UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Year Ended Commission File Number
December 31, 1996 1-8319
GATX CAPITAL CORPORATION
Incorporated in the IRS Employer Identification Number
State of Delaware 94-1661392
Four Embarcadero Center
San Francisco, CA 94111
(415) 955-3200
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
All Common Stock of Registrant is held by GATX Financial Services, Inc. (A
wholly-owned subsidiary of GATX Corporation).
As of March 17, 1997, Registrant has outstanding 1,031,250 shares of $1 par
value Common Stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) and
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
Annual Report to Stockholders for Part II Items 6, 7, & 8
Fiscal Year Ended December 31, 1996
(the "Annual Report")
Registration Statement on Form S-1 Part IV Item 14(a)3
filed with the Commission on
December 23, 1981 (file No. 2-75467)
Amendment No. 1 to Form S-1 filed Part IV Item 14(a)3
with the Commission on
February 23, 1982
Amendment No. 2 to Form S-1 filed Part IV Item 14(a)3
with the Commission on March 2, 1982
Form 10-K for the Year Ended Part IV Item 14(a)3
December 31, 1982 filed with the
Commission on March 28, 1983
Form 10-K for the Year Ended Part IV Item 14(a)3
December 31, 1990 filed with the
Commission on March 30, 1991
Form 10-K for the Year Ended Part IV Item 14(a)3
December 31, 1992 filed with the
Commission on March 31, 1993
Form 10-K for the Year Ended Part IV Item 14(a)3
December 31, 1994 filed with the
Commission on March 27, 1995
Form 10-K for the Year Ended Part IV Item 14(a)3
December 31, 1995 filed with the
Commission on March 28, 1996
<PAGE>
PART I
Item 1. Business
- -----------------
GATX Capital Corporation and its subsidiaries ("GATX Capital" or the
"Company") actively invest in a wide variety of assets. These investments are
made through a variety of financing instruments, primarily leases and loans,
either for the Company's own account or through partnerships and joint ventures.
GATX Capital actively manages its existing portfolio of investments as well as
those of institutional investors, and manages several joint ventures and
partnerships in which it participates. Additionally, the Company arranges
secured financing for others. The Company also sells computer network technology
equipment and provides technical service on the equipment it sells. GATX
Capital Corporation is a wholly-owned subsidiary of GATX Corporation.
Item 2. Properties
- -------------------
The Company leases all of its office space and owns no materially important
physical properties other than those related directly to its investment
portfolio. The Company's principal offices are rented under a twelve year lease
expiring in 2003.
Item 3. Legal Proceedings
- --------------------------
On July 11, 1996, GATX/Airlog Company ("Airlog"), a California general
partnership of which a subsidiary of the Company is a partner, and the Company
filed a complaint for Declaratory Judgment against Evergreen International
Airlines, Inc., ("Evergreen") in the United States District Court for the
Northern District of California (No. C96-2494) seeking a declaration that
neither the Company nor Airlog has any liability to Evergreen as a result of the
issuance of Airworthiness Directive 96- 01-03 (the "Airworthiness Directive") by
the Federal Aviation Administration (the "FAA") in January of 1996. The effect
of the Airworthiness Directive is to reduce significantly the amount of freight
that three of Evergreen's B747 aircraft may carry.
Between 1988 and 1990, these three aircraft, along with a fourth no longer owned
by Evergreen, were modified from passenger to freight configuration by
subcontractors of Airlog, with Evergreen's knowledge and consent, pursuant to
contracts between Airlog and Evergreen or one of its affiliates. These four
aircraft are part of a group of ten B747 aircraft (the "Affected Aircraft") that
were modified by subcontractors of Airlog pursuant to a design approved by the
FAA at the time the modifications were made, and which are subject to the
Airworthiness Directive. The three Evergreen aircraft were flown as part of its
fleet for more than five years, and the seven other modified aircraft were flown
by Evergreen and the three other operators for significant periods. The Company
guaranteed certain of Airlog's obligations to Evergreen. The Company did not
issue guarantees with respect to Airlog's obligations to any of Airlog's other
customers for the affected aircraft.
Evergreen filed an answer and counterclaim on August 1, 1996, asserting that
Airlog and the Company are liable to it under a number of legal theories in
connection with the application of the Airworthiness Directive to the three
aircraft. In an initial disclosure statement dated October 29, 1996, and served
on Airlog and the Company pursuant to applicable discovery rules, Evergreen
alleges to have suffered damages which it has calculated as follows: (i)
out-of-service costs amounting to approximately $16.2 million as of October 15,
1996; (ii) denial of access to then currently favorable capital markets,
resulting in an alleged inability to issue shares in an initial public offering
with a value of as much as $ 1.8 billion; (iii) lost flight revenues and profits
amounting to approximately $25.8 million; (iv) lost business opportunities and
profits attributable to Evergreen's diminished 747 fleet capacity (which
Evergreen did not quantify, but has indicated is subject to further
calculation); and maintenance costs in responding to the Airworthiness Directive
(and to related airworthiness directives issued by the FAA) of approximately
$1.6 million as of March 1996. The counterclaim also seeks exemplary and
punitive damages in an unspecified amount. Airlog and the Company have filed a
motion seeking partial summary judgment as to four of Evergreen's counterclaims.
Airlog and the Company have alleged that three counterclaims, each for breach of
warranty are barred by the California Commercial Code's four-year statute of
repose, and that a fourth counterclaim, which seeks recovery for negligent
misrepresentation is barred by the "economic loss doctrine" which prevents
contracting parties from attempting to use tort law to avoid liability
limitations they agreed to in their contracts.
The Company learned that on December 18, 1996, General Electric Capital
Corporation and a subsidiary (collectively, "GECC") filed a Complaint in the
Superior Court for the county of San Francisco (Case No. 983351) against Airlog
and the Company among others. The Complaint asserts causes of action under a
number of legal theories arising out of the modification of three B747 aircraft
from passenger to freighter configuration. These aircraft were modified by
subcontractors of Airlog in 1991 with GECC's knowledge and consent, and are
three of the ten Affected Aircraft. The Complaint seeks direct and consequential
damages which it alleges may be in excess of $50 to $75 million, a declaration
requiring defendants promptly to repair the aircraft and punitive damages. To
the best of the Company's knowledge, no Summons has been served on any of the
defendants in this action.
On January 31, 1997, American International Airways, Inc. ("AIA") filed a
complaint in the United States District Court for the Northern District of
California (C97-0378) against Airlog, the Company, Airlog Management Corp., and
others asserting that Airlog and the Company are liable to it under a number of
legal theories in connection with the application of the Airworthiness Directive
to two aircraft owned by AIA. These aircraft were modified by subcontractors of
Airlog in 1992 and 1994 with AIA's knowledge and consent, and are two of the ten
Affected Aircraft. The Complaint seeks damages (to be trebled under one count of
the complaint) of an unspecified amount relating to lost revenues, lost profits,
denied access to capital markets, repair costs, disruption of its business plan,
lost business opportunities, maintenance and engineering costs, and other
additional consequential, direct, incidental and related damages. The Complaint
asks in the alternative for a recision of AIA's agreements with Airlog and a
return of amounts paid, and for injunctive relief directing that Airlog, and
certain individual defendants, properly staff and manage the correction of the
alleged deficiencies that caused the FAA to issue the Airworthiness Directive.
Consistent with its ongoing product support, Airlog continues to pursue, with
the apparent cooperation of each of the four operators of the Affected Aircraft,
including Evergreen, GECC and AIA, solutions to the FAA's concerns raised in the
Airworthiness Directive. While the results of any litigation are impossible to
predict with certainty, the Company believes that each of the foregoing claims
are without merit, and that the Company and Airlog have adequate defenses
thereto.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Omitted under provisions of the reduced disclosure format.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
- --------------------------------------------------------------------------------
Not applicable. All common stock of the Registrant is held by GATX Financial
Services, Inc. (a wholly-owned subsidiary of GATX Corporation). Information
regarding dividends is shown on the consolidated statements of income and
reinvested earnings which are included in Item 8.
Item 6. Selected Financial Data
- -------------------------------
Omitted under provisions of the reduced disclosure format.
Item 7. Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
Incorporate herein by reference to the Annual Report, pages 26-30,included as
Exhibit 13 of this document.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of GATX Capital Corporation,
included in the 1996 Annual Report (Exhibit 13), are incorporated herein by
reference (page references are to the Annual Report):
Consolidated Statements of Income
and Reinvested Earnings for Years
Ended December 31, 1996, 1995, and 1994 Page 31
Consolidated Balance Sheets
As of December 31, 1996 and 1995 Page 32
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994 Page 33
Notes to Consolidated Financial Statements Pages 34 - 44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
- ---------------------------------------------------------------------
and Financial Disclosure
------------------------
None.
PART III
Item 10(a). Directors of the Registrant
- ----------------------------------------
Name Office Held Since Age
- ----------------------------------------------------------------------------
Ronald H. Zech Chairman of the Board 1984 53
Joseph C. Lane President, Chief Executive
Officer and Director 1994 43
David B. Anderson Director 1996 55
Alan C. Coe Executive Vice President
and Director 1994 45
Jesse V. Crews Executive Vice President,
Chief Investment Officer,
and Director 1994 44
David M. Edwards Director 1990 45
Frederick L. Hatton Executive Vice President
and Director 1984 54
Item 10(b). Executive Officers of the Registrant
- -------------------------------------------------
Name Office Held Since Age
- -----------------------------------------------------------------------------
Joseph C. Lane President, Chief Executive
Officer and Director 1994 43
Alan C. Coe Executive Vice President
and Director 1994 45
Jesse V. Crews Executive Vice President,
Chief Investment Officer,
and Director 1994 44
Frederick L. Hatton Executive Vice President
and Director 1984 54
Cal C. Harling Senior Vice President and
Managing Director-
Technology Group 1994 48
Glenn L. Hickerson Senior Vice President and
President-Air Group 1995 59
Kathryn G. Jackson Executive Vice President and
Managing Director-Corporate
Finance 1995 40
Robert J. Sammis Senior Vice President-
Corporate Development 1993 50
Michael C. Cromar Vice President and Chief
Financial Officer 1994 49
Richard M. Tinnon Vice President and Treasurer 1996 34
Thomas C. Nord Vice President, General
Counsel, and Secretary 1980 56
Valerie C. Williams Vice President-Human
Resources 1989 52
Curt F. Glenn Principal Accounting Officer,
Vice President and Controller 1992 42
<PAGE>
JOSEPH C. LANE, President, Chief Executive Officer and Director since 1994. Mr.
