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 SECURITIES EXCHANGE ACT OF 1934
For the Year Ended Commission File Number
December 31, 1997 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 20, 1998, 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.
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DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
Annual Report to Stockholder for Part II Items 6,7,& 8
Fiscal Year ended December 31, 1997
(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
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PART I
Item 1. Business
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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.
Item 2. Properties
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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
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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 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 under authority of Supplemental Type
Certificates issued by the FAA pursuant to a design approved by the FAA at the
time the modifications were made, and which are subject to the Airworthiness
Directive (the "STCs"). The three Evergreen Affected Aircraft were flown as part
of its fleet for more than five years, and the seven other Affected 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 its three
Affected Aircraft. In an initial disclosure statement dated October 29, 1996,
and served on Airlog and the Company pursuant to applicable discovery rules,
Evergreen alleged damages which it 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
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attributable to Evergreen's diminished 747 fleet capacity (which Evergreen did
not quantify, but 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. In its November 7, 1997 Subsequent Case Management Statement, Evergreen
claimed that it seeks recovery for out-of-pocket losses, lost revenues, lost
profits, lost business opportunities, maintenance work, repair costs and capital
losses in an amount that exceeds $145 million.
Airlog and the Company filed a motion seeking partial summary judgment as to
four of Evergreen's counterclaims. Airlog and the Company 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,
seeking 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. On June 5, 1997,
the Court ruled on the Motion For Partial Summary Judgment. The Court granted
the motion as to Evergreen's counterclaim that alleged Airlog breached its
warranty under the Purchase Agreement pursuant to which Airlog sold one of the
converted aircraft to Evergreen, and denied the motion as to Evergreen's
counterclaim that Airlog breached its warranty under the Modification Agreements
pursuant to which Airlog manufactured and installed freighter conversion kits
with respect to two other aircraft owned by Evergreen. The Court ruled that the
Purchase Agreement was a contract for the sale of goods and that claims
thereunder were barred by the four year statute of repose under the California
Commercial Code (the "Code"). The Court ruled that the Modification Agreements
were contracts for services not governed by the Code, and that any applicable
statute of limitations did not begin to run until Evergreen had, or should have
had, knowledge of the alleged breach. The Court also denied the motion with
respect to Evergreen's counterclaim in which it alleged that Airlog negligently
misrepresented certain facts which purportedly induced Evergreen to enter into
the Purchase and Modification Agreements. The Court's ruling bars Evergreen from
recovering under its claim for breach of warranty under the Purchase Agreement,
and permits Evergreen (subject to reconsideration or appeal) to proceed with its
claim for breach of warranty under the Modification Agreements and its claim of
negligent misrepresentation. The ruling does not represent a decision that
Evergreen is entitled to prevail on those claims. Airlog and the Company have
other defenses to those claims which they are vigorously asserting.
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 Affected Aircraft owned by AIA. These aircraft were modified by
subcontractors of Airlog in 1992 and 1994 with AIA's knowledge and consent. 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. AIA filed
a Joint Case Management Statement and Proposed Order specifying the damages it
has allegedly suffered as a result of the application of the Airworthiness
Directive to the two Affected Aircraft it owns. In that pleading, AIA alleges
that it sustained damages of $43,787,954 through May 31, 1997, and further
alleges that it continues to accrue loss of use damages of at least $1,800,000
per month until the aircraft are operational.
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On June 4, 1997 Tower Air, Inc. ("Tower") filed an action in the Supreme Court
of the State of New York, County of New York (Index No. 97/602851) against the
Company, Airlog, an officer of the Company and others with respect to one
Affected Aircraft it leased and subsequently purchased from a trust for the
benefit of an affiliate of Airlog in December 1994. This action asserts causes
of action in fraud and deceit, negligent misrepresentation, breach of contract,
negligence and seeks damages in excess of $25 million together with interest,
costs, attorneys' fees and punitive damages.
General Electric Capital Corporation and a subsidiary thereof (collectively,
"GECC"), Airlog, GATX Corporation and the Company entered into a Tolling
Agreement dated December 17, 1996 and amended in April 1997 and January 1998.
The Tolling Agreement relates to certain causes of action under a number of
legal theories arising out the modification of three Affected Aircraft from
passenger to freighter configuration. These aircraft were modified by
subcontractors of Airlog in 1991 with GECC's knowledge and consent. Under the
Tolling Agreement, as amended, the parties have agreed that any defenses of
expiration of the statute of limitations or statute of repose or laches
applicable to the causes of action asserted by GECC are tolled up to and
including July 6, 1998.
On February 25, 1998 The Bank of New York ("BNY") filed an action, as beneficial
owner of an Affected Aircraft, in the United States District Court for the
Northern District of California (No. C98-0385 WHO). This aircraft was originally
converted by Airlog for Evergreen. This action seeks declaratory relief and
asserts claims for breach of contract, intentional misrepresentation,
nondisclosure of known facts, negligence, negligent misrepresentation and unfair
competition. The suit alleges damages of a minimum of $262,000 per month in lost
rent and storage costs since February 1996, unspecified maintenance and related
expenses, diminution in the value of its aircraft by well in excess of $10
million plus the costs of aircraft inspection and modifications to comply
with the Airworthiness Directive,"Anticipated to be in the millions of dollars".
Claims for interest, injunctive relief, restitution and attorneys' fees are also
included.
Airlog and the Company have filed an action in the United States District Court
for the Northern District of California against Pemco Aeroplex, Inc.
(C97-2484WHO), a contractor for Airlog which obtained the STCs and modified
certain of the Affected Aircraft. The Complaint in this action alleges causes of
action for fraudulent and negligent misrepresentation, breach of contract,
professional negligence, implied and equitable indemnity and contribution. This
action seeks a judgment awarding the plaintiffs any and all damages, costs and
expenses in connection with the resolution of the concerns of the FAA as
expressed in the Airworthiness Directive or relating to it, repairing the
Affected Aircraft, defending against the litigation involving the plaintiffs
arising from the Affected Aircraft, paying any judgments against plaintiffs that
may be entered in said litigation and attorneys' fees incurred by the plaintiffs
in connection with defending said litigation.
On December 18, 1997 Airlog filed a claim under the Federal Tort Claims Act
against the FAA for negligence in connection with the FAA's participation in the
design and manufacture of the Affected Aircraft in the amount of $6,204,065.
This amount represents, as at December 18, 1997, the expenses incurred by Airlog
in responding to the Airworthiness Directive and legal fees and costs incurred
in defending the litigation described above. Airlog reserved its right to
increase the amount of its claim in the future. On January 29, 1998 the FAA
rejected Airlog's claim. While disappointing, the FAA's rejection of Airlog's
claim was a procedural requirement to initiating litigation against the agency.
Under the applicable statute Airlog has six months in which to commence such
litigation against the FAA.
On February 10, 1998 the FAA issued a letter to Airlog that approves a number of
Airlog generated Service Bulletins which, when collectively performed on an
Affected Aircraft, permit an operator of such aircraft to achieve revenue
service, but at payloads less than the original certified payload.
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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, Tower, GECC and AIA, solutions to the FAA's remaining
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.
In addition to those matters set forth above, the Company is involved in various
matters of litigation (including those matters set forth above) 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.
