GATX
Annual Report 1999

Plain-text annual report

T R O P E R L A U N N A 9 9 9 1 N O I T A R O P R O C X T A G EACH GATX BUSINESS WORKS INDIVIDUALLY TO MEET THE NEEDS OF CUSTOMERS AND PARTNERS. VIEWED AS A WHOLE, GATX’S BUSINESSES FORM A UNIQUE, INTEGRATED FINANCE AND SERVICES COMPANY PROVIDING Railcar Leasing Railcar Maintenance Fleet Management Transportation Solutions GATX RAIL Technology Supply Chain Design Air GATX CAPITAL GATX INTEGRATED SOLUTIONS GROUP Transportation Management Rail Logistics Optimization Diversified Finance Inventory Management SOLUTIONS MORE VALUABLE THAN A CUSTOMER CAN OBTAIN FROM ANY OF OUR COMPETITORS. THE COLLECTIVE SERVICES THAT WE OFFER MAKE GATX PROUD TO SHARE OUR EXCITING OPPORTUNITIES WITH YOU THROUGH THIS ANNUAL REPORT. GATX CORPORATION combines unique financing, asset and logistics solutions for customers and partners worldwide. GATX’s ASSETS include railcars, locomotives, commercial aircraft, bulk liquid terminals and distribu- tion systems, and technology equipment. GATX SERVES CUSTOMERS through THREE interlinked groups…GATX RAIL, GATX CAPITAL and the GATX INTEGRATED SOLUTIONS GROUP…all of which have strong growth potential. Through combined marketing and services, the WHOLE OF GATX offers a broad array of financial services capabilities resulting in RECORD EARNINGS and HIGH RETURN ON INVESTMENT. GATX FINANCIAL HIGHLIGHTS IN MILLIONS, EXCEPT FOR PER SHARE DATA 1999 1998 1997 Gross income Income before provision for restructuring Net income (loss) Common shares outstanding at year end $ 1,858.9 151.3 151.3 48.6 $1,850.1 131.9 131.9 49.3 $1,767.1) 111.9) (50.9) 48.9) Per common share Income before provision for restructuring Basic Diluted Net income (loss) Basic Diluted Dividends declared Year-end stock price Book value $ 3.07 3.01 $ 2.68 2.62 $ 2.34) 2.25) 3.07 3.01 1.10 33.75 17.17 2.68 2.62 1.00 37.88 14.84 (1.28) (1.28) .92) 36.28) 13.36) Total assets $ 5,866.8 $5,006.8 $4,990.2) B 2 8 20 CORPORATE OVERVIEW ON FOLDOUT CHAIRMAN’S LETTER TO SHAREHOLDERS BUSINESS OVERVIEW REVIEW OF FINANCIAL OPERATIONS 23 MANAGEMENT DISCUSSIONS 26 60 62 FINANCIAL DATA OF BUSINESS SEGMENTS LOCATIONS OF OPERATIONS CORPORATE INFORMATION SERVICES MARKET POSITION S T R E N G T H S G ROW T H D R I V E R S v Full service railcar leases to shippers v 101,000 railcars worldwide v Over 100 years of industry experience v Continued growth in domestic v Railcar maintenance v Regulatory compliance v Fleet management v Engineering and design v Structured financial transactions v Largest North American tank car lessor v Broad lease product offerings v Own/manage 10% of U.S. rail fleet v Established customer relationships v Nine service centers across North America v 38 mini-mobile service units v International capabilities v Regulatory expertise v Internet-based information services v Design and engineering expertise GATX R AIL railcar demand v International expansion opportunities v Enhanced service offerings v Fleet acquisitions v Fleet management v Aircraft operating leases and portfolio management v Spare engine leasing v Third largest independent aircraft lessor v Over 30 years of experience in the v Selective expansion of GATX-owned v Over 300 jet commercial aircraft owned/managed/interest leasing industry and managed portfolio v Experience in early-stage company valuation/financing v Recently established partnerships in spare engine and corporate aircraft sectors v Full range of technology leasing solutions v Growing portfolio of leased technology v Financing early-stage telecom companies equipment v Secondary lease market acquisitions v Third-party portfolio management v Structuring of tax-advantaged and cross-border financing v Residual value guarantees v Own/manage rail assets GATX CAPITAL v Expanding presence in telecommunications finance sector v $5 billion of assets managed for third parties v Quality portfolio of newer, narrow- v Overall growth of technology body aircraft leasing industry 95 96 97(A) 98 99 v Strong relationships with major airlines v Expansion of telecom investing platform and aircraft manufacturers v Partnership/asset management approach v Growth of early-stage/venture financing v Further development of financial and v Key partnerships with nearly 50 v Over 20 years of experience in secondary strategic partnerships companies lease market transactions v Continued investment in pool of v Managing/interest in 50,000 railcars v Cross-border and tax knowledge diversified assets v Waterborne cargo transportation v Interests in 1,000 locomotives v Asset/residual value expertise v Chemical supply chain management v Largest U.S. independent bulk liquid v Integrated logistics v Refined petroleum and chemical storage and distribution storage company with 15 wholly-owned terminal facilities, 9 international joint ventures and own/interest in four refined product pipelines v Technology-driven transportation v Provider of logistics services to the solutions chemical industry GATX INTEGR ATED SOLUTIONS GROUP v Pipeline connections and distribution v Petroleum blending and related services v Rail logistics v Real time inventory data, demand and usage profiles v Supplier managed inventory v One of the largest U.S. third-party contract logistics providers v Growing presence in e-commerce business-to-residential and business- to-business delivery market v Leading position in domestic bulk liquid storage industry with over 70 years of experience v Strategic terminal and pipeline locations v Extensive customer relationships v Supply chain design and optimization expertise v Chemical industry relationships and knowledge v Electronic/web-based services v Growing base of long-term, integrated v Over 6,000 railcars managed for others contracts v Information technology expertise v International service offerings v Growing trend toward outsourcing v Expansion of chemical services v Expansion of petroleum logistics capabilities v Gaining greater share of customers’ logistics business v Strengthening of global storage markets v International opportunities v Application of rail expertise to integrated solutions v E-commerce boom v Enhanced and integrated service offerings v Customers’ demand for one-stop service/solutions provider GROSS INCOME DOLLARS IN MILLIONS 95 96 97 98 99 INCOME DOLLARS IN MILLIONS $2,000 $1,600 $1,200 $ 800 $ 400 $175 $140 $105 $ 70 $ 35 DILUTED EARNINGS PER SHARE IN DOLLARS $3.75 $3.00 $2.25 $1.50 $ .75 95 96 97(A) 98 99 DIVIDENDS DECLARED PER COMMON SHARE IN DOLLARS $1.25 $1.00 $ .75 $ .50 $ .25 96 97 98 99 00(B) (A) Excludes effect of $163 million after-tax restructuring charge, which resulted in Basic and Diluted Earnings Per Share of ($1.28). (B) Annualized The PRESIDENTS of GATX’s major operations and RON ZECH, Chairman and CEO, MANAGE the company AS a TEAM to not only MAXIMIZE the VALUE of each business, but to CREATE cohesive CUSTOMER SOLUTIONS using the resources of ALL of GATX. RIGHT TO LEFT: RON ZECH, CHAIRMAN AND CEO WARD FULLER, PRESIDENT, GATX RAIL JESSE CREWS, PRESIDENT, GATX CAPITAL DAVE EDWARDS, PRESIDENT, GATX INTEGRATED SOLUTIONS GROUP LETTER FROM THE CHAIRMAN OF THE BOARD DEAR SHAREHOLDERS GATX enters the new century with strong momentum. Earn- ings per share increased 15 percent in 1999, and our return on average shareholders’ equity was an impressive 19 percent, far exceeding most of our competitors. We laid the foundation for future earnings growth by investing a record $1.7 billion in key markets and expanding our role as a leading provider of telecommunication infra- structure financing. We also realigned the organization to better reflect our strategy and clarify our external message to our shareholders, customers and employees. Ultimately, however, we failed in the performance measure that matters most— total shareholder return. GATX’s total return in 1999 was a negative 7.9 percent, unacceptable to our management and to our shareholders. We take little solace in the realization that it was a difficult year in the stock market for the majority of U.S. companies, nor in the fact that most of our commercial finance competitors pro- duced substantially lower total returns to their respective shareholders. I am confident that GATX is well positioned to produce excellent returns for its shareholders, and we will achieve this by executing three basic initiatives: consistent earnings growth, reallocating capital to our highest return opportunities, and clarifi- 3 cation of our strategy and message. I will take the opportunity to use the balance of this letter to explore each of these points in greater detail. CONSISTENT GROWTH Investors place a higher valuation on companies that con- sistently meet or exceed a specific earnings growth target. As we continue to make changes within the company and focus our efforts on building investment platforms that drive consistent growth, we have clarified our target: 12-15 percent growth in earnings per share. We shared this target with Wall Street and met or exceeded it in each of the past two years. While I am pleased with our recent performance, I also recognize that the real key to driving a higher valuation is developing a longer track record of consistent earnings growth. Based on a number of strategic changes and opportunities within our core businesses, I am confident that we will achieve this long-term objective. GATX Rail is capitalizing on its position as the leading U.S. tank car lessor by expanding its fleet beyond U.S. borders, increasing service capabilities, accelerating fleet acquisition activities, and pursuing fleet management opportunities. Each of these initiatives serves to diversify and stabilize our sources of income, and GATX Rail is well positioned for continued growth. GATX Capital is applying its extensive asset knowledge, asset management exper- tise, financial structuring capabilities, and partnering skills to build a broad base of income sources. Across its primary markets, GATX Capital has strengthened its operating lease platforms, grown fee and interest income, expanded its venture leas- ing and warrant-based financing activity, and identified attractive asset remarketing opportunities. We are also capitalizing on a new era of infrastructure development, one that is rooted in the Internet, telecommunications, and emerging technologies. GATX Capital has established itself as one of the leading providers of financing to early-stage telecommunication companies, thereby establishing a powerful growth platform that complements our traditional transportation-related finance businesses. GATX Terminals Corporation, part of the GATX Integrated Solutions Group, has sold or closed a number of cyclical petroleum storage facilities and reallocated this capital to markets with more attractive return and growth prospects. By focusing 4 on providing our customers with value-added services at strategic locations, we are stabilizing our income base and are poised to grow this segment’s profitability. The strength and diversity of our income-generating capabilities support my confidence that we will continue to deliver our target of 12-15 percent annualized growth in earnings per share to our shareholders. CAPITAL ALLOCATION Allocating capital to the highest return opportunities is a critical process for a capital-intensive business such as GATX, especially when pre- sented with the most exciting growth opportunities we have seen in our history. For example, in the last four years, we have focused the majority of our investment volume in GATX Rail and GATX Capital because these investments generate in excess of a 20 percent return on equity, an attractive return on investment for our sharehold- ers, and we will continue to focus most of our investment in these two businesses. We have also identified ways to grow our business in a less capital-intensive fashion. Partnering is an excellent example and one that sets us apart from our peers. Consider GATX Capital’s strategy in financing start-up telecommunication companies. We have been active in financing telecom companies for several years. As the growth in this market exploded, we could have opted to allocate an increasingly larger share of our own capital to this area. Instead we chose to form two telecom- munication investment funds with GATX Capital acting as arranger, manager, and co-investor. Partnering with co-investors has allowed us to aggressively pursue this exciting growth sector while limiting and diversifying our own capital commitment. GATX Capital earns management fees, receives spread income, and also receives warrants in many of the transactions, resulting in tremendous return on investment potential. Today we have nearly 50 active partnerships across GATX, with income from equity in these affiliates increasing almost 25 percent in 1999. Partnering is one of our core strengths, and I plan to continue expanding this activity in the years ahead. Allocation of capital also incorporates reallocation of capital within the com- pany. During the past three years, we have implemented a strategy to sell under- performing assets and exit weak business lines. We must accelerate this effort and I expect to make substantial progress in 2000 as we continue to reallocate capital to our highest return opportunities. CORPORATE REALIGNMENT During the past year, we realigned GATX, thereby clarifying our strategy and message as a unique finance and services company. The majority of our earnings, cash flow, and investments are related to our two high return 5 businesses, GATX Rail Corporation and GATX Capital Corporation. Prior to the realignment, the balance of the company was comprised of several businesses, including GATX Terminals and GATX Logistics, which focus on various aspects of supply chain management. In September 1999, I asked Dave Edwards, then our chief financial officer, to head up a new organization called the GATX Integrated Solutions Group. This group brings all of our supply chain related businesses under one umbrella. Beyond the obvious benefit of sharing services and skills across our sup- ply chain companies, the GATX Integrated Solutions Group positions us to achieve one of our key goals: providing chemical customers with a bundled service offering by lever- aging the unique competitive position we have forged within the chemical industry. Individually, each of our three key operations has a clearly defined strategy. GATX Rail will continue to expand its full service railcar leasing business in North America and abroad. GATX Capital will continue to expand its core air, technology/telecom- munications, rail, and marine financing activity through direct ownership of assets, partnerships, and asset management. GATX Integrated Solutions Group will maximize our global service offering to chemical and petroleum companies. As a result, GATX can provide customers with a combined financing and service capability that is unmatched by any competitor worldwide. Our overall mission is straightforward: drive consistent earnings growth, earn attractive returns by allocating our capital wisely, and communicate a simplified strat- egy to the market. I believe that successful execution of these initiatives will lead to a more appropriate market valuation for GATX. In closing I would like to thank our shareholders for the confidence they have shown in the future of GATX. I am committed to ensuring that you are rewarded with an attractive return on your investment. That’s our primary focus in 2000, and with the support of the many dedicated employees of GATX, I am confident that we will deliver on this commitment. Sincerely, RONALD H. ZECH Chairman and Chief Executive Officer 6 CAPITAL ADDITIONS & PORTFOLIO INVESTMENTS DOLLARS IN MILLIONS $2,000 $1,600 $1,200 $1,800 $1,400 95 96 97 98 99 RETURN ON EQUITY IN PERCENT 25% 20% 15% 10% 15% 95 96 97(A) 98 99 (A) Excludes effect of $163 million after-tax restructuring charge. Including the charge, 1997 Return on Equity would be (7.1%). GATX JOINT VENTURE INVESTMENT 39% Air 22% Rail 20% Terminals 15% Diversified Finance and Other 4% Technology CASH FROM OPERATIONS & PORTFOLIO PROCEEDS DOLLARS IN MILLIONS $1,500 $1,200 $1.900 $1.600 $1.300 95 96 97 98 99 GATX JOINT VENTURE INVESTMENT BY REGION 49% Europe (Excluding UK) 30% United States 13% Asia 8% United Kingdom CUSTOMER FOCUS INTEGRITY INTEGRATED FINANCIAL AND OPERATING SKILLS GROWTH These are the CHARACTERISTICS that DRIVE the operating companies of GATX. The following 12 pages discuss the STRATEGIES, the VALUES and the EXPERTISE that GATX provides THROUGH its operations… CREATIVITY GATX RAIL CORPORATION provides CUSTOMIZED transportation SOLUTIONS for its CUSTOMERS. For more than 100 YEARS, the GATX brand has stood for INNOVATION, CAPABILITY, and RELIABILITY to PARTNERS and CUSTOMERS worldwide. On January 1, 2000, the former General American Transportation Corporation changed to its NEW name, GATX RAIL, to better capitalize on this well recognized brand. GATX RAIL PIONEERED the rail LEASING industry and REMAINS a LEADER because of its BREADTH of offerings and DEDICATION to SERVICE. GATX provides a full range of rail trans- portation solutions, combining extensive transportation, financial and rail logistics experience. GATX owns, operates or has an interest in over 157,000 railcars worldwide. GATX offers full-service tank car, freight car and locomotive leasing, fleet management, railcar design and maintenance, innovative financing and a complete menu of integrated e-commerce and web support services. GATX RAIL CORPORATION operates the largest tank car fleet in North America and a significant fleet of specialty freight cars. Its fleet totaled 87,800 railcars at the end of 1999. GATX Rail leases railcars to shippers in virtually all industries, with a particular emphasis on chemical, petroleum and food, and it provides all the services a company needs to operate railcars. Benefits include improving utilization, keeping plants on schedule, arranging maintenance schedules that maximize in-service time, helping ship- pers meet complex financial challenges, improving safety records, helping ensure gov- ernment regulatory compliance and offering internet-based and e-commerce services to help manage rail fleets more efficiently. GATX Rail’s web site, www.gatxrail.com, gives an excellent overview of GATX Rail’s product and service offerings. GATX Rail’s fleet consists of more than 50 different car types from general service cars to specialty pressure cars, designed to safely transport over 700 commodities, including chemicals, petroleum, plastics, food, coal, mineral, agricultural, forest and con- sumer products. Providing repair and mainte- nance support to these railcars are four one-stop service centers in the U.S., four in Canada and one in Mexico. In addition, 38 mini-mobile repair units form an inte- grated service network