Lane joined GATX in 1978 as a Financial Analyst. At GATX he has held a variety
of positions including District Manager, Regional Marketing Manager, Managing
Director of Corporate Finance and President of GATX International. Mr. Lane
served as Vice President Corporate Finance for two years with the regional
investment banking firm of Rotan Mosle in Houston, Texas, before re-joining GATX
in 1983. He was elected to the Board of Directors of GATX Capital in 1988. Mr.
Lane was a member of the staff at Yale University and a founding officer of
American Digital Systems. He currently serves as Chairman of the Board of
Directors of Centron Corporation and of Sun Financial. He is Vice Chairman of
the Equipment Leasing Association, the national association of the leasing and
finance industry. He received a Bachelor of Arts degree from Yale University in
1975.
ALAN C. COE, Executive Vice President and Director since 1994. Mr. Coe joined
the Company in 1977 as a Financial Analyst and has held a variety of positions
both domestically and internationally. Prior to 1977, Mr. Coe served as an
officer in the United States Air Force (four years) and as Vice
President-Corporate Finance - with Rotan Mosle in Houston, Texas (three years).
Mr. Coe received a BA from Southern Methodist University in 1973 and his MBA
from Golden Gate University in 1976.
JESSE V. CREWS, Executive Vice President, Chief Investment Officer and
Director since 1995. Mr. Crews joined the Company in 1977 as a Financial Analyst
and held a variety of positions, including Regional Manager of the Singapore
(two years) and New Orleans/Houston (five years) offices before returning to San
Francisco in 1985. He has been broadly responsible for the development of new
business investment opportunities for the Company's own portfolio since 1986 and
as head of the Corporate Finance Group from 1990 to 1994. Mr. Crews received a
BA from Yale and an MBA from the University of Virginia.
FREDERICK L. HATTON, Executive Vice President and Director since 1984. Mr.
Hatton joined the Company in 1983 as Senior Vice President and President of GATX
Air. He is currently responsible for GATX Airlog. He is currently a Director of
IASCO and a Director of the International Society of Transport Aircraft Trading
(CISTAT). Prior to 1983, he served as Vice President Marketing for two years,
and Executive Vice President for four years with International Air Service
Company (IASCO). Prior to IASCO, Mr. Hatton served in a number of managerial
capacities for Flying Tiger Lines. He received a BS from Yale University in
1964, an MS in aerospace management from the University of Southern California
in 1971, and an MBA from the Wharton School in 1972. Mr. Hatton served as a U.S.
Marine Corps fighter pilot from 1964 to 1970, including a tour in Vietnam.
CAL C. HARLING, Senior Vice President-Technology Group since 1994. Mr. Harling
joined the Company in 1987 as Vice President, Technology Financing. Prior to
1987 Mr. Harling was an independent consultant for two years. Mr. Harling worked
for Decimus Corporation, a subsidiary of Bank America Corporation, for ten years
starting in 1975. While at Decimus Mr. Harling held various positions including
Vice President of Vendor Operating Leasing, Vice President of Portfolio
Management, and other management positions in systems development. Mr. Harling
received a BS from California State University, Sacramento in 1973.
GLENN L. HICKERSON, President of the Air Group since 1995 and Executive Vice
President of the Air Group from 1990 to 1995. Prior to joining the Company, he
was President/Managing Director of GPA Asia Pacific (1989-1990) and Vice
President-Commercial Marketing and Sales at Douglas Aircraft Company
(1983-1989). Mr. Hickerson served the Lockheed California Company from 1976
through 1983, the last four years as Vice President-Marketing and Sales-
International. Prior to 1976 he served as Group Vice President-Travel Division
with Marriott Corporation (four years), President, Universal Airlines (five
years) and Secretary-Treasurer, Douglas Finance Corporation (five years). Mr.
Hickerson received a BS from Claremont McKenna College and an MBA from New York
University.
<PAGE>
KATHRYN G. JACKSON, Executive Vice President; has managed the Company's
Corporate Finance Group since 1995. She joined the Company in 1981 as Financial
Analyst, and transferred to the Chicago regional office in 1982 serving as
District Manager, Vice President and Managing Director. From 1987 to 1994, she
was employed by D'Accord Financial Services as a Managing Director, member of
the Executive Committee and ultimately served as President, Chairman and Chief
Executive Officer. Ms. Jackson holds a BA from Stanford University and an MBA
from Northwestern University.
ROBERT J. SAMMIS, Senior Vice President-Corporate Development since 1993. Mr.
Sammis joined the Company in 1975 as Associate Counsel. He has served as a
Senior Vice President in charge of Equipment Management and as Managing
Director, International. Mr. Sammis is a Fulbright scholar and, in that
capacity, taught law at the University of Los Andes, Bogota, Columbia. Prior to
joining the Company, he was with Pillsbury, Madison & Sutro as Associate
Counsel. Mr. Sammis received a BA from the University of California and a JD
from the University of Michigan.
MICHAEL E. CROMAR, Vice President and Chief Financial Officer since October
1994. Prior to joining the Company, Mr. Cromar was Vice President, Treasurer and
Chief Financial Officer at The Harper Group, Inc., a San Francisco based
international logistics services company from December 1992 to October 1994.
From September 1988 through August 1992 he served S.A. Louis-Dreyfus & Cie.,
principally as Senior Vice President, Finance and Information, for Gearbulk Ltd.
an industrial bulk shipping joint venture in Bergen, Norway. From 1982 to 1988
he was corporate controller and a director of information technology for
American President Companies, Ltd. From 1975, he held a variety of financial
management positions with Natomas Co., an energy resources company. Mr. Cromar
began his career with Touche Ross & Co. where he was a Certified Public
Accountant. He received a BS degree in Business Administration in 1972 from the
University of Utah and was an infantry officer in the U.S. Army, including
service in Vietnam.
RICHARD M. TINNON, Vice President and Treasurer since 1996. Mr Tinnon joined
GATX Capital in 1987 as a Senior Financial Analyst. He has also served as an
Associated Director of GATX Realty, Director of Financial Planning and Analysis,
Assistant Treasurer, and Assistant to the President. Prior to GATX Capital, Mr.
Tinnon worked for Touche Ross & Co. Mr. Tinnon received his B.A. from Michigan
State University in 1985 and his MBA in 1990 from the University of California,
Berkeley.
VALERIE C. WILLIAMS, Vice President-Human Resources since 1989. Prior to joining
the Company, Ms. Williams was President of VC Williams & Associates, a human
resources consulting firm; was Director, Corporate Compensation and Incentives
at Carson Pirie Scott & Co. and Senior Consultant, Compensation with A.S.
Hansen, Inc. Ms. Williams received her MBA from Lake Forest School of Management
in 1980.
CURT F. GLENN, Principal Accounting Officer, Vice President & Controller since
1992. Mr. Glenn joined the Company in 1980 as Assistant Tax Manager, was
appointed Tax Manager in 1985 and elected Vice President in 1989. Prior to
joining the Company, Mr. Glenn was a Senior Tax Analyst at GATX Corporation (two
years) and a Senior Tax Accountant with Trans Union Corporation (four years).
Mr. Glenn received a B.S. in Accounting from DePaul University in 1977. Mr.
Glenn is currently Chairman of the Federal Tax Committee of the Equipment
Leasing Association.
Items 11, 12 & 13
- -----------------
Omitted under provisions of the reduced disclosure format.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) 1. Financial statements
The following consolidated financial statements of GATX Capital Corporation are
included in Item 8.
Consolidated Statements of Income and Reinvested Earnings
Years Ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets
As of December 31, 1996 and 1995
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial statement schedules
All financial statement schedules have been omitted because they are not
applicable or because required information is provided in the financial
statements, including the notes thereto, which are included in Item 8.
3. Exhibits Required by Item 601 of Regulation S-K
Exhibit Number
--------------
3(a) Restated Certificate of Incorporation of the Company.(6)
3(b) By-laws of the Company.(1)
4(d) Term Loan Agreement between the Company and a Bank dated
December 26, 1990.(2)
10(a) Office Leases, Four Embarcadero Center, dated October 1, 1990
and June 1, 1991, between the Company and
Four Embarcadero Center Venture.(2)
10(b) Tax Operating Agreement dated January 1, 1983 between GATX
Corporation and the Company.(3)
10(c) Credit Agreement among the Company, the Subsidiaries listed in
Schedule II thereto, the Banks listed on the signature pages
thereto and Chase Manhattan Bank, as agent for the Banks,
dated December 14, 1992.(4)
10(d) Amendment No.1, dated December 1, 1994, to Credit Agreement
referred to in 10(c).(5)
10(e) Credit Agreement among the Company, its two subsidiaries
operating in Canada, and the Bank of Montreal, dated
December 14, 1992.(4)
10(f) First Amendment, dated June 20, 1993 to Credit Agreement
referred to in 10(e).(5)
10(g) Second Amendment, dated June 14, 1994, to Credit
Agreement referred to in 10(e).(5)
10(h) Third Amendment, dated December 1, 1994, to Credit Agreement
referred to in 10(e).(5)
12 Ratio of Earnings to Fixed Charges (7)
13 Annual Report to Shareholders, pages 26-45. (7)
23 Consent of Independent Auditors.(7)
27 Financial Data Schedule.(7)
99 Listing of Medium Term Notes.(7)
The Registrant agrees to furnish to the Commission upon request a copy of each
instrument with respect to issues of long-term debt of the Registrant the
authorized principal amount of which does not exceed 10% of the total assets of
Registrant.
(1) Incorporated by reference to Registration Statement on Form S-1, as
amended, (file number 2-75467) filed with the Commission on
December 23, 1981, page II-4.
(2) Incorporated by reference to Form 10-K filed with the Commission
on March 30, 1991.
(3) Incorporated by reference to Form 10-K filed with the Commission
on March 28, 1983.
(4) Incorporated by reference to Form 10-K filed with the Commission
on March 31, 1993.
(5) Incorporated by reference to Form 10-K filed with the Commission
on March 27, 1995.
(6) Incorporated by reference to Form 10-K filed with the Commission
on March 28, 1996.
(7) Submitted to the Securities and Exchange Commission with the
electronic filing of this document.
<PAGE>
Item 14(b). Reports on Form 8-K
- ---------------------------------
The company filed no reports on Form 8-K during the last quarter of the
period covered by this report. A current report on Form 8-K was filed on
January 23, 1997, under Item 5., Other Events.
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 CAPITAL CORPORATION
(Registrant)
By /s/ Joseph C. Lane
-- ------------------
Joseph C. Lane
President, Chief Executive Officer
and Director
March 28, 1997
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.
