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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, 1999 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 30, 2000, Registrant has outstanding 1,031,250 shares of $1 par
value Common Stock.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(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
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Document Part of Form 10-K
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Annual Report to Stockholder for Part II Items 7 & 8
Fiscal Year ended December 31, 1999
(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
Form 10-Q for the Quarter Ended Part IV Item 14(a)3
September 30, 1998 filed with the
Commission on November 16, 1998
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PART I
Item 1. Business
GATX Capital Corporation and its subsidiaries (the "Company") provides
asset-based financing, structures transactions for investment by other lessors,
and manages lease portfolios for third parties. Asset-based financing is
provided primarily to the aircraft, rail, technology, warehouse, production, and
marine industries. These financings, which are held within the Company's own
portfolio and through partnerships with coinvestors, are structured as leases
and secured loans, and frequently include interests in the asset's residual
value. For its transaction structuring and portfolio management services, the
Company receives fees when the transaction is completed, when an asset is
remarketed, and/or on an ongoing basis.
The Company competes with captive leasing companies, leasing subsidiaries of
commercial banks, independent leasing companies, lease brokers, investment
bankers, and financing arms of equipment manufacturers.
Information concerning financial data of business segments and the basis for
grouping products or services is contained in Exhibit 13, GATX Annual Report to
Shareholders for the year ended December 31, 1999 on pages 29 through 33, which
is incorporated herein by reference (page references are to the Annual Report to
Shareholders).
Item 2. Properties
The Company leases all of its office space and owns no materially important
physical properties other than those related directly to its investment
portfolio. The Company's principal offices are rented under a twelve year lease
expiring in 2003.
Item 3. Legal Proceedings
The Company is a party to actions arising from the issuance by the Federal
Aviation Administration (the "FAA") in January 1996 of Airworthiness Directive
96-01-03 (the "AD"). The AD has the effect of significantly reducing the amount
of freight that ten 747 aircraft may carry. These aircraft (the "Affected
Aircraft") were modified from passenger to freighter configuration by
GATX/Airlog Company ("Airlog") a California general partnership. A subsidiary of
the Company, GATX Aircraft Corporation, is a partner in Airlog. The
modifications were carried out between 1988 and 1994 by subcontractors of Airlog
under authority of Supplemental Type Certificates ("STC's") issued by the FAA in
1987 pursuant to a design approved by the FAA. In the AD, the FAA stated that
the STC's were issued "in error."
On July 11, 1996 Airlog 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) with
respect to three Affected Aircraft seeking a declaration that neither Airlog nor
the Company has any liability to Evergreen as a result of the issuance of the
AD. 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 AD to its three Affected Aircraft.
Evergreen alleges approximately $160 million in compensatory damages and also
seeks unspecified punitive damages.
On June 5, 1997, the Court ruled on Airlog's previously filed motion for partial
summary judgment against Evergreen. The Court ruled that the Purchase Agreement
covering one Evergreen aircraft was a contract for the sale of goods, and that
claims thereunder were barred by the four-year statute of limitations under the
California Commercial Code (the "Code"); but that the Modification Agreements
covering two aircraft owned by Evergreen were contracts of 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 Airlog's motion for Summary Judgment 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 to proceed with its claim for breach of warranty under the
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Modification Agreements and its claim of negligent misrepresentation.
On October 27, 1999 the Court issued its ruling on Evergreen's previously filed
motion for partial summary judgment regarding two Affected Aircraft. The Court
ruled : (i) the limitation on damages clause in the contracts under which the
Evergreen planes were converted which precludes consequential damages is not
unenforceable, (ii) the contracts included a warranty of the modification design
(iii) certain claims by Evergreen are not barred by the statute of limitations
and (iv) as to one airplane modification, which was guaranteed by the Company,
the Company can be held liable if any judgement were imposed against Airlog. The
Court also ruled that whether any warranty was breached is a triable issue of
fact.
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 AD to two Affected
Aircraft owned by AIA. 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 rescission of AIA's agreements with
Airlog, 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 AD. The
AIA claim was recently assigned to Kalitta Air ("Kalitta Air"). Kalitta Air
alleges $480 million in compensatory damages, trebling of such damages pursuant
to 18 U.S.C. 1964, prejudgment interest and unspecified punitive damages.
On June 4, 1997, Tower Air, Inc. 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 and negligence
and seeks damages in excess of $25 million together with interest, costs,
attorneys' fees, and unspecified punitive damages.
On February 25, 1998, The Bank of New York ("BNY") filed an action, as purported
beneficial owner of an Affected Aircraft, in the United States District Court
for the Northern District of California (No. C98-0385) against Airlog, the
Company and others. 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. BNY alleges
approximately $19 million in compensatory damages, prejudgment interest and
unspecified punitive damages.
On June 15, 1998, General Electric Capital and PALC II, Inc. (collectively
"GECC") filed a complaint in the United States District Court for the Northern
District of California (C98-2387) against Airlog, the Company, and others with
respect to three Affected Aircraft. These aircraft were modified in 1991 and
1992. In the action GECC asserts that the defendants are liable to it under a
number of legal theories in connection with the application of the AD to the
three aircraft owned by GECC. GECC alleges approximately $100 million in
compensatory damages, trebling of such damages pursuant to 18 U.S.C. 1964,
prejudgment interest and unspecified punitive damages.
Airlog, the Company, and others 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, alleging 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 AD 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. In February 2000, Airlog stipulated to the dismissal of its
fraudulent, negligent and innocent misrepresentation and professional negligence
causes of action against Pemco Aeroplex, Inc.
On July 24, 1998, Airlog filed an action in United States District Court for the
Western District of Washington
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against the United States of America (C98-1029). This action is to recover
losses suffered by Airlog as a result of the alleged negligence of the FAA in
the development and approval of the design to convert the Affected Aircraft from
passenger to freighter configuration. The complaint seeks damages in excess of
$8.3 million representing the expenses incurred by Airlog in responding to the
AD and legal fees and costs incurred by Airlog in defending the litigation
described above. On August 27, 1999 the Court dismissed Airlog's action against
the United States. This dismissal was based on the Court's determination that
the governmental discretionary function exception to the Federal Tort Claims Act
is applicable to Airlog's claim. Airlog is appealing that decision to the
Circuit Court of Appeals for the Ninth Circuit.
On January 25, 1999, the FAA issued a letter to Airlog stating that satisfactory
accomplishment of a number of Airlog generated Service Bulletins on an Affected
Aircraft would remove the limitations of the AD. On or about February 26, 1999
the first Affected Aircraft, owned by Evergreen, returned to revenue service.
Actions with respect to nine of the ten Affected Aircraft have been consolidated
for trial in the Federal District Court for the Northern District of California.
On February 1, 2000 the judge assigned to these cases recused himself. The case
has been assigned to a new judge. As a result of this reassignment, the trial of
these cases, which had been set for April 3, 2000, has been removed from the
calendar.
While the results of any litigation are impossible to predict with certainty,
the Company believes that each of the foregoing claims brought against it is
without merit, and that the Company and Airlog have adequate defenses thereto.