throughout North America, so that customers’ railcars can be serviced wherever they may be located. An excellent example of GATX Rail’s cus- tomer focus and integration capabilities is a ser vice GATX designed for Mobil Oil Corporation. A Mobil Oil affiliate pumps crude oil from a field in central California that is 240 miles from Mobil’s nearest refin- This 24-car Tank- Train® system in Mt. Isa, Australia, runs along miles of desolate terrain flecked with 3-foot high termite hills. Cars placed at the beginning and end of the train are loaded with rocks to maximize safety for the 384,000 gallons of sulfuric acid carried in each train load. 9 ery. In the past, Mobil piped oil to a Chevron ery. In the past, Mobil piped oil to a Chevron facility, loaded it on tanker trucks, and facility, loaded it on tanker trucks, and shipped it to a marine terminal where the shipped it to a marine terminal where the crude oil was mixed with lighter crude and crude oil was mixed with lighter crude and transferred by pipeline to the refinery. With transferred by pipeline to the refinery. With the Chevron facility closing, Mobil turned to the Chevron facility closing, Mobil turned to GATX Rail for an alternative. The result is a GATX Rail for an alternative. The result is a 78-unit GATX Rail TankTrain ® system of 78-unit GATX Rail TankTrain ® system of interconnected cars that can be loaded and interconnected cars that can be loaded and unloaded in a matter of hours, not days. unloaded in a matter of hours, not days. Specifically, this TankTrain system transports Specifically, this TankTrain system transports crude oil from the field to an existing rail facil- crude oil from the field and delivers it to a GATX Integrated Solutions Group termi- ity, and delivers it to a GATX Integrated Solutions Group terminalling facility. Before nalling facility. Before unloading, the oil in unloading, the oil in the TankTrain system is the TankTrain system is blended with lighter blended with lighter weight crude prior to weight crude prior to shipment to Mobil’s refinery. Using the unique patented, environ- shipment to Mobil’s refiner y. Using the unique patented, environmentally friendly mentally friendly TankTrain technolog y loading/unloading TankTrain technolog y speeds up and improves the entire process for Mobil. The photographs on pages 9 and speeds up and improves the entire process for Mobil. The photographs on pages 9 and 11 are of another GATX TankTrain system, 11 are of another GATX TankTrain system, which recently went into service moving sul- which recently went into service moving furic acid in Northern Australia. GATX Rail is an industry leader in utiliz- sulfuric acid in Northern Australia. GATX Rail is an industry leader in utiliz- ing the Internet and e-commerce to help its ing the Internet and e-commerce to help its customers manage their fleets. Customer offerings include up-to-date mechanical and customers manage their fleets. Customer service information on their fleets, a content- offerings include up-to-date mechanical and service information on their fleets, a content- rich interactive environment encouraging communications, and extensive information. rich interactive environment encouraging communications, and extensive information. GATX Rail continues to capitalize on GATX Rail continues to capitalize on market opportunities. Recent legislation has market opportunities. Recent legislation has mandated more stringent inspection and mandated more stringent inspection and repair guidelines, such that many shippers repair guidelines, such that many shippers may not want to continue to service their may not want to continue to service their own fleets. Therefore, GATX Rail can buy own fleets. Therefore, GATX Rail can buy fleets and lease them back to the original fleets and lease them back to the original owners, while providing additional value- owners, while providing additional value- adding services. GATX Rail’s historic skill as adding services. GATX Rail’s historic skill as a lessor and its outstanding reputation as a a lessor and its outstanding reputation as a service provider make this possible. service provider make this possible. GATX Rail’s business has experienced sig- GATX Rail’s business has experienced sig- nificant international growth over the past nificant international growth over the past decade. In 1996, GATX Rail acquired the decade. In 1996, GATX Rail acquired the remaining interest it did not already own in remaining interest it did not already own in the Canadian railcar lessor CGTX, recently the Canadian railcar lessor CGTX, recently renamed GATX Rail Canada. This name renamed GATX Rail Canada. This name change reflects the North American integra- change reflects the North American integra- tion of operations and the customer service tion of operations and the customer service network. GATX Rail Canada has 9,000 railcars network. GATX Rail Canada has 9,000 railcars in its railcar fleet. GATX Rail de Mexico oper- in its railcar fleet. GATX Rail de Mexico oper- ates a fleet of nearly 2,600 railcars, and GATX ates a fleet of nearly 2,600 railcars, and GATX has a significant interest in European railcar has a significant interest in European railcar lessors Ahaus Alstatter Eisenbahn (AAE lessors Ahaus Alstatter Eisenbahn (AAE Cargo) and Kesselwagen Vermietgesellschaft Cargo), and Kesselwagen Vermietgesellschaft mbH (KVG). AAE is the leading general-pur- mbH (KVG). AAE is the leading general-pur- pose freight car lessor in Europe, with a fleet pose freight car lessor in Europe, with a fleet of almost 12,000 cars operating throughout of almost 12,000 cars operating throughout 10 GATX FLEET INTEREST IN 157,000 CARS Interest: Owned, Managed, Financial Interest 55% Tankcars 19% Covered Hoppers 8% Boxcars & Gondolas 8% European Freight Wagon 5% Open Top Hoppers 3% Grain Cars 2% Other GATX RAIL FLEET UTILIZATION IN PERCENT 100% 80% 60% 40% 20% 80 84 89 94 99 Shown here at Phosphate Hill, Australia, unloading sulfuric acid as a raw material for fertilizer, this Tank- Train® system can be loaded or un- loaded in 41⁄2 hours. A conventional unit train of tank cars would take more than 40 hours. GATX’s TankTrain system is a cost- effective alternative to building pipelines. tion product for their customers, through operating leases of well-maintained, reliable and efficient locomotives. Railroads often turn to LLP to help handle peak power needs or to satisfy a portion of longer requirements through creatively structured leases. Working closely with EMD, GATX Capital has been able to acquire, refurbish and deploy excellent assets that are in high demand and that perform well for customers. With over 100 years of experience , GATX has longstanding relationships with shippers, railroads, railcar manufacturers, and the financial community. These relationships allow GATX to provide the railcars, terms and ser vice offerings that help our customers serve their customers better. Though many know GATX primarily as a full- service lessor of railcars, the reality is that we provide a broad spectrum of transporta- tion, distribution, and logistics solutions that capitalize on the expertise available through- out all of GATX. 11 Europe and the United Kingdom. Based in Germany and Austria, KVG provides a modern fleet of 8,000 tank cars to European shippers of chemical, petroleum and food products. These international interests pro- vide a strong market position through which GATX can capitalize on numerous new European rail opportunities. In addition to GATX Rail, the rail related assets and capabilities of GATX Capital are a critical component of the overall rail offerings of GATX. GATX Capital primarily leases rail- cars to Class I and regional railroads, and owns or has an interest in a fleet of 50,000 railcars including coal, aggregate, hopper and other general purpose cars. GATX Capital also buys and sells fleets of rail assets, oppor- tunistically selling highly valued rail assets at premiums while purchasing other rail assets at attractive valuations that also have signif- icant upside potential. GATX Capital’s asset expertise gives it a competitive advantage, particularly as railroads have increased their demand for general-purpose cars. Through a joint venture with the Electro- Motive Division of General Motors (EMD), GATX Capital leases a large modern fleet of nearly 1,000 locomotives to railroads world- wide. Locomotive Leasing Partners fills the railroads’ need for a high quality transporta- GATX CAPITAL CORPORATION provides ASSET-BASED financing for TRANSPORTATION, INDUSTRIAL and INFORMATION TECHNOLOGY equipment; financing for VENTURE-BACKED and HIGH-TECHNOLOGY companies; MANAGEMENT of assets for third-parties; and TRANSACTION STRUCTURING, RESIDUAL GUARANTEES and ASSET REMARKETING services. GATX Capital DIFFERENTIATES itself in the financial services markets in that it acts as an INVESTOR, a MANAGER, and a TRANSACTION ARRANGER. GATX CAPITAL CORPORATION is experi- encing tremendous opportunities for growth. GATX Capital is capitalizing on opportunities in its traditional air, rail and structured finance markets while rapidly expanding its presence in technology, telecommunications, and venture finance. An impor tant component of GATX Capital’s success is its ability to adapt to new opportunities, and it has demonstrated this ability consistently. GATX Capital has evolved from being primarily a tax-oriented lessor to a company with skills that include asset knowledge, financial structuring, remar- keting expertise, buying and selling lease portfolios, third-party portfolio management, and partnering capabilities. One of the best examples of GATX Capital’s ability to identify and aggressively pursue new opportunities relates to the "new economy." The major factors that will drive economic growth in the future are clear: globalization, emerging technologies, and telecommunications. While many com- panies are racing to keep pace with these trends, GATX Capital is well ahead of the curve. Starting in 1987, GATX Capital began making prudent investments in venture finance and technology leasing. Risk/return analyses were adjusted to suit the dynamism of these emerging, warrant-based finance markets. Most importantly, critical relation- ships were developed with start-up compa- nies and key venture capital firms. The knowledge base and contact network devel- oped over the course of the past decade cannot be duplicated, and the benefit of this early initiative is evident in the potential for substantial equity-based income. GATX Capital has provided early-stage financing to emerging companies such as Rhythms, Exodus Communications, Copper Mountain Networks, Sentient, and Cerent. In 1999, GATX Capital acquired a former part- ner, Meier Mitchell, thereby broadening its base of new economy financing activity. Meier Mitchell has a long and successful his- tory in venture leasing and is recognized as one of the pioneers of secured, warrant- based financing to early-stage companies. While Meier Mitchell’s venture leasing activ- ity is diversified across a broad range of equipment and industr y sectors, it has unique expertise in the biotech industry, providing GATX Capital with access to another rapidly growing market. In addition to the areas of growth and opportunity provided by the new economy, GATX Capital continues to expand in its tra- ditional areas of expertise. GATX Capital leas- es, manages, or has an interest in over 300 commercial jet aircraft. The GATX Capital fleet consists largely of modern, stage III, sin- gle aisle aircraft that have a large user base worldwide, such as B-737s and A320-A321s. Through a joint ven- ture with SAirGroup, GATX ordered 38 Airbus aircraft valued at $2.2 billion. Joint ventures such as this provide the GATX Air Group an even stronger presence in the global avia- tion marketplace with enhanced infor- mation, knowledge, products and services to accelerate growth. 13 GATX AIRCRAFT INVESTMENT BY TYPE OF AIRCRAFT 29% A320/A321/A318/A330 25% B-737 17% B-757 10% MD-80/DC-9 4% A300/A310 4% B-767 4% MD11 7% Other GATX AIRPLANES ON ORDER 15 12 9 6 3 00 01 02 03 04 05 06 In 1998, GATX Capital entered into a joint venture with Flightlease AG, a subsidiary of the SAirGroup, and became a 50 percent partner in Rolls-Royce & Partners Ltd. These ventures in aircraft operating leasing and jet engine leasing, respectively, have allied GATX Capital with companies of unsurpassed expertise in their fields. Both of these part- nerships continue to grow and provide excit- ing growth platforms for the future. GATX Capital's strategy to expand its air- craft portfolio through partnerships has allowed it to diversify its fleet, lower its risk profile, and create enhanced returns through management fees and residual sharing. Joint venture partnerships have allowed GATX Capital to broaden its presence in the aircraft leasing market, while at the same time achiev- ing diversification in the overall GATX Capital portfolio. Aircraft investments constitute 29 percent of GATX Capital's total assets. Partnering is one of GATX Capital’s core strengths and much of the company’s recent success can be tied to this critical skill. Through par tnering, GATX Capital can achieve scale in certain markets, gain insight into new asset types, diversify its own invest- ment activity, or establish business in a new region of the world. Today GATX Capital has nearly 50 active partnerships providing a substantial and growing income stream. While the type of partners is itself quite diversified, many times GATX Capital will join with commercial banks and finance companies to pursue operating leasing or related activi- ties. These active finance industry partners include the Lombard North Central sub- sidiary of NatWest, Commonwealth Bank of Australia, Heller Financial, Sanwa, and, most recently, Royal Bank of Scotland and Halifax plc. GATX Capital’s ability to work in partner- ship with leading financial institutions broad- ens its access to capital and in many cases has enhanced its access to regional markets. Over the past 18 months, GATX Capital has formed two new partnerships to pursue warrant-based financing opportunities in the telecommunications and emerging technolo- gy markets. GATX Capital serves as arranger, manager, and a co-investor in the funds. Focusing on early-stage companies, both partnerships are experiencing tremendous deal flow and excellent investment oppor- tunity, providing a potentially strong source of income growth for GATX Capital. Structuring financial transactions is anoth- er one of GATX Capital’s core strengths. With a goal of maximizing its own return while providing competitive terms to its cus- tomers, GATX Capital has established itself as a leading resource for complex financial solutions. Often times, structuring involves 14 the allocation of the tax benefits of owner- ship to the most efficient investors; the allo- cation of residual benefits to the investors bidding most aggressively; and the allocation of defined debt service to the lowest cost debt providers. GATX Capital has the expe- rience to deliver the structures and solu- tions that benefit all parties involved. GATX Capital also selectively pursues opportunities in asset classes other than air, rail, or technology equipment. In this capac- ity, GATX Capital invests in and manages a diversified pool of assets. As an investor, GATX Capital combines strong asset knowledge with excellent financial structuring skills to provide its cus- tomers and partners not only with tradi- tional financial products but also innovative risk sharing arrangements. For example, GATX Capital has orchestrated a number of joint venture arrangements that offered its partners attractive off-balance sheet or asset monetization alternatives. GATX Capital also participates in high- yield debt investments in selected industries, operating lease and asset-based lending activities, as well as financing of marine assets. In addition, GATX Capital works with partners to provide residual value guaran- tees that allow lessors to manage residual exposure at the time of lease termination. As a manager, GATX Capital has estab- lished partnerships with major industrial companies, banks, and insurance companies in which the company manages lease portfo- lios on behalf of these institutions. GATX Capital is able to leverage its significant lease management and remarketing expertise while providing partners with an efficient means for managing their portfolios. This $4.5 billion portfolio managed on behalf of third parties provides GATX Capital with management fees and significant residual sharing fees when assets are sold. GATX Corporation reports the revenues and earnings of American Steamship Com- pany, GATX’s Great Lakes shipping company, in the segment called Financial Services. By combining American Steamship with GATX Capital’s marine asset financing group, all of GATX’s marine activities are housed within one group, providing an opportunity to optimize GATX’s marine activities. With 11 vessels, American Steamship is the largest operator of self-unloading vessels on the U.S. Great Lakes. With approximately $1 billion invested in technology equip- ment and telecom venture start-ups, GATX is capital- izing on and parti- cipating in the “new economy.” GATX offers serv- ices to small to large companies to manage their technology needs. In addition, GATX manages two telecom investing funds in which it serves as arranger, manager, and co-investor. 