Item 4. Submission of Matters to a Vote of Security Holders
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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
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Incorporated herein by reference to the Annual Report, pages 26-29, 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 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, 1997, 1996, and 1995 Page 30
Consolidated Balance Sheets
As of December 31, 1997 and 1996 Page 31
Consolidated Statements of Cash Flows for
years ended December 31, 1997, 1996, and 1995 Page 32
Notes to Consolidated Financial Statements Pages 33 - 43
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Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
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None.
PART III
Item 10(a). Directors of the Registrant
- ----------------------------------------
Name Office Held Since Age
- ----------------------------------------------------------------------------
Ronald H. Zech Chairman of the Board 1984 54
Joseph C. Lane President, Chief Executive
Officer and Director 1994 44
David B. Anderson Director 1996 56
Alan C. Coe Executive Vice President
and Director 1994 46
Jesse V. Crews Executive Vice President,
Chief Investment Officer,
and Director 1994 45
David M. Edwards Director 1990 46
Kathyrn G. Jackson Executive Vice President
and Director 1997 42
Item 10(b). Executive Officers of the Registrant
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Name Office Held Since Age
- -----------------------------------------------------------------------------
Joseph C. Lane President, Chief Executive
Officer and Director 1994 44
Alan C. Coe Executive Vice President
and Director 1994 46
Jesse V. Crews Executive Vice President,
Chief Investment Officer,
and Director 1994 45
Frederick L. Hatton Executive Vice President 1984 55
Cal C. Harling Executive Vice President-
Technology Group 1994 49
Kathryn G. Jackson Executive Vice President,
Managing Director-Corporate
Finance and Director 1997 42
Robert J. Sammis Executive Vice President-
Diversified Portfolios 1993 51
Michael C. Cromar Senior Vice President and Chief
Financial Officer 1994 50
Richard M. Tinnon Vice President and Treasurer 1996 34
Thomas C. Nord Vice President, General
Counsel, and Secretary 1980 57
Valerie C. Williams Vice President-Human
Resources 1989 53
Curt F. Glenn Vice President-Investment
and Managed Portfolios 1997 43
A. Douglas Shattuck Principal Accounting Officer
and Corporate Controller 1997 35
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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 an 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. Mr. Coe is currently responsible for the
activities of GATX Air. 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 had
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 since 1984. Mr. Hatton joined the
Company in 1983 as Senior Vice President and President of GATX Air and is
responsible for GATX/Airlog. He is currently a Director of International Air
Leasing Co. (IASCO) and a Director of the International Society of Transport
Aircraft Trading (ISTAT). Prior to GATX, he served as Vice President Marketing,
and Executive Vice President with IASCO, and in a number of managerial
capacities for The Flying Tiger Line. He received a BS from Yale University in
1964, 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, Executive Vice President-GATX Technology Services since 1997.
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.
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KATHRYN G. JACKSON, Executive Vice President and Director since 1997. Ms.
Jackson 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 graduated Phi Beta
Kappa from Stanford University and holds an MBA from Northwestern University.
ROBERT J. SAMMIS, Executive Vice President. 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 and Senior Vice
President, Corporate Development. 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, Senior 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
Associate 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.
THOMAS C. NORD, Vice President, General Counsel and Secretary since 1980. Mr.
Nord joined the Company as Associate Counsel in 1977 and became Assistant
General Counsel in 1978. Prior to 1977, Mr. Nord served as Counsel for Irving
Trust Company (three years) and as an Associate in the New York law firm of
Seward & Kissel (five years). Mr. Nord received a BA from Northwestern
University in 1962 and a JD from the University of North Carolina in 1969.
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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, Vice President-Investment and Managed Portfolios since 1997. Mr.
Glenn joined the Company in 1980 as Assistant Tax Manager, was appointed Tax
Manager in 1985 and elected Vice President in 1989. He was the Controller and
Principal Accounting officer from 1992 until 1997. 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.
A. DOUGLAS SHATTUCK, Principal Accounting Officer and Corporate Controller since
1997. Mr. Shattuck joined the Company in 1996 as Assistant Controller, Financial
Reporting. Prior to joining GATX Capital, Mr. Shattuck was Assistant Controller
of Matson Navigation Company, a San Francisco based container shipping firm,
from March 1992 to December 1996. Mr. Shattuck began his career in 1984 with
Deloitte & Touche in San Francisco. He received his BS degree in Business
Administration in 1984 from Georgetown University.
Items 11, 12 & 13
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Omitted under provisions of the reduced disclosure format.
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, 1997, 1996 and 1995
Consolidated Balance Sheets
As of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for
years ended December 31, 1997, 1996 and 1995
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.
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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 Shareholder, pages 26-44. (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.
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Item 14(b). Reports on Form 8-K
- --------------------------------
The Company filed a current report on Form 8-K on October 14, 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 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By /s/ Joseph C. Lane By /s/ Michael E. Cromar
- -- ------------------ -- ---------------------
Joseph C. Lane Michael E. Cromar
President, Chief Executive Officer Senior Vice President and
and Director Chief Financial Officer
Dated: March 30, 1998 Dated: March 30, 1998
By /s/ A. Douglas Shattuck By /s/ David M. Edwards
- -- ----------------------- -- --------------------
A. Douglas Shattuck David M. Edwards
Principal Accounting Officer Director
and Corporate Controller
Dated: March 30, 1998 Dated: March 30, 1998
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 30, 1998 Dated: March 30, 1998
12
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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, 1997 and 1996 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 26, 1998
13
<PAGE>
Exhibit 12
GATX Capital Corporation
Ratio of Earnings to Fixed Charges
Year Ended December 31, 1997
(in thousands)
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
Fixed Charges:
Interest on indebtedness
and amortization of debt
discount and expense $96,800 $86,106 $68,396 $62,744 $65,454
Capitalized interest 1,575 3,074 1,601 292 279
Portion of rents
representing interest
factor (assumed to
approximate 33%) 13,703 10,849 6,574 5,122 3,012
-------- -------- ------- ------- -------
Total fixed charges $112,078 100,029 76,571 68,158 68,745
======== ======= ====== ====== =======
Earnings available for
fixed charges:
Net income 53,564 45,855 32,604 24,851 21,525
Add (deduct):
Income taxes (benefit) 36,628 32,636 22,740 18,785 21,361
Equity in net earnings of
joint ventures, net of
dividends received 39,031 8,740 13,522 14,322 16,222
Fixed charges (excluding
capitalized interest) 110,503 96,955 74,970 67,864 68,466
-------- -------- ------- -------- --------
Total earnings available
for fixed charges $239,726 $184,186 $143,836 $125,822 $127,574
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges 2.14 1.84 1.88 1.85 1.86
======== ======== ======== ======== ========
14
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
- --------
GATX Capital Corporation and its subsidiaries ("GATX Capital" or the "Company")
engage in two main activities: 1) we are actively involved in asset-based
investment and finance, and 2) we provide a wide range of technology services
enabling their customers to acquire, construct and finance information networks.
The Company's technology solutions business was significantly expanded with the
October 1996 acquisition of the 50% of Centron which it did not already own.