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Item 4. Submission of Matters to a Vote of Security Holders
Omitted under provisions of the reduced disclosure format.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Not applicable. All common stock of the Registrant is held by GATX Financial
Services, Inc. (a wholly-owned subsidiary of GATX Corporation). Information
regarding dividends is shown on the consolidated statements of income and
retained 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
Incorporated herein by reference to the Annual Report, pages 29-33, included as
Exhibit 13 of this document.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Incorporated herein by reference to the Annual Report, page 32, 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):
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Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 Page 34
Consolidated Balance Sheets as of December 31, 1999 and 1998 Page 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 Page 36
Consolidated Statements of Changes in Stockholder's Equity
As of December 31, 1999, 1998, and 1997 Page 37
Notes to Consolidated Financial Statements Pages 38-53
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Items 10, 11, 12 & 13
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 that
are included in the Annual Report to Stockholders for the year ended December
31, 1999, are filed in response to Item 8:
Consolidated Statements of Income for the years ended December 31, 1999,
1998, and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998, and 1997
Consolidated Statements of Changes in Stockholder's Equity as of
December 31, 1999, 1998, and 1997
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
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Exhibit Number
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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 Banks listed on
Schedule I thereto and Chase Manhattan Bank, as agent
for the Banks, dated July 1, 1998.(8)
10(d) Credit Agreement among the Company, its two subsidiaries
operating in Canada, and the Bank of Montreal, dated
December 14, 1992.(4)
10(e) First Amendment, dated June 20, 1993 to Credit Agreement
referred to in 10(d).(5)
10(f) Second Amendment, dated June 14, 1994, to Credit
Agreement referred to in 10(d).
10(g) Third Amendment, dated December 1, 1994, to Credit
Agreement referred to in 10(d).(5)
12 Ratio of Earnings to Fixed Charges.(7)
13 Annual report to Shareholder, pages 30-63.(7)
23 Consent of Independent Auditors.(7)
27 Financial Data Schedule.(7)
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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.
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(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.
(8) Incorporated by reference to Form 10Q filed with the
Commission on November 16, 1998.
</TABLE>
Item 14(b). Reports of Form 8-K
Not Applicable.
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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/ Jesse V. Crews
------------------------
Jesse V. Crews
President, Chief Executive Officer
and Director
March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By / s/ Jesse V. Crews By / s/ Jack F. Jenkins-Stark
- ------------------------ -------------------------------
Jesse V. Crews Jack F. Jenkins-Stark
President, Chief Executive Officer Senior Vice President and
and Director Chief Financial Officer
Dated: March 30, 2000 Dated: March 30, 2000
By / s/ Delphine M. Regalia By / s/ Brian A. Kenney
- ----------------------------- -------------------------
Delphine M. Regalia Brian A. Kenney
Principal Accounting Officer Director
and Controller
Dated: March 30, 2000 Dated: March 30, 2000
By / s/ Kathryn G. Jackson By / s/ Alan C. Coe
- ---------------------------- ---------------------
Kathryn G. Jackson Alan C. Coe
Executive Vice President Executive Vice President
and Director and Director
Dated: March 30, 2000 Dated: March 30, 2000
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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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements 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, 1999 and 1998 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
San Francisco, California
January 28, 2000
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Exhibit 12
GATX Capital Corporation
Ratio of Earning to Fixed Charges
(in thousands)
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Year Ended December 31, 1999 1998 1997 1996 1995
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Fixed Charges:
Interest on indebtedness and amortization of
debt discount and expense $ 115,031 $ 110,187 $ 96,800 $ 86,106 $ 68,396
Capitalized interest 4,096 2,064 1,575 3,074 1,601
Portion of rents representing interest factor
(assumed to approximate 33%) 14,297 13,498 13,703 10,849 6,574
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Total fixed charges $ 133,424 $ 125,749 $ 112,078 $ 100,029 $ 76,571
========= ========= ========= ========= =========
Earnings available for fixed charges:
Net income $ 71,609 $ 71,891 $ 53,564 $ 45,855 $ 32,604
Add:
Income taxes 49,139 51,267 36,628 32,636 22,740
Equity in net earnings of joint ventures, net
of dividends received (38,962) (21,778) 39,031 8,740 13,522
Fixed charges (excluding capitalized interest) 129,328 123,685 110,503 96,955 74,970
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Total earnings available for fixed charges $ 211,114 $ 225,065 $ 239,726 $ 184,186 $ 143,836
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.58 1.79 2.14 1.84 1.88
========= ========= ========= ========= =========
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Exhibit 13
OVERVIEW
GATX Capital Corporation and its subsidiaries ("GATX Capital" or the "Company")
is a diversified international financial services company which provides
asset-based financing for transportation, industrial and information technology
equipment; financing for venture-backed and high-technology ("new economy")
companies; management of assets for third parties; and transaction structuring,
residual guarantee and asset remarketing services. As investor, the Company
invests in a variety of assets including commercial aircraft and commercial
aircraft engines, locomotives and railcars, marine equipment, oil and steel
production equipment, personal computers, client servers, telecom related assets
and financing for "new economy" companies. As manager, the Company combines its
asset and industry expertise with its financial structuring expertise to
optimize the value of lease portfolios that it manages for major industrial,
insurance and financial services companies. As transaction arranger, the Company
brings appropriate parties together, leveraging knowledge and relationships from
its investing and managing activities, to maximize value for all involved
parties. Frequently GATX Capital's roles of investor, manager and arranger are
intertwined as the Company invests alongside its partners in ventures that the
Company also manages. GATX Capital is a wholly-owned subsidiary of GATX
Corporation.
The Company's commercial aircraft and rail investment activities are focused on
operating leasing and maximizing the value of owned and managed operating lease
fleets. Marine, oil and steel production, and other industrial and
transportation investments are typically individual transactions that are longer
term in nature. Investments in personal computers, client servers and other
technology-related investments are typically shorter term due to the rapid pace
of technological advancements. "New economy" investments typically provide
customers with financing for technology, telecommunications, biotechnology and
other similar productivity enhancing capital expenditures.
In addition to these investing related activities, the Company was also a
value-added reseller of technology equipment and services through June 30, 1999,
at which time the Company sold this business segment. Accordingly, results from
the technology equipment sales and service segment are shown as discontinued
operations with prior year activity reclassified into one line for purposes of
reporting consolidated income. All assets and liabilities relating to the
technology equipment sales and service segment were removed from the balance
sheet in connection with the sale.
RESULTS OF OPERATIONS
GATX Capital achieved record results during 1999:
> Net income of $67.6 million was 14% higher than in 1998 and marked
the fifth straight year of record earnings;
> New investment of $1.2 billion was a new GATX record, growing 42%
from 1998;
> Investments totaled $2.9 billion at the end of the year, up 33% from
the end of 1998.
The Company achieved these record results through growth in traditional
activities and contributions from new platforms. New growth platforms include
Rolls-Royce & Partners Finance Ltd., in which the Company acquired a 50%
interest in 1998; Meier Mitchell, the Company's former venture finance partner,
which the Company acquired in 1999; the GATX Flightlease Aircraft partnership
formed in 1999; and the GATX Telecom Investors partnerships formed in 1998 and
1999.
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1999 compared to 1998
Income from continuing operations decreased slightly to $71.6 million, as
compared to $71.9 million in 1998. Income from investments was greater than in
1998 but was offset by a decrease in income from management activities and an
increase in selling, general and administrative expenses.
Income from investments increased as a result of higher average investment
balances and an increase in income from the sale of stock, offset by a decrease
in gain on sale of assets.
Financing and leveraged lease income increased a combined 15% over 1998 due
primarily to the impact of new leases. Operating lease margin, the excess of
operating lease income over operating lease expense, increased 10% compared to
1998 due to higher average lease balances. Average operating lease balances were
approximately 41% greater during 1999 than during 1998.
Equity earnings from investments in joint ventures increased 32% to $60.7
million in 1999 due to income generated from new joint ventures and growth
within previously existing joint ventures. Investments in joint ventures
increased to $667.6 million at the end of the year, 17% greater than the end of
1998. The increase in investments in joint ventures reflects continued growth in
partnering activities, including a new joint venture with Flightlease,
SwissAir's leasing subsidiary, and GATX Telecom Investors, a limited liability
company that provides financing to early-stage telecommunications service
providers. In addition to these new joint ventures, pre-existing joint ventures
grew during the year as well. At the end of 1999, GATX Capital's share of assets
in joint ventures in which the Company has an investment totaled $1.6 billion,
up 24% from the end of 1998.