15 The GATX INTEGRATED SOLUTIONS GROUP was created in September 1999. It provides customers with a SINGLE SOURCE for the OPTIMIZATION and INTEGRATION of their SUPPLY CHAINS. It combines the necessary expertise, information and resources to provide VALUE-ADDING The GATX Integrated Solutions Group offers its customers VALUE supply chain and logistics SOLUTIONS. through NETWORK DESIGN, ENHANCED KNOWLEDGE, IMPROVED SERVICE and COST EFFICIENCIES. SIMPLICITY out of COMPLEXITY…It positions GATX as a The GATX Integrated Solutions Group derives world LEADER in GLOBAL SUPPLY CHAIN and LOGISTIC SOLUTIONS and SERVICES. GATX INTEGRATED SOLUTIONS GROUP utilizing the Internet as a management tool. The Houston petro- The GATX Integrated Solutions Group is a While the capabilities of the Integrated chemical complex combination of all of the GATX supply chain Solutions Group are wide-ranging, it contin- sets the backdrop for related businesses, creating a single source ues the tradition of extending its offerings the broad variety of for customers seeking supply chain solutions through strategic global partnerships. The services offered by and services worldwide. It brings together GATX Integrated Solutions Group is focused the GATX Integrated the core strengths of four GATX companies: on improving each of its supply chain service Solutions Group. GATX Terminals, GATX Logistics, GATX components as well as combining these ser- From simple storage Chemical Logistics and GATX Rail Logistics. vices into integrated solutions that create to complex logistic This allows GATX to align its capabilities, more value for customers. It is particularly algorithms, GATX improve its traditional lines of business and focused on providing integrated solutions to is rapidly expanding 17 offer seamlessly integrated solutions to its the chemical and petroleum industries and will its services to the customers. By combining its broad array of continue to expand capabilities as they relate chemical and petro- capabilities and emphasizing its focus to chemical and petroleum product handling leum industries. on optimizing customers’ transportation and supply chain management. and inventor y systems worldwide , the GATX TERMINALS The restructuring pro- GATX Integrated Solutions Group is an gram initiated in 1997 by GATX Terminals industr y leader uniquely positioned to has continued and remains a catalyst for the provide unrivaled, value-adding supply chain alignment of GATX Terminals’ facilities and and logistics solutions. capabilities with its strategy to provide supe- The GATX Integrated Solutions Group rior services to chemical and petroleum mar- has extensive supply chain capabilities which kets worldwide. International markets are a include supply chain reengineering, design key focal point. A new terminal in Kertih, and implementation, inventory and trans- Malaysia, is now substantially completed and portation optimization and planning, ship- is a significant part of that region’s develop- ment management, product storage, bulk ing petrochemical hub. Early in 2000, GATX product distribution, multimodal transporta- Terminals also expanded its interests in two tion management, bulk chemical transloading, global petrochemical capitals. It acquired the remote inventory monitoring, continuous remaining 50 percent interests in GAMATEX inventory replenishment, asset management, N.V., which owns a facility in Antwerp, and carrier management. These capabilities Belgium, and in Tankstore Ltd., which owns a are augmented by innovative, state-of-the-art facility in Singapore. information systems that are increasingly 418 In March 1999, GATX Terminals formed a ter service providers, GATX now offers partnership, called GATX Product Services, commercial and retail shippers a turnkey, LP, which leverages the assets of its partners end-to-end solution for delivering products and allows GATX Terminals to extend its purchased via the Internet. The broad array supply chain offerings to the petroleum of services offered through this new initia- industry beyond warehousing and into distri- tive not only capitalizes on GATX’s logistics bution. GATX Product Services’ distillate and fulfillment expertise, but also includes blending and distribution capabilities create the capability to establish virtual stores to value for customers by providing flexibility deliver purchased products from GATX and integrated services to refiners. Logistics’ fulfillment centers to a commercial Over the past several years, GATX Ter- dock-door or a residential doorstep. Under- minals has actively managed its asset port- standing and finding effective supply chain folio, shedding assets that do not conform to solutions for the delivery of goods will be its overall strategic plan and acquiring others critical to the success of Internet-based sell- that will accelerate its growth. The result is ers. A natural tie-in to those solutions is the a network of terminals located in key chemi- service GATX provides through Paxis, its cal and petroleum markets that provide a joint venture with Lockheed Martin. Paxis competitively advantaged foundation for allows shippers to capitalize upon the dis- logistics services around the world. GATX counts offered by the United States Postal Terminals is now well placed to play a key Service based on the package’s point of role in the existing and developing supply entry into their distribution system. chains that the Integrated Solutions Group is GATX Logistics has developed value- offering its customers. adding services, technologies and partner- GATX LOGISTICS GATX Logistics opti- ships that allow it to gather the critical mass mizes the supply chain by managing the to firmly position itself as an industry leader movement of its customers’ raw materials, in state-of-the-art integrated contract logis- products and information through the manu- tics in North and South America. As a mem- facturing and distribution processes. GATX ber of the GATX Integrated Solutions Logistics has capitalized upon the industry Group, GATX Logistics’ capabilities will be changes resulting from e-commerce market made useful in creating more value for a trends. By partnering with leading e-com- broader set of customers. merce software, server hosting and call cen- GATX INTEGRATED SOLUTIONS GROUP INDUSTRY REVENUE SOURCES DURING 1999 51% Logistics 23% Petroleum 15% Pipelines 11% Chemical TERMINALS THROUGHPUT FROM CONTINUING OPERATIONS MILLIONS OF BARRELS DELIVERED 750 600 450 300 150 95 96 97 98 99 GATX CHEMICAL LOGISTICS GATX entities, GATX Chemical Logistics possesses The GATX Integrated formed GATX Chemical Logistics in Septem- the unique skill set necessary to provide the Solutions Group pro- ber 1999 concurrent with its acquisition of best supply chain management solutions. vides supply chain Leaman Logistics, Inc., a leading transportation GATX RAIL LOGISTICS GATX Rail Logis- management services management and integrated solutions provider tics develops and manages customized rail to meet its customers’ to the chemical industry. GATX Chemical transportation solutions that increase opera- competitive goals of Logistics brings together the capabilities of tional efficiency, minimize overall rail trans- improving services Leaman Logistics with GATX’s chemical supply portation expense and enhance service for while reducing costs. chain management and outsourcing business- customers. The services offered by GATX GATX designs, operates es: GATX Liquid Logistics, Inc. and GATX Rail Logistics include rail, asset, carrier, ship- and finances supply Inventory Monitoring Services, Inc. The newly ment and inventory management. and distribution models formed GATX Chemical Logistics provides With its shipment management offering, from the sourcing of chemical companies with customized, value- GATX Rail Logistics executes the daily ship- raw materials to deliv- adding, integrated supply chain solutions and ment tracking and expediting required to ery to the end-user. services. Its integrated offering includes supply maintain rail transportation reliability. GATX chain reengineering, design and implementa- Rail Logistics has coupled its access to up-to- tion, inventory and multimodal transportation date transit data on railcars with proprietary optimization, planning and management, information systems and is uniquely qualified remote inventory monitoring, and continuous to effectively manage total transit times. inventory replenishment. GATX Rail Logistics benefits from GATX’s With its Internet-enabled services, includ- leading position in the rail industry. By pro- ing access to remote inventory information viding expertise, information and manage- and collaborative planning and execution of ment capabilities directly to customers, transportation schedules, GATX Chemical GATX Rail Logistics is a key component of Logistics provides customers with an innova- the multimodal solutions offered by the tive outsourcing solution for their bulk GATX Integrated Solutions Group. chemical needs at a much lower investment and implementation risk than the customer could achieve on its own. When combined with the worldwide logistics management, transportation and storage expertise of the other GATX Integrated Solutions Group 19 CHEMICAL & PETROLEUM SUPPLY CHAIN INBOUND SUPPORT OUTBOUND SUPPORT SOURCE TRANS- PORTATION MODE REFINE MANUFACTURE BLEND TRANS- PORTATION MODE CUSTOMERS RECLAIM-RESELL SELL TECHNOLOGY APPLICATION—INVENTORY FINANCING S N O I T A R E P O L A I C N A N I F 9 9 9 1 F O W E I V E R X T A G GATX REVIEW OF FINANCIAL OPERATIONS GATX CORPORATION AND SUBSIDIARIES 22 23 26 28 30 32 37 38 55 56 58 REPORTS OF GATX MANAGEMENT AND OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS MANAGEMENT’S DISCUSSION AND ANALYSIS: 1999 COMPARED TO 1998 (CONTINUED ON PAGES 29, 31 AND 33) FINANCIAL DATA OF BUSINESS SEGMENTS CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) AND COMMON STOCK INFORMATION SELECTED CONSOLIDATED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS: 1998 COMPARED TO 1997 BUSINESS SEGMENTS The following summary describes GATX’s current business segments: GATX RAIL represents GATX Rail Corporation (formerly General American Transportation Corporation) and its foreign subsidiaries and affiliates which lease and manage tank cars and other specialized railcars. FINANCIAL SERVICES represents GATX Capital Corporation and its subsidiaries and affiliates, which arrange and service the financing of equipment and other capital assets on a worldwide basis, and American Steamship Company, which operates self-unloading vessels on the Great Lakes. 21 GATX INTEGRATED SOLUTIONS GROUP encompasses GATX Terminals Corporation and its domestic and for- eign subsidiaries and affiliates, which own and operate tank storage terminals and pipelines; GATX Logistics, Inc., which provides distribution and logistics support services and warehousing facilities; as well as several other GATX companies providing integrated solutions to the chemical and petroleum industries. REPORT OF GATX MANAGEMENT REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS GATX CORPORATION AND SUBSIDIARIES TO OUR SHAREHOLDERS: The management of GATX Corporation has prepared the accompanying consolidated financial statements and related information included in this 1999 Annual Report to Shareholders and has the primary responsibility for the integrity of this information. The financial statements have been prepared in con- formity with generally accepted accounting principles and necessarily include certain amounts which are based on estimates and informed judgments of management. The financial statements have been audited by the company’s independent auditors, whose report thereon appears on this page. Their role is to form an independent opinion as to the fairness with which such statements present the financial position of the company and the results of its operations. GATX maintains a system of internal accounting controls which is designed to provide reasonable assurance as to the reliability of its financial records and the protection of its shareholders’ assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the related benefits. Management believes the company’s system provides this appropriate balance in all material respects. GATX’s system of internal controls is further augmented by an audit committee composed of independent directors, which meets regularly throughout the year with management, the independent auditors and the internal auditors; an internal audit program that includes prompt, responsive action by management; and the annual audit of the company’s financial statements by independent auditors. Ronald H. Zech Chairman, President and Chief Executive Officer Brian A. Kenney Vice President and Chief Financial Officer Ralph L. O’Hara Controller and Chief Accounting Officer 22 TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF GATX CORPORATION: We have audited the accompanying consolidated balance sheets of GATX Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders’ equity, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 1999. 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 presen- tation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GATX Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conform- ity with accounting principles generally accepted in the United States. Chicago, Illinois January 25, 2000 ERNST & YOUNG LLP MANAGEMENT’S DISCUSSION AND ANALYSIS 1999 COMPARED TO 1998 GATX CORPORATION AND SUBSIDIARIES GATX RAIL (RAIL) Rail’s gross income of $571 million increased 6.7% over the prior year period primarily due to a larger active North American fleet, a slight increase in rental rates, and a gain from the sale of 1,700 grain cars that did not provide an acceptable level of long-term economic value. Rail added 5,400 railcars during 1999 and at year end had 83,300 railcars on lease in North America. Utilization ended the year at 95% on a total fleet of 87,800 railcars, which was comparable to utilization at the end of 1998. The railcar leasing market has become more com- petitive due to lower demand. Rail congestion problems resulted in strong car demand in the chemical markets and contributed to the historically high demand in the prior year. Although Rail anticipates continuing to invest aggres- sively in railcars in 2000, the total investment will be reflective of market conditions. Rail’s share of earnings of its two European affiliates was $4 million in 1999 compared to $3 million in 1998. Rail invested an additional $28 million in these affiliates’ freight and tank car fleets in 1999. Record net income of $73 million increased $6 million from the prior year period, reflecting higher revenues, including the gain related to the grain car sale, partially offset by higher selling, general and administrative costs. These expenses increased 12.5% largely to support business development and information systems initiatives. Asset ownership costs increased 7.9% over last year primarily due to an increase in operating lease expense. Depreciation and interest did not change appreciably from last year due to Rail’s continued use of sale-leaseback financing. In 1999, $143 million of new railcars were sold and leased back and the resultant cost is included in operating lease expense. Repair costs as a percentage of revenues decreased from 1998 as a result of lower material costs and fewer labor hours incurred. FINANCIAL SERVICES Financial Services’ gross income of $694 million decreased $37 million from the prior year. Comparisons between periods are affected by the sale of the value-added technology equipment sales and ser- vice business (VAR) in June 1999. Excluding VAR, revenues increased 11.0% over the prior year. Gains on the sale of stock of $15 million, which were derived from warrants received during the financing of nonpublic start-up companies, and an increase in lease income generated from a higher average investment portfolio were offset by lower asset remarketing income. Lease income increased $63 million predominately driven by the growing tech- nology financing portfolio. Pretax asset remarketing income of $79 million was $14 million lower than last year’s record $93 million. A significant portion of 1999 asset remarketing gains was realized from the sale of marine and air assets. Asset remarketing income includes both gains from the sale of assets from Financial Services’ own portfolio as well as residual sharing fees from the sale of managed assets. Asset remarketing income and gains from the sale of stock do not occur evenly from period to period. 23 MANAGEMENT’S DISCUSSION AND ANALYSIS 1999 COMPARED TO 1998 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES During 1999, Financial Services continued to emphasize its strategy of joining with partners to finance and man- age assets. Financial Services’ share of earnings in such joint ventures was $61 million in 1999, a 32.5% increase over last year. The increase is primarily attributable to increased contribution from existing rail joint ventures and new air and marine joint ventures. Several new joint ventures were formed in 1999 including a joint venture cre- ated to acquire and lease Boeing 737 new generation aircraft and a joint venture created to provide financing and leasing to start-up telecommunications companies. Net income of $71 million increased 6.8% from last year and was positively affected by an increase in the share of affiliates’ earnings, the impact of the VAR business, and the sale of stock. These increases were offset by lower remarketing income, a decreased contribution from marine operations, higher depreciation expense, and an increase in selling, general and administrative expenses due to higher human resource and other costs associated with increased investment activity. Higher average investment balances in operating leases, specifically technology, drove the 29.6% increase in depreciation and amortization. Marine operations contributed $3 million to net income in 1999 versus $7 million in 1998. A decline in iron ore shipments resulting from higher imported steel volumes, competitive pricing, and lower than normal water levels have negatively impacted current year results. Financial Services’ allowance for possible losses decreased $19 million to $111 million, representing 3.8% of net investments, down from 5.9% at the end of 1998. The loss provision was $11 million in each of 1999 and 1998. Write-offs of $34 million in 1999 were $26 million higher than the prior year and were primarily related to twin-aisle commercial aircraft and a steel production facility. Financial Services invested a record $1.2 billion in 1999, which was 42.0% higher than 1998. Approximately $500 million was added to the technology leasing portfolio with significant investments also made in the air, telecommunications and venture sectors. GATX INTEGRATED SOLUTIONS GROUP GATX Integrated Solutions Group’s (ISG) gross income of $599 million increased by 2.2% over 1998 with new business and growth initiatives being partially offset by the absence of ter- minal facilities that were sold or closed during 1999. For ongoing wholly owned operations, gross income grew by 8% reflecting new business and improved pricing. As part of its 1997 strategic realignment, ISG divested three domestic terminals and six foreign terminals in early 1999. One other domestic and one United Kingdom terminal were closed during 1999. In ISG’s ongoing North American bulk liquid terminal and pipeline operation, throughput and capacity utiliza- tion improved to 537 million barrels and 95% in 1999 compared to 531 million barrels and 94% in 1998. Space uti- lization for the company’s dry goods integrated logistics operation likewise improved to 96% from 95% in 1998. 