Centron's financial results were consolidated in the Company's financial
statements subsequent to the October 1996 acquisition.
Revenue from asset-based investment and finance activities is generated from
financing equipment (either for the Company's own account or through
partnerships and joint ventures); from the remarketing of assets; from managing
the equipment related investment portfolios of others; and from brokering or
arranging asset financing transactions. These types of revenue are included in
investment and asset management revenue, including revenue earned from financing
alternatives related to technology solutions. Sales and service revenue related
to technology service is included in technology sales and service revenue.
INVESTMENT PORTFOLIO
Stacked pie charts presenting the following:
As of December 31, 1997 1996
- ------------------ ---- ----
Commercial Aircraft 26% 33%
Rail 25% 20%
Technology 15% 12%
Diversified Portfolios 34% 35%
In 1997, 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 lease portfolios; in the operating lease of a wide
variety of assets; and in successfully arbitraging between asset and financial
markets. Going forward, the Company's response to tightening market conditions
will include: (i) risk-sharing via partnerships 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 GATX Capital, our partners and our customers, and (iii)
selectively adapting and exporting our skills internationally.
The worldwide commercial aviation industry continued to perform well again in
1997. All of the major indices, from load factors to capacity, showed upward
growth. Industry profitability reached an all time high as well, notwithstanding
difficulties experienced by certain airlines. The Company had a successful year
remarketing aircraft coming off lease, placing new aircraft deliveries with
highly regarded airlines, and selling aircraft opportunistically out of its
portfolio both to airlines and financial buyers. Lease terminations of its
operating lease aircraft are staggered so that the Company is not overly exposed
to a downturn in any single year.
15
<PAGE>
GATX Capital and its partners have emphasized single aisle passenger aircraft in
recent aircraft acquisitions. The Airbus Industrie A320 family and Boeing 737
and 757 have wide user bases with proven lease values. GATX Capital will
continue to examine all commercial aircraft for acquisition, ranging in size
from regional jets to intercontinental twin aisle aircraft, to ensure that it is
aware of advantageous purchase opportunities. The Company will continue to sell
portfolio aircraft in 1998 that either do not meet, or marginally comply with,
noise and emission restrictions that will be enacted in developed countries
commencing in 2000. In addition, the Company will take delivery of three new
Airbus A321 aircraft in 1998 as well as commence acceptance of its order for the
Next Generation Boeing 737's. The Company believes the airline market will be
especially receptive to the delivery dates of its Next Generation 737 aircraft
since there is no new availability of these aircraft from the manufacturer
during the scheduled delivery period.
The North American rail equipment leasing marketplace continues to be
characterized by relatively high demand for equipment and active competition
among leasing companies and financial institutions. Railroad consolidations and
serious service problems created some unsettled market conditions during 1997,
with varied impacts on GATX Capital's operating lease fleet. Generally, the
demand for leased locomotives was very strong, and most freight car types
similarly experienced solid demand. The year-end utilization of GATX Capital's
operating lease fleet was approximately 97% for both rail cars and 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 on a global basis.
GATX Capital continues to believe the market for information technology and
communications equipment and services will provide opportunities for substantial
growth. 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, provides customers with a range of integrated and
stand-alone financial, consultative, implementation, operational and information
services in North America and Europe.
RESULTS OF OPERATIONS
- ---------------------
1997 was another outstanding year, as evidenced by several key financial
highlights: net income of $53.6 million was 16.8% higher than 1996 and a new
GATX Capital record; the Company earned a 23.3% return on common equity; new
investments of $862.4 million exceeded 1996's record investment by 31%.
Net income increased during the year primarily as a result of increases in
income from asset remarketing and from brokering and arranging financing
transactions. 1996's net income exceeded 1995's net income due to increases in
income from asset remarketing and from the Company's investment portfolio
(excluding asset remarketing income).
INVESTMENT AND ASSET MANAGEMENT
Bar graph presenting the following (in millions):
Year ended December 31, 1997 1996 1995
- ----------------------- ----- ----- -----
Total investment and asset management revenue $406.5 $324.1 $236.5
Investment and asset management revenue increased over 25% in 1997 to an
all-time high of $406.5 million, following a 37% increase during 1996 to $324.1
million. Growth of the Company's investment portfolio during both 1997 and 1996
was the primary driver of the increase during both years.
16
<PAGE>
AVERAGE TOTAL INVESTMENTS
Bar graph presenting the following (in billions):
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
Average total investments $1.9 $1.7 $1.3
Total average investments, before the allowance for possible losses, increased
14% during 1997 to a year-end balance of $2.2 billion. 1997's increase is
significant given that average investments grew nearly 24% during 1996. Revenues
from investments are offset by interest expense on borrowings used to fund new
investments and operating lease expense, which includes depreciation of
operating lease equipment and rent expense from off-balance sheet financing. The
increases in average investments during both 1997 and 1996 are also the primary
causes of the increase in interest expense and operating lease expense.
Increases in asset remarketing income during both 1997 and 1996 and an increase
in fee income in 1997 also contributed to the increases in investment and asset
management revenue during 1997 and 1996. Asset remarketing income totaled $83.2
million in 1997 and $57.0 million in 1996. These amounts are comprised of gains
on sale ($68.9 million and $35.5 million in 1997 and 1996, respectively) and
residual sharing fees ($14.3 million and $21.5 million in 1997 and 1996,
respectively). Fee income primarily includes fees earned from managing the
equipment-related investment portfolios of others and fees earned from brokering
or arranging transactions. The 1997 increase in fee income ($4.7 million) is due
to increases in both management fees and arranger fees. Asset remarketing income
includes gains on the sales of the Company's owned assets and 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. Although it is not
necessarily consistent from year to year, and it may be composed of different
mixes of gains on sales and fees, income from asset remarketing is a core
component of the Company's business and has historically been a significant
contributor to income.
ASSET REMARKETING
Bar graph presenting the following (in millions):
Gains on Residual
Year ended December 31, sale sharing fees Total
- ---------------------- -------- ------------ -----
1988 $ 25.9 $ 2.3 $ 28.2
1989 35.6 1.1 36.7
1990 48.6 1.5 50.1
1991 52.3 1.8 54.1
1992 22.3 1.7 24.0
1993 44.4 0.3 44.7
1994 21.4 2.9 24.3
1995 33.1 9.4 42.5
1996 35.5 21.5 57.0
1997 68.9 14.3 83.2
1997's asset remarketing income highlights the Company's ability to capitalize
on market opportunities by selling assets at other than their lease termination
and to realize the value of assets by arbitraging between the end user equipment
markets and the financial markets. As mentioned previously, the Company
opportunistically sold aircraft from its portfolio during the year to both
airlines and financial buyers. Gains generated from these sales were a
significant contributor to the increase in asset remarketing income.
17
<PAGE>
TECHNOLOGY EQUIPMENT SALES AND SERVICE REVENUE AND RELATED COST
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, as well as provides financing for
the hardware it markets. Centron's sales and earnings are seasonal in nature,
with a disproportionately positive impact in the fourth quarter. During 1997 the
Company expanded its sales operations into Europe via a 60% owned subsidiary.