Earnings from owned assets also include the gain recorded upon disposition of
the asset. Gains on the sale of assets, which do not necessarily occur evenly
between periods, decreased $9.4 million in 1999.
Interest income increased $6.7 million in 1999 due to higher average loan
balances and the prepayment of several loans and the related fees.
Other income increased $10.7 million due primarily to income from the sale of
stock. Stock sales generally relate to shares received upon exercise of warrants
received in connection with financing of non-public, start-up companies. Income
from stock sales totaled $14.7 million in 1999, an increase of $12.3 million
compared to 1998.
Higher average borrowing balances and an increase in borrowing rates both drove
interest expense higher in 1999. Average debt balances were approximately $233.7
million higher in 1999 because proceeds from borrowings were needed to fund the
growth in investments.
The provision for losses on investments is derived from the Company's estimate
of losses inherent in the portfolio based on a review of credit, collateral and
market risks. The allowance for losses on investments decreased $19.5 million in
1999 as a result of an $11.0 million provision for losses offset by net
charge-offs of $30.5 million. The net charge-offs primarily related to leases of
twin-aisle commercial aircraft and a steel production facility.
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Income from management and transaction arranging activities is included in fee
income which decreased $7.0 million in 1999. As compensation for managing lease
portfolios, the Company typically receives recurring management fees during the
terms of the managed leases and a performance based remarketing fee upon
disposing of the leased assets. The company may also earn a performance based
remarketing fee for remarketing assets it does not manage. The decrease in
income from management activities in 1999 is primarily due to a decrease in fees
earned from remarketing assets under management, which more than offset an
increase in recurring management fees as a result of growth in managed
investments, primarily commercial aircraft. Although they do not necessarily
occur evenly between periods, performance based remarketing fees are often a
significant component of our total compensation as manager of portfolios.
Selling, general and administrative expenses increased in 1999 as a result of a
significant increase in business activity, as evidenced by the Company's record
year of new investment, and expenses incurred for litigation related to the
conversion by an affiliate of certain aircraft from passenger to freighter
configuration. Headcount at the end of 1999 was approximately 13% higher than at
the end of 1998, due in part to the acquisition of Meier Mitchell. Also,
expenses from consulting projects and other external service providers increased
in 1999 as a result of an increase in transaction activity and exploring new
growth initiatives and an increase in other activities such as growing the
Company's infrastructure to support a larger business.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
During 1999 the Company invested a record $1.2 billion. This new investment was
funded with the issuance of $647.0 million of notes, $189.5 million of
nonrecourse debt borrowings and a portion of the $660.7 million of cash
generated from the recovery of investments and from operations. Cash generated
from the recovery of investments and from operations was also used to repay
$98.6 million of senior term notes and $173.0 million of nonrecourse borrowings.
In addition, the Company paid $33.9 million of dividends to its Parent in 1999.
Historically, dividends have been paid on the Company's common stock at the rate
of 50% of net income.
During 1999 the Company issued the remaining $162.0 million of notes under its
Series E shelf registration and filed a $500.0 million Series F shelf
registration. The Company issued an additional $485.0 million of notes under the
Series F shelf registration, including a $350.0 million bond offering. As of
December 31, 1999, the Company had the following borrowing capacity: $15.0
million of notes under its Series F shelf registration, $181.1 million of unused
capacity under its commercial paper and bankers' acceptance credit agreements
and $35.0 million of remaining capacity under a stand-alone bank facility
maintained by one of the Company's subsidiaries. In addition, the Company filed
a $1.015 billion Series G shelf registration in January 2000, which assumes the
remaining $15.0 million of Series F capacity is rolled into the Series G filing.
The Company's commercial paper and bankers' acceptances are backed by credit
agreements from a syndicate of domestic and international commercial banks. The
Company's senior unsecured notes are rated BBB+ by Standard and Poor's and Baa2
by Moody's Investors Service.
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.
14
<PAGE> 4
During 1999, primarily as a result of the dramatic growth in the Company's
investment balances and the borrowings needed to fund that growth, total debt
financing increased $527.1 million. This increase, despite the $60.6 million
increase in equity, caused the Company's debt to equity ratio to increase to
3.9:1 at year-end 1999 from 3.1:1 at year-end 1998. At December 31, 1999, the
Company could borrow an additional $719.3 million and still meet the 4.5:1
leverage ratio defined in its bank credit agreements.
During 1998 the Company placed the proceeds from the sale of certain assets 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 sheets. Amounts in trust at
December 31, 1999 and 1998 were zero and $29.2 million, respectively.
As of December 31, 1999, the Company has approved unfunded transactions totaling
$1.8 billion, of which $0.5 billion is expected to fund in 2000 and the
remaining $1.3 billion 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.
MARKET RISK DISCLOSURE
The Company, like most other companies, is exposed to certain market risks,
including changes in interest rates, currency exchange rates, and changes in
prices of equity securities. To manage these risks, the Company, pursuant to
pre-established and pre-authorized policies, may enter into certain derivative
transactions, predominantly interest rate swaps, foreign currency hedges, and
forward sale agreements.
These interest rate swaps and other derivative instruments are entered into for
hedging purposes only. The Company does not hold or issue derivative financial
instruments for speculative purposes.
The Company's interest expense is affected by changes in interest rates as a
result of its use of variable rate debt instruments, including commercial paper
and other floating rate debt. Based on the Company's variable rate debt at
December 31, 1999, if market rates were to change by a hypothetical 100 basis
points, interest expense would change by approximately $5.1 million in 2000.
The Company seeks to minimize the impact of foreign currency fluctuations by
hedging transactional exposures with foreign currency hedges. Based on 1999's
reported earnings, changes in these currency exchange rates would be immaterial
to the Company's reported earnings in 2000.
The interpretation and analysis of the results from the hypothetical changes to
interest rates and currency exchange rates should not be considered in
isolation; changes, such as these, would typically have corresponding offsetting
changes. Offsetting effects are present, for example, to the extent that
floating rate debt is associated with floating rate assets.
15
<PAGE> 5
YEAR 2000 DISCLOSURE
Throughout 1999 the Company addressed what is commonly referred to as the Year
2000 problem. As expected, the Company did not experience any significant Year
2000 problems and does not believe it has any continued exposure to Year 2000
issues. The total Year 2000 project cost was immaterial to the Company's results
of operations.
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.