By /s/ Joseph C. Lane By /s/ Michael E. Cromar
- -- ------------------ -- ---------------------
Joseph C. Lane Michael E. Cromar
President, Chief Executive Officer Vice President and
and Director Chief Financial Officer
Dated: March 28, 1997 Dated: March 28, 1997
By /s/ Curt F. Glenn By /s/ David M. Edwards
- -- ----------------- -- --------------------
Curt F. Glenn David M. Edwards
Principal Accounting Officer, Director
Vice President & Controller
Dated: March 28, 1997 Dated: March 28, 1997
By /s/ Jesse V. Crews By /s/ Alan C. Coe
- -- ------------------ -- ---------------
Jesse V. Crews Alan C. Coe
Executive Vice President, Chief Executive Vice President
Investment Officer and Director and Director
Dated: March 28, 1997 Dated: March 28, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GATX Capital Corporation
We have audited the accompanying consolidated financial statements of GATX
Capital Corporation (a wholly-owned subsidiary of GATX Corporation) and
subsidiaries listed in the accompanying index to financial statements (Item
14(a)). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying index to
financial statements (Item 14(a)) present fairly, in all material respects, the
consolidated financial position of GATX Capital Corporation and subsidiaries at
December 31, 1996 and 1995 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 28, 1997
Exhibit 12
GATX Capital Corporation
Ratio of Earnings to Fixed Charges
Year Ended December 31, 1996
(in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Fixed Charges:
Interest on indebtedness
and amortization of debt
discount and expense $86,106 $68,396 $62,744 $65,454 $71,889
Capitalized interest 3,074 1,601 292 279 73
Portion of rents
representing interest
factor (assumed to
approximate 33%) 10,849 6,574 5,120 3,012 2,440
-------- ------- ------- ------- -------
Total fixed charges 100,029 76,571 68,158 68,745 75,060
======= ====== ====== ======= ======
Earnings available for
fixed charges:
Net income (loss) 45,855 32,604 24,851 21,525 (7,197)
Add (deduct):
Income taxes (benefit) 32,636 22,740 18,785 21,361 (9,849)
Cumulative effect of
accounting changes - - - (9,456) -
Equity in net earnings of
joint ventures, net of
dividends received 8,740 13,522 14,322 16,222 40,161
Fixed charges (excluding
capitalized interest) 96,955 74,970 67,864 68,466 74,329
-------- ------- -------- -------- --------
Total earnings available
for fixed charges $184,186 $143,836 $125,822 $127,574 $87,988
======== ======== ======== ======== =======
Ratio of earnings to
fixed charges 1.84 1.88 1.85 1.86 1.17
======== ======== ======== ======== =======
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
ASSET CONCENTRATION
Stacked pie charts presenting the following:
As of December 31, 1996 1995
- ------------------ ---- ----
Commercial Aircraft 33% 39%
Rail 20% 18%
Technology 12% 8%
Other 35% 35%
OVERVIEW
GATX Capital Corporation and its subsidiaries ("GATX Capital" or the
"Company") actively invest in a wide variety of assets. These investments are
made through a variety of financing instruments, primarily leases and loans,
either for the Company's own account or through partnerships and joint ventures.
GATX Capital actively manages its existing portfolio of investments as well as
those of institutional investors, and several joint ventures and partnerships in
which it participates. Additionally, the Company arranges secured financing for
others. The Company also sells computer network technology equipment and
provides technical service on the equipment it sells.
In 1996, the domestic asset financing markets in which the Company
participates remained extremely competitive, as the imbalance between investor
supply (high) and financing demand (comparatively low) continued to depress
lessor returns in new lease transactions. Nonetheless, GATX Capital enjoyed
notable success in the secondary market purchase of leases or lease portfolios;
in the operating lease of aircraft, rail and technology assets; and in
successfully arbitraging between asset and financial markets. Going forward, the
Company's response to tightening market conditions will include: (i) partnering
with others possessing complementary expertise and/or funding capabilities, (ii)
combining our financial structuring, asset management and investment banking
skills in new ways to benefit our customers, and (iii) selectively adapting and
exporting that skill set to markets around the globe.
GATX Capital's operating lease rates for aircraft leases entered into
during 1996 were higher for the same type of aircraft than in the past several
years. Improvement in rental rates is expected to continue in 1997. Rental rates
reflect the results of continuous traffic growth on top of already high industry
load factors, the replacement of aircraft that do not meet Stage III noise
levels, and relatively low manufacturer 1997/1998 production rates.
Additionally, recent fuel cost increases, safety concerns about older aircraft,
and a desire on the part of major airlines to reduce flight crew costs through
the use of modern "common cockpit" fleets from the same manufacturer have
combined to make new aircraft delivery positions relatively scarce until 2000.
GATX Capital has positioned itself in this environment with its partner-oriented
investment in six firm A321-200 orders and three options, together with its 1996
order for 10 firm and 10 option B737-800 aircraft, as well as a B757-200
purchase. As in 1996, our future aircraft strategy will include continuing to
seek institutional partners for aircraft purchases to reduce risk, earn fees,
and obtain performance-based upside in conjunction with managing partner
investment.
The North American rail equipment leasing marketplace continues to be
characterized by relatively high demand for equipment as well as active
competition among leasing companies and financial institutions. Railroads'
increased efficiency, a relatively strong economy, and corresponding increases
in freight traffic have contributed to an attractive supply-demand relationship
for leased rail equipment in general, although certain rail car types
experienced isolated instances of softness in demand. The year-end utilization
of GATX Capital's operating lease fleet was approximately 97% for rail cars and
99% for locomotives. The outlook for this business remains positive and the Rail
Group's primary focus will continue to be North America, although it will pursue
attractive opportunities in other parts of the world.
The market for information technology and communications equipment and
services continues to provide substantial growth opportunities for GATX Capital.
PAGE 26
<PAGE>
With the October 1996 acquisition of the 50% of Centron it did not already own,
the Company broadened its presence in this growing market. Businesses are
increasingly migrating from centralized, proprietary legacy systems to
distributed client/server systems based upon open standards which present
complex design, procurement, integration and management issues. The Company
believes that equipment financing and value-added services must be combined to
be successful in this market. GATX Capital, with its joint venture partners and
affiliates, is positioning itself to provide customers with a single source for
the life cycle requirements of computing and networking products, both in North
America and in Europe.
RESULTS OF OPERATIONS
The Company's 1996 record net income of $45.9 million exceeded 1995's net
income by $13.3 million, or 41%. The increase is due primarily to an increase in
investment income resulting from (1) an increase in the investment portfolio
during the year and (2) an increase in fee income from asset remarketing
services provided to third parties.
The increase in net income between 1994 and 1995 was primarily due to
higher gains and fees from asset remarketing coupled with increased joint
venture income, partially offset by lower income from leases and loans and
higher interest and administrative expenses.
Investment Income
The Company uses its financial structuring, asset management and investment
banking skills to generate investment-related income in three primary ways: (1)
managing its investments while under contract, (2) selling or remarketing its
assets at the end of the contract term or when market opportunities arise and
(3) generating fees from third parties by serving as a resource for similar
transactions.
During 1996, the Company invested approximately $656.7 million (70% more
than in 1995), resulting in a net increase in the Company's investment portfolio
of $240.7 million over year-end 1995. Depending on the type of investment,
related revenues are recorded as lease income, interest income, joint venture
income or other income. Investment revenues are offset by interest expense on
borrowings used to fund investments, operating lease expense and other expenses.
Loss reserves are provided to maintain an adequate allowance for losses in
relation to investments based on assessments of credit, collateral and market
risks.
INVESTMENT INCOME
Bar graph presenting following:
Year ended December 31, 1996 1995 1994
- ---------------------------- -------- -------- --------
Leases $195,745 $139,712 $143,639
Interest 28,374 23,179 27,085
Investment in joint ventures 22,411 18,594 9,242
Other 10,414 2,875 4,511
-------- -------- --------
Total $256,944 $184,360 $184,477
======== ======== ========
New investments in leased assets, including those funded with off-balance
sheet financing, contributed to the increases in lease income and operating
lease expense. The $56.0 million increase in lease income is attributable to the
full-year impact of Sun Financial, which was acquired in late 1995 ($22.1
million), revenues from new lease investments ($29.3 million), and revenues
related to the October 1996 acquisition of Centron ($4.6 million). The $26.9
million increase in operating lease expense is due primarily to higher
depreciation expense resulting from increased investments (including the
full-year impact of Sun Financial and the impact of Centron) and operating lease
rent expense associated with investments funded with off-balance sheet
financing.
Lease income in 1995 was $3.9 million lower than 1994 despite an increase
in lease investments. Four aircraft, subsequently sold, which had been
generating $8.0 million per year in income, came off lease in early 1995.
Operating lease expense in 1995 was essentially flat versus 1994, although
depreciation expense decreased due to the termination of the aforementioned
aircraft leases, offset by increased operating lease expense associated with
off-balance sheet financed investments.
PAGE 27
<PAGE>
OPERATING LEASE EXPENSE
Bar graph presenting following:
Year ended December 31, 1996 1995 1994
- ----------------------- ------- ------- -------
Depreciation $41,366 $28,420 $33,262
Rent 29,974 17,110 12,669
Other 5,949 4,894 4,690
------- ------- -------
Total $77,289 $50,424 $50,621
======= ======= =======
Interest income increased $5.2 million in 1996 when compared to 1995, due
to higher average loan balances outstanding during the year along with fees
related to loan prepayments. Interest income in 1995 was lower than in 1994 due
to early loan repayments in 1994, which generated $2.4 million of interest
income from prepayment premiums and an additional $3.0 million of interest,
which had not been accrued due to its uncertain nature and was realized from a
real estate loan and an investment in purchased notes.
The majority of the $3.8 million increase in joint venture income is due to
the Company's continued focus on partnering with other investors. During the
year, the Company entered into five new air, rail and technology joint ventures,
in addition to making additional investments in existing joint ventures.
Partially offsetting the increase in joint venture income was the impact of the
acquisition of the non-owned portion of Centron, which was accounted for under
the equity method prior to the acquisition and consolidated thereafter. The
increase in 1995 joint venture income was due to (1) the Company's aircraft
leasing joint venture generating more lease income in 1995 than in 1994 as a
result of certain aircraft earning higher than normal rents for a short term
during the year coupled with the impact of higher interest rates on variable
rate leases, and (2) $3.1 million from the final disposition of a real estate
investment.