The increase in technology equipment sales and service revenue ($170.5 million)
and related cost ($136.8 million) during 1997 is a combination of a full year of
revenues in 1997 versus two months in 1996 and the 1997 growth of this portion
of the Company's business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses include costs incurred to support
all types of activities discussed in the overview section. Selling, general and
administrative costs increased in both 1997 and 1996 due primarily to higher
human resource and other administrative costs resulting from a growth in
business activity, including expansion of the technology portion of the
business. The technology business has grown over the past two years primarily
through the October 1996 acquisition of Centron and the November 1995
acquisition of Sun Financial. 1997 expenses also included those costs incurred
to establish the necessary infrastructure to grow GATX Capital's technology
solutions presence in Europe.
PROVISION FOR LOSSES ON INVESTMENTS
The provision for losses on investments is based on the Company's estimate for
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 $7.5 million in 1997 as a result of a $11.0 million
provision for losses and $2.7 million of recoveries of previously written off
investments, offset by $6.2 million of write-downs. At December 31, 1997 the
allowance for losses on investments was 5.8% of investments, including
off-balance sheet assets and after deducting nonrecourse debt, and is at an
appropriate level given the current quality of the investment portfolio. This
compares with 6.6% of investments as of December 31, 1996.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------------------
NEW INVESTMENT
Bar graph presenting the following (in millions):
Year ended December 31, 1997 1996 1995
- ----------------------- ------- ------- -------
New investment $862.4 $656.7 $385.9
The Company generates cash from operations and portfolio proceeds and has
certain facilities for borrowing. During 1997 the Company invested a record
$862.4 million in new investments, up over 31% from 1996. This new investment
was funded with a $350.0 million note issuance, $179.4 million of nonrecourse
debt borrowings, $139.1 million of short-term debt borrowings and a portion of
the $513.7 million of cash generated from portfolio proceeds and operations.
1997's new investment volume included $368.0 million related to the acquisition
of leased assets from Pitney Bowes, of which $174.6 million was contributed to a
newly formed partnership with Pitney Bowes. The Company also paid $26.5 million
of dividends in 1997. Historically, dividends have been paid on the Company's
common stock at the rate of 50% of net income.
The $350.0 million of notes was issued under the Company's new Series E $532
million shelf registration which was filed during 1997. The Company's commercial
paper and bankers' acceptances are backed by credit agreements from a syndicate
of domestic and international commercial banks.
18
<PAGE>
As of December 31, 1997 the Company had the following borrowing capacity: $182.0
million remaining under the Series E shelf registration, $142.2 million of
unused capacity under its commercial paper and bankers' acceptances credit
agreements and $31.2 million remaining capacity under various stand-alone bank
facilities maintained by two of the Company's subsidiaries.
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 and Poor's and Baa2
by Moody's Investors Service.
During 1997 total debt financing grew at a faster rate than equity, increasing
the Company's debt to equity ratio to 3.73:1 at year-end 1997 from 2.79:1 at
year-end 1996. At December 31, 1997 GATX Capital can borrow an additional $196.7
million and still meet the 4:1 leverage ratio defined in its credit agreements.
Also during 1997 the Company placed the proceeds from the sale of certain assets
(approximately $35.7 million) in trust with a qualified intermediary pending the
identification and acquisition of qualified replacement assets in order to
affect a like-kind exchange for federal income tax purposes. The amounts in
trust are classified as cash and cash equivalents in the accompanying balance
sheet.
As of December 31, 1997 the Company has approved unfunded transactions totaling
$259.2 million, of which $150.9 million is expected to fund in 1998 and the
remaining $108.3 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's capital structure includes both fixed and floating rate debt. 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 it considers
financially sound and by avoiding concentrations of risk with a single
counterparty.
YEAR 2000 DISCLOSURE
- --------------------
The Company has evaluated its internal computer systems and has determined that
it does not have any significant exposure to potential computer system failures
caused by the Year 2000. The Company is currently in the process of assessing
its exposure to the failure of the systems of its customers and suppliers. It is
not anticipated that this assessment will identify significant exposure.
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,
that could cause actual results to differ materially from those projected.
19
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(in thousands)
Year ended December 31, 1997 1996 1995
-------- -------- --------
REVENUES:
Investment and asset management $ 406,481 $ 324,077 $ 236,509
Technology equipment sales and service 206,802 36,286
--------- -------- --------
613,283 360,363 236,509
--------- -------- --------
EXPENSES:
Interest 96,800 86,106 68,396
Operating leases 118,096 77,289 50,424
Cost of technology equipment sales and service 169,826 32,991
Selling, general & administrative 118,849 68,298 43,517
Provision for losses on investments 11,033 12,744 18,000
Other 8,487 4,444 828
--------- -------- --------
523,091 281,872 181,165
--------- -------- --------
Income before income taxes 90,192 78,491 55,344
Provision for income taxes 36,628 32,636 22,740
--------- -------- --------
NET INCOME 53,564 45,855 32,604
Reinvested earnings at beginning of year 185,686 162,400 146,036
Dividends paid to stockholder (26,500) (22,569) (16,240)
--------- -------- --------
Reinvested earnings at end of year $ 212,750 $ 185,686 $ 162,400
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
1997 1996
-------------- ----------------
ASSETS:
Cash and cash equivalents $ 61,990 $ 18,482
Investments:
Direct financing leases 666,524 461,757
Leveraged leases 170,555 257,039
Operating lease equipment-
net of depreciation 524,523 429,880
Secured loans 180,331 222,602
Investment in joint ventures 549,596 308,934
Assets held for sale or lease 15,398 12,393
Other investments 52,690 65,506
Investment in future residuals 19,693 21,457
Allowance for losses on investments (121,576) (114,096)
--------------- ----------------
Total investments 2,057,734 1,665,472
--------------- ----------------
Due from GATX Corporation 35,904 45,147
Other assets 161,515 119,528
--------------- ----------------
TOTAL ASSETS $ 2,317,143 $ 1,848,629
=============== ================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 16,070 $ 15,821
Accounts payable and other liabilities 167,825 138,660
Debt financing:
Commercial paper and bankers' acceptances 127,832 13,772
Notes payable 74,161 63,114
Obligations under capital leases 9,754 12,429
Senior term notes 1,155,600 935,600
---------------- ----------------
Total debt financing 1,367,347 1,024,915
---------------- ----------------
Nonrecourse obligations 329,820 268,044
Deferred income 13,556 5,786
Deferred income taxes 55,600 51,726
Stockholder's equity:
Convertible preferred stock, par value $1.00,
and additional paid-in capital 125,000 125,000
Authorized--4,000,000 shares
Issued and outstanding--1,027,050 shares in both years
Common stock, par value $1.00, and
additional paid-in capital 28,960 28,960
Authorized--2,000,000 shares
Issued and outstanding--1,031,250 shares in both years
Foreign currency translation adjustment (4,404) (1,543)
Unrealized gain on available-for-sale
securities 4,619 5,574
Reinvested earnings 212,750 185,686
---------------- ----------------
Total stockholder's equity 366,925 343,677
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,317,143 $ 1,848,629
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
GATX CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, 1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 53,564 $ 45,855 $ 32,604
Reconciliation to net cash provided by
operating activities:
Provision for losses on investments 11,033 12,744 18,000
Depreciation expense 79,381 44,579 28,404
Provision for deferred income taxes 10,323 18,932 15,065
Gain on sale of assets (68,899) (35,533) (33,123)
Changes in assets and liabilities:
Other assets (40,678) (12,613) (2,436)
Due from GATX Corporation 9,243 (810) (1,822)