24 MANAGEMENT’S DISCUSSION AND ANALYSIS 1999 COMPARED TO 1998 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES ISG’s joint ventures, which serve the European, Asian, Latin American and North American markets, contributed $21 million to gross income in 1999 which is consistent with last year as the benefit of an investment in a distillate blending and distribution joint venture was offset by lower results at Olympic Pipeline Company (Olympic). On June 10, 1999, a rupture and explosion occurred on the pipeline owned by Olympic, causing three fatalities and property damage as well as damage to the environment. The cause of the incident is being investigated by a number of state and federal agencies. GATX Terminals (Terminals), an ISG operating company, owns 25.1% of the common shares of Olympic. Management is presently unable to determine the impact, if any, of this incident on GATX. In early 2000, ISG announced that Terminals purchased from Koninklijke Vopak N.V. (Vopak) Vopak’s 50% ownership interests in GAMATEX N.V., located in Belgium, and Tankstore Ltd., located in Singapore. The result gave Terminals 100% ownership in both GAMATEX N.V. and Tankstore Ltd. In turn, Terminals sold to Vopak its 50% ownership inter- est in Tees Storage Company Ltd., a terminal facility in Middlesborough, England. Net income of $25 million increased by $7 million or 41.2% over 1998.This significant improvement is largely attrib- utable to ongoing operations reflecting higher contribution margins as well as lower asset ownership costs and SG&A. The remainder of the increase is the net impact of increased business development efforts and nonrecur- ring items, including a gain on the sale of rights along the Central Florida Pipeline and discontinued terminals. CORPORATE AND OTHER Corporate and Other net expense of $17 million was comparable to 1998 net expense of $18 million. Increases in selling, general and administrative expenses were offset by decreases in interest expense. 25 FINANCIAL DATA OF BUSINESS SEGMENTS GATX CORPORATION AND SUBSIDIARIES During 1999, GATX formed GATX Integrated Solutions Group, a combination of operating companies to be man- aged together sharing resources and expertise to create value-adding supply chain and logistics solutions. Further, the company’s Great Lakes shipping operations were combined with GATX Capital’s marine financing group. Accordingly, GATX’s operating segments are now defined as GATX Rail, Financial Services, and GATX Integrated Solutions Group. The prior year information has been restated to reflect the new segment presentation. The financial data presented on this and the following page conform to Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, and depict the profitabil- ity, financial position and cash flow of each of GATX’s business segments. Segment profitability is presented to reflect operating results inclusive of allocated support expenses from the parent company and interest costs based upon the debt levels shown below. Management assesses performance using return measures such as return on equity both across segments and over time. In certain cases, return on equity is labeled n/m (not meaningful) on the table to reflect returns that are immaterial, negative, or distorted as a result of the 1997 restructuring charge. IN MILLIONS 1999 Profitability Revenues Share of affiliates’ earnings Gross Income 26 Interest expense Depreciation and amortization Income (loss) before taxes Net income (loss) Return on equity (A) Financial Position Debt Equity Investments in affiliated companies Identifiable assets Items Affecting Cash Flow Net cash provided by (used in) operating activities Portfolio proceeds Total cash provided (used) Capital additions and portfolio investments (A) Based on average equity for the year. GATX RAIL FINANCIAL SERVICES GATX INTEGRATED SOLUTIONS GROUP CORPORATE AND OTHER INTER- SEGMENT TOTAL $ 567.1 $ 632.9 3.8 570.9 (52.6) (100.1) 117.5 72.9 23.3% 831.0 327.5 91.3 1,693.8 141.4 — 141.4 386.5 60.7 693.6 (122.4) (151.9) 117.9 71.0 21.3% 2,255.3 362.8 665.5 3,088.9 161.5 503.0 664.5 1,217.8 $578.0 21.4 599.4 (52.3) (52.7) 44.8 25.0 11.7% 664.9 216.6 199.8 1,166.4 67.0 — 67.0 80.0 $ 1.9 $ (6.9) $1,773.0 — 1.9 (7.3) (1.4) (25.0) (16.7) n/m 67.6 (65.9) .7 29.8 (15.1) — (15.1) 1.7 — (6.9) 2.4 (2.1) (1.3) (0.9) n/m (8.8) (5.0) — 85.9 1,858.9 (232.2) (308.2) 253.9 151.3 19.3% 3,810.0 836.0 957.3 (112.1) 5,866.8 — — — — 354.8 503.0 857.8 1,686.0 FINANCIAL DATA OF BUSINESS SEGMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES IN MILLIONS 1998 Profitability Revenues Share of affiliates’ earnings Gross Income Interest expense Depreciation and amortization Income (loss) before taxes Net income (loss) Return on equity (A) Financial Position Debt Equity Investments in affiliated companies Identifiable assets Items Affecting Cash Flow Net cash provided by (used in) operating activities Portfolio proceeds Total cash provided (used) Capital additions and portfolio investments 1997 Profitability Revenues Share of affiliates’ earnings Gross Income Interest expense Depreciation and amortization Income (loss) before taxes Operating income (loss) before restructuring (B) Net income (loss) Return on equity (A) Financial Position Debt Equity Investments in affiliated companies Identifiable assets Items Affecting Cash Flow Net cash provided by (used in) operating activities Portfolio proceeds Total cash provided (used) Capital additions and portfolio investments GATX RAIL FINANCIAL SERVICES GATX INTEGRATED SOLUTIONS GROUP CORPORATE AND OTHER INTER- SEGMENT TOTAL $ 532.3 $ 684.3 $ 565.8 $ 3.2 $ (4.7) $1,780.9 2.7 535.0 (52.9) (97.3) 108.5 67.1 23.3% 710.4 298.3 62.2 1,539.9 166.1 — 166.1 384.8 45.8 730.1 (121.4) (117.2) 121.1 66.5 22.8% 1,717.4 304.6 570.3 2,443.8 148.5 811.5 960.0 857.8 20.7 586.5 (54.4) (51.1) 31.6 17.7 9.1% 629.0 208.4 150.3 1,104.5 93.3 — 93.3 79.0 — 3.2 (7.8) (1.1) (27.1) (17.9) n/m 68.7 (74.3) — 19.5 (16.8) — (16.8) 0.8 — (4.7) 1.6 (0.8) (2.3) (1.5) n/m (3.9) (4.1) — 69.2 1,850.1 (234.9) (267.5) 231.8 131.9 19.0% 3,121.6 732.9 782.8 (100.9) 5,006.8 — (6.4) (6.4) (7.7) 391.1 805.1 1,196.2 1,314.7 $ 493.0 $ 675.8 $ 549.9 $ 0.6 $ (1.3) $1,718.0 1.0 494.0 (51.0) (98.0) 100.1 62.7 62.7 22.1% 693.8 278.8 59.8 1,504.5 158.3 — 158.3 336.9 27.9 703.7 (103.9) (88.1) 102.5 61.5 61.5 23.1% 1,798.9 277.7 549.6 2,495.4 104.5 430.8 535.3 866.5 20.2 570.1 (57.5) (65.2) 17.2 9.3 (153.5) n/m 629.1 181.3 140.4 1,049.2 81.0 — 81.0 72.2 — 0.6 (11.6) (1.0) (31.6) (20.9) (20.9) n/m 90.1 (79.8) — 26.9 (24.5) — (24.5) — — (1.3) 1.6 — (1.3) (0.7) (0.7) n/m — (2.6) — (85.8) — — — — 49.1 1,767.1 (222.4) (252.3) 186.9 111.9 (50.9) (7.1%) 3,211.9 655.4 749.8 4,990.2 319.3 430.8 750.1 1,275.6 (A) Based on average equity for the year. In 1997, consolidated return on equity, based on operating income, was 14.0%. (B) Pretax income excludes a $224.8 million charge for restructuring with $185.8 million related to closure of certain nonstrategic terminals and pipelines and $39.0 million after-tax charge for the write-down of goodwill related to the company’s dry goods integrated logistics operation. The after-tax impacts were $162.8 million, $123.8 million, and $39.0 million, respectively. 27 CONSOLIDATED STATEMENTS OF OPERATIONS GATX CORPORATION AND SUBSIDIARIES IN MILLIONS, EXCEPT PER SHARE DATA/YEAR ENDED DECEMBER 31 1999 1998 1997 Gross Income Lease, interest and financing services Distribution services Other income Revenues Share of affiliates’ earnings Total Gross Income Ownership Costs Depreciation and amortization Interest Operating lease expense Total Ownership Costs Other Costs and Expenses Operating expenses Selling, general and administrative Provision for possible losses Provision for restructuring Income (Loss) Before Income Taxes Income Taxes Net Income (Loss) Per Share Data Basic: 28 $1,132.5 578.0 62.5 1,773.0 85.9 1,858.9 $1,041.2 565.8 173.9 1,780.9 69.2 1,850.1 $ 962.0 549.9 206.1 1,718.0 49.1 1,767.1 308.2 232.2 215.5 755.9 591.5 246.3 11.3 — 253.9 102.6 267.5 234.9 206.8 709.2 659.5 234.9 14.7 — 231.8 99.9 252.3 222.4 193.6 668.3 672.6 228.5 11.1 224.8 (38.2) 12.7 $ 151.3 $ 131.9 $ (50.9) Net Income (Loss) Average Number of Common Shares (in thousands) $ 3.07 49,296 $ 2.68 49,178 $ (1.28) 45,084) Diluted: Net Income (Loss) Average Number of Common Shares and Common $ 3.01 $ 2.62 $ (1.28) Share Equivalents (in thousands) 50,301 50,426 45,084) Dividends paid: Common $3.875 Cumulative Preferred The accompanying notes are an integral part of these consolidated financial statements. $ 1.10 — $ 1.00 — $ .92) 1.9375) MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS 1999 COMPARED TO 1998 GATX CORPORATION AND SUBSIDIARIES GROSS INCOME of $1,859 million increased $9 million from 1998. The comparison of 1999 to 1998 is influenced by the midyear sale of the VAR business. LEASE, INTEREST AND FINANCING SERVICES INCOME of $1,133 million in 1999 increased $91 million over the prior year. Financial Services’ lease income grew 23.3% in 1999 as a result of a higher average portfolio in 1999. The $14 million decrease in asset remarketing income is partially offset by a $12 million increase in gains from stock sales. Rail’s rental revenue increased 4.5% from the prior year period due to a larger North American active fleet. Rail’s 1999 revenues also include the gain from the sale of 1,700 grain cars. DISTRIBUTION SERVICES INCOME of $578 million grew 2.2% from the prior year. Comparisons between periods are affected by terminal locations sold or closed that were part of the 1997 restructuring plan. Distribution serv- ices income from continuing operations and development efforts increased 9.5% over the prior year period reflecting new business and improved pricing primarily in the terminal and pipeline operations. OTHER INCOME of $63 million significantly decreased from the prior year due to the sale of the VAR business in June 1999. VAR revenue in 1999 was $67 million versus $175 million in 1998. SHARE OF AFFILIATES’ EARNINGS grew by 24.1% over the prior year due to significant growth at Financial Services, particularly within air and rail joint ventures. OWNERSHIP COSTS of $756 million increased $47 million over the prior year period. Depreciation and amor- tization expense of $308 million increased $41 million and reflects the high level of portfolio investments in operating lease assets. The increase in operating lease expense reflects Rail’s sale-leaseback financing of the railcar additions. OPERATING EXPENSES were 10.3% lower than 1998. This decrease is largely due to the sale of the VAR business and cost savings from closed terminal locations, partially offset by higher costs to support new business at ISG. 29 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES of $246 million increased 4.9% over the prior year due to higher human resource and other administrative expenses associated with increased portfolio investment activity and costs incurred to support business development and information systems initiatives. THE PROVISION FOR POSSIBLE LOSSES of $11 million decreased $3 million from last year. The 1998 provision included a $3 million write-off of an ISG customer that ceased operations. INCOME TAXES of $103 million represent an effective tax rate of 40.4%, which is lower than last year’s rate of 43.1%. The prior year’s provision included certain expenses, including a goodwill write-down related to VAR, that were not deductible for tax purposes. NET INCOME of $151 million, an increase of 14.7% from last year, was driven by increased earnings at Rail and ISG. CONSOLIDATED BALANCE SHEETS IN MILLIONS/DECEMBER 31 Assets Cash and Cash Equivalents Receivables Trade accounts Finance leases Secured loans Less–Allowance for possible losses Operating Lease Assets and Facilities Railcars and service facilities Tank storage terminals and pipelines Operating lease investments and other Less–Allowance for depreciation Investments in Affiliated Companies Other Assets 30 Liabilities, Deferred Items and Shareholders’ Equity Accounts Payable Accrued Expenses Debt Short-term Long-term: Recourse Nonrecourse Capital lease obligations Deferred Income Taxes Other Deferred Items Total Liabilities and Deferred Items Shareholders’ Equity Preferred stock Common stock Additional capital Reinvested earnings Accumulated other comprehensive income (loss) Less–Cost of common shares in treasury Total Shareholders’ Equity The accompanying notes are an integral part of these consolidated financial statements. GATX CORPORATION AND SUBSIDIARIES 1999 1998 $ 102.5 $ 94.5 153.6 645.7 358.0 (115.7) 1,041.6 2,552.6 1,460.7 1,311.6 5,324.9 (2,042.9) 3,282.0 957.3 483.4 156.2 676.0 241.6 (135.9) 937.9 2,567.1 1,168.2 974.4 4,709.7 (1,919.6) 2,790.1 782.8 401.5 $ 5,866.8 $ 5,006.8 $ 372.3 65.8 $ 353.0 54.1 377.4 299.9 2,785.7 463.8 183.1 3,810.0 457.2 325.5 5,030.8 — 34.5 338.7 543.0 1.2 917.4 (81.4) 836.0 2,171.3 451.9 198.5 3,121.6 392.6 352.6 4,273.9 — 34.3 331.6 446.0 (32.2) 779.7 (46.8) 732.9 $ 5,866.8 $ 5,006.8 MANAGEMENT’S DISCUSSION AND ANALYSIS OF BALANCE SHEETS 1999 COMPARED TO 1998 GATX CORPORATION AND SUBSIDIARIES TOTAL ASSETS were $5.9 billion and increased $860 million from the prior period. Growth from a record level of portfolio investments and capital additions was partially offset by depreciation and amortization, the sale- leaseback of railcars at Rail, and portfolio asset sales at Financial Services. In addition to the $5.9 billion of assets on the balance sheet, GATX utilizes approximately $1.5 billion of assets, such as railcars, aircraft and warehouses, that are financed with operating leases and therefore are not included on the balance sheet. including finance leases and secured loans, increased $104 million mostly due to secured TOTAL RECEIVABLES, loan activity at Financial Services and a decrease in the allowance for possible losses. Significant new investment opportunities, specifically telecommunications and venture investments, resulted in a $116 million increase in secured loans. The allowance for possible losses decreased from the prior period, as write-offs at Financial Services were $34 million. OPERATING ASSETS AND FACILITIES of $3.3 billion increased by $492 million from 1998 largely due to the $1.7 bil- lion of portfolio investments and capital additions made in 1999. Offsetting these additions were depreciation, the sale-leaseback of railcars at Rail and asset remarketing activities. INVESTMENTS IN AFFILIATED COMPANIES grew 22.3% in 1999 with significant investments in air and rail joint ven- tures. Approximately $186 million was invested in GATX’s joint ventures in 1999 and a record $86 million of equity income was recognized. Cash distributions from affiliates, which include dividends and the return of investment, decreased substantially from the prior year’s record distributions. OTHER ASSETS of $483 million increased $82 million since the end of last year, with the majority of the in- crease due to progress payments for aircrafts and investments in stock warrants. TOTAL DEBT of $3.8 billion increased $688 million from the end of 1998 to fund the record portfolio invest- ment volume, a significant level of fleet additions and business development initiatives. 31 TOTAL SHAREHOLDERS’ EQUITY increased $103 million, reflecting net income of $151 million partially offset by $54 million in common stock dividends and the repurchase of $35 million of common stock. Unrealized gains on stock warrants held and changes to the cumulative foreign currency translation adjustment added $33 mil- lion to equity. CONSOLIDATED STATEMENTS OF CASH FLOWS GATX CORPORATION AND SUBSIDIARIES IN MILLIONS/YEAR ENDED DECEMBER 31 1999 1998 1997 Operating Activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Realized gains on remarketing of leased equipment Depreciation and amortization Provision for possible losses Deferred income taxes Provision for restructuring, net of tax Net change in trade receivables, inventories, accounts payable and accrued expenses Other Net cash provided by operating activities Investing Activities Additions to operating lease assets and facilities Additions to equipment on lease, net of nonrecourse financing Secured loans extended Investments in affiliated companies Other investments and progress payments Capital additions and portfolio investments Portfolio proceeds: From remarketing of leased equipment From return of investment Total portfolio proceeds Proceeds from other asset sales Net cash used in investing activities Financing Activities Proceeds from issuance of long-term debt Repayment of long-term debt Net increase (decrease) in short-term debt Repayment of capital lease obligations (Repurchase) issuance of common stock and other Cash dividends Net cash provided by (used in) financing activities 32 $ 151.3 $ 131.9 $ (50.9) (75.5) 308.2 11.3 62.5 — 21.0 (124.0) 354.8 (72.9) 267.5 14.7 64.4 — (13.4) (1.1) 391.1 (74.1) 252.3 11.1 36.2 162.8 34.9 (53.0) 319.3 (420.0) (468.5) (362.0) (697.0) (268.8) (186.4) (113.8) (501.6) (161.6) (147.2) (35.8) (536.4) (35.1) (306.1) (36.0) (1,686.0) (1,314.7) (1,275.6) 221.0 282.0 503.0 254.0 242.0 563.1 805.1 261.6 218.5 212.3 430.8 226.9 (929.0) (248.0) (617.9) 981.5 (395.7) 95.6 (17.6) (27.3) (54.3) 582.2 360.1 (361.6) (69.2) (15.4) 9.0 (49.3) (126.4) 569.9 (395.2) 207.8 (15.3) 12.4 (49.4) 330.2 Net Increase in Cash and Cash Equivalents $ 8.0 $ 16.7 $ 31.6 The accompanying notes are an integral part of these consolidated financial statements. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CASH FLOWS 1999 COMPARED TO 1998 GATX CORPORATION AND SUBSIDIARIES GATX generates significant cash from its operating activities and proceeds from its investment portfolio, which are used to service debt, pay dividends, and fund capital additions and portfolio investments. Most of the capital requirements are considered discretionary and represent additions to the railcar fleet, capital equipment invest- ment portfolio, joint ventures, and terminal and pipeline facilities. As a result, the level of capital spending and investments can be adjusted as conditions in the economy or GATX’s businesses warrant. CASH PROVIDED BY OPERATING ACTIVITIES generated $355 million of cash flow in 1999, a $36 million decrease from 1998. Net income adjusted for noncash items generated $458 million of cash, an increase of $52 million over 1998, primarily due to increased net income and depreciation and amortization. Changes in working capital and other generated $89 million less cash in 1999 largely due to an increase in share of affiliates’ earnings offset by lower affiliate dividends and settlement of litigation subject to final court approval. CAPITAL ADDITIONS AND PORTFOLIO INVESTMENTS totaled a record $1.7 billion, an increase of $371 million from 1998. Rail’s capital additions in 1999 were $387 million, including $344 million to acquire 5,400 railcars through- out North America. Rail also acquired additional interests in both of its European rail joint ventures. GATX Integrated Solutions Group’s capital additions were comparable to the prior period; an investment in a joint venture distillate blending and distribution business and the purchase of Leaman Logistics, Inc., a chemical logis- tics and transportation company, were offset by the timing of terminal improvement projects. Financial Services’ portfolio investments of $1.2 billion were $360 million higher than 1998, representing strong market opportunities in the technology leasing, aircraft, telecommunication and venture sectors. Financial Serv- ices’ technology leasing operation funded $494 million, a 61.4% increase over 1998’s volume. Financial Services invested $139 million and $147 million in joint ventures in 1999 and 1998, respectively. Financial Services also extended $269 million of loans to various entities in 1999, which are collateralized by various types of assets. PORTFOLIO PROCEEDS of $503 million decreased $302 million from 1998. Portfolio proceeds in 1998 were exceptionally high and 1999 is more reflective of historical levels. Proceeds from the remarketing of leased equip- included both the return of principal and gains on the transactions. ment, primarily rail and aircraft assets, Proceeds from the return of investment were $282 million and $563 million for 1999 and 1998, respectively. Also included in the portfolio proceeds amount are loan principal receipts and return of capital distributions from joint venture investments. PROCEEDS FROM OTHER ASSET SALES of $254 million in 1999 included the receipt of $143 million from the sale- leaseback of railcars at GATX Rail. Additional asset sale activity included Rail’s sale of 1,700 grain cars and ISG’s sale of its United Kingdom and Port Everglades terminals. In 1998, GATX Rail and Financial Services sold and leased back $231 million of railcars and ISG sold its Vancouver terminal. The sale of certain selected terminal locations is consistent with the 1997 strategic realignment plan. CASH PROVIDED BY FINANCING ACTIVITIES increased $709 million compared to 1998 as a result of the high level of current year capital additions and portfolio investments, lower portfolio proceeds and lower sale-leaseback activity in 1999. During 1999, $982 million of long-term debt was issued and $396 million of long-term obliga- tions were repaid. Short-term debt increased $96 million. GATX also repurchased 1.1 million common shares for $35 million. Common dividends per share were $1.10 in 1999 compared to $1.00 in 1998. In January 2000, the Board of Directors approved a 9% increase in the quarterly dividend to $.30 per common share, or $1.20 on an annual- ized basis. This is the fifteenth consecutive year GATX has increased its dividend. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF CASH FLOWS 1999 COMPARED TO 1998 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES: GATX Rail Corporation (GRC) and GATX Capital have revolving credit facilities. GRC and GATX Capital also have commercial paper programs and uncommitted money market lines which are used to fund operating needs. The GRC revolving credit facility expires in 2003 while GATX Capital’s revolving credit facility expires in 2001. Under the covenants of the commercial paper programs and rating agency guidelines, GRC and GATX Capital individually must keep unused revolver credit capacity at least equal to the amount of commercial paper outstanding. At December 31, 1999, GATX and its subsidiaries had avail- able unused committed lines of credit amounting to $433.5 million. GRC has a $650 million shelf registration for pass through trust certificates and debt securities of which $220 million of notes and $106 million of pass-through certificates had been issued at year end. GATX Capital has a shelf registration for $500 million of which $485 million has been issued. GATX Capital filed a $1.0 billion shelf registration, which was declared effective by the Securities and Exchange Commission in January 2000. At year end, GATX had $2 billion of commitments to provide financing to customers or to acquire assets, $742 million of which is scheduled to fund in 2000. At December 31, 1999, approximately $333 million of subsidiary net assets were restricted, limiting the ability of the subsidiaries to transfer assets to GATX parent in the form of loans, advances or dividends. The majority of net asset restrictions relate to the revolving credit agreement of GRC and the various loan agreements of GATX Capital. Such restrictions are not expected to have an adverse impact on the ability of GATX to meet its cash obligations. RISK MANAGEMENT AND MARKET SENSITIVE INSTRUMENTS: GATX, like most other companies, is exposed to cer- tain market risks, including changes in interest rates and currency exchange rates. To manage these risks, GATX, pursuant to preestablished and preauthorized policies, enters into certain derivative transactions, predominantly interest rate swaps. These interest rate swaps and other derivative instruments are entered into for hedging purposes only; GATX does not hold or issue derivative financial instruments for speculative purposes. GATX’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 GATX’s variable rate debt at December 31, 1999, if market rates were to increase by 10% of GATX’s weighted average floating rate, after- tax interest expense would increase by approximately $4 million in 2000. Changes in certain currency exchange rates would affect GATX’s reported earnings. Based on 1999 reported earnings, a uniform and hypothetical 10% strengthening in the U.S. dollar versus those foreign currencies would decrease after-tax income in 2000 by approximately $4 million. The interpretation and analysis of the results from the hypothetical changes to interest rates and currency exchange rates should not be considered in isolation; such changes would typically have corresponding offset- ting changes. Offsetting effects are present, for example, to the extent that floating rate debt is associated with floating rate assets. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS 1999 COMPARED TO 1998 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES ENVIRONMENTAL MATTERS: Certain operations of GATX’s subsidiaries (collectively GATX) present potential environmental risks principally through the transportation or storage of various commodities. Recognizing that some risk to the environment is intrinsic to its operations, GATX is committed to protecting the environment as well as complying with applicable environmental protection laws and regulations. GATX, as well as its competi- tors, is subject to extensive regulation under federal, state and local environmental laws which have the effect of increasing the costs and liabilities associated with the conduct of its operations. In addition, GATX’s foreign oper- ations are subject to environmental laws in effect in each respective jurisdiction. GATX’s policy is to monitor and actively address environmental concerns in a responsible manner. GATX has received notices from the U.S. Environmental Protection Agency (EPA) that it is a potentially responsible party (PRP) for study and clean-up costs at 13 sites under the requirements of the Federal Comprehensive Environ- mental Response, Compensation and Liability Act of 1980 (Superfund). Under these Acts and comparable state laws, GATX may be required to share in the cost to clean up various contaminated sites identified by the EPA and other agencies. GATX has also received notice that it is a PRP at one site to undertake a Natural Resource Damage Assessment. In all instances, GATX is one of a number of financially responsible PRPs and has been identified as contributing only a small percentage of the contamination at each of the sites. Due to various fac- tors such as the required level of remediation or restoration and participation in clean up or restoration efforts by others, GATX’s total clean-up costs at these sites cannot be predicted with certainty; however, GATX’s best estimates for remediation and restoration of these sites have been determined and are included in its envi- ronmental reserves. Future costs of environmental compliance are indeterminable due to unknowns such as the magnitude of possi- ble contamination, the timing and extent of the corrective actions that may be required, the determination of the company’s liability in proportion to other responsible parties, and the extent to which such costs are recoverable from third parties including insurers. Also, GATX may incur additional costs relating to facilities and sites where past operations followed practices and procedures that were considered acceptable at the time but in the future may require investigation and/or remedial work to ensure adequate protection to the environment under cur- rent or future standards. If future laws and regulations contain more stringent requirements than presently anticipated, expenditures may be higher than the estimates, forecasts and assessments of potential environmental costs provided below. However, these costs are expected to be at least equal to the current level of expen- ditures. In addition, GATX has provided indemnities for environmental issues to the buyers of three divested companies and a number of divested terminals facilities for which GATX believes it has adequate reserves. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS 1999 COMPARED TO 1998 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES GATX’s environmental reserve at the end of 1999 was $87 million and reflects GATX’s best estimate of the cost to remediate known environmental conditions. Additions to the reserve were $12 million in each of 1999 and 1998. Expenditures charged to the reserve amounted to $8 million and $9 million in 1999 and 1998, respectively. In 1999, GATX made capital expenditures of $8 million for environmental and regulatory compliance compared to $5 million in 1998. These projects included marine vapor recovery systems, discharge prevention compliance, waste water systems, impervious dikes, tank modifications for emissions control, and tank car cleaning systems. Environmental projects authorized or planned would require capital expenditures of approximately $11 million in 2000. GATX anticipates it will make annual expenditures at approximately the same level over each of the next three years. YEAR 2000 READINESS DISCLOSURE: GATX’s program to resolve the Year 2000 issue on a timely basis was suc- cessful. All affected systems were remediated or replaced as planned. There were no significant interruptions to customer service, and there was no significant disruption to internal systems as a result of the year 2000 change- over. The total Year 2000 cost was approximately $9 million, with approximately $4 million expensed in 1999. GATX will continue to monitor its significant computer systems throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. FORWARD-LOOKING STATEMENTS: Certain statements in Management’s Discussion and Analysis constitute for- ward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although GATX believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and un- certainties include, but are not limited to, unanticipated changes in the markets served by GATX such as air- craft, petroleum, chemical, rail, technology and steel industries. 36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) GATX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY IN MILLIONS, EXCEPT NUMBER OF SHARES DOLLARS 1999 1998 1997 1999 SHARES 1998 1997 DECEMBER 31 Preferred Stock Balance at beginning of period Conversion of preferred stock into common stock Balance at end of period Common Stock Balance at beginning of period Issuance of common stock Conversion of preferred stock into common stock Balance at end of period Treasury Stock Balance at beginning of period Purchase of common stock Issuance of common stock Balance at end of period Additional Capital Balance at beginning of period Issuance of common stock Conversion of preferred stock into common stock Balance at end of period Reinvested Earnings Balance at beginning of period Net income (loss) Dividends declared Balance at end of period Accumulated Other Comprehensive Income (Loss) Balance at beginning of period Foreign currency translation gain (loss) Unrealized gain (loss) on securities, net Balance at end of period $ —) $ —) $ 3.4) 26,065) 26,365) 3,418,705) (754) 25,311) (300) (3,392,340) 26,065) 26,365) 54,822,163) 54,480,556) 46,129,548) 372,413) 340,107) 548,754) 3,770) 1,500) 7,802,254) 55,198,346) 54,822,163) 54,480,556) (5,538,230) (5,539,440) (5,580,078) (1,065,010) 4,193) —) 1,210) —) 40,638) (6,599,047) (5,538,230) (5,539,440) 37 —) —) 34.3) .2) —) 34.5) (46.8) (34.6) —) (81.4) 331.6) 7.1) —) 338.7) 446.0) 151.3) (54.3) 543.0) (32.2) 5.1) 28.3) 1.2) —) —) 34.1) .2) —) 34.3) (46.8) —) —) (46.8) 322.6) 9.0) —) 331.6) 363.4) 131.9) (49.3) 446.0) (17.9) (16.3) 2.0) (32.2) (3.4) —) 28.8) .4) 4.9) 34.1) (47.0) —) .2) (46.8) 314.6) 13.0) (5.0) 322.6) 463.7) (50.9) (49.4) 363.4) 11.4) (28.3) (1.0) (17.9) Total Shareholders’ Equity $ 836.0) $ 732.9) $ 655.4) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) IN MILLIONS/YEAR ENDED DECEMBER 31 1999 Net income (loss) Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) Unrealized gain (loss) on securities, net Other comprehensive income (loss) $ 151.3) 5.1) 28.3) 33.4) 1998 $ 131.9) 1997 $ (50.9) (16.3) 2.0) (14.3) (28.3) (1.0) (29.3) Comprehensive Income (Loss) $ 184.7) $ 117.6) $ (80.2) The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GATX CORPORATION AND SUBSIDIARIES Financial data of business segments for 1999, 1998, and 1997 on pages 26 and 27 are an integral part of the con- solidated financial statements of GATX Corporation and subsidiaries. NOTE A—SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of GATX and its consolidated subsidiaries are discussed below. CONSOLIDATION—The consolidated financial statements include the accounts of GATX and its majority-owned subsidiaries. Investments in 20 to 50 percent-owned companies and joint ventures are accounted for under the equity method and are shown as investments in affiliated companies, with pretax operating results shown as share of affiliates’ earnings. CASH EQUIVALENTS—GATX considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. OPERATING LEASE ASSETS AND FACILITIES—Operating lease assets and facilities are stated principally at cost. Assets acquired under capital leases are included in operating lease assets and the related obligations are recorded as liabilities. Provisions for depreciation include the amortization of the cost of capital leases and are computed by the straight-line method which results in equal annual depreciation charges over the estimated useful lives of the assets. The estimated useful lives of depreciable assets are as follows: Railcars ........................................................................................................................................................................................................................................................................................................... 20-38 years 28 years Locomotives ............................................................................................................................................................................................................................................................................................... 25 years Aircraft ........................................................................................................................................................................................................................................................................................................... Technology equipment/software.................................................................................................................................................................................................................................................. 3-5 years Marine vessels ........................................................................................................................................................................................................................................................................................... 15-40 years 5-40 years Buildings, leasehold improvements, storage tanks and pipelines............................................................................................................................................................................ 3-20 years Machinery and related equipment.............................................................................................................................................................................................................................................. 38 GOODWILL—GATX has classified the cost in excess of the fair value of net assets acquired as goodwill. Good- will, which is included in other assets, is being amortized on a straight-line basis over 10 to 40 years. GATX continually evaluates the existence of goodwill impairment on the basis of whether the goodwill is recoverable from projected undiscounted net cash flows of the related business, and in that regard adjusted certain In 1998, $6.0 million of goodwill related to carrying amounts in 1997 (as is explained in Note O) and 1998. Financial Services’ technology equipment sales business was written off, as that asset was determined to be impaired. Goodwill, net of accumulated amortization of $40.9 million and $37.5 million, was $124.7 million and $116.6 million as of December 31, 1999 and 1998, respectively. Amortization expense was $6.0 million in 1999, $13.8 million in 1998, and $6.7 million in 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES INCOME TAXES—United States income taxes have not been provided on the undistributed earnings of foreign subsidiaries and affiliates which GATX intends to permanently reinvest in these foreign operations. The cumula- tive amount of such earnings was $220.4 million at December 31, 1999. OTHER DEFERRED ITEMS—Other deferred items include the accrual for postretirement benefits other than pen- sions; environmental, general liability and workers’ compensation reserves; and other deferred credits. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS—GATX uses off-balance sheet financial instruments such as inter- est rate and currency swaps, forwards and similar contracts to set interest and exchange rates on existing or anticipated transactions. Fair values of GATX’s off-balance sheet financial instruments (futures, swaps, forwards, options, guarantees, and lending and purchase commitments) are based on current market prices, settlement values or fees currently charged to enter into similar agreements. The fair values of these hedge contracts are not recognized in the financial statements. Net amounts paid or received on such contracts are recognized over the term of the contract as an adjustment to interest expense or the basis of the hedged financial instrument. ENVIRONMENTAL LIABILITIES—Expenditures that relate to current or future operations are expensed or capital- ized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are charged to environmental reserves. Reserves are recorded in accordance with accounting guidelines to cover work at identified sites when GATX’s liability for environmental clean-up is probable and a minimum estimate of associated costs can be made; adjustments to initial estimates are recorded as necessary. REVENUE RECOGNITION—The majority of GATX’s gross income is derived from the rentals of railcars, commer- cial aircraft, technology equipment and marine vessels as well as terminaling, warehousing and logistics services. In addition, income is derived from finance leases, asset remarketing, stock sales, secured loans, technology equipment sales and other services. 39 FOREIGN CURRENCY TRANSLATION—The assets and liabilities of GATX operations located outside the United States are translated at exchange rates in effect at year end and income statements are translated at the aver- age exchange rates for the year. Adjustments resulting from the translation of foreign currency financial state- ments are deferred and recorded as a separate component of accumulated other comprehensive income (loss). The cumulative foreign currency translation adjustment recorded in accumulated other comprehensive income (loss) was $(33.7) million and $(38.8) million at the end of 1999 and 1998, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES INVESTMENTS IN EQUITY SECURITIES—Financial Services’ venture investment portfolio includes stock and stock warrants held as available-for-sale securities. The unrealized gain on these securities recorded in accumulated other comprehensive income (loss) was $34.9 million and $6.6 million at the end of 1999 and 1998, respectively. USE OF ESTIMATES—The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual amounts when ultimately realized could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS—The Financial Accounting Standards Board issued Statement No. 133 –Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). This new accounting standard will require that all derivatives be recorded on the balance sheet at fair value. If the derivative is a hedge, depend- ing on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a deriva- tive’s change in fair value will be immediately recognized in earnings. GATX utilizes fundamental derivatives to hedge changes in interest rates and foreign currencies. In July 1999, Statement No. 137 was issued which deferred the effective date of SFAS No. 133 for one year. SFAS No. 133 is now required to be adopted in years beginning after June 15, 2000. Management is currently assessing the impact that the adoption of SFAS No. 133 will have on the company’s financial position, results of operations and cash flows. GATX expects to adopt SFAS No. 133 effective January 1, 2001. 40 RECLASSIFICATIONS—Certain amounts in the 1998 and 1997 financial statements have been reclassified to con- form to the 1999 presentation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE B—ACCOUNTING FOR LEASES The following information pertains to GATX as a lessor: FINANCE LEASES—GATX’s finance leases include direct financing leases and leveraged leases. Financing leases which are financed principally with nonrecourse borrowings at lease inception and which meet certain criteria are accounted for as leveraged leases. Leveraged lease contracts receivable are stated net of the related nonre- course debt.The components of the investment in finance leases were (in millions): DECEMBER 31 1999 Net minimum future lease receivables .............................................................................................................................................................................. $ 664.1 262.7 Estimated residual values.......................................................................................................................................................................................................... Less–Unearned income ............................................................................................................................................................................................................ 926.8 (281.1) Investment in finance leases.................................................................................................................................................................................................... $ 645.7 1998 $ 690.0 202.5 892.5 (216.5) $ 676.0 OPERATING LEASES—The majority of railcar and tank storage assets and certain other equipment leases are accounted for as operating leases. MINIMUM FUTURE RECEIPTS—Minimum future lease receipts from finance leases and minimum future rental receipts from noncancelable operating leases by year at December 31, 1999 were (in millions): 2000....................................................................................................................................................................................................... 2001....................................................................................................................................................................................................... 2002....................................................................................................................................................................................................... 2003....................................................................................................................................................................................................... 2004....................................................................................................................................................................................................... Years thereafter................................................................................................................................................................................ FINANCE LEASES OPERATING LEASES $ 175.9 120.7 69.1 44.6 31.4 222.4 $ 664.1 $ 825.2 609.9 431.1 269.7 175.9 495.5 $ 2,807.3 TOTAL $ 1,001.1 730.6 500.2 314.3 207.3 717.9 $ 3,471.4 41 The following information pertains to GATX as a lessee: CAPITAL LEASES—Assets classified as operating lease assets and finance leases which have been financed under capital leases were (in millions): DECEMBER 31 1999 Railcars .............................................................................................................................................................................................................................................. $ 150.0 159.5 Great Lakes vessels ..................................................................................................................................................................................................................... 3.0 Other ................................................................................................................................................................................................................................................. Less–Allowance for depreciation ......................................................................................................................................................................................... Finance leases ................................................................................................................................................................................................................................ 312.5 (194.0) 118.5 6.9 $ 125.4 1998 $ 151.1 159.5 1.8 312.4 (183.8) 128.6 8.6 $ 137.2 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES OPERATING LEASES—GATX has financed railcars, aircraft, warehouses, and other assets through sale-leasebacks which are accounted for as operating leases. In addition, GATX leases certain other assets and office facilities. Total rental expense for the years ended December 31, 1999, 1998, and 1997 was $215.5 million, $206.8 million, and $193.6 million, respectively. Sublease income was $1.7 million, $3.8 million, and $5.1 million, in 1999, 1998, and 1997, respectively. FUTURE MINIMUM RENTAL PAYMENTS—Future minimum rental payments due under noncancelable leases at December 31, 1999 were (in millions): 2000....................................................................................................................................................................................................... 2001....................................................................................................................................................................................................... 2002....................................................................................................................................................................................................... 2003....................................................................................................................................................................................................... 2004....................................................................................................................................................................................................... Years thereafter................................................................................................................................................................................ Less—Amounts representing interest................................................................................................................................... CAPITAL LEASES OPERATING LEASES NONRECOURSE OPERATING LEASES $ 32.4) 31.5) 30.8) 28.6) 23.4) 133.5) $ 280.2) (97.1) $ 157.4 142.1 140.5 122.1 111.7 1,204.4 $1,878.2 $ 38.2 39.9 37.4 40.0 39.9 601.1 $796.5 Present value of future minimum capital lease payments............................................................................................ $ 183.1) The above capital lease amounts and certain operating leases do not include the costs of licenses, taxes, insur- ance and maintenance which GATX is required to pay. Future minimum operating lease payments have not been reduced by aggregate future noncancelable sublease rentals of $1.1 million. Interest expense on the above capital leases was $15.2 million in 1999, $16.5 million in 1998, and $17.6 million in 1997. 42 The amounts shown as nonrecourse operating leases reflect rental payments of three bankruptcy remote special purpose corporations which are wholly owned by GATX. These rentals are consolidated for accounting pur- poses but do not represent legal obligations of GATX. NOTE C—SECURED LOANS Investments in secured loans are stated at the principal amount outstanding plus accrued interest. The loans are collateralized by equipment and company blanket liens. As of December 31, 1999, secured loan principal due by year was as follows (in millions): 2000.......................................................................................................................................................................................................................................................................................................................... 2001.......................................................................................................................................................................................................................................................................................................................... 2002.......................................................................................................................................................................................................................................................................................................................... 2003.......................................................................................................................................................................................................................................................................................................................... 2004.......................................................................................................................................................................................................................................................................................................................... Years thereafter................................................................................................................................................................................................................................................................................................. LOAN PRINCIPAL $ 78.0 58.0 44.3 55.0 25.6 97.1 $358.0 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE D—INVESTMENTS IN AFFILIATED COMPANIES GATX has investments in 25 to 50 percent-owned companies and joint ventures which are accounted for using the equity method. These domestic and foreign investments are in businesses similar to those of GATX’s princi- pal subsidiaries. Distributions received from such affiliates were $75.3 million, $167.5 million, and $71.6 million in 1999, 1998 and 1997, respectively. These distributions reflect both operating results and return of principal. For all affiliated companies held at the end of a year, operating results, as if GATX held 100 percent interest, were (in millions): YEAR ENDED DECEMBER 31 1999 Gross income ................................................................................................................................................................................... Pretax income.................................................................................................................................................................................. $ 849.2 193.5 1998 $ 611.9 157.7 1997 $ 505.7 117.9 For all affiliated companies held at the end of a year, summarized balance sheet data, as if GATX held 100 percent interest, were (in millions): DECEMBER 31 1999 Total assets.................................................................................................................................................................................................................................. $ 5,257.0 1,971.6 Long-term liabilities ................................................................................................................................................................................................................ 893.0 Other liabilities ......................................................................................................................................................................................................................... Shareholders’ equity ............................................................................................................................................................................................................... $ 2,392.4 1998 $ 4,200.7 2,056.6 339.7 $ 1,804.4 NOTE E—FOREIGN OPERATIONS GATX has a number of investments in subsidiaries and affiliated companies which are located in or derive rev- enues from foreign countries. Foreign entities contribute significantly to share of affiliates’ earnings. The foreign identifiable assets represent investments in affiliated companies as well as fully consolidated assets for a Canadian railcar subsidiary, a Mexican railcar operation, and foreign lease, loan and other investments. 43 IN MILLIONS YEAR ENDED DECEMBER 31 REVENUES 1999 Foreign ........................................................................................................................................................................................... United States .............................................................................................................................................................................. $ 197.8 1,575.2 SHARE OF AFFILIATES’ EARNINGS Foreign ........................................................................................................................................................................................... United States .............................................................................................................................................................................. DECEMBER 31 IDENTIFIABLE ASSETS $ 1,773.0 $ $ 49.0 36.9 85.9 1999 Foreign ........................................................................................................................................................................................... United States .............................................................................................................................................................................. $ 1,165.7 4,701.1 $ 5,866.8 1998 $ 219.7 1,561.2 $ 1,780.9 $ $ 37.9 31.3 69.2 1998 $ 898.2 4,108.6 $ 5,006.8 1997 $ 188.8 1,529.2 $ 1,718.0 $ $ 33.9 15.2 49.1 1997 $ 882.6 4,107.6 $ 4,990.2 Foreign cash flows generated are used to meet local operating needs and for reinvestment. The translation of the foreign balance sheets into U.S. dollars results in an unrealized foreign currency translation adjustment, a compo- nent of accumulated other comprehensive income (loss). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE F—SHORT-TERM DEBT AND LINES OF CREDIT Short-term debt (in millions) and its weighted average interest rate as of year end were: DECEMBER 31 1999 1998 Commercial paper .................................................................................................................... Other short-term borrowings ............................................................................................ AMOUNT $ 261.5 115.9 $ 377.4 RATE 6.65% 6.53% AMOUNT $ 163.3 136.6 $ 299.9 RATE 6.07% 6.14% Under a revolving credit agreement with a group of banks, GRC may borrow up to $350.0 million. While at year end no borrowings were outstanding, availability under the line was reduced by $132.6 million of commer- cial paper outstanding. GRC also had borrowings of $115.0 million under unsecured money market lines at December 31, 1999. GATX Capital and one of its wholly owned subsidiaries have commitments under credit agreements with a group of banks for revolving credit loans totaling $345.0 million of which $216.1 million was available at December 31, 1999; availability under the line was reduced by $128.9 million of commercial paper outstanding. Both GRC’s and GATX Capital’s primary revolving credit agreements contain various restrictive covenants, including requirements to maintain a defined minimum net worth and certain financial ratios. Both GRC and GATX Capital met all credit agreement requirements at December 31, 1999. Interest expense on short-term debt was $25.1 million in 1999, $23.5 million in 1998, and $24.0 million in 1997. 