JOINT VENTURE INCOME
Bar graph presenting following:
Year ended December 31, 1996 1995 1994
- ----------------------- ------- ------- -------
Air $9,869 $11,329 $6,878
Rail 6,683 1,172 204
Technology 4,856 3,498 2,360
Other 1,003 2,595 --
------- ------- -------
Total $22,411 $18,594 $ 9,442
======= ======= =======
Other income increased $7.3 million. The 1996 income amount includes $3.0
million of realized gains on sales of stock acquired with warrants received in
conjunction with certain financing activities. Such gains are not generally
predictable.
The $17.7 million increase in interest expense is primarily a result of an
overall increase in the Company's average debt balance related to portfolio
growth, partially offset by lower average borrowing rates. Also affecting
interest expense was the full year impact of Sun Financial. The increase in
interest expense in 1995 compared to 1994 was primarily due to an increase in
average outstanding debt balances and an increase in interest rates.
Asset Remarketing
Asset remarketing income includes gains on the sales of the Company's owned
assets and fee income generated from providing remarketing services for third
parties and from the sale of non-owned assets in which the Company has a
residual share. Fee income from asset remarketing services is generally
performance-based. Because asset remarketing income is realized at both lease
end and in response to market opportunities, it does not occur evenly between
periods and can fluctuate significantly depending on market conditions. Income
from asset remarketing has historically been a significant contributor to
income.
PAGE 28
<PAGE>
Bar graph presenting following:
Year ended
December 31, Gains Residual
on Sale Sharing Fees Total
1996 35,534 21,425 56,959
1995 33,131 9,382 42,513
1994 21,444 2,883 24,327
1993 44,434 262 44,696
1992 22,277 1,678 23,955
1991 50,510 1,765 52,275
1990 47,062 1,537 48,599
1989 34,485 1,138 35,623
1988 23,675 2,252 25,927
1987 21,403 -- 21,403
Portfolio Management and Transaction Services
In addition to earning fees for asset remarketing services, the Company
also generates fees from managing leased asset portfolios for institutional
investors, from managing substantially all of the partnerships in which the
Company invests, and from brokering or arranging transactions. As with asset
remarketing fees, transaction fees do not occur evenly between periods.
Equipment Sales and Service
In October 1996, the Company purchased the 50% of Centron which it did not
already own. Centron sells computer hardware and technical services required to
build and operate corporate computer networks. During the two months of 1996 in
which Centron financial results were consolidated in the Company's financial
statements, Centron's equipment sales and service business contributed $36.3
million of sales and service revenue and $33.0 million of related costs and
expenses. Centron's sales and earnings are seasonal in nature, with a
disproportionately positive impact in the fourth quarter. Related trade accounts
receivable and inventory balances at December 31, 1996 are included in the other
assets balance. GATX Capital expects this business activity to have a much
larger financial impact in 1997, the first full year in which Centron will be
consolidated.
SELLING, GENERAL AND ADMINISTRATIVE expenses include costs to manage the
Company's own portfolio as well as the portfolios of institutional investors and
of partnerships in which the Company has an interest. These costs increased in
1996 as a result of higher human resource and other administrative costs
resulting from increased business activity, including the full-year impact of
Sun Financial and the two-month impact of Centron. The increase in selling,
general and administrative expenses in 1995 compared to 1994 was also caused by
an increase in business activity.
THE PROVISION FOR LOSSES ON INVESTMENTS is based on the current estimate of
reserve needs, and fluctuates from period to period as warranted based on a
review of credit, collateral and market risks. The allowance for losses on
investments increased $21.6 million during the year as a result of a $12.7
million provision for losses and $13.9 million in recoveries of previously
written-off investments, offset by $5.0 million in write-downs. At December 31,
1996 the allowance for losses was 6.6% of investments, including off-balance
sheet assets and after deducting non-leveraged non-recourse debt.
Cash Flow, Liquidity and Capital Resources
In 1996, the Company generated cash from operations and from investments of
$454.2 million, borrowed $159.8 million net of repayments, and received $63.8
million from sale-leasebacks. This cash was used to fund new investments of
$656.7 million and pay dividends of $22.6 million. Historically, dividends have
been paid on the Company's common stock at the rate of 50% of net income.
CASH FROM OPERATING ACTIVITIES IN 1996 increased primarily as a result of an
increase in fee income received during the year. 1995 was negatively impacted by
a $48 million payment made that year related to the return of four wide-body
aircraft.
CASH USED IN INVESTING ACTIVITIES increased in 1996, reflecting a record $656.7
million of new investment, up 70% over 1995, partially offset by an increase in
cash from recovery of investments including proceeds from sale-leaseback
transactions. The increase in cash from recovery of investments resulted mainly
from an increase in loan repayments and lease rents received. In 1995, cash used
in investing activities was relatively unchanged from the prior year, despite an
increase in cash from recovery of investments, because this cash was reinvested
in new leases, loans and other investments.
PAGE 29
<PAGE>
INVESTMENT VOLUME
Bar graph presenting following:
Year ended December 31, 1996 1995 1994
- ----------------------- ---- ---- ----
New investment volume $656,662 $385,938 $279,126
======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
In December 1996, the Company issued $200 million of 10-year bonds in an
underwritten public offering under its existing medium-term note shelf
registration. Proceeds from the issuance were used to pay down commercial paper
and fund new investments.
As of December 31, 1996, the Company has approved unfunded transactions
totaling $425 million, of which $203.6 million is expected to fund in 1997 and
the remaining $221.4 million thereafter. Once approved for funding, a
transaction may not be completed for various reasons, or the investment may be
shared with partners or sold.
The Company expects to fund a portion of future growth through issuance of
additional medium-term notes, commercial paper and bankers' acceptances. The
commercial paper and bankers' acceptances are backed by credit agreements from a
syndicate of domestic and international commercial banks. The Company has unused
capacity under these agreements of $256.2 million at December 31, 1996. In
addition, the Company has a $300 million shelf registration for Series D
medium-term notes, under which $268 million has been issued as of December 31,
1996. A new shelf registration of Series E medium-term notes is planned for the
second quarter of 1997. The Company has no firm commitments for the purchase of
notes that it may issue from the unused portions of these shelf registration
statements.
Certain lease transactions are financed by obtaining nonrecourse loans
equal to the present value of some or all of the rental stream. The interest
rates used to discount the rentals are based on the credit quality of the lessee
and the size and term of the lease. The Company uses a wide variety of
nonrecourse lenders to ensure adequate and reliable access to the credit
markets. GATX Capital's senior unsecured notes are rated BBB+ by Standard &
Poor's and Baa2 by Moody's Investors Service.
The Company ensures a stable margin over its cost of funds by managing the
relationship of its fixed and floating rate lease and loan investments to its
fixed and floating rate borrowings. In order to meet this objective, derivative
financial instruments, primarily interest rate swaps, are used to modify the
interest characteristics of the Company's debt. The Company manages the credit
risk of counterparties by dealing only with institutions that it considers
financially sound and by avoiding concentrations of risk with a single
counterparty. Fluctuations in interest rates may impact earnings, either
negatively or positively, depending on the Company's net floating rate asset or
debt position. At December 31, 1996, the Company has $50.2 million more floating
rate assets than floating rate debt.
Total debt financing and stockholder's equity both increased to bring the
Company's debt to equity ratio from 2.78:1 in 1995 to 2.79:1 in 1996. GATX
Capital can borrow an additional $450.0 million and still meet the 4:1 leverage
ratio defined in its credit agreements.
FORWARD-LOOKING STATEMENTS
Certain statements in the Management's Discussion and Analysis constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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, including those discussed elsewhere in this report, and
could cause actual results to differ materially from those projected.
PAGE 30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
Year ended December 31, (in thousands) 1996 1995 1994
- -------------------------------------- ---- ---- ----
Earned income
Leases $ 195,745 $139,712 $ 143,639
Gain on sale of assets 35,533 33,123 21,444
Fees 31,840 19,026 10,111
Interest 28,374 23,179 27,085
Investment in joint ventures 22,411 18,594 9,242
Equipment sales and service 36,286 -- --
Other 10,174 2,875 4,511
--------- --------- ---------
360,363 236,509 216,032
--------- --------- ---------
Expenses
Interest 86,106 68,396 62,744
Operating leases 77,289 50,424 50,621
Cost of equipment sales and service 32,991 -- --
Selling, general and administrative 68,298 43,517 39,296
Provision for losses on investments 12,744 18,000 19,000
Other 4,444 828 735
--------- --------- ---------
281,872 181,165 172,396
--------- --------- ---------
Income before income taxes 78,491 55,344 43,636
Provision for income taxes 32,636 22,740 18,785
--------- --------- ---------
Net income 45,855 32,604 24,851
Reinvested earnings at beginning of year 162,400 146,036 133,570
Dividends paid to stockholder (22,569) (16,240) (12,385)
--------- --------- ---------
Reinvested earnings at end of period $ 185,686 $ 162,400 $ 146,036
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 31
<PAGE>
CONSOLIDATED BALANCE SHEETS
As of December 31, (in thousands) 1996 1995
- --------------------------------- ---- ----
Assets
Cash and cash equivalents $ 18,482 $ 19,905
Investments:
Direct financing leases 461,757 406,950
Leveraged leases 257,039 220,407
Operating lease equipment--net of depreciation 429,880 315,707
Secured loans 222,602 239,873
Investment in joint ventures 308,934 205,292
Assets held for sale or lease 12,393 28,230
Other investments 65,506 77,604
Investment in future residuals 21,457 23,223
Allowance for losses on investments (114,096) (92,489)
----------- -----------
Total investments 1,665,472 1,424,797
----------- -----------
Due from GATX Corporation 45,147 44,337
Other assets 119,528 29,344
----------- -----------
TOTAL ASSETS $ 1,848,629 $ 1,518,383
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued interest $ 15,821 $ 15,053
Accounts payable and other liabilities 138,660 80,045
Debt financing:
Commercial paper and bankers' acceptances 13,772 130,600
Notes payable 63,114 54,883
Obligations under capital leases 12,429 15,802
Senior term notes 935,600 679,600
----------- -----------
Total debt financing 1,024,915 880,885
----------- -----------
Nonrecourse obligations 268,044 193,446
Deferred income 5,786 4,392
Deferred income taxes 51,726 27,562
Stockholder's equity:
Convertible preferred stock, par value $1.00 1,027 1,027
Authorized--4,000,000 shares
Issued and outstanding
--1,027,050 shares in both years
Common stock, par value $1.00 1,031 1,031
Authorized--2,000,000 shares
Issued and outstanding
--1,031,250 shares in both years
Additional paid-in capital
--convertible preferred stock 123,973 123,973
--common stock 27,929 27,929
Foreign currency translation adjustment (1,543) 640
Unrealized gain on equity securities 5,574 --
Reinvested earnings 185,686 162,400
----------- -----------
Total stockholder's equity 343,677 317,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,848,629 $ 1,518,383
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, (in thousands) 1996 1995 1994
- -------------------------------------- ---- ---- ----
Cash flows from operating activities
Net income $ 45,855 $ 32,604 $ 24,851
Reconciliation to net cash
provided by operating activities:
Provision for losses
on investments 12,744 18,000 19,000
Depreciation expense 41,363 27,360 33,341
Provision for deferred income taxes 18,932 15,065 6,673
Gain on sale of assets (35,533) (33,123) (21,444)
Joint venture income (22,411) (18,594) (9,242)
Changes in assets and liabilities:
Accrued interest, accounts
payable and other liabilities 29,951 (40,219) 61,836
Due from GATX Corporation (810) (1,822) 123
Deferred income 1,394 (205) (48,072)
Other--net 8,868 8,220 (6)
--------- --------- ---------
Net cash flows provided
by operating activities 100,353 7,286 67,060
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in leased equipment,
net of nonrecourse borrowings
for leveraged leases (376,276) (256,137) (161,341)
Loans extended to borrowers (117,052) (84,050) (101,500)
Other investments (163,334) (45,751) (16,285)
--------- --------- ---------
Total investments (656,662) (385,938) (279,126)
--------- --------- ---------
Lease rents received,
net of earned income and
leveraged lease nonrecourse
debt service 100,350 51,960 24,234
Loan principal received 121,952 56,042 88,415
Proceeds from sale of assets 100,362 139,338 75,697
Proceeds from disposition
of real estate -- 2,020 10,475
Joint venture investment recovery 31,151 32,116 23,564
--------- --------- ---------
Recovery of investments 353,815 281,476 222,385
--------- --------- ---------
Proceeds from sales of other
assets 63,807 46,975 --
--------- --------- ---------
Net cash flows used in
investing activities (239,040) (57,487) (56,741)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
short-term borrowings (133,014) 13,425 16,920
Proceeds from issuance of
long-term debt 368,000 170,000 55,000
Repayment of long-term debt (112,000) (104,000) (66,250)
Dividends paid to stockholder (22,569) (16,240) (12,385)
Other financing activities 36,847 (2,486) (7,147)
--------- --------- ---------
Net cash flows provided by (used in)
financing activities 137,264 60,699 (13,862)
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (1,423) 10,498 (3,543)
--------- --------- ---------
Cash and cash equivalents at
beginning the year 19,905 9,407 12,950
--------- --------- ---------
CASH AND CASH EQUIVALENTS
AT DECEMBER 31 $ 18,482 $ 19,905 $ 9,407
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Income taxes paid to parent $ 14,402 $ 13,473 $ 15,557
========= ========= =========
Interest paid $ 88,560 $ 68,645 $ 61,918
Interest capitalized (3,074) (1,601) (292)
--------- --------- ---------
Net interest paid $ 85,486 $ 67,044 $ 61,626
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 33
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES
Business
GATX Capital Corporation and its subsidiaries (the "Company") actively
invest in a wide variety of assets. These investments are made through a variety
of financing instruments, primarily leases and loans, either for the Company's
own account or through partnerships and joint ventures. GATX Capital actively
manages its existing portfolio of investments as well as those of institutional
investors, and several joint ventures and partnerships in which it participates.
Additionally, the Company arranges secured financing for others. The Company
also sells computer network technology equipment and provides technical service
on the equipment it sells. GATX Capital Corporation is a wholly-owned subsidiary
of GATX Corporation.
Acquisitions
On October 25, 1996, the Company purchased the 50% of Centron DPL Company,
Inc. (Centron) which it did not already own for approximately $22.8 million.
Centron is a technology solutions provider that offers products, technical
services and financial services required for building corporate information
networks.
The acquisition has been accounted for using the purchase method. Assets
with a book value of $63.4 million were acquired and liabilities of $51.7
million were assumed. The Company recorded approximately $11.7 million of
goodwill associated with this acquisition, which is being amortized on a
straight-line basis over ten years. Centron's results of operations for the two
months ended December 31, 1996 are consolidated in the Company's financial
statements. While the Company now owns 100% of Centron, a small portion of two
Centron-managed partnerships is owned by third-party investors. This minority
interest is included in other liabilities in the balance sheet.
Unaudited pro forma consolidated revenue of the Company as if the
acquisition of Centron had occurred at the beginning of 1996 and 1995 is $520.5
million and $389.1 million, respectively. Pro forma consolidated net income is
$48.9 million and $34.8 million for 1996 and 1995, respectively.
In November 1995, the Company entered into an agreement to purchase the
stock of Sun Financial Group, Inc. (Sun Financial), a technology-focused finance
company, for a $26.0 million note payable over four years. Under the agreement,
80% of Sun Financial's stock was acquired in 1995, with the remaining shares to
be exchanged on December 31, 1999. The Company may be required to make an
additional payment in 1999, contingent upon the attainment of certain financial
measures. The seller remains an executive officer of the Company. Assets with a
book value of $134.2 million were acquired and liabilities of $126.7 million
were assumed.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
after elimination of intercompany accounts and transactions. Investments in
minority-owned or non-controlled affiliated companies are accounted for using
the equity method.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Lease and Loan Origination Costs
Initial direct costs for originated direct financing and leveraged leases
(collectively, financing leases) are capitalized and amortized as an adjustment
of yield over the term of the lease. For operating leases, initial direct costs
are deferred and amortized on a straight-line basis over the lease term. Loan
origination fees are netted with loan costs, and are deferred and recognized
over the term of the loan as an adjustment to interest income.
Residual Values
Residual values of leased equipment are estimated at the inception of the
lease. The Company reviews these estimates at least annually. Declines in
estimated residual values for financing leases are recognized as an immediate
charge to income. Declines in estimated residual values for operating leases are
recognized as adjustments to depreciation expense over the shorter of the useful
life of the asset or the remaining term of the lease.
PAGE 34
<PAGE>
Technology Equipment Inventory
Technology equipment inventory, which is included in other assets on the
balance sheet, consists of new and used computer equipment purchased from
manufacturers and is stated at the lower of cost or market.
Goodwill
The excess of cost over the fair value of the net assets of businesses
acquired is classified as goodwill and is included in other assets on the
balance sheet. Goodwill is amortized on a straight-line basis over periods
ranging from 10 to 25 years. The Company continually evaluates the carrying
value of goodwill for possible impairment.
Equity Securities
The Company receives stock warrants of investee companies as consideration
for certain investments. In January 1996, the Company recorded the effect of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires that
available-for-sale securities, including these warrants as well as common stock
obtained by exercising these warrants, be carried at fair value when such
securities are marketable. Fair value of the stock warrants is estimated based
on the market price of the underlying security; no cost is allocated to these
warrants. Fair value of the common stock is estimated based on its market price.
The effect as of December 31, 1996 was to increase stockholder's equity by $5.6
million (net of $3.6 million in deferred income taxes) to reflect the net
unrealized holding gain on these securities classified as available-for-sale.
SFAS 115, which was effective as of January 1, 1994, did not have a material
effect on the Company's financial statements in prior years.
Deferred Income
Deferred income primarily represents income related to operating leases
where the Company is the lessee and for which the earnings process has not been
completed. The income is recognized on a straight-line basis over the terms of
the operating leases.
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
disclosures about contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the reporting period. Actual
results, when ultimately realized, could differ from those estimates.
INVESTMENTS
Direct Financing Leases
The Company's investment in direct financing leases includes lease
contracts receivable, plus the estimated residual value of the equipment at the
lease termination date less unearned income. Lease contracts receivable includes
the total rent to be received over the term of the lease reduced by rent already
collected. Initial unearned income is the amount by which the lease contract
receivable plus the estimated residual value exceeds the initial investment in
the leased equipment at lease inception. The remaining unearned income is
amortized to lease income over the lease term in a manner which produces a
constant rate of return on the net investment in the lease.
The components of the Company's investment in direct financing leases are
as follows:
At December 31, 1996 1995
- --------------- ---- ----
Lease contracts receivable $ 469,644 $ 451,489
Estimated residual value 139,205 103,301
Unearned income (147,092) (147,840)
-------- --------
Net investment $ 461,757 $ 406,950
========= =========
PAGE 35
<PAGE>
Leveraged Leases
Financing leases, which are financed principally with nonrecourse
borrowings at lease inception and which meet certain criteria, are accounted
for as leveraged leases. Leveraged lease contracts receivable are stated
net of the related nonrecourse debt service, which includes unpaid principal
and aggregate remaining interest on such debt. Unearned income represents
the excess of anticipated cash flows (including estimated residual values
after taking into account the related debt service) over the Company's
investment in the lease.
The components of the Company's net investment in leveraged leases are as
follows:
At December 31, 1996 1995
- -------------------------------- --------- ---------
Lease contracts receivable $ 434,182 $ 356,330
Nonrecourse debt service (242,358) (157,771)
--------- ---------
Net receivable 191,824 198,559
Estimated residual value 186,042 130,391
Unearned income (120,827) (108,543)
--------- ---------
Investment in leveraged leases 257,039 220,407
Deferred taxes arising from
leveraged leases (57,409) (50,762)
--------- ---------
Net investment $ 199,630 $ 169,645
========= =========
Operating Leases
Leases that do not qualify as direct financing or leveraged leases are
accounted for as operating leases. Most rental income is reported on a
straight-line basis over the term of the lease. Rental income on certain leases
is based on equipment usage and is recognized when received. Usage rents totaled
$1.9 million, $3.1 million, and none in 1996, 1995 and 1994, respectively.
Equipment subject to operating leases is stated at cost less accumulated
depreciation plus accrued rent and is generally depreciated using the
straight-line method to an estimated residual value. Aircraft and rail equipment
are depreciated over their useful lives, while other equipment is generally
depreciated over the term of the lease. Estimated useful lives are up to 25
years for aircraft, 37.5 years for rail cars, and 27.5 years for locomotives.
Depreciation expense of $41.4 million, $27.4 million and $33.3 million was
included in operating lease expense for 1996, 1995 and 1994, respectively.
Major classes of equipment on operating leases are as follows:
At December 31, 1996 1995
- ------------------------ --------- ---------
Commercial aircraft $ 212,576 $ 217,065
Rail 123,791 92,448
Technology 82,524 12,751
Other 46,441 34,122
--------- ---------
Total cost 465,332 356,386
Accumulated depreciation (50,986) (49,557)
--------- ---------
Net book value 414,346 306,829
Accrued rent and other 15,534 8,878
--------- ---------
Net investment $ 429,880 $ 315,707
======== =========
Earned Income from Leases
The sources of earned income from leases are as follows:
At December 31, 1996 1995 1994
- --------------- ---- ---- ----
Direct financing leases $ 43,644 $ 31,491 $ 28,612
Leveraged leases 23,843 25,013 25,894
Operating leases 128,258 83,208 89,133
------- ------ ------
Total earned income $195,745 $139,712 $143,639
======== ======== ========
The tax expense related to leveraged lease income was $8.6 million, $9.4
million and $9.3 million in 1996, 1995 and 1994, respectively.