Accrued interest, accounts payable
and other liabilities 29,414 29,951 (40,219)
Deferred income 7,770 1,394 (205)
Other - net (7,364) 18,265 9,612
---------- ----------- -----------
Net cash flows provided by operating activities 83,787 122,764 25,880
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (536,388) (376,276) (256,137)
Loans extended to borrowers (35,126) (117,052) (84,050)
Other investments (290,916) (163,334) (45,751)
------------ ----------- -----------
Total investments (862,430) (656,662) (385,938)
------------ ----------- -----------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 110,023 100,350 51,960
Loan principal received 62,377 121,952 56,042
Proceeds from sale of assets 218,493 164,169 188,333
Joint venture investment recovery,
net of earned income 39,031 8,740 13,522
------------ ----------- -----------
Recovery of investments 429,924 395,211 309,857
------------ ----------- -----------
Net cash flows used in investing activities (432,506) (261,451) (76,081)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease)in short-term borrowings 139,107 (133,014) 13,425
Proceeds from issuance of long-term debt 350,000 368,000 170,000
Proceeds from nonrecourse obligations 179,409 109,328 13,646
Repayment of long-term debt (130,000) (112,000) (104,000)
Repayment of nonrecourse obligations (117,113) (68,665) (12,423)
Dividends paid to stockholder (26,500) (22,569) (16,240)
Other financing activities (2,676) (3,816) (3,709)
---------- ----------- -----------
Net cash flows provided by financing activities 392,227 137,264 60,699
--------- ----------- -----------
Net increase(decrease) in cash
and cash equivalents 43,508 (1,423) 10,498
Cash and cash equivalents at beginning of period 18,482 19,905 9,407
--------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,990 $ 18,482 $ 19,905
========= =========== ============
22
<PAGE>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Income taxes paid to parent $ 17,720 $ 14,402 $ 13,473
========== ========== ===========
Interest paid $ 98,126 $ 88,560 $ 68,645
Interest capitalized (1,575) (3,074) (1,601)
------------ ---------- -----------
Net interest paid $ 96,551 $ 85,486 $ 67,044
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
- ------------------------------------------
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.
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 remaining lease term.
23
<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. These warrants, as well as common stock obtained by
exercising these warrants, are classified as available-for-sale and are 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. Changes to the fair value of these securities are
reflected in stockholder's equity until realized.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate and currency swap agreements to manage its
exposure to interest rate and currency exchange rate risk on existing or
anticipated transactions. These derivative financial instruments are
specifically identified with the instruments creating the interest and currency
risk and qualify for hedge accounting. Interest rate differentials to be paid or
received as a result of the interest rate swap agreements are accrued and
recognized as an adjustment to interest expense and net amounts paid or received
under the currency swap agreements are recognized over the term of the contract
as an adjustment to the hedged investment. The fair values of these hedge
contracts are not recognized in the financial statements.
ACQUISITIONS
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. However, in September 1997 the term of the
agreement was accelerated and the Company paid $9.0 million to acquire the
remaining 20% of Sun Financial. The Company also paid additional performance
related compensation to key employees of Sun Financial upon acquisition.
Goodwill of approximately $3.9 million was recorded in connection with the
acquisition of the remaining 20%, which is being amortized on a straight-line
basis over the remaining ten year life of the original acquisition goodwill.
Assets with a book value of $134.2 million were acquired and liabilities of
$126.7 million were assumed in 1995.
24
<PAGE>
In October 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. 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 on the balance sheet.
Unaudited pro forma consolidated revenue of the Company, including Centron, 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 including the results of Centron is $48.9 million and $34.8 million for
1996 and 1995, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
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.
25
<PAGE>
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. 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, 1997 1996
----------------- ----------------
Lease contracts receivable $ 650,544 $ 469,644
Estimated residual value 261,730 139,205
Unearned income (245,750) (147,092)
----------------- ----------------
Net investment $ 666,524 $ 461,757
================= ================
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 and 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, 1997 1996
------------------ -------------------
Lease contracts receivable $ 276,469 $ 434,182
Nonrecourse debt service (169,045) (242,358)
------------------ -------------------
Net receivable 107,424 191,824
Estimated residual value 122,194 186,042
Unearned income (59,063) (120,827)
------------------ -------------------
Investment in leveraged leases 170,555 257,039
Deferred taxes arising from
leveraged leases (42,466) (57,409)
------------------ -------------------
Net investment $ 128,089 $ 199,630
================== ===================
26
<PAGE>
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 $2.8
million, $1.9 million and $3.1 million in 1997, 1996 and 1995, 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
typically 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 $74.5 million, $41.4 million and $27.4
million is included in operating lease expense for 1997, 1996 and 1995,
respectively.
Major classes of equipment on operating leases are as follows:
At December 31, 1997 1996
---------------- ------------------
Commercial aircraft $ 183,464 $ 212,576
Rail 146,764 123,791
Technology 197,104 82,524
Other 104,639 46,441
---------------- ------------------
Total cost 631,971 465,332
Accumulated depreciation (119,153) (50,986)
---------------- ------------------
Net book value 512,818 414,346
Accrued rent and other 11,705 15,534
---------------- ------------------
Net investment $ 524,523 $ 429,880
================ ==================
27
<PAGE>
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 principal is recovered.
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 $19.3 million,
$26.7 million and $14.3 million in 1997, 1996 and 1995, respectively.
The types of loans in the Company's portfolio are as follows:
At December 31, 1997 1996
--------------- ---------------
Equipment $ 123,521 $ 122,994
Golf courses 53,959 78,286
Real estate 2,851 21,322
--------------- ---------------
Total investment $ 180,331 $ 222,602
================ ===============
Impaired Loans (included in total) $ 9,028 $ 29,600
=============== ===============
FUTURE LEASE AND LOAN RECEIVABLES
- ---------------------------------
As of December 31, 1997, 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
----------------- ------------------ -----------------
1998 $ 182,905 $ 166,579 $ 22,411
1999 142,908 136,459 19,664
2000 118,153 88,808 18,370
2001 84,176 46,304 12,729
2002 57,899 27,895 18,014
After 2002 171,927 97,140 89,143
----------------- ------------------ -----------------
Total $ 757,968 $ 563,185 $ 180,331
================= ================== =================
28
<PAGE>
INVESTMENT IN JOINT VENTURES
- ----------------------------
Investments in joint ventures include commercial aircraft leasing, rail
equipment leasing, information technology equipment leasing, and asset residual
value guarantee ventures in both the 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.
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 $41.0 million, $30.8 million and $34.2
million in 1997, 1996 and 1995, 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 $730.2
million, $527.9 million and $457.0 million at December 31, 1997, 1996 and 1995,
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, 1997 1996 1995
--------------- ---------------- ----------------
Revenues $ 311,929 $ 175,973 $ 292,989
Pre-tax income 72,728 47,247 51,517
Total assets 2,642,460 1,651,495 1,310,062
Indebtedness 645,605 643,909 442,514
Total liabilities 1,161,724 719,446 585,532
Equity 1,480,736 932,049 724,530
29
<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 and golf courses 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 release or sale in
the normal course of business.