16
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands/Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Lease income $ 330,471 $ 267,966 $ 245,523
Equity earnings from investments
in joint ventures 60,663 45,850 27,909
Gain on sale of assets 60,062 69,423 68,899
Interest 40,789 34,110 23,271
Fees 31,873 38,832 29,371
Other 21,004 10,271 10,895
-----------------------------------------
544,862 466,452 405,868
-----------------------------------------
EXPENSES:
Operating leases 185,171 139,160 118,096
Interest 115,031 110,187 94,305
Selling, general & administrative 108,117 77,439 83,657
Provision for losses on investments 11,001 11,029 11,033
Other 4,794 5,479 8,487
-----------------------------------------
424,114 343,294 315,578
-----------------------------------------
Income from continuing operations before income taxes 120,748 123,158 90,290
Provision for income taxes 49,139 51,267 36,366
-----------------------------------------
INCOME FROM CONTINUING OPERATIONS 71,609 71,891 53,924
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
income tax benefit (provision) of $2,398, $743, and
($262) in 1999, 1998 and 1997, respectively (5,112) (12,574) (360)
Gain on sale of discontinued operations,
net of income tax benefit of $1,820 1,094 -- --
-----------------------------------------
NET INCOME $ 67,591 $ 59,317 $ 53,564
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands/As of December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 45,817 $ 67,975
Investments:
Direct financing leases 477,739 537,897
Leveraged leases 170,066 133,380
Operating lease equipment -
net of depreciation 960,123 547,221
Secured loans 358,001 241,567
Investments in joint ventures 667,648 570,255
Assets held for sale or lease 36,993 26,286
Other investments 197,096 84,856
Investments in future residuals 14,538 18,706
Allowance for losses on investments (109,771) (129,278)
-----------------------------
Net investments 2,772,433 2,030,890
-----------------------------
Due from GATX Corporation 46,705 37,816
Other assets 76,736 139,001
-----------------------------
TOTAL ASSETS $ 2,941,691 $ 2,275,682
=============================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued interest $ 17,366 $ 13,634
Accounts payable and other liabilities 147,797 150,504
Debt financing:
Commercial paper and bankers' acceptances 128,927 128,329
Notes payable 5,454 25,847
Obligations under capital leases 7,253 8,781
Senior term notes 1,625,000 1,076,600
-----------------------------
Total debt financing 1,766,634 1,239,557
-----------------------------
Nonrecourse obligations 397,849 381,390
Deferred income 10,714 9,702
Deferred income taxes 143,560 83,754
Stockholder's equity:
Convertible preferred stock, par value $1,
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,
and additional paid-in capital 28,960 28,960
Authorized - 2,000,000 shares
Issued and outstanding - 1,031,250 shares in both years
Accumulated other comprehensive income 27,661 772
Retained earnings 276,150 242,409
-----------------------------
Total stockholder's equity 457,771 397,141
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,941,691 $ 2,275,682
=============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands/Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 67,591 $ 59,317 $ 53,564
Reconciliation to net cash flows provided by operating activities:
Provision for losses on investments 11,001 11,029 11,033
Depreciation expense 145,344 110,825 79,381
Provision for deferred income taxes 45,227 19,339 10,323
Gain on sale of assets (60,062) (69,423) (68,899)
Gain on sale of discontinued operations (1,094) -- --
Joint venture income, net of cash dividends (38,962) (21,778)
Impairment loss -- 6,000 --
Changes in assets and liabilities:
Other Assets (87) 19,499 (40,678)
Due from GATX Corporation (8,889) (1,912) 9,243
Accrued interest, accounts payable and other liabilities (1,034) (19,757) 29,414
Deferred income 1,012 (3,854) 7,770
Other - net (992) (8,782) (7,364)
-----------------------------------------------
Net cash flows provided by operating activities 159,055 100,503 83,787
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in leased equipment, net of
nonrecourse borrowings for leveraged leases (696,978) (507,996) (536,388)
Loans extended to borrowers (268,762) (161,633) (35,126)
Other investments (245,311) (181,482) (290,916)
-----------------------------------------------
Total investments (1,211,051) (851,111) (862,430)
-----------------------------------------------
Lease rents received, net of earned income and
leveraged lease nonrecourse debt service 145,940 148,842 110,023
Loan principal received 88,688 326,193 62,377
Proceeds from sale of assets 220,427 248,425 218,493
Joint venture investment recovery 46,599 139,011 39,031
-----------------------------------------------
Recovery of investments 501,654 862,471 429,924
-----------------------------------------------
Net cash flows (used in) provided by investing activities (709,397) 11,360 (432,506)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings (1,297) (47,817) 139,107
Proceeds from issuance of long-term debt 647,000 20,000 350,000
Proceeds from nonrecourse obligations 189,467 204,098 179,409
Repayment of long-term debt (98,600) (99,000) (130,000)
Repayment of nonrecourse obligations (173,008) (152,528) (117,113)
Dividends paid to stockholder (33,850) (29,658) (26,500)
Other financing activities (1,528) (973) (2,676)
-----------------------------------------------
Net cash flows provided by (used in) financing activities 528,184 (105,878) 392,227
-----------------------------------------------
Net (decrease) increase in cash and cash equivalents (22,158) 5,985 43,508
Cash and cash equivalents at beginning of period 67,975 61,990 18,482
===============================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,817 $ 67,975 $ 61,990
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid to parent $ 8,103 $ 23,800 $ 17,720
===============================================
Interest paid $ 115,395 $ 119,075 $ 98,126
===============================================
Interest capitalized $ (4,096) $ (2,064) $ (1,575)
===============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Additional Retained Comprehensive
In thousands Stock Stock Capital Earnings Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,027 $ 1,031 $151,902 $185,686 $ 4,031 $343,677
Comprehensive income: (A)
Net income 53,564 53,564
Other comprehensive income:
Foreign currency translation (2,861) (2,861)
Unrealized gain/loss on securities, net of tax:
Net unrealized holding gains 408
Less: reclassification adjustment for gains
realized in net income (1,363)
----------------------
Net unrealized gains (955) (955)
--------
Comprehensive income 49,748
Dividends paid on common stock (26,500) (26,500)
---------------------------------------------------------------------
Balance, December 31, 1997 1,027 1,031 151,902 212,750 215 366,925
Comprehensive income:
Net income 59,317 59,317
Other comprehensive income:
Foreign currency translation (1,447) (1,447)
Unrealized gain/loss on
securities, net of tax:
Net unrealized holding gains 2,818
Less: reclassification adjustment for gains
realized in net income (814)
----------------------
Net unrealized gains 2,004 2,004
--------
Comprehensive income 59,874
Dividends paid on common stock (29,658) (29,658)
---------------------------------------------------------------------
Balance, December 31, 1998 1,027 1,031 151,902 242,409 772 397,141
Comprehensive income:
Net income 67,591 67,591
Other comprehensive income:
Foreign currency translation (1,454) (1,454)
Unrealized gain/loss on
securities, net of tax:
Net unrealized holding gains 37,279
Less: reclassification adjustment for gains
realized in net income (8,936)
----------------------
Net unrealized gains 28,343 28,343
--------
Comprehensive income 94,480
Dividends paid on common stock (33,850) (33,850)
---------------------------------------------------------------------
Balance, December 31, 1999 $ 1,027 $ 1,031 $151,902 $276,150 $ 27,661 $457,771
=====================================================================
</TABLE>
(A) The beginning balance is comprised of ($1,543) foreign currency translation
adjustment and $5,574 net unrealized gain.
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 10
(dollars in thousands)
1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting and reporting policies used
in preparing the consolidated financial statements.
CONSOLIDATION
The consolidated financial statements of GATX Capital Corporation and its
subsidiaries (the "Company") are prepared in accordance with accounting
principles generally accepted in the United States. The consolidated financial
statements reflect the elimination of all material intercompany accounts and
transactions. Investments in joint ventures and other entities in which the
Company has significant influence over operating and financial policies are
accounted for by the equity method.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased within three
months of their maturity date to be cash equivalents for purposes of preparing
the consolidated statements of cash flows.
LEASE AND LOAN ORIGINATION COSTS
Initial direct costs of leases are deferred and amortized over the lease term,
either as an adjustment to the yield for direct finance and leveraged leases
(collectively, "financing leases"), or on a straight-line basis for operating
leases. Loan origination fees and related direct loan origination costs for a
given loan are offset, and the net amount is deferred and amortized over the
term of the loan as an adjustment to interest income.
RESIDUAL VALUES
For financing leases, the Company reviews the estimated residual values of
leased equipment at least annually, and any other-than-temporary declines in
value are immediately charged to income. For operating leases, the Company
reviews the estimated salvage values of leased equipment at least annually, and
changes in value are recorded as adjustments to depreciation expense over the
shorter of the remaining useful life of the asset or the remaining lease term.
GOODWILL
Goodwill, which represents the excess of the purchase price of a business over
the fair value of net assets acquired, is included in other assets on the
balance sheet. The Company amortizes goodwill on a straight-line basis over
periods ranging from 10 to 25 years, and regularly reviews the remaining balance
for possible impairment.