Secured Loans
Investments in secured loans are stated at the principal amount outstanding
plus accrued interest. The loans are collateralized by equipment, golf courses,
or real estate. A loan is classified as impaired when it is probable, based on
normal portfolio review procedures, that the Company will be unable to collect
all amounts due under the loan agreement. Most loans in the portfolio are
collateral dependent and, if impaired, are measured using the fair value of the
collateral. If the measure of the impaired loan is less than the recorded
investment in the loan, an adjustment to the allowance for losses on investments
is made. Interest income is not recognized on impaired loans until the
outstanding loan balance is recovered.
PAGE 36
<PAGE>
Significant changes in the fair value of the collateral, subsequent to the
initial measure of impairment, are reflected as adjustments to the allowance for
losses on investments. The average balance of impaired loans was $26.7 million,
$14.3 million and $8.7 million in 1996, 1995 and 1994, respectively.
The types of loans in the Company's portfolio are as follows:
At December 31, 1996 1995
- --------------- ---- ----
Equipment $122,994 $137,248
Golf courses 78,286 73,835
Real estate 21,322 28,790
------ ------
Total investment $222,602 $239,873
======== ========
Impaired loans (included in total) $ 29,600 $ 23,800
======== ========
Future Lease and Loan Receivables
As of December 31, 1996, financing lease receivables (net of nonrecourse
debt service related to leveraged leases), minimum future rentals under
operating leases, and secured loan principal by year due are as follows:
Financing Operating
Lease Lease Loan
Year Due Receivables Receivables Principal
- ----------- ----------- ----------- ---------
1997 $161,398 $ 95,582 $ 42,644
1998 125,559 81,900 17,444
1999 96,260 61,334 19,903
2000 78,952 38,169 11,903
2001 55,814 24,548 14,294
After 2001 143,485 85,632 116,414
------- ------- -------
Total $661,468 $387,165 $222,602
======== ======== ========
Investment in Joint Ventures
Investments in joint ventures include commercial aircraft leasing, rail
equipment leasing, information technology equipment leasing, and asset residual
guarantee ventures in both U.S. and foreign markets. These joint ventures are
accounted for using the equity method, as dictated by the Company's effective
ownership interest and/or level of management control. Original investments are
recorded at cost and are adjusted by the Company's share of undistributed
earnings or losses and reduced by cash distributions.
In October 1996, the Company purchased the 50% of Centron which it did
not already own. Prior to the acquisition, the Company had accounted for its
investment in Centron and Centron-managed partnerships using the equity
method. Subsequent to the acquisition, the results of Centron are consol-
idated in the Company's financial statements.
Unaudited combined and condensed information for affiliated ventures, which
are accounted for using the equity method, is shown below on a 100% basis. The
Company makes certain adjustments to pre-tax income as reported by some of the
joint ventures prior to the Company's calculation of its share of that pre-tax
income in order to provide consistency with the Company's accounting policies.
The information shown below has been restated to reflect these adjustments.
Pre-tax income has been increased by $30.8 million, $34.2 million and $27.3
million in 1996, 1995 and 1994, respectively, to reverse interest expense
recognized on loans to two joint ventures from its partners; the Company records
these loans as equity contributions. The partner loan balances of $527.9
million, $457.0 million and $472.2 million at December 31, 1996, 1995 and 1994,
respectively, have been reclassified from indebtedness to partners' equity. This
results in a difference between the carrying value of the Company's investment
in the joint venture and the Company's equity in the underlying net assets as
reported by the joint venture. Pre-tax income is presented because the majority
of the joint ventures are partnerships which do not provide for income taxes in
their separate financial statements. Consistent with the Company's unclassified
balance sheet, the joint venture balance sheets are unclassified as to assets
and liabilities.
Year ended December 31, 1996 1995 1994
- ----------------------- -------- -------- --------
Revenues $175,973 $292,989 $282,352
Pre-tax income 47,247 51,517 41,510
Total assets 1,651,495 1,310,062 1,257,794
Indebtedness 643,909 442,514 441,625
Total liabilities 719,446 585,532 558,679
Equity 932,049 724,530 699,115
PAGE 37
<PAGE>
Assets Held for Sale or Lease
Assets held for sale or lease consist of equipment which the Company has
used for investment purposes that has been repossessed or returned by the lessee
after normal lease maturity, and real estate upon which the Company foreclosed.
These assets are recorded at the lower of their then carrying amount or fair
value and are being remarketed for re-lease or sale in the normal course of
business.
The major classes of assets held for sale or lease are as follows:
At December 31, 1996 1995
- --------------- -------- ------
Rail $5,023 $8,092
Real estate 4,081 4,687
Aircraft -- 13,931
Other 3,289 1,520
-------- ------
Net investment $12,393 $28,230
======== ======
Other Investments
The components of other investments are as follows:
At December 31, 1996 1995
- --------------- ------ ------
Progress payments $15,338 $31,934
Cogeneration facility 29,062 31,100
Real estate development 11,935 14,570
Equity securities 9,171 --
------- -------
Total other investments $65,506 $77,604
======= =======
Progress payments include amounts paid, including capitalized interest,
toward the construction of aircraft and steel production equipment at December
31, 1996 and 1995, respectively.
In a 1995 noncash transaction, the Company reacquired a majority interest
in the cogeneration facility. The December 31, 1995 balance is net of $9.2
million of accumulated depreciation. The facility is financed by a nonrecourse
obligation having a balance of $37.7 million at December 31, 1995.
Investment in Future Residuals
Investment in future residuals consists primarily of purchased interests in
the residual values of equipment leased by others. In general, purchased
residual interests are recorded at cost. The difference between initial cost and
realized value is recognized upon sale.
Allowance for Losses on Investments
The purpose of the allowance is to provide for credit and collateral
losses which are inherent in the investment portfolio. The allowance
is at a level deemed adequate by management, considering an assessment
of overall risks and probable losses in the portfolio as a whole and a review of
historical experience. It is the Company's policy to charge off amounts which,
in the opinion of management, are not recoverable from obligors or the
disposition of collateral. The Company reviews the recoverability of all
investments, both on and off the balance sheet, at least annually. Factors
considered include a customer's payment history and financial position, and the
value of the underlying collateral determined by reference to internal and
external equipment knowledge and resources.
Activity within the allowance for losses on investments is as follows:
Year ended December 31, 1996 1995 1994
- ----------------------- -------- -------- --------
Beginning balance $ 92,489 $ 82,206 $ 88,193
Provision 12,744 18,000 19,000
Charges to allowance (5,025) (11,734) (27,480)
Recoveries and other 13,888 4,017 2,493
-------- -------- --------
Balance at end of year $114,096 $92,489 $ 82,206
======== ======== ========
OTHER ASSETS
Other assets consist of the following:
At December 31, 1996 1995
- -------------------------------- -------- --------
Trade and other receivables 48,67 $ 5,833
Technology equipment inventory 27,895 --
Goodwill 21,093 10,268
Other 21,864 13,243
-------- --------
Total other assets $119,528 $ 29,344
======== ========
PAGE 38
<PAGE>
Trade and other receivables consist primarily of trade accounts receivable
related to the Company's sales and service of computer network technology.
DEBT AND CAPITAL LEASE FINANCING
Short-Term Borrowing
At December 31, 1996, the Company has commitments under its credit
agreements with a group of banks for revolving credit loans aggregating up to
$270 million. These credit agreements contain various covenants which include,
among other factors, minimum net worth, restrictions on dividends and
requirements to maintain certain financial ratios. At December 31, 1996, these
covenants limit the Company's ability to transfer net assets to its parent to no
more than $44.2 million. While the commitments are available for borrowing,
repaying and reborrowing at any time, they are used primarily as undrawn
facilities and serve to support the Company's issuance of commercial paper in
the U.S. and bankers' acceptances in Canada. At December 31, 1996, the Company
had $13.8 million of commercial paper and bankers' acceptances outstanding,
meaning that $256.2 million was available. The Company also has $63.1 million of
notes payable outstanding at December 31, 1996, which includes $14.0 million due
to the seller of Sun Financial, who remains an officer-employee of the Company.
The weighted average interest rate of short-term borrowings at the end of the
period was 5.60% and 6.20% as of December 31, 1996 and 1995, respectively. In
addition, two consolidated subsidiaries have bank commitments totaling $75.5
million at December 31, 1996 to finance their operations, of which $34.7 million
was available.
Senior Term Notes
In December 1996, the Company issued $200 million of bonds due in
December 2006. The proceeds of this borrowing were used to repay outstanding
commercial paper indebtedness.
At December 31, 1996 1995
- --------------- -------- --------
Variable Rate Notes,
due 1997-1999 $ 65,000 $ 40,000
Fixed Rate Notes, 5.45%-10.20%,
due 1997-2006 870,600 639,600
-------- --------
Total senior term notes $935,600 $679,600
======== ========
Interest on variable rate senior term notes is calculated using LIBOR.
The Company has significant amounts of floating rate lease and loan
investments, potentially giving rise to market risks associated with changing
interest rates. The Company mitigates these risks by attempting to approximately
match its floating rate assets with floating rate liabilities. Derivative
financial instruments are a useful tool in matching the portfolio and in
otherwise reducing the Company's exposure to interest rate risk. Interest rate
swap agreements are used to modify the underlying interest characteristics of
the Company's outstanding debt, either from a fixed to a floating basis, or from
floating to fixed. These agreements involve the receipt (or payment) of fixed
rate amounts in exchange for floating rate interest payments (receipts) over the
life of the agreement without an exchange of the underlying principal amount.
The differential to be paid or received is calculated based on the notional
amounts and a widely used floating rate index (LIBOR). It is accrued as interest
rates change and is recognized as an adjustment to interest expense related to
the debt. As a result of interest rate swaps, interest expense was higher by
$0.8 million in 1996 and was reduced by $2.2 million in 1995 and $3.1 million in
1994. The related amount payable to or receivable from counterparties is
included in accrued interest. The fair values of the swap agreements are not
recognized in the financial statements. The total notional principal of all
interest rate swaps as of December 31, 1996 was $251.8 million, with termination
dates ranging from 1997 to 2006.
