of 82 million. Short-term Debt is not included in this
calculation.
<F3>Revenues exclude share of affiliates' earnings.
<F4>This value represents Operating Expenses on the Consolidated Statements of
Income.
<F5>This value consists of two components: the Provision for Depreciation and
Amortization of 143 million and operating lease expense of 117 million on the
Consolidated Statements of Operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following Financial Data Schedules have been restated to reflect a revised
income, statement presentation which includes changes to share of affiliates'
earnings, investments in affiliated companies, operating lease expenses,
operating expense, income before taxes and taxes.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-1999 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-1999 JAN-01-1997
<PERIOD-END> MAR-31-1999 JUN-03-1999 SEP-30-1999 DEC-31-1997
<CASH> 23 28 99 14
<SECURITIES> 0 0 0 0
<RECEIVABLES> 65 73 88 59
<ALLOWANCES> 5 5 5 6
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 3,839 3,933 3,824 3,609
<DEPRECIATION> 1,700 1,731 1,745 1,594
<TOTAL-ASSETS> 3,006 3,111 3,081 2,828
<CURRENT-LIABILITIES> 0 0 0 0
<BONDS> 1,156 1,307 1,282 1,243
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 718 737 757 665
<TOTAL-LIABILITY-AND-EQUITY> 3,006 3,111 3,081 2,828
<SALES> 0 0 0 0
<TOTAL-REVENUES> 216 430 652 815
<CGS> 0 0 0 0
<TOTAL-COSTS> 67 132 199 268
<OTHER-EXPENSES> 64 129 193 242
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 26 54 81 118
<INCOME-PRETAX> 48 92 140 (55)
<INCOME-TAX> 19 36 54 (14)
<INCOME-CONTINUING> 29 56 86 (41)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 29 56 86 (41)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following Financial Data Schedules have been restated to reflect a revised
income, statement presentation which includes changes to share of affiliates'
earnings, investments in affiliated companies, operating lease expenses,
operating expense, income before taxes and taxes.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<CASH> 17 18 20 21
<SECURITIES> 0 0 0 0
<RECEIVABLES> 42 60 63 65
<ALLOWANCES> 5 5 5 5
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 3,719 3,798 3,663 3,735
<DEPRECIATION> 1,634 1,652 1,660 1,669
<TOTAL-ASSETS> 2,884 2,970 2,831 2,897
<CURRENT-LIABILITIES> 0 0 0 0
<BONDS> 1,219 1,209 1,323 1,255
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 676 679 685 703
<TOTAL-LIABILITY-AND-EQUITY> 2,884 2,970 2,831 2,897
<SALES> 0 0 0 0
<TOTAL-REVENUES> 207 417 632 850
<CGS> 0 0 0 0
<TOTAL-COSTS> 69 138 208 277
<OTHER-EXPENSES> 60 120 174 241
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 28 57 0 113
<INCOME-PRETAX> 37 76 118 162
<INCOME-TAX> 13 28 44 62
<INCOME-CONTINUING> 24 48 74 100
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 24 48 74 100
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