AVAILABLE-FOR-SALE SECURITIES
The available-for-sale portfolio consists of stock warrants received from
investee companies and common stock resulting from exercising the warrants.
These securities are carried at fair value. Upon receipt, fair value is
generally not ascertainable due to the early-stage nature of the investee
companies; accordingly, assigned values are nominal. For subsequent reporting,
cost is generally assumed to be the best estimate of fair value until the
investee's common stock becomes marketable. Unrealized gains and losses arising
from marking the portfolio to fair value are included on a net-of-tax basis as a
separate component of other comprehensive income in the stockholder's equity
section of the balance sheet.
21
<PAGE> 11
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate and currency swap agreements, and forward sale
agreements, as hedges to manage the exposure to interest rate, currency exchange
rate, and market risk on existing and anticipated transactions. To qualify for
hedge accounting, the derivative instrument must be identified with and reduce
the risk arising from a specific transaction. Interest income or expense on
interest rate swaps is accrued and recorded as an adjustment to the interest
income or expense related to the hedged item. Realized and unrealized gains on
currency swaps are deferred and included in the measurement of the hedged
investment over the term of the contract. Fair value changes arising from
forward sale agreements are deferred in the investment section of the balance
sheet and recognized in other comprehensive income in stockholder's equity in
conjunction with the designated hedged item.
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133, is required to be adopted in years
beginning after June 15, 2000. The Company is in the process of assessing the
impact that adoption of SFAS No. 133 will have on its financial position and
results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. NATURE OF OPERATIONS
The Company, a wholly-owned subsidiary of GATX Corporation (the "Parent"),
engages in various asset-based financings using financial instruments, primarily
leases and loans, both for its own account and as a participant in various
partnerships and joint ventures. The Company actively manages its own investment
portfolio, the portfolios of several joint ventures and partnerships in which it
participates, and portfolios owned by others. The Company also arranges secured
financing for others.
3. ACQUISITIONS AND DISPOSITIONS
On June 30, 1999, the Company sold its technology equipment sales and service
business segment to a third party (the "Buyer") for $23.4 million. The
consideration received included stock of the Buyer valued at $18.4 million and
an interest bearing note receivable from the Buyer for the remaining balance
due. The Company recognized an after-tax gain of $1.1 million from the sale.
Results from the technology sales and service business segment are shown as
discontinued operations with prior year activity reclassified into one line on
the consolidated statements of income. All assets and liabilities relating to
the technology equipment segment were removed from the balance sheet at the time
of the sale.
In February 1999, the Company purchased 100% of Meier Mitchell & Company, a
venture capital firm, for $7.9 million, which includes $4.1 million of goodwill
to be amortized over 10 years. In addition to the original purchase price, the
Company agreed to make contingency payments to the seller over the next five
years based on certain performance criteria. These payments cannot be reasonably
estimated currently.
22
<PAGE> 12
In December 1998, the Company paid approximately $61.0 million for a 50%
interest in Rolls-Royce & Partners Finance Ltd. (RRPF), which owns and leases a
portfolio of spare aircraft engines. The Company recorded $17.0 million of
goodwill, which is being amortized on a straight-line basis over 20 years.
In September 1997, the Company paid $9.0 million and additional
performance-related compensation to key employees to acquire the remaining 20%
of Sun Financial Group, Inc. The Company recorded $3.9 million of goodwill
arising from the 20% acquisition, which is being amortized on a straight-line
basis over the remaining ten year life of the goodwill that arose from the
original acquisition.
4. INVESTMENTS
DIRECT FINANCING LEASES
The Company's investment in direct financing leases consists of lease contracts
receivable, plus the estimated residual value of the equipment at the lease
termination date, less unearned income. Lease contracts receivable represents
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 original sum of
the lease contract receivable and the estimated residual value exceeds the
original cost of the leased equipment. Unearned income is amortized to lease
income over the lease term in a manner that produces a constant rate of return
on the net investment in the lease.
The following summarizes the Company's investment in direct financing leases:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- ---------------------------------------------------
<S> <C> <C>
Lease contracts receivable $ 504,865 $ 588,945
Estimated residual value 127,767 107,204
Unearned income (154,893) (158,252)
----------------------
Net investment $ 477,739 $ 537,897
======================
</TABLE>
LEVERAGED LEASES
Financing leases that are primarily funded with nonrecourse borrowings at lease
inception and that satisfy certain additional criteria are accounted for as
leveraged leases. Leveraged lease contracts receivable are reported net of
related nonrecourse debt service. Initial unearned income represents the excess
of anticipated cash flows (including estimated residual values, and net of the
related debt service) over the Company's original investment in the lease. The
Company recognized net leveraged lease income of $23.8 million, $17.7 million
and $15.5 million in 1999, 1998, and 1997, respectively.
The following summarizes the Company's net investment in leveraged leases:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Lease contracts receivable $ 1,277,789 $ 689,772
Nonrecourse debt service (1,074,741) (547,194)
--------------------------
Net receivable 203,048 142,578
Estimated residual value 116,406 72,401
Unearned income (149,388) (81,599)
--------------------------
Investment in leveraged leases 170,066 133,380
Deferred taxes arising from leveraged leases (49,754) (29,506)
--------------------------
Net investment $ 120,312 $ 103,874
==========================
</TABLE>
23
<PAGE> 13
OPERATING LEASES
Leases that do not qualify as direct financing or leveraged leases are accounted
for as operating leases. Rental income from operating leases is usually reported
on a straight-line basis over the term of the lease, although it may be
recognized as it is received when rents are based on equipment usage. Usage
rents totaled $2.4 million, $1.5 million, and $2.8 million in 1999, 1998, and
1997, respectively. Equipment subject to operating leases are recorded at cost,
plus accrued rent, less accumulated depreciation and are generally depreciated
using the straight-line method to an estimated residual value. Aircraft and rail
equipment are depreciated over their useful lives, while other equipment are
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. Operating lease expense included depreciation expense of $137.3
million, $94.1 million, and $74.5 million for 1999, 1998, and 1997,
respectively.
Major classes of equipment on operating leases are as follows:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -----------------------------------------------------
<S> <C> <C>
Commercial aircraft $ 321,411 $ 193,261
Rail 180,785 132,492
Technology 588,876 271,279
Other 87,893 108,801
--------------------------
Total cost 1,178,965 705,833
Accumulated depreciation (241,791) (169,636)
--------------------------
Net book value 937,174 536,197
Accrued rent and other 22,949 11,024
--------------------------
Net investment $ 960,123 $ 547,221
==========================
</TABLE>
SECURED LOANS
Secured loans are recorded at the principal amount outstanding plus accrued
interest. The loan portfolio is reviewed regularly, and a loan is classified as
impaired when it is probable that the Company will be unable to collect all
amounts due under the loan agreement. Since most loans are collateral dependent,
impairment is generally measured as the amount the recorded investment in the
loan exceeds the fair value of the collateral, and any adjustment is considered
in determining the provision for losses on investments. Interest income is not
recognized on impaired loans until the outstanding principal is recovered.
The average balance of impaired loans was $14.7 million, $8.1 million, and $19.3
million in 1999, 1998, and 1997, respectively.