The major classes of assets held for sale or lease are as follows:
At December 31, 1997 1996
--------------- ---------------
Real estate and golf courses $ 12,666 $ 4,081
Rail 2,216 5,023
Other 516 3,289
--------------- ---------------
Net investment $ 15,398 $ 12,393
=============== ===============
OTHER INVESTMENTS
- -----------------
The components of other investments are as follows:
At December 31, 1997 1996
--------------- ---------------
Progress payments $ 4,608 $ 15,338
Cogeneration facility 27,068 29,062
Real estate development 13,414 11,935
Equity securities 7,600 9,171
--------------- ---------------
Total other investments $ 52,690 $ 65,506
=============== ===============
Progress payments include amounts paid, including capitalized interest, toward
the construction of steel production equipment at December 31, 1997, and toward
the construction of aircraft and steel production equipment at December 31,
1996.
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 disposition.
30
<PAGE>
INVESTMENT AND ASSET MANAGEMENT REVENUE
- ---------------------------------------
The sources of investment and asset management revenue are as follows:
Year Ended December 31, 1997 1996 1995
------------ ------------ ------------
Earned lease income $ 245,523 $ 195,745 $ 139,712
Gain on sale of assets 68,899 35,533 33,123
Fees 29,371 31,840 19,026
Interest 23,271 28,374 23,179
Investment in joint ventures 27,909 22,411 18,594
Other 11,508 10,174 2,875
------------ ------------ ------------
Total investment and asset
management revenue $ 406,481 $ 324,077 $ 236,509
============ ============ ============
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:
At December 31, 1997 1996 1995
----------- ----------- ----------
Beginning balance $ 114,096 $ 92,489 $ 82,206
Provision 11,033 12,744 18,000
Charges to allowance (6,250) (5,025) (11,734)
Recoveries and other 2,697 13,888 4,017
------------ ------------ -----------
Balance at end of year $ 121,576 $ 114,096 $ 92,489
============ ============ ===========
31
<PAGE>
OTHER ASSETS
- ------------
Other assets consists of the following:
At December 31, 1997 1996
-------------- ---------------
Trade and other receivables $ 70,277 $ 48,676
Technology equipment inventory 41,534 27,895
Goodwill 22,402 21,093
Other 27,302 21,864
--------------- ---------------
Total other assets $ 161,515 $ 119,528
=============== ===============
Trade and other receivables consist primarily of trade accounts receivable
related to the Company's technology equipment sales and service segment.
DEBT AND CAPITAL LEASE FINANCING
- --------------------------------
SHORT-TERM BORROWING
- --------------------
At December 31, 1997, 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, 1997, these covenants limit
the Company's ability to transfer net assets to its parent to no more than $58.8
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, 1997, the Company had $127.8 million of
commercial paper and bankers' acceptances outstanding, meaning that $142.2
million was available. The Company has $74.2 million of notes payable
outstanding at December 31, 1997. The weighted average interest rate of
short-term borrowings at the end of the period was 6.24% and 5.60% as of
December 31, 1997 and 1996, respectively. In addition, two consolidated
subsidiaries have bank commitments totaling $103.0 million at December 31, 1997
to finance their operations, of which $31.2 million was available.
SENIOR TERM NOTES
- -----------------
In October 1997 the Company issued $350 million of notes, $225 million of which
is due in 2000 and the balance in 2004. The proceeds of this borrowing were used
to repay outstanding commercial paper and other short-term indebtedness.
At December 31, 1997 1996
--------------- ---------------
Variable Rate Notes, $ 20,000 $ 65,000
due 1999
Fixed Rate Notes, 5.45%-10.20% 1,135,600 870,600
due 1998-2007
--------------- ---------------
Total senior term notes $ 1,155,600 $ 935,600
=============== ===============
32
<PAGE>
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 characteristic 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 rate 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
reduced by $0.4 million in 1997, was higher by $0.8 million in 1996 and was
reduced by $2.2 million in 1995. 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, 1997 was $216.8 million,
with termination dates ranging from 1998 to 2006.
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, 1997 is $381.2 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, 1997 1996
----------------- ------------------
Variable Rate, due 2000-2002 $ 44,606 $ 50,220
Fixed Rate, 5.76%-9.25%,
due 1998-2013 285,214 217,824
----------------- ------------------
Total nonrecourse obligations $ 329,820 $ 268,044
================= ==================
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 $9.9 million and $12.4 million at
December 31, 1997 and 1996, respectively. Minimum future lease payments
receivable under the subleases aggregate $13.0 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.
33
<PAGE>
MATURITIES
- ----------
Maturities of debt financings, obligations under capital leases and nonrecourse
obligations are presented in the following table. Imputed interest on capital
leases totaled $2.4 million at December 31, 1997. 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
------------- ---------- ---------- ---------- ------------
1998 $ 63,141 $ 99,000 $ 1,484 $ 163,625 $ 115,630
1999 138,852 98,600 1,528 238,980 88,193
2000 319,000 1,660 320,660 52,034
2001 90,000 1,832 91,832 30,888
2002 79,000 1,974 80,974 14,305
After 2002 470,000 1,276 471,276 28,770
------------- ---------- ---------- ----------- ------------
Total $ 201,993 $1,155,600 $ 9,754 $ 1,367,347 $ 329,820
============= ========== ========== =========== ============
34
<PAGE>
STOCKHOLDER'S EQUITY
- --------------------
As of December 31, 1997 and 1996, 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.
Additional
Convertible Common Paid-In Reinvested
(in thousands) Preferred Stock Stock Capital Earnings
-------------- -------- -------- ----------
BALANCE AT JANUARY 1, 1995 $1,027 $1,031 $151,902 $146,036
Net income 32,604
Dividends paid to stockholder (16,240)
Translation adjustment
-------------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1995 1,027 1,031 151,902 162,400
Net income 45,855
Dividends paid to stockholder (22,569)
Translation adjustment
Unrealized gain on
available-for-sale securities
-------------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1996 1,027 1,031 151,902 185,686
Net income 53,564
Dividends paid to stockholder (26,500)
Translation adjustment
Change in unrealized gain on
available-for-sale securities
-------------- -------- -------- ----------
BALANCE AT DECEMBER 31, 1997 $1,027 $ 1,031 $151,902 $212,750
============== ======== ======== ==========
Unrealized
Equity Adj Gain on
from Foreign Available-
Currency for-sale
(in thousands) Translation Securities
------------ --------------
BALANCE AT JANUARY 1, 1995 $ (759) $ 0
Net income
Dividends paid to stockholder
Translation adjustment 1,399
------------ --------------
BALANCE AT DECEMBER 31, 1995 640 0
Net income
Dividends paid to stockholder
Translation adjustment (2,183)
Unrealized gain on
available-for-sale securities 5,574
------------ --------------
BALANCE AT DECEMBER 31, 1996 (1,543) 5,574
Net income
Dividends paid to stockholder
Translation adjustment (2,861)
Change in unrealized gain on
available-for-sale securities (955)
------------ --------------
BALANCE AT DECEMBER 31, 1997 $ (4,404) $4,619
============ ==============
35
<PAGE>
OPERATING LEASE OBLIGATIONS
- ---------------------------
The Company is a lessee under certain equipment and facility leases which are
classified as operating leases. Total rental expense was $41.5 million, $34.0
million and $20.5 million in 1997, 1996 and 1995, respectively. The equipment
under these leases has been subleased, generating operating lease income of
$42.7 million, $38.3 million and $23.8 million in 1997, 1996 and 1995,
respectively.