44 NOTE G—LONG-TERM DEBT Long-term debt (in millions) and the range of interest rates as of year end were: INTEREST RATES FINAL MATURITY DECEMBER 31 1999 DECEMBER 31 1998 Variable rate: Term notes ........................................................................................................... Nonrecourse obligations............................................................................... 5.25%-6.92% 6.19%-8.25% 2001-2004 2000-2004 ......................................................................................................................................... Fixed rate: Term notes ........................................................................................................... Nonrecourse obligations............................................................................... Industrial revenue bonds ............................................................................... 5.81%-10.45% 6.28%-10.00% 6.63%- 7.30% 2000-2012 2003-2013 2019-2024 $ 388.0 28.7 416.7 2,309.8 435.1 87.9 2,832.8 $ 195.7 34.3 230.0 1,887.7 417.6 87.9 2,393.2 $3,249.5 $ 2,623.2 Maturities of GATX’s long-term debt as of December 31, 1999 for the next five years were (in millions): 2000 .................................................................................................................................................................................................................................................................................................................. 2001 .................................................................................................................................................................................................................................................................................................................. 2002 .................................................................................................................................................................................................................................................................................................................. 2003 .................................................................................................................................................................................................................................................................................................................. 2004 .................................................................................................................................................................................................................................................................................................................. MATURITIES $607.6 426.5 351.6 378.0 291.5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES At December 31, 1999, certain technology assets, aircraft, railcars, cogeneration facilities and warehouse equip- ment with a net carrying value of $488.8 million were pledged as collateral for $417.1 million of notes and bonds. Interest cost incurred on long-term debt, net of capitalized interest, was $191.9 million in 1999, $194.9 million in 1998, and $180.8 million in 1997. Interest cost capitalized as part of the cost of construction of major assets was $4.6 million in 1999, $3.3 million in 1998, and $2.5 million in 1997. NOTE H—OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, GATX utilizes off-balance sheet financial instruments to manage financial mar- ket risk, including interest rate and foreign exchange risk. At December 31, 1999, GATX had the following off-balance sheet financial instruments (in millions): INTEREST RATE SWAPS NOTIONAL AMOUNT PAY RATE/ INDEX GATX pays fixed, receives floating ............................................................................ GATX pays floating, receives fixed ............................................................................ $595.2 692.0 4.80-6.83% LIBOR-LIBOR+.75% CURRENCY SWAPS RECEIVE Canadian dollar swap........................................................................................................................................................ Deutschemark swap.......................................................................................................................................................... $115.0 $ 40.5 CURRENCY FORWARDS RECEIVE Canadian dollar forward.................................................................................................................................................. Deutschemark forward.................................................................................................................................................... C$4.9 $ 6.3 GATX had the following interest rate hedge activity (in millions): RECEIVE RATE/INDEX LIBOR 5.41-7.65% DELIVER C$156.2 72.5DM DELIVER $3.3 11.8DM MATURITY 2000-2005 2000-2008 MATURITY 2011 2002 MATURITY 2000 2002 INTEREST RATE SWAPS PAY FIXED PAY FLOATING Balance at January 1, 1998............................................................................................................................................................................................... Additions ................................................................................................................................................................................................................................. Maturities ................................................................................................................................................................................................................................ Balance at December 31, 1998..................................................................................................................................................................................... Additions ................................................................................................................................................................................................................................. Maturities ................................................................................................................................................................................................................................ $ 752.6 370.2 (350.0) 772.8 85.3 (262.9) Balance at December 31, 1999..................................................................................................................................................................................... $ 595.2 $ 690.0 30.0 (18.0) 702.0 — (10.0) $ 692.0 GATX uses interest rate swaps and forwards to manage its assets and liabilities, to convert floating rate debt to fixed rate debt (or fixed to floating) and to manage interest rate risk associated with the anticipated issuance of debt. At GRC, interest rate swaps are utilized to better match the cash flow characteristics of its debt port- folio and its railcar leases. Railcar assets are financed with long-term fixed rate debt or through sale-lease- backs. However, the railcar assets are placed on lease with average new lease terms of five years; the average renewal term is three years. Rents are fixed over these lease terms. Interest rate swaps effectively convert GRC’s long-term fixed rate debt to debt with maturities of three months to five years. Through the swap pro- gram, changes in GRC’s interest expense are expected to better reflect changes in railcar lease rates. Also, GATX Capital uses interest rate swaps in addition to commercial paper and floating rate medium-term notes to match fund its floating rate lease and loan portfolio with floating rate borrowings. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES The net amount payable or receivable from the interest rate swap agreements is accrued as an adjustment to interest expense. The fair value of its interest rate swap agreements is an estimate of the amount the company would receive or pay to terminate those agreements. At December 31, 1999, GATX would have received $4.9 million if the swaps were terminated; GATX would have received $36.6 million if the swaps were terminated at December 31, 1998. GATX has entered into currency swaps and forwards to hedge $115.0 million in debt obligations at its Canadian subsidiaries and $46.8 million in debt obligations associated with a German joint venture. The fair market value of its currency swap and forward agreements is an estimate of the amount the company would receive or pay to terminate those agreements. If the swaps and forwards were terminated, GATX would have received $5.7 mil- lion at December 31, 1999 or $20.9 million at December 31, 1998. In the event that a counterparty fails to meet the terms of the interest rate swap agreement or a foreign exchange contract, GATX’s exposure is limited to the interest rate or currency differential. GATX manages the credit risk of counterparties by dealing only with institutions that the company considers financially sound and by avoiding concentrations of risk with a single counterparty. GATX considers the risk of nonperformance to be remote. NOTE I—FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair value of financial instruments: 46 The carrying amount of cash and cash equivalents, trade receivables, accounts payable, and short-term debt approximates fair value because of the short maturity of those instruments. Also, the carrying amount of variable rate long-term debt and variable rate secured loans approximates fair value. The fair value of fixed rate secured loans was estimated using discounted cash flow analyses, at interest rates cur- rently offered for loans with similar terms to borrowers of similar credit quality. The fair value of fixed rate long-term debt was estimated by performing a discounted cash flow calculation using the term and market interest rate for each note based on GATX’s current incremental borrowing rates for similar borrowing arrangements. Portions of fixed rate long-term debt have effectively been converted to float- ing rate debt by utilizing interest rate swaps (GATX pays floating, receives fixed), as described in Note H. In such instances, the increase (decrease) in the fair value of the fixed rate long-term debt would be offset in part by the increase (decrease) in the fair value of the interest rate swap. The following table sets forth the carrying amounts and fair values of the company’s fixed rate instruments (in millions): DECEMBER 31 1999 1998 Secured loans–fixed.................................................................................................................. Long-term debt–fixed.............................................................................................................. CARRYING AMOUNT $ 292.2 2,832.8 FAIR VALUE $ 290.1 2,769.4 CARRYING AMOUNT $ 222.8 2,393.2 FAIR VALUE $ 219.5 2,470.4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE J—PENSION AND OTHER POSTRETIREMENT BENEFITS GATX and certain of its subsidiaries maintain noncontributory defined benefit pension plans covering their respective employees. Benefits payable under the pension plans are based on years of service and/or final aver- age salary. The funding policy for the pension plans is based on an actuarially determined cost method allow- able under Internal Revenue Service regulations. In addition to the pension plans, GATX’s other postretirement plans provide health care, life insurance and other benefits for certain retired employees who meet established criteria. Most domestic employees are eligible for health care and life insurance benefits if they retire from GATX with immediate pension benefits under the GATX plan. The plans are either contributory or noncontributory, depending on various factors. The following tables set forth pension and other postretirement obligations and plan assets (in millions) as of December 31: PENSION BENEFITS 1999) 1998) RETIREE HEALTH AND LIFE 1999) 1998) Change in benefit obligation: Benefit obligation at beginning of period ............................................................................. Service cost ........................................................................................................................................ Interest cost ....................................................................................................................................... Plan amendments ............................................................................................................................ Actuarial loss (gain) ........................................................................................................................ Benefits paid ....................................................................................................................................... Curtailments ...................................................................................................................................... $ 304.6) 7.4) 20.6) —) 1.6) (22.0) —) Benefit obligation at end of period ......................................................................................... $ 312.2) $ 276.1) 5.9) 20.4) (.6) 24.8) (22.0) —) $ 304.6) $ 68.4) .7) 4.6) —) 1.6) (6.6) —) $ 68.7) $ 68.8) .5) 4.8) —) (.5) (6.5) 1.3) $ 68.4) PENSION BENEFITS 1999) 1998) RETIREE HEALTH AND LIFE 1999) 1998) 47 Change in fair value of plan assets: Plan assets at beginning of period ........................................................................................... Actual return on plan assets ...................................................................................................... Company contributions ................................................................................................................ Benefits paid ....................................................................................................................................... $ 325.8) 49.2) .5) (22.0) Plan assets at end of period ....................................................................................................... $ 353.5) $ 299.1) 44.4) 4.3) (22.0) $ 325.8) $ —) —) 6.6) (6.6) $ —) $ —) —) 6.5) (6.5) $ —) PENSION BENEFITS 1999) 1998) RETIREE HEALTH AND LIFE 1999) 1998) Funded status: Funded status of the plan ............................................................................................................ Unrecognized net gain .................................................................................................................. Unrecognized prior service cost ............................................................................................. Unrecognized net transition (asset) obligation ................................................................. $ 41.3) (46.9) 1.8) (.2) Accrued cost ..................................................................................................................................... $ (4.0) $ 21.2) (23.0) 2.1) (.3) $ —) $ (68.7) (9.4) —) .4) $ (77.7) $ (68.4) (12.1) —) .5) $ (80.0) Amount recognized: Prepaid benefit cost ....................................................................................................................... Accrued benefit liability ................................................................................................................ Intangible asset ................................................................................................................................. $ 3.6) (9.3) 1.7) $ 6.7) (8.4) 1.7) Total recognized .............................................................................................................................. $ (4.0) $ —) $ —) (78.1) .4) $ (77.7) $ —) (80.5) .5) $ (80.0) PENSION BENEFITS 1999) 1998) RETIREE HEALTH AND LIFE 1999) 1998) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES The components of pension and other postretirement benefit costs are as follows (in millions): PENSION BENEFITS RETIREE HEALTH AND LIFE Service cost ....................................................................................................... Interest cost ...................................................................................................... Expected return on plan assets ............................................................... Amortization of: Unrecognized prior service cost ........................................................... Unrecognized net loss (gain) ................................................................... Unrecognized net (asset) obligation .................................................... Recognized gain due to settlement or curtailment ..................................................................... Recognized special termination benefits expense ........................................................................................ 1999 $ 7.4) 20.6) (23.9) 1998 $ 5.9) 20.4) (22.6) 1997 $ 5.8) 20.0) (21.5) .4) .2) (.1) —) —) .4) .1) —) —) —) .4) .1) (.1) (.7) 3.2) 1999 $ .7) 4.6) —) —) (.4) .1) —) —) 1998 $ .5) 4.8) —) —) (.6) —) —) —) Net costs ............................................................................................................ $ 4.6) $ 4.2) $ 7.2) $5.0) $ 4.7) 1997 $ .5) 5.1) —) —) (.5) —) —) 1.1) $6.2) GATX amortizes the prior service cost using a straight-line method over the average remaining service period of employees to receive benefits under the plan. Assumptions as of December 31: Discount rate ..................................................................................................................................................... Expected return on plan assets ................................................................................................................ Rate of compensation increases ............................................................................................................... PENSION BENEFITS RETIREE HEALTH AND LIFE 1999 7.00% 8.75% 5.00% 1998 7.00% 8.75% 5.00% 1999 7.00% n/a 5.00% 1998 7.00% n/a 5.00% The assumed health care cost trend rate was 5.0% for participants over the age of 65 and 6.0% for participants under the age of 65 for 1999 and thereafter. The health care cost trend rate has a significant effect on the other postretirement benefit cost and obligation. A 1% increase in the trend rate would increase the cost by $.3 million and the obligation by $3.7 million. A 1% decrease in the trend rate would decrease the cost by $.3 million and the obligation by $3.0 million. In addition to contributions to its defined benefit plans, GATX makes contributions to the multi-employer pen- sion plans of various unions. Further, GATX and its subsidiaries maintain several 401(k) retirement plans which are available to substantially all salaried and certain other employee groups. GATX may contribute to the plans as defined by their respective terms.The contributions to such plans were (in millions): YEAR ENDED DECEMBER 31 Contributions to multi-employer pension plans ................................................................................................................... Contributions to 401(k) plans ....................................................................................................................................................... 