The types of loans in the Company's portfolio are as follows:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Equipment $245,684 $155,002
Venture 102,686 49,966
Golf courses 9,631 36,599
-------------------
Total investment $358,001 $241,567
-------------------
Impaired loans (included in total) $ 22,250 $ 7,092
===================
</TABLE>
24
<PAGE> 14
FUTURE LEASE AND LOAN RECEIVABLES
The following summarizes maturities by year for financing lease receivables (net
of nonrecourse debt service in the case of leveraged leases), minimum future
rentals under operating leases, and secured loans, as of December 31, 1999:
<TABLE>
<CAPTION>
Financing Operating
Lease Lease Loan
Year Due Receivables Receivables Receivables
--------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 $ 178,174 $ 252,256 $ 77,969
2001 121,627 168,730 58,021
2002 68,612 99,963 44,300
2003 43,783 52,981 54,971
2004 33,787 44,896 25,667
After 2004 261,930 117,329 97,073
------------------------------------------
Total $ 707,913 $ 736,155 $ 358,001
==========================================
</TABLE>
INVESTMENTS IN JOINT VENTURES
The Company invests in joint ventures in commercial aircraft leasing, rail
equipment leasing, technology equipment leasing, and other business activities,
including ventures that provide asset residual value guarantees in both domestic
and foreign markets. The Company uses the equity method to account for these
investments, based on the effective ownership interest and/or level of control
over the venture. Accordingly, the investments are initially recorded at cost,
subsequently adjusted for the Company's share of undistributed earnings or
losses, and reduced by cash distributions.
The following table provides unaudited combined and condensed financial
information about the Company's joint ventures. 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.
For purposes of preparing the following information, the Company makes certain
adjustments to the information provided by the joint ventures. First, the
Company makes adjustments to insure that the joint venture's financial
statements are consistent with the Company's accounting policies and
presentation. For example, the balance sheets for all ventures are unclassified,
consistent with the Company's balance sheet. Secondly, pre-tax income has been
increased by $49.0 million, $46.8 million, and $41.0 million in 1999, 1998, and
1997, respectively, to reverse interest expense recognized by joint ventures on
loans from the Company. Finally, since the Company records its loans to the
joint ventures as equity contributions, loan balances of $773.2 million, $703.2
million, and $730.2 million at December 31, 1999, 1998, and 1997, respectively,
have been reclassified from liabilities to 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.
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 561,565 $ 415,265 $ 311,929
Pre-tax income 137,191 113,151 72,728
Total assets 4,208,898 3,586,607 2,642,460
Indebtedness 1,646,623 1,844,339 645,605
Total liabilities 2,174,921 2,024,536 1,161,724
------------------------------------
Equity 2,033,977 1,562,071 1,480,736
</TABLE>
25
<PAGE> 15
ASSETS HELD FOR SALE OR LEASE
Assets held for sale or lease consist of equipment, repossessed or returned by
the lessee upon lease termination, and real estate (including golf courses) on
which the Company foreclosed, which the Company intends to release or sell in
the normal course of business. These assets are recorded at the lower of their
carrying amount or fair value.
The major classes of assets held for sale or lease are as follows:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Rail $20,227 $ 5,547
Real estate and golf courses 12,750 13,575
Aircraft 3,230 6,230
Other 786 934
--------------------
Net investment $36,993 $26,286
====================
</TABLE>
OTHER INVESTMENTS
The following summarizes other investments:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
Progress payments $ 85,786 $ 33,032
Available-for-Sale securities 57,533 11,123
Cogeneration facility 23,446 25,256
Investment carried at cost 18,374 --
Real estate development 7,689 10,923
Other 4,268 4,522
----------------------
Total other investments $197,096 $ 84,856
======================
</TABLE>
Progress payments represent amounts paid, including capitalized interest, toward
the construction of aircraft as of December 31, 1999 and toward both the
construction of aircraft and steel production equipment as of December 31, 1998.
Available-for-Sale securities consist only of gross unrealized holding gains.
The Company realized gains from the sale of available-for-sale securities of
$14.7 million, $1.3 million, and $2.2 million in 1999, 1998 and 1997,
respectively.
INVESTMENT IN FUTURE RESIDUALS
Investments in future residuals primarily represent the Company's purchased
interest in the residual values of equipment leased by others. Such purchased
residual interests are generally recorded at cost, with differences between
initial cost and realized value recognized upon disposition.
ALLOWANCE FOR LOSSES ON INVESTMENTS
The purpose of the allowance is to provide for credit and collateral losses
inherent in the investment portfolio. Management sets the allowance by assessing
overall risks and total probable losses in the portfolio, and by reviewing the
Company's historical loss experience. The Company charges off amounts that
management considers unrecoverable from obligors or the disposition of
collateral. The Company assesses the recoverability of investments, including
off-balance-sheet assets, at least annually, considering factors such as a
customer's payment history and financial position, and the value of collateral
based on internal and external appraisal sources.
26
<PAGE> 16
The following summarizes changes in the allowance for losses on investments:
<TABLE>
<CAPTION>
Year ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Balance $ 129,278 $ 121,576 $ 114,096
Provision 11,001 11,029 11,033
Charges to allowance (34,249) (8,305) (6,250)
Recoveries and other 3,741 4,978 2,697
-----------------------------------------
Balance at end of year $ 109,771 $ 129,278 $ 121,576
=========================================
</TABLE>
The charges to allowance in 1999 increased primarily due to writeoffs related to
twin-aisle commercial aircraft and a steel production facility.
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
Trade and other receivables $ 30,846 $ 56,792
Technology equipment inventory -- 24,360
Goodwill 31,687 29,363
Other 14,203 28,486
----------------------
Total other assets $ 76,736 $139,001
======================
</TABLE>
6. DEBT AND CAPITAL LEASE FINANCING
SHORT-TERM BORROWING
The Company has revolving credit agreements with a syndicate of domestic and
international commercial banks totaling $310.0 million at December 31, 1999. The
Company uses these credit agreements as undrawn facilities that support the
issuance of commercial paper in the U.S. and bankers' acceptances in Canada.
These credit agreements contain various covenants requiring minimum net worth,
restricting dividends and mandating certain financial ratios that collectively
restrict the Company from transferring more than $323.6 million of net assets to
the Parent at December 31, 1999. In addition to the above credit agreements, one
consolidated subsidiary has bank commitments totaling $35.0 million to fund
their operations, all of which was available at December 31, 1999.
At December 31, 1999, the Company had $128.9 million of commercial paper and
bankers' acceptances outstanding, leaving $181.1 million of unused revolving
credit agreements available for other purposes. Also, the Company has $5.5
million of short-term notes payable outstanding at December 31, 1999, $5.0
million of which was borrowed from a subsidiary of the Parent. The
weighted-average interest rate on all short-term borrowings was 6.6% and 6.3% as
of December 31, 1999 and 1998, respectively.
27
<PAGE> 17
SENIOR TERM NOTES
The following summarizes the Company's senior term notes:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Variable Rate Notes, due 2001-2004 $ 210,000 $ 20,000
Fixed Rate Notes, 5.81% - 10.2% due 2000-2007 1,415,000 1,056,600
--------------------------
Total senior term notes $1,625,000 $1,076,600
==========================
</TABLE>
Interest on variable-rate senior term notes is calculated based on LIBOR. The
weighted average interest rate on senior term notes was 7.1% and 7.8% at
December 31, 1999 and 1998, respectively.
The Company has significant amounts of floating-rate lease and loan investments
that expose the Company to interest rate risk. The Company mitigates this risk
by trying to match its floating-rate assets with its floating-rate liabilities,
often using derivative financial instruments. Interest rate swap agreements are
used to modify the interest characteristic of outstanding liabilities, either by
changing the interest on debt from a fixed to a floating rate, or vice versa.
Under interest rate swap terms, the Company periodically receives or pays a
differential determined by calculating the difference between paying (receiving)
interest at a fixed rate and receiving (paying) interest at a LIBOR-indexed
floating rate, based on a notional principal amount. The differential is accrued
as interest on the debt and recognized as an adjustment to interest expense over
the life of the swap contract. As a result of using interest rate swaps,
interest expense was reduced by $1.4 million in 1999, $0.7 million in 1998 and
$0.4 million in 1997. The fair values of the interest rate swap agreements are
not recognized in the financial statements. The total notional principal of all
interest rate swaps as of December 31, 1999 was $188.7 million, with termination
dates ranging from 2000 to 2006.