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 noncancelable operating leases through 2011 are as follows:
Obligations Operating
Year Due Under Sublease Lease Receivables
- ----------- ------------------- --------------------
1998 $ 38,343 $ 42,428
1999 38,226 39,978
2000 35,750 26,004
2001 26,905 18,828
2002 25,246 13,219
After 2002 245,339 70,105
------------------- --------------------
Total $ 409,809 $ 210,562
=================== ====================
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 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 $10.2 million due to GATX
Corporation which consists of amounts owed for dividends, overhead, and taxes
pursuant to the intercompany tax agreement.
36
<PAGE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
At December 31, 1997 1996
--------------- --------------
DEFERRED TAX LIABILITIES
Leveraged Leases $ 42,466 $ 57,409
Other Leases 91,486 85,250
Investment in joint ventures 37,453 30,725
Alternative minimum tax adjustment 19,483 4,217
Other 11,743 10,647
--------------- --------------
Total deferred tax liabilities 202,631 188,248
--------------- --------------
DEFERRED TAX ASSETS
Allowance for losses on investments 47,688 44,754
Loans 11,699 7,235
Other 8,703 5,592
--------------- --------------
Total deferred tax assets 68,090 57,581
--------------- --------------
Net deferred tax liabilities $ 134,541 $ 130,667
=============== ==============
TAX ACCOUNT BALANCES
Deferred income tax liabilities $ 55,600 $ 51,726
Preferred stock and related
additional paid-in capital 125,000 125,000
Due from GATX Corporation (46,059) (46,059)
--------------- --------------
Net deferred tax liabilities $ 134,541 $ 130,667
=============== ==============
The provision for income taxes consists of the following:
Year Ended December 31, 1997 1996 1995
--------------- -------------- ----------------
CURRENT
Federal $ 26,086 $ 13,276 $ 7,389
State and local 206 371 1,513
Foreign 13 57 (1,227)
--------------- -------------- ----------------
Total current 26,305 13,704 7,675
--------------- -------------- ----------------
DEFERRED
Federal 3,069 12,730 10,515
State and local 5,571 4,301 2,175
Foreign 1,683 1,901 2,375
--------------- -------------- ----------------
Total deferred 10,323 18,932 15,065
--------------- -------------- ----------------
Total provision for income taxes $ 36,628 $ 32,636 $ 22,740
=============== ============== ================
37
<PAGE>
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
Year Ended December 31, 1997 1996 1995
--------------- -------------- ----------------
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 1.5% 2.5% 2.0%
--------------- -------------- ----------------
Effective tax rate 40.6% 41.6% 41.1%
=============== ============== ================
The tax expense related to leveraged lease income was $6.6 million, $8.6 million
and $9.4 million in 1997, 1996 and 1995, respectively.
Income before income taxes from foreign operations was $3.0 million, $4.7
million and $2.5 million in 1997, 1996 and 1995, 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
$20.3 million at December 31, 1997. 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.
Year Ended December 31, 1997 1996 1995
--------------- ---------------- ----------------
EARNED INCOME
Domestic $ 508,042 $ 306,896 $ 191,343
Export 39,251 28,750 28,537
Foreign 67,129 25,902 17,591
Eliminations (1,139) (1,185) (962)
--------------- ---------------- ----------------
$ 613,283 $ 360,363 $ 236,509
=============== ================ ================
NET INCOME
United States $ 43,070 $ 37,261 $ 24,246
Foreign 10,494 8,594 8,306
Eliminations - - 52
--------------- ---------------- ----------------
$ 53,564 $ 45,855 $ 32,604
=============== ================ ================
TOTAL ASSETS
United States $ 2,046,424 $ 1,613,390 $ 1,318,020
Foreign 281,665 244,729 207,779
Eliminations (10,946) (9,490) (7,416)
--------------- ---------------- ----------------
$ 2,317,143 $ 1,848,629 $ 1,518,383
=============== ================ ================
38
<PAGE>
The Company has entered into currency swap agreements to protect itself from 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.
BUSINESS SEGMENTS
- -----------------
The Company operates in two business segments, as defined by SFAS 14. These
segments are: Investment and Asset Management, which includes the Company's
lease, loan and joint venture investments as well as the fee generation and
asset management businesses; and Technology Equipment Sales and Service, which
includes the sale and service of computer network technology equipment, provided
primarily by Centron. The following table presents significant financial
information related to the Company's two business segments:
Technology
Investment Equipment
and Asset Sales and
Management Service Total
--------------------------------------------
1997
Revenue $ 406,481 $ 206,802 $ 613,283
Pre-tax income 89,524 668 90,192
Identifiable assets 2,209,140 108,003 2,317,143
Capital expenditures 862,430 - 862,430
Depreciation 77,651 1,730 79,381
1996
Revenue 324,077 36,286 360,363
Pre-tax income 77,600 891 78,491
Identifiable assets 1,778,699 69,930 1,848,629
Capital expenditures 656,662 - 656,662
Depreciation 44,395 184 44,579
The Technology Equipment Sales and Service segment did not exist in 1995.
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. Independent actuaries determine pension cost for each GATX
subsidiary included in the Plan. 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 health care 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.
39
<PAGE>
COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK
- ------------------------------------------------------------
At December 31, 1997, the Company's investment portfolio, including off-balance
sheet assets, consists of 26% commercial jet aircraft, 25% rail equipment, 15%
information technology equipment, 8% warehouse and production equipment, 8%
marine equipment, and 18% other equipment.
The Company's backlog was $259.2 million (unaudited) and $425.0 million
(unaudited), at December 31, 1997 and 1996, 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 and
affiliates. Guarantees are commitments issued by the Company to (1) guarantee
performance of an affiliate to a third party, generally in the form of lease and
loan payment guarantees, or (2) guarantee the value of an asset at the end of a
lease. Similar to the Company's on-balance sheet investments, these guarantees
involve, to varying degrees, elements of credit and market risk which are not
recognized in the consolidated balance sheets. Accordingly, the Company uses the
same credit and market evaluation practices when making commitments and
conditional obligations as it does for funded transactions. 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.
Lease and loan payment guarantees generally involve guaranteeing repayment of
the financing required to acquire assets being leased by an affiliate to third
parties, and are in lieu of the Company making direct equity investments in the
affiliate. The Company knows of no event of default which would require it to
satisfy these guarantees and expects that the affiliated entities will generate
sufficient cash flow to satisfy the related lease and loan obligations. At
December 31, 1997 the Company had guaranteed $99.2 million of such obligations,
having fixed expiration dates ranging from 1998 through 2016. The Company earns
fees for providing certain of these guarantees and recognizes the income as
earned.