1999 $ .5 4.3 1998 $ .6 4.2 1997 $1.8 4.0 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE K—INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of GATX’s deferred tax liabilities and assets were (in millions): DECEMBER 31 Deferred tax liabilities: 1999 1998 Book/tax basis differences due to depreciation ...................................................................................................................................................... $ 345.6 58.2 Leveraged leases .................................................................................................................................................................................................................... 101.8 Investment in joint ventures .............................................................................................................................................................................................. 99.1 Lease accounting (other than leveraged) ................................................................................................................................................................... 68.9 Other ........................................................................................................................................................................................................................................... Total deferred tax liabilities .......................................................................................................................................................................................... 673.6 Deferred tax assets: Alternative minimum tax credit ...................................................................................................................................................................................... Accruals not currently deductible for tax purposes ............................................................................................................................................. Allowance for possible losses .......................................................................................................................................................................................... Postretirement benefits other than pensions ........................................................................................................................................................... Other ........................................................................................................................................................................................................................................... 64.3 44.8 45.1 27.3 34.9 Total deferred tax assets ............................................................................................................................................................................................... 216.4 Net deferred tax liabilities ............................................................................................................................................................................................ $ 457.2 $ 336.9 39.1 69.0 81.2 67.7 593.9 52.8 46.9 52.6 27.7 21.3 201.3 $ 392.6 At December 31, 1999, GATX had an alternative minimum tax credit of $64.3 million that can be carried forward indefinitely to reduce future regular tax liabilities. GATX and its United States subsidiaries file a consolidated federal income tax return. Amounts shown as Current—Federal represent taxes payable as determined by the Alternative Minimum Tax. Included in 1997’s total deferred tax credit is a $56.5 million deferred tax benefit resulting from Terminals’ $185.8 million pretax restructuring charge. Income taxes consisted of (in millions): 49 YEAR ENDED DECEMBER 31 Current– Domestic: 1999 1998 1997 Federal................................................................................................................................................................................... State and local ................................................................................................................................................................... $ 23.5 5.3 Foreign ........................................................................................................................................................................................ Deferred– Domestic: Federal................................................................................................................................................................................... State and local ................................................................................................................................................................... Foreign ........................................................................................................................................................................................ 28.8 11.3 40.1 47.3 5.8 53.1 9.4 62.5 Income tax expense (benefit)............................................................................................................................................... $ 102.6 Income taxes paid....................................................................................................................................................................... $ 38.6 $ $ $ 26.2 3.2 29.4 6.1 35.5 43.2 8.6 51.8 12.6 64.4 99.9 33.7 $ 28.0 1.1 29.1 3.9 33.0 (35.9) 2.2 (33.7) 13.4 (20.3) $ 12.7 $ 35.5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES The reasons for the difference between GATX’s effective income tax rate and the federal statutory income tax rate were: YEAR ENDED DECEMBER 31 Federal statutory income tax rate.................................................................... Add (deduct) effect of: Corporate owned life insurance .................................................................. State income taxes ............................................................................................. 1997 restructuring charges ............................................................................. Foreign income ..................................................................................................... Goodwill amortization ...................................................................................... Minority interest .................................................................................................. Other ........................................................................................................................ 1999 35.0% (.6) 2.8 — 1.8 .6 (.1) .9 1998 35.0%) (.9) 3.3) —) 2.9) 1.8) —) 1.0) 1997 35.0% 6.0 (15.9) (43.6) (5.2) (4.6) (1.0) (4.1) 1997(A) 35.0% (1.2) 3.3 — 1.1 .9 .2 .8 Effective income tax rate ...................................................................................... 40.4% 43.1% (33.4)% 40.1% (A) Before restructuring charges NOTE L—SHAREHOLDERS’ EQUITY In 1998, the company’s shareholders approved an amendment to GATX’s certificate of incorporation which increased authorized shares of common stock from 60 million to 120 million shares and effected a two-for-one stock split, in the form of a stock dividend. Par value remained at $.625 per share after the split. All share and per share amounts in the accompanying consolidated financial statements have been restated accordingly. GATX’s certificate of incorporation also authorizes 5 million shares of preferred stock at a par value of $1.00 per share. Shares of preferred stock issued and outstanding consist of Series A and B $2.50 cumulative convertible preferred stock, which entitles holders to a cumulative annual cash dividend of $2.50 per share. Each share of such preferred stock may be called for redemption by GATX at $63 per share, has a liquidating value of $60 per share, and may be converted into 5 shares of common stock. Holders of $2.50 convertible preferred stock and common stock are entitled to one vote for each share held. Except in certain instances, all such classes vote together as a single class. A total of 10,084,913 shares of common stock were reserved at December 31, 1999, for the following: Conversion of outstanding preferred stock ...................................................................................................................................................................................................... Incentive compensation programs ......................................................................................................................................................................................................................... Employee service awards ........................................................................................................................................................................................................................................... Employee stock purchase plan ................................................................................................................................................................................................................................ SHARES 124,098 6,263,389 36,550 3,660,876 10,084,913 During 1997, GATX called for the redemption of all outstanding shares of its $3.875 cumulative convertible pre- ferred stock, each share of which was convertible into 2.2988 shares of common stock. As a result of the redemption, 3.4 million preferred shares were converted to 7.8 million shares of common stock. In an effort to ensure the fair value to all shareholders in the event of an unsolicited takeover offer for the company, GATX adopted a Shareholders’ Rights Plan in August 1998. Shareholders received a distribution of one right for each share of the company’s common stock held. Initially the rights are represented by GATX’s common stock certificates and are not exercisable. The rights will be exercisable only if a person acquires or announces a tender offer which would result in beneficial ownership of 20 percent or more of the com- pany’s common stock. If a person acquires beneficial ownership of 20 percent or more of the company’s com- mon stock, all holders of rights other than the acquiring person will be entitled to purchase the company’s common stock at half price. The rights are scheduled to expire on August 14, 2008. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES NOTE M—INCENTIVE COMPENSATION PLANS The GATX Corporation 1995 Long Term Incentive Compensation Plan (the 1995 Plan) contains provisions for the granting of nonqualified stock options, incentive stock options, stock appreciation rights (SARs), cash and common stock individual performance units (IPUs), restricted stock rights, restricted common stock, perform- ance awards and exchange stock options. An aggregate of 5,000,000 shares of common stock may be issued under the 1995 Plan. As of December 31, 1999, 2,338,041 shares are available for issuance under the 1995 Plan. Nonqualified stock options and incentive stock options may be granted for the purchase of common stock for periods not longer than ten years from the date of grant. The exercise price will not be less than the higher of market value at date of grant or par value of the common stock. All options become exercisable commencing on a date no earlier than one year from the date of grant. IPUs may be granted to key employees and, if predetermined performance goals are met, will be redeemed in cash and common stock, as applicable, with the redemption value determined in part by the fair market value of the common stock as of the date of redemption and in part by the extent to which preestablished performance goals have been achieved. A total of 31,857 IPUs were granted during 1999 and 69,181 IPUs in total were out- standing at the end of the year. In 1999, 19,584 shares of common stock and $.5 million in cash were paid to the participants in redemption of previously issued IPUs. Restricted stock rights may be granted to key employees entitling them to receive a specified number of shares of restricted common stock. The recipients of restricted common stock are entitled to all dividends and vot- ing rights, but the shares are not transferable prior to the expiration of a “restriction period” as determined at the discretion of the Compensation Committee of the Board of Directors. Performance Awards are granted to employees who have been granted restricted stock rights or restricted common stock, but these Awards may not exceed the market value of the restricted common stock when restrictions lapse. The Performance Awards provide cash payments if certain criteria and earnings goals are met over a predetermined period. During 1999, one grant of 300 shares of restricted stock was made. The Exchange Stock Option Program became part of the 1995 Plan in 1999 and allows key employees to make an irrevocable election to exchange up to 25% of their pensionable incentive payments for stock options, with a minimum contribution of $5,000 in any calendar year. These options are valued based on a percentage of the Black-Sholes value of GATX common stock as specified by the Compensation Committee of the Board of Directors. Exchange Stock Options are granted in January and are exercisable immediately following grant thereof. All Exchange Stock Options will terminate on the tenth anniversary of the date of grant. The exercise price of the options is the fair market value of the common stock on the grant date. In January 2000, 77,477 options were granted for the year 1999. Under the GATX Employee Stock Purchase Plan, which became effective July 1, 1999, GATX is authorized to issue up to 247,649 shares of common stock to eligible employees during the calendar year. Such employees may have up to $10,000 of earnings withheld to purchase GATX common stock. The purchase price of the stock on the date of exercise is 85% of the lesser of its market price at the beginning or end of the plan year. In accor- dance with the plan, GATX sold approximately 46,600 shares to employees for 1999. Stock options are outstanding under the GATX Corporation 1985 Long Term Incentive Compensation Plan (the 1985 Plan), as amended, but no additional options, stock or awards may be issued thereunder. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES Data with respect to both plans, including the range of exercise prices per share for 1999 and 1998, are set forth below: NUMBER OF SHARES UNDER STOCK OPTION PLANS 1998 1999 PRICE PER SHARE Outstanding at January 1 ........................................................................................................................................ Granted .......................................................................................................................................................................... Exercised ........................................................................................................................................................................ Canceled ........................................................................................................................................................................ 3,388,275) 591,050) (272,550) (55,675) Outstanding at December 31 .............................................................................................................................. 3,651,100) Outstanding at December 31, by year granted: 1989............................................................................................................... 1990............................................................................................................... 1991............................................................................................................... 1992............................................................................................................... 1993............................................................................................................... 1994............................................................................................................... 1995............................................................................................................... 1996............................................................................................................... 1997............................................................................................................... 1998............................................................................................................... 1999............................................................................................................... —) 56,000) 168,000) 153,200) 259,800) 372,100) 451,100) 593,800) 510,350) 504,200) 582,550) 3,321,300) 543,350) (372,849) (103,526) 3,388,275) 47,000) 64,000) 185,500) 154,200) 306,800) 416,700) 501,400) 639,025) 550,300) 523,350) —) Total .................................................................................................................................................................................. 3,651,100) 3,388,275) Options exercisable at December 31 .............................................................................................................. 2,691,175) 2,459,525) Options available for future grant at December 31.................................................................................. 2,388,041) 943,000) $ 9.97-39.72 30.78-39.75 9.97-33.47 23.94-39.72 $ 9.97-39.75 $ 9.97-14.97 9.97 14.00 12.75 18.84 20.91 23.78-25.28 23.16-24.91 27.44-33.47 33.38-39.72 30.78-39.75 $ 9.97-39.75 52 ACCOUNTING FOR STOCK OPTIONS GATX has