NONRECOURSE OBLIGATIONS
In the event of default, the lender of nonrecourse debt may only look to the
collateral for repayment. The Company's nonrecourse debt is primarily
collateralized by assigned leases and a security interest in the underlying
leased assets. The carrying amount of this collateral at December 31, 1999 is
$455.2 million.
The following summarizes the Company's nonrecourse obligations:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Variable Rate, due 2000-2005 $ 28,675 $ 37,502
Fixed Rate, 5.4% - 9.75%, due 2000-2013 369,174 343,888
----------------------
Total nonrecourse obligations $397,849 $381,390
======================
</TABLE>
Interest on variable rate nonrecourse obligations is calculated based on LIBOR.
The weighted average interest rate on variable nonrecourse obligations was 6.8%
and 6.9% at December 31, 1999 and 1998, respectively.
28
<PAGE> 18
OBLIGATIONS UNDER CAPITAL LEASE
Obligations under capital leases arise from acquiring equipment to be subleased
under direct financing leases. Such subleases had carrying values of $6.9
million and $8.6 million at December 31, 1999 and 1998, respectively. Minimum
future lease payments receivable under these subleases aggregate to $8.4 million
through the period ending in 2003. The terms of the obligations under capital
leases match the terms of the related subleases, both having fixed rental
payments, and similar purchase or renewal options if available.
MATURITIES
The following table summarizes the maturity dates for senior term notes,
nonrecourse obligations, and obligations under capital leases. The table also
includes maturity dates for unused revolving commitments based on the assumption
that the commitment will be used to retire commercial paper, notes payable and
bankers' acceptances.
<TABLE>
<CAPTION>
Converted Obligations Total
Revolving Senior Under Capital Total Debt Nonrecourse
Year Due Credit Loans Term Notes Leases Financing Obligations
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 $ 5,454 $ 319,000 $ 1,660 $ 326,114 $ 160,930
2001 128,927 220,000 1,832 350,759 110,606
2002 -- 129,000 1,974 130,974 59,696
2003 -- 82,500 1,787 84,287 29,402
2004 -- 176,000 -- 176,000 8,127
After 2004 -- 698,500 -- 698,500 29,088
----------------------------------------------------------------------------------------------
Total $ 134,381 $ 1,625,000 $ 7,253 $ 1,766,634 $ 397,849
==============================================================================================
</TABLE>
Imputed interest on capital leases totaled $1.1 million at December 31, 1999.
7. OPERATING LEASE OBLIGATIONS
The Company incurs rental expense as a lessee under certain equipment and
facility operating leases, and earns rental income as a lessor under related
operating subleases. Total rental expense was $39.5 million, $42.9 million, and
$41.5 million, and corresponding sublease operating income was $42.4 million,
$43.5 million, and $42.7 million in 1999, 1998, and 1997, respectively.
The following summarizes future rents payable through 2021 and sublease rents
receivable under noncancelable operating leases through 2013:
<TABLE>
<CAPTION>
Operating
Lease Lease
Year Due Obligations Receivables
- --------------------------------------------------------
<S> <C> <C>
2000 $ 40,672 $ 37,332
2001 32,352 27,524
2002 30,472 20,013
2003 31,636 19,408
2004 26,437 19,238
After 2004 199,183 77,945
------------------------------
Total $ 360,752 $ 201,460
==============================
</TABLE>
29
<PAGE> 19
8. STOCKHOLDER'S EQUITY
As of December 31, 1999 and 1998, all issued common and preferred stock of the
Company was held by the Parent. 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 at the same rate per share as common stock when and as
declared by the board of directors.
9. INCOME TAXES
The Parent files a consolidated federal income tax return that includes the
taxable income of the Company. Under an intercompany tax agreement, the Company
reimburses the Parent for any additional federal tax liabilities that it
generates, and receives reimbursement from the Parent for any of the Company's
operating losses or tax credits utilized in the consolidated federal return.
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. During the period from 1975 to 1985, the
Company sold a portion of its deferred tax liability to the Parent, and the
Parent reinvested the proceeds in the Company by purchasing convertible
preferred stock that is currently outstanding. The Company also purchased
deferred tax liabilities from the Parent through December 31, 1994 for which the
Company recorded an account receivable of $46.1 million. In addition to this
receivable, the Company is also due amounts aggregating to $0.6 million from the
Parent based on dividends, overhead, and taxes pursuant to the intercompany tax
agreement.
In connection with the Company's 1998 acquisition of a 50% interest in RRPF, a
net deferred income tax liability of $8.8 million was recorded in accordance
with SFAS No. 109, Accounting for Income Taxes. In 1999, $0.9 million of this
liability turned around.
30
<PAGE> 20
The Company's deferred tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
At December 31, 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Leveraged Leases $ 49,754 $ 29,506
Other Leases 125,668 94,685
Investment in joint ventures 101,064 68,974
Alternative minimum tax adjustment 5,889 27,855
Other 40,089 29,516
-------------------------
Total deferred tax liabilities 322,464 250,536
=========================
DEFERRED TAX ASSETS
Allowance for losses on investments 43,058 50,709
Loans 31,416 25,222
Other 25,489 11,910
Total deferred tax assets 99,963 87,841
-------------------------
Net deferred tax liabilities $ 222,501 $ 162,695
=========================
TAX ACCOUNT BALANCES
Deferred income tax liabilities $ 143,560 $ 83,754
Preferred stock and related additional paid-in capital 125,000 125,000
Due from GATX Corporation (46,059) (46,059)
-------------------------
Net deferred tax liabilities $ 222,501 $ 162,695
=========================
</TABLE>
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
Federal $ (2,984) $ 29,074 $ 25,824
State and local 1,643 2,239 206
Foreign 4,598 615 13
-------------------------------------
Total current 3,257 31,928 26,043
=====================================
DEFERRED
Federal 40,023 10,999 3,069
State and local 5,347 5,553 5,571
Foreign 512 2,787 1,683
Total deferred 45,882 19,339 10,323
-------------------------------------
Total provision for income taxes, from continuing operations $ 49,139 $ 51,267 $ 36,366
=====================================
</TABLE>
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is shown below:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1.6% 2.5% 1.2%
Effective tax rate 40.7% 41.6% 40.3%
</TABLE>
31
<PAGE> 21
The tax expense related to leveraged lease income was $17.8 million, $5.2
million, and $6.6 million in 1999, 1998 and 1997, respectively.
Income before income taxes from foreign operations was $8.0 million, $0.8
million, and $3.0 million in 1999, 1998 and 1997, respectively.
The Company does not allocate federal income taxes to the undistributed earnings
of foreign subsidiaries and affiliates where it intends to permanently reinvest
the earnings in the foreign operations. The cumulative amount of such earnings
was $30.2 million at December 31, 1999. It is not practicable to estimate the
tax liability, if any, related to these earnings.
10. 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"
revenue arises from transactions, some denominated in foreign currencies,
between the Company's domestic operations and customers in foreign countries.
"Foreign" refers to the Company's operations located outside of the United
States.