Asset value guarantees represent the Company's commitment to a third party that
an asset or group of assets will be worth a specified amount at the end of a
lease term. In addition to asset value guarantees, the Company also guarantees
minimum lease receipts to third party lessors. The Company issues these
guarantees either on its own in the normal course of business or through joint
venture affiliates which have the sole business purpose of guaranteeing asset
values. The Company follows the same practices as it does for its funded
transactions when evaluating the amount to guarantee. Based on known and
expected market conditions, management does not believe that the asset value
guarantees will result in any adverse financial impact to the Company. At
December 31, 1997 the Company had guaranteed $71.8 million of asset value,
having fixed expiration dates ranging from 1998 through 2018. Fees are earned
for providing these asset value guarantees in the form of an initial fee (which
is amortized into income over the guarantee period) and by sharing in any
proceeds received upon disposition of the asset in excess of the amount
guaranteed (which is recorded when earned).
The Company is engaged in various matters of litigation and has unresolved
claims pending. In one matter, the Company, through an affiliate, is the subject
of both litigation and unasserted claims related to the conversion of certain
aircraft from passenger to freighter configuration. While the amounts claimed in
this matter and other matters 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.
40
<PAGE>
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
accounted for under SFAS 13. Fair value is a subjective and imprecise
measurement that is based on assumptions and market data.
The use of different market assumptions and valuation methodologies may have a
material effect on the estimated fair value amounts. Accordingly, management
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 assumptions 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 bankers' 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 nonrecourse 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 rate senior term
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.
41
<PAGE>
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, 1997 Amount Value
------------------- -------------------
ASSETS
Secured Loans $ 180,331 $ 183,641
LIABILITIES
Senior term notes 1,155,600 1,176,527
Nonrecourse obligations 329,820 333,293
Interest rate and currency swaps (4) 1,269
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
42
<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,
No. 33-64474 on Form S-3 filed June 17, 1993 , No.33-65053 on Form S-3 filed
January 5, 1996 and No. 333-34879 on Form S-3 filed August 29, 1997 (as amended
by Amendment No. 1 filed October 16, 1997) of GATX Capital Corporation of our
report dated January 26, 1998, 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, 1997.
ERNST & YOUNG LLP
San Francisco, California
March 25, 1998
<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 BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 61,990
<SECURITIES> 0
<RECEIVABLES> 1,017,410 <F1>
<ALLOWANCES> 121,576
<INVENTORY> 47,420 <F2>
<CURRENT-ASSETS> 0 <F4>
<PP&E> 524,523 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 2,317,143
<CURRENT-LIABILITIES> 0 <F4>
<BONDS> 1,495,174 <F5>
<COMMON> 1,031 <F6>
0
1,027 <F6>
<OTHER-SE> 364,867 <F7>
<TOTAL-LIABILITY-AND-EQUITY> 2,317,143
<SALES> 206,802
<TOTAL-REVENUES> 613,283
<CGS> 169,826
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 245,432 <F8>
<LOSS-PROVISION> 11,033
<INTEREST-EXPENSE> 96,800
<INCOME-PRETAX> 90,192
<INCOME-TAX> 36,628
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,564
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> CONSISTS OF DIRECT FINANCE LEASE RECEIVABLES OF 666,524, LEVERAGED LEASE
RECEIVABLES OF 170,555, AND SECURED LOANS OF 180,331.
<F2> CONSISTS OF ASSETS HELD FOR SALE OR LEASE OF 15,398 AND TECHNOLOGY EQUIP-
MENT INVENTORY OF 32,022.
<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 1,155,600, OBLIGATIONS UNDER
CAPITAL LEASES OF 9,754, AND NONRECOURSE OBLIGATIONS OF 329,820.
<F6> PAR VALUE ONLY.
<F7> CONSISTS OF RETAINED EARNINGS OF 212,750, ADDITIONAL PAID-IN CAPITAL
OF 151,902, UNREALIZED GAINS ON MARKETABLE EQUITY SECURITIES, NET OF TAX
OF 4,619 AND FOREIGN CURRENCY TRANSLATION ADJUSTMENT OF (4,404).
<F8> CONSISTS OF OPERATING LEASE EXPENSE OF 118,096, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES OF 118,849, AND OTHER EXPENSES OF 8,487.
</FN>
</TABLE>
Exhibit 99
Medium Term Notes
Maturity Interest
Principal Date Rate
Fixed
$5,000,000 01/30/98 10.000%
$4,000,000 02/02/98 5.400%
$2,000,000 02/25/98 9.760%
$7,000,000 03/10/98 10.000%
$5,000,000 03/10/98 8.670%
$10,000,000 03/16/98 10.000%
$6,000,000 03/19/98 10.000%
$2,000,000 03/19/98 10.000%
$5,000,000 03/20/98 9.930%
$10,000,000 04/01/98 10.000%
$13,000,000 04/30/98 6.120%
$5,000,000 05/07/98 6.110%
$10,000,000 06/09/98 6.150%
$10,000,000 06/11/98 6.550%
$5,000,000 10/15/98 8.780%
$5,000,000 02/02/99 5.560%
$5,000,000 03/22/99 9.900%
$16,000,000 04/15/99 9.900%
$32,600,000 05/05/99 9.850%
$5,000,000 06/11/99 6.800%
$5,000,000 06/11/99 6.760%
$10,000,000 11/15/99 6.375%
$5,000,000 02/02/00 5.810%
$4,000,000 05/10/00 10.200%
$30,000,000 06/09/00 6.440%
$10,000,000 06/12/00 6.950%
$17,000,000 07/26/00 6.210%
$10,000,000 10/11/00 6.500%
$2,000,000 10/30/00 9.280%
$225,000,000 11/01/00 6.500%
$6,000,000 11/15/00 9.120%
$10,000,000 12/05/00 6.165%
$5,000,000 02/02/01 5.880%
$15,000,000 03/15/01 6.660%
$2,000,000 03/21/01 10.000%
$5,000,000 03/22/01 10.000%
$16,000,000 04/11/01 10.000%
$10,000,000 05/21/01 6.930%
$10,000,000 06/09/01 6.535%
$10,000,000 10/08/01 9.125%
$2,000,000 10/08/01 9.050%
$15,000,000 12/05/01 6.270%
$10,000,000 01/10/02 9.500%
$15,000,000 01/10/02 9.500%
$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%
$20,000,000 06/03/03 7.200%
$6,000,000 02/02/04 6.340%
$5,000,000 04/14/04 7.920%
$5,000,000 04/14/04 7.920%
$5,000,000 05/20/04 7.290%
$5,000,000 05/20/04 7.290%
$125,000,000 11/01/04 6.875%
$3,000,000 02/02/05 6.375%
$25,000,000 10/13/05 6.860%
$10,000,000 11/30/05 6.690%
$15,000,000 11/30/05 6.690%
$3,000,000 02/02/06 6.450%
$8,000,000 05/10/06 7.640%
$10,000,000 05/31/06 7.350%
$200,000,000 12/15/06 6.875%
$3,500,000 02/02/07 6.480%
Floating $20,000,000 02/16/99
----------------
$1,155,600,000
================