PAGE 39
<PAGE>
Nonrecourse Obligations
Nonrecourse obligations consist primarily of debt collateralized by the
assignment of leases and a security interest in the underlying asset. The
carrying amount of this collateral at December 31, 1996 is $305.0 million. The
nonrecourse obligation associated with one aircraft will become recourse to the
Company to the extent of the then remaining debt balance in 2002 when a balloon
payment of $7.3 million is due.
Nonrecourse obligations include the following:
At December 31, 1996 1995
- ----------------------------- -------- --------
Variable Rate, due 2000-2002 $ 50,220 $ 52,633
Fixed Rate, 5.10%-11.08%,
due 1997-2013 217,824 140,813
-------- --------
Total nonrecourse obligations $268,044 $193,446
======== ========
Interest on variable rate nonrecourse obligations is calculated using the
prime rate or LIBOR.
Obligations Under Capital Leases
Obligations under capital leases consist of equipment subject to capital
lease financing which has been subleased. Such subleases are classified
as direct financing leases, having carrying values of $12.4 million and
$15.9 million at December 31, 1996 and 1995, respectively. Minimum future
lease payments receivable under the subleases aggregate $15.6 million receivable
over a period ending in 2003. The obligations under capital leases and the
related subleases have the same terms and call for fixed rental payments. The
Company has purchase and renewal options under the leases which allow it to
accommodate similar options exercisable by sublessees.
Maturities
Maturities of debt financings, obligations under capital leases and
nonrecourse obligations are presented in the following table. Imputed interest
on capital leases totaled $3.2 million at December 31, 1996. This table assumes
that the commercial paper, notes payable and bankers' acceptances are retired by
the unused revolving commitments.
Obligations
Converted Under Total Total
Revolving Senior Capital Debt Nonrecourse
Year Due Credit Loans Term Notes Leases Financing Obligations
- ------ -------- -------- -------- -------- -----------
1997 $ 36,626 $130,000 $2,157 $168,783 $ 86,192
1998 -- 99,000 1,483 100,483 61,517
1999 40,260 98,600 1,537 140,397 36,615
2000 -- 94,000 1,660 95,660 21,138
2001 -- 90,000 1,832 91,832 14,107
After 2001 -- 424,000 3,760 427,760 48,475
-------- -------- -------- -------- --------
Total $ 76,886 $935,600 $12,429 $1,024,915 $268,044
======== ======== ======== ========== ========
OPERATING LEASE OBLIGATIONS
The Company is a lessee under certain equipment and facility leases which
are classified as operating leases. Total rental expense was $34.0 million,
$20.5 million and $16.1 million in 1996, 1995 and 1994, respectively. The
equipment under these leases has been subleased, generating operating lease
income of $38.3 million, $23.8 million and $17.4 million in 1996, 1995 and 1994,
respectively. The Company has purchase and renewal options under certain of
these leases.
During 1996, the Company entered into transactions for the sale leaseback
of rail equipment and a steel production facility. During 1995, the Company
entered into a transaction for the sale leaseback of an aircraft. The net book
value of the equipment is not shown on the balance sheet.
Future rentals payable by the Company through 2021 and sublease receivables
under noncancellable operating leases through 2011 are as follows:
Obligations Operating
Year Due Under Sublease Lease Receivables
- -------- -------------- -----------------
1997 $ 37,284 $ 43,067
1998 38,103 40,745
1999 38,020 38,762
2000 35,606 24,908
2001 23,954 18,201
After 2001 268,636 83,054
-------- --------
Total $441,603 $248,737
======== ========
PAGE 40
<PAGE>
Stockholder's Equity
As of December 31, 1996 and 1995, all issued common and preferred stock
of the Company was held by GATX Corporation. The preferred stock is
convertible to common stock on a one-for-one basis at the option of the
holder. Dividends on preferred stock are payable on a share-for-share basis at
the same rate per share as common stock when and as declared by the board of
directors.
The equity adjustment from foreign currency translation decreased
stockholder's equity $2.2 million in 1996, increased stockholder's equity $1.4
million in 1995 and decreased stockholder's equity $0.4 million in 1994. The net
unrealized gain on equity securities increased stockholder's equity $5.6 million
in 1996 and was not material in either 1995 or 1994.
INCOME TAXES
GATX Corporation files a consolidated federal income tax return which
includes the Company. Under an intercompany tax agreement, the parent reimburses
the Company to the extent the Company's operating losses and investment tax
credits are utilized in the consolidated federal return. Should the Company
generate taxable income, the agreement provides for payment by the Company of
any resulting additional federal tax liability incurred by GATX Corporation.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has recorded
these differences in its deferred tax accounts, intercompany accounts
receivable, and equity accounts. In exchange for cash payments, GATX Corporation
has assumed a portion of GATX Capital's deferred tax liability. GATX Corporation
recontributed these amounts through the purchase of Convertible Preferred Stock,
currently outstanding, over the period from 1975 to 1985. In addition, GATX
Capital has an account receivable of $46.1 million from GATX Corporation
resulting from the reassumption of a portion of these deferred taxes through
December 31, 1994. Offsetting this receivable is $0.9 million due to GATX
Corporation, which consists of amounts owed for dividends, overhead and taxes
pursuant to the intercompany tax agreement.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
At December 31, 1996 1995
- --------------- -------- --------
DEFERRED TAX LIABILITIES
Leveraged leases $ 57,409 $ 50,762
Other leases 85,250 79,360
Investment in joint ventures 30,725 22,684
Alternative minimum tax
adjustment 4,217 2,839
Other 10,647 12,259
-------- --------
Total deferred tax liabilities 188,248 167,904
-------- --------
DEFERRED TAX ASSETS
Allowance for losses on investments 44,754 36,279
Loans 7,235 9,653
Other 5,592 15,469
-------- --------
Total deferred tax assets 57,581 61,401
-------- --------
Net deferred tax liabilities $130,667 $106,503
======== ========
TAX ACCOUNT BALANCES
Deferred income tax liabilities $ 51,726 $ 27,562
Preferred stock and related
additional paid-in capital 125,000 125,000
Due from GATX Corporation (46,059) (46,059)
-------- --------
Net deferred tax liabilities $130,667 $106,503
======== ========
PAGE 41
<PAGE>
The provision for income taxes consists of the following:
Year ended December 31, 1996 1995 1994
- ----------------------- ---- ---- ----
CURRENT
Federal $13,276 $ 7,389 $11,437
State and local 371 1,513 (44)
Foreign 57 (1,227) 719
------ ------ ------
Total current 13,704 7,675 12,112
------ ------ ------
DEFERRED
Federal 12,730 10,515 2,683
State and local 4,301 2,175 2,778
Foreign 1,901 2,375 1,212
------ ------- -------
Total deferred 18,932 15,065 6,673
------ ------ -------
Total provision for income taxes $32,636 $22,740 $18,785
======= ======= =======
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
Year ended December 31, 1996 1995 1994
- ----------------------- ---- ---- ----
Federal statutory income
tax rate 35.0% 35.0% 35.0%
State tax provision, net
of federal tax benefit 4.1% 4.1% 4.1%
Other 2.5% 2.0% 3.9%
---- ---- ----
Effective tax rate 41.6% 41.1% 43.0%
==== ==== ====
Income before income taxes from foreign operations was $4.7 million, $2.5
million and $1.8 million in 1996, 1995 and 1994, respectively.
Federal income taxes have not been provided on the undistributed earnings
of foreign subsidiaries and affiliates which the Company intends to permanently
reinvest in these foreign operations. The cumulative amount of such earnings was
$14.3 million at December 31, 1996. It is not practicable to estimate the tax
liability, if any, related to these earnings.
FOREIGN OPERATIONS
The Company provides or arranges equipment financing for non-affiliated
entities both inside and outside the United States. In the following table,
export income pertains to revenue generated by domestic operations through
transactions with customers in foreign countries. Some of these transactions are
denominated in foreign currencies. Information designated as foreign in the
following table pertains to operations that are located outside of the United
States, primarily in Canada, Europe and Australia.
Year ended December 31, 1996 1995 1994
- ----------------------- ---- ---- ----
EARNED INCOME
Domestic $306,896 $191,343 $179,709
Export 28,750 28,537 26,436
Foreign 25,902 17,591 10,505
Eliminations (1,185) (962) (618)
------ ---- -------
$360,363 $236,509 $216,032
======== ======== ========
NET INCOME
United States $37,261 $24,246 $20,596
Foreign 8,594 8,306 4,192
Eliminations -- 52 63
------- ------- -------
$45,855 $32,604 $24,851
======= ======== =======
TOTAL ASSETS
United States $ 1,613,390 $ 1,318,020 $ 1,038,762
Foreign 244,729 $207,779 236,828
Eliminations (9,490) (7,416) (6,000)
----------- ----------- -----------
$ 1,848,629 $ 1,518,383 $ 1,269,590
=========== =========== ===========
The Company has entered into currency swap agreements to hedge the risk
that the eventual dollar net cash in-flow from foreign denominated investments
will be adversely affected by changes in exchange rates. The currency swaps
exchange U.S. borrowings of $31.2 million for liabilities of $42.3 million
Canadian dollars, with termination dates ranging from 2001 to 2003.
PAGE 42
<PAGE>
RETIREMENT BENEFITS
The Company, exclusive of Sun Financial and Centron, participates in
the GATX Corporation Non-Contributory Pension Plan for Salaried Employees
(the "Plan"), a defined benefit pension plan with GATX Corporation
covering substantially all employees. Sun Financial and Centron employees
participate in a 401(k) retirement plan. Pension cost for each GATX subsidiary
included in the Plan is determined by independent actuaries. However,
accumulated Plan obligation information, Plan assets and the components of net
periodic pension costs pertaining to each subsidiary have not been separately
determined. Contributions to the Plan made by the Company through GATX
Corporation and pension expense allocated to the Company are not material to
these financial statements.
In addition to pension benefits, the Company provides other postretirement
benefits including limited healthcare and life insurance benefits for certain
retired employees who meet established criteria. Most domestic employees,
exclusive of Sun Financial and Centron employees, are eligible if they retire
from the Company with immediate pension benefits under the Plan. The net
periodic cost and accrued liability are not material to these financial
statements.
COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
At December 31, 1996, the Company's investment portfolio consists of 33%
commercial jet aircraft, 20% rail equipment, 12% warehouse and production
equipment, 12% information technology equipment, 11% marine equipment, 4% golf
courses, and 8% other equipment.
The Company's backlog was $425 million (unaudited) and $325.0 million
(unaudited), at December 31, 1996 and 1995, respectively. Backlog represents
planned equipment purchases at year-end, a portion of which are subject to firm
purchase commitments.