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Domestic $ 466,097 $ 398,638 $ 341,271
Export 61,252 43,864 39,251
Foreign 20,184 25,553 26,485
Eliminations (2,671) (1,603) (1,139)
-----------------------------------------------
$ 544,862 $ 466,452 $ 405,868
===============================================
NET INCOME
United States $ 49,327 $ 49,948 $ 43,070
Foreign 18,264 9,369 10,494
-----------------------------------------------
$ 67,591 $ 59,317 $ 53,564
===============================================
TOTAL ASSETS
United States $ 2,480,442 $ 1,939,246 $ 1,992,522
Foreign 478,372 412,145 335,567
Eliminations (17,123) (75,709) (10,946)
-----------------------------------------------
$ 2,941,691 $ 2,275,682 $ 2,317,143
===============================================
</TABLE>
The Company has entered into currency swap and forward rate agreements to
protect the dollar-value of expected foreign-denominated cash flows from adverse
changes in foreign exchange rates. As of December 31, 1999, total currency swap
agreements convert $33.9 million of dollar-denominated liabilities to 46.8
million of Canadian dollar-denominated liabilities, with swap termination dates
between 2001 and 2003. The forward rate agreements convert 26.6 million euros to
$30.8 million between 2000 and 2011.
32
<PAGE> 22
11. BUSINESS SEGMENTS
For the first six months of 1999, the Company operated in two business segments:
Investment and Asset Management, comprised of lease, loan and joint venture
investments and fee generation and asset management businesses; and Technology
Equipment Sales and Service, comprised of sales and servicing of computer
network technology equipment. The Company sold the technology equipment segment
on June 30, 1999.
Notwithstanding the above, senior management periodically reviews categories
within its investment portfolio for selected purposes. One such categorization
divides the Company's investments into air, rail, technology and other, in
accordance with the type of asset underlying the investment. The following table
summarizes the data reviewed by senior management for these categories:
<TABLE>
<CAPTION>
(in millions) Air Rail Tech Other Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $100.1 $ 100.8 $ 194.1 $ 149.9 $ 544.9
Total Investments 817.7 388.4 759.4 916.7 2,882.2
Funded Investments in 1999 294.3 102.7 518.9 295.2 1,211.1
</TABLE>
12. RETIREMENT BENEFITS
The Company participates in the Parent's Non-Contributory Pension Plan for
Salaried Employees (the "Plan"), a defined benefit pension plan covering
substantially all employees. Independent actuaries determine pension cost for
each subsidiary of the Parent 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 the Parent were zero, $0.5
million, and $0.5 million, in 1999, 1998 and 1997 respectively. Pension expense
allocated to the Company was $1.3 million, $1.0 million, and $1.0 million in
1999, 1998 and 1997, respectively.
For certain retired employees who meet established criteria, the Company
provides other postretirement benefits in addition to pension benefits, such as
limited health care and life insurance benefits. Most domestic employees are
eligible for other postretirement benefits if they retire from the Company with
immediate pension benefits under the Plan. The net periodic cost and accrued
liability associated with these benefits are not material to these financial
statements.
33
<PAGE> 23
13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
At December 31, 1999, the Company's investment portfolio, including off-balance
sheet assets, consists of 32% air equipment, 18% rail equipment, 24% technology
equipment, 9% oil, steel and other production equipment, 5% marine equipment, 6%
venture-related investments and 6% other equipment.
The Company's backlog, which represents planned equipment purchases, some
subject to firm purchase commitments, was $1.8 billion (unaudited) and $466.5
million (unaudited), at December 31, 1999 and 1998, respectively.
The Company provides financial guarantees to its customers and affiliates in the
normal course of business. Guarantees are commitments having off-balance sheet
risk issued to (1) guarantee performance of an affiliate to a third party,
generally in the form of a lease or loan payment guarantee, 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 expose the Company to credit and market
risk; accordingly, the Company evaluates commitments (and other contingency
obligations) using the same techniques used to evaluate funded transactions.
Commitments are reviewed at least annually for potential exposure using the same
criteria as discussed in the Allowance for Losses on Investments footnote, and
the provision is adjusted for losses as appropriate.
The Company generally issues loan and lease payment guarantees to support
affiliates' outside borrowings, which affiliates use to acquire assets that are
then leased to third parties. The Company is not aware of any event of default
which would require it to satisfy these guarantees, and expects the affiliates
to generate sufficient cash flow to satisfy their lease and loan obligations. At
December 31, 1999 the Company had guaranteed $133.7 million of such obligations,
having fixed expiration dates ranging from 2000 through 2016. The Company
receives fees for providing some of these guarantees, which it recognizes in
income as earned.
The Company issues asset value guarantees, which insure that an asset or group
of assets will have a specific worth at the end of a lease term, and minimum
lease receipt guarantees to third parties, both on its own and through joint
venture affiliates created solely to guarantee asset values. The Company has
evaluated these guarantees using the same techniques used to evaluate funded
transactions, and has concluded, based on known and expected market conditions,
that the guarantees will not result in any adverse financial impact to the
Company. At December 31, 1999 the Company had guaranteed $97.9 million of asset
value, under contracts expiring between 2000 and 2015. Revenue is 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 realized).
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 litigation 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, management believes that damages, if any,
required to be paid by the Company in the discharge of such liability could be
material to the results of operations for a given quarter or year, but are not
likely to be material to the Company's consolidated financial position.
34
<PAGE> 24
14. 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.
35
<PAGE> 25
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.
<TABLE>
<CAPTION>
Carrying Fair
At December 31, 1999 Amount Value
- ------------------------------------------------------------------
<S> <C> <C>
ASSETS
Secured Loans $ 358,001 $ 355,971
LIABILITIES
Senior term notes 1,625,000 1,592,234
Nonrecourse obligations 397,849 372,950
Interest rate and currency swaps 46 (1,109)
Carrying Fair
At December 31, 1998 Amount Value
- -------------------------------------------------------------------
ASSETS
Secured Loans $ 241,567 $ 238,276
LIABILITIES
Senior term notes 1,076,600 1,105,887
Nonrecourse obligations 381,390 361,529
Interest rate and currency swaps 164 (9,578)
</TABLE>
36
<PAGE> 1
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, No. 333-34879 on Form S-3 filed August 29, 1997 (as amended by
Amendment No. 1 filed October 16, 1997), and No. 333-86879 on Form S-3 filed
September 10, 1999 (as amended by Amendment No. 1 filed December 29, 1999) of
GATX Capital Corporation of our report dated January 28, 2000, 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,
1999.
ERNST & YOUNG LLP
San Francisco, California
March 30, 2000
37
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 45,817
<SECURITIES> 0
<RECEIVABLES> 1,005,806<F1>
<ALLOWANCES> 109,771
<INVENTORY> 36,993
<CURRENT-ASSETS> 0<F3>
<PP&E> 960,123<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 2,941,691
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 2,030,102<F4>
0
1,027<F5>
<COMMON> 1,031<F5>
<OTHER-SE> 455,713<F6>
<TOTAL-LIABILITY-AND-EQUITY> 2,941,691
<SALES> 0
<TOTAL-REVENUES> 544,862
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 298,082<F7>
<LOSS-PROVISION> 11,001
<INTEREST-EXPENSE> 115,031
<INCOME-PRETAX> 120,748
<INCOME-TAX> 49,139
<INCOME-CONTINUING> 71,609
<DISCONTINUED> (4,018)<F8>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,591
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Consists of direct finance lease receivables of 477,739, leveraged lease
receivables of 170,066, and secured loans of 358,001.
<F2>Consists of cost of equipment leased to others under operating leases, net of
depreciation.
<F3>GATX Capital Corporation has an unclassified balance sheet.
<F4>Consists of senior term notes of 1,625,000, obligations under capital leases of
7,253, and nonrecourse obligations of 397,849.
<F5>Par value only.
<F6>Consists of retained earnings of 276,150, additional paid-in capital of
151,902, unrealized gains on marketable equity securities, net of tax of 34,966
and foreign currency translation adjustment of (7,305).
<F7>Consists of operating lease expense of 185,171, selling, general and
administrative expenses of 108,117, and other expenses of 4,794.
<F8>Consists of loss from discontinued operations, net of tax of (5,112) and gain
on sale of discontinued operations, net of tax of 1,094.
</FN>
</TABLE>