The Company is a party to financial guarantees with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
Guarantees are commitments issued by the Company to guarantee the value of an
asset at the end of the lease, or to guarantee performance of an affiliate to a
third-party, and involve, to varying degrees elements of credit and market risk
which are not recognized in the consolidated balance sheets. These commitments
have fixed expiration dates ranging from 1997 to 2015. Since many of the assets
on lease are expected to retain their value, the total amount guaranteed does
not necessarily represent future cash requirements. the value of such guarantees
was $148.2 and $131.1 million at December 31, 1996 and 1996 respectively. Fees
received are generally recognized over the guarantee period.
The Company uses essentially the same credit policies in making commitments
and conditional obligations as it does for funded transactions. All investments
are subject to normal credit policies, collateral requirements and senior
management review. For example, lease provisions require lessees to meet certain
standards for maintenance and return conditions, and provide for repossession
upon default. Loans are generally secured by equipment or real estate, and may
involve guarantees or other assets as collateral. All commitments having
off-balance sheet risk are reviewed at least annually for potential exposure
using the same criteria discussed in the Allowance for Losses on Investments
footnote, and the allowance is adjusted accordingly.
The Company is engaged in various matters of litigation and has unresolved
claims pending. While the amounts claimed are substantial and the ultimate
liability with respect to such claims cannot be determined at this time, it is
the opinion of management that damages, if any, required to be paid by the
Company in the discharge of such liability are not likely to be material to the
Company's financial position or results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of the
estimated fair value of the Company's financial instruments, excluding lease
transactions for under SFAS 13. Fair value is a subjective and imprecise
measurement that is based on assumptions and market data.
PAGE 43
<PAGE>
The use of different market assumptions and valuations methodologies may
have a material effect on the estimated fair value amounts. Accordingly,
managements cannot provide assurance that the fair values presented are
indicative of the amounts that the company could realize in a current market
exchange.
The following methods and assumtions were used to estimate the fair value
of each class of financial instruments:
Short-Term Financial Instruments
The carrying amounts included on the balance sheet approximate fair value
because of the short maturity of these instruments. This approach applies to
cash and cash equivalents, accrued interest, accounts payable, commercial paper,
and banker's acceptances.
Secured Loans
The fair values of the fixed rate loans are estimated using discounted cash
flow analysis at interest rates currently offered for loans with similar terms
to borrowers of similar credit quality. The fair values of the variable rate
secured loans are assumed to be equal to their carrying values.
Senior Term Notes and Nonrecourse Obligations
The fair value of fixed rate senior term notes and non-recourse obligations
are estimated by discounting future contractual cash flows using the market
interest rate for each note based on the Company's current incremental borrowing
rates for similar borrowing arrangements. The fair values of variable senior
notes and nonrecourse obligations are assumed to be equal to their carrying
values.
Interest Rate and Currency Swaps
The fair value of the interest rate and currency swaps are estimated by
discounting the fixed cash flows received under each swap using the rate at
which the Company could enter into new swaps of similar remaining maturities.
The carrying amount shown on the table below represents the amount of accrued
interest payable or receivable at the end of the period. The fair value
represents the accrued amount plus the amount that the Company would have to pay
or would receive in the current market to unwind the swaps.
Other Off-Balance Sheet Financial Instruments
It is not practicable to estimate the fair value of the Company's other
off-balance sheet financial instruments because there are few active markets for
these transactions, and the Company is unable at this time to estimate fair
value without incurring excessive costs.
Summary of Fair Values
The following table presents the fair values of only those financial
instruments required to be presented by generally accepted accounting
principles. Proceeds from senior term notes are invested in a variety of
activities including both financial instruments shown in this table as well as
leases and joint venture investments for which fair value disclosures are not
required.
Carrying Fair
At December 31, 1996 Amount Value
- -------------------- ------ -----
ASSETS
Secured Loans $ 222,602 $ 219,389
LIABILITIES
Senior term notes 935,600 954,428
Nonrecourse obligations 268,044 269,917
Interest rate and
currency swaps (240) 5,420
Carrying Fair
At December 31, 1995 Amount Value
- -------------------- ------ -----
ASSETS
Secured Loans $239,873 $252,443
LIABILITIES
Senior term notes 679,600 726,700
Nonrecourse obligations 193,446 199,797
Interest rate and
currency swaps 103 (964)
PAGE 44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GATX Capital Corporation
We have audited the accompanying consolidated balance sheets of GATX Capital
Corporation (a wholly-owned subsidiary of GATX Corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of income
and reinvested earnings, and consolidated cash flows for each of the three years
in the period ended December 31, 1996. These statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of GATX Capital Corporation and subsidiaries at December 31, 1996 and
1995 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 28, 1997
<PAGE>
Exhibit 23 - Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statements
No.33-6910 on Form S-3 filed July 7, 1986 (as amended by Amendment No. 1 filed
December 19, 1986, Amendment No. 2 filed January 7, 1987, Amendment No. 3 filed
December 23, 1987, and Amendment No. 4 filed August 9, 1989), No. 33-30300 on
Form S-3 filed August 2, 1989, No. 33-40327 on Form S-3 filed May 2, 1991, and
No. 33-64474 on Form S-3 filed June 17, 1993 , and No.35-65053 on Form S-3 filed
January 5, 1996 of GATX Capital Corporation of our report dated January 28,
1997, with respect to the consolidated financial statements of GATX Capital
Corporation incorporated by reference in this Annual Report on Form 10-K
for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Francisco, California
March 27, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND THE
CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY
TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,482
<SECURITIES> 0
<RECEIVABLES> 941,398<F1>
<ALLOWANCES> 114,096
<INVENTORY> 12,393<F2>
<CURRENT-ASSETS> 0<F4>
<PP&E> 429,880<F3>
<DEPRECIATION> 0<F3>
<TOTAL-ASSETS> 1,848,629
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 1,216,073<F5>
<COMMON> 1,031<F6>
0
1,027<F6>
<OTHER-SE> 341,619<F7>
<TOTAL-LIABILITY-AND-EQUITY> 1,848,629
<SALES> 36,286
<TOTAL-REVENUES> 360,363
<CGS> 32,991
<TOTAL-COSTS> 110,280
<OTHER-EXPENSES> 72,742<F8>
<LOSS-PROVISION> 12,744
<INTEREST-EXPENSE> 86,106
<INCOME-PRETAX> 78,491
<INCOME-TAX> 32,636
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,855
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 461,757, LEVERAGED LEASE
RECEIVABLES OF 257,039, AND SECURED LOANS OF 222,602.
<F2>CONSISTS OF ASSETS HELD FOR SALE OR LEASE.
<F3>CONSISTS OF COST OF EQUIPMENT LEASED TO OTHERS UNDER OPERATING LEASES,
NET OF DEPRECIATION.
<F4>GATX CAPITAL CORPORATION HAS AN UNCLASSIFIED BALANCE SHEET.
<F5>CONSISTS OF SENIOR TERM NOTES OF 735,600, OBLIGATIONS UNDER
CAPITAL LEASES OF 12,429, AND NONRECOURSE OBLIGATIONS OF 268,044.
<F6>PAR VALUE ONLY.
<F7>CONSISTS OF RETAINED EARNINGS OF 185,686, ADDITIONAL PAID-IN CAPITAL OF
151,902 ,UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX OF 5,574
AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (1,543).
<F8>CONSISTS OF COTS OF GOODS SOLD OF 32,991 AND OPERATING LEASE EXPENSE OF 52,404,
<F9>CONSISTS OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES OF 68,298, AND
OTHER EXPENSES OF 4,444.
</FN>
<PAGE>
</TABLE>
Exhibit 99
Medium Term Notes
Interest
Amount Maturity Rate
Fixed
$50,000,000 1/1/96 9.380
$5,000,000 01/30/98 10.000
$2,000,000 02/25/98 9.760
$7,000,000 03/10/98 10.000
$10,000,000 03/16/98 10.000
$2,000,000 03/19/98 10.000
$6,000,000 03/19/98 10.000
$5,000,000 03/20/98 9.930
$10,000,000 04/01/98 10.000
$5,000,000 03/22/99 9.900
$16,000,000 04/15/99 9.900
$4,000,000 05/10/00 10.200
$2,000,000 03/21/01 10.000
$5,000,000 03/22/01 10.000
$16,000,000 04/11/01 10.000
$32,600,000 05/05/99 9.850
$25,000,000 01/15/97 7.900
$10,000,000 05/05/97 8.200
$5,000,000 03/10/98 8.670
$13,000,000 04/30/98 6.120
$5,000,000 05/07/98 6.110
$5,000,000 10/15/98 8.780
$10,000,000 11/15/99 6.375
$17,000,000 07/26/00 6.210
$10,000,000 10/11/00 6.500
$2,000,000 10/30/00 9.280
$6,000,000 11/15/00 9.120
$10,000,000 10/08/01 9.125
$2,000,000 10/08/01 9.050
$10,000,000 01/10/02 9.500
$15,000,000 01/10/02 9.500
$20,000,000 06/03/03 7.200
$4,000,000 02/02/98 5.400
$10,000,000 06/09/98 6.150
$5,000,000 02/02/99 5.560
$30,000,000 06/09/00 6.440
$5,000,000 02/02/00 5.810
$10,000,000 12/5/00 6.165
$5,000,000 02/02/01 5.880
$15,000,000 03/15/01 6.660
$10,000,000 06/09/01 6.535
$15,000,000 12/5/01 6.270
$4,000,000 02/04/02 6.100
$5,000,000 04/04/02 7.460
$15,000,000 05/17/02 7.170
$15,000,000 05/17/02 7.170
$15,000,000 12/16/02 6.360
$21,500,000 04/25/03 7.070
$6,000,000 02/02/04 6.340
$5,000,000 04/14/04 7.920
$5,000,000 04/14/04 7.920
$3,000,000 02/02/05 6.375
$25,000,000 10/13/05 6.860
$15,000,000 11/30/05 6.690
$10,000,000 11/30/05 6.690
$3,000,000 02/02/06 6.450
$3,500,000 02/02/07 6.480
$10,000,000 06/11/98 6.550
$5,000,000 06/11/99 6.800
$5,000,000 06/11/99 6.760
$10,000,000 06/12/00 6.950
$10,000,000 05/21/01 6.930
$5,000,000 05/20/04 7.290
$5,000,000 05/20/04 7.290
$8,000,000 05/10/06 7.640
$10,000,000 05/31/06 7.350
$200,000,000 12/15/06 6.875
Floating
$20,000,000 04/07/97
$20,000,000 02/16/99
$25,000,000 01/16/97
-------------
$935,600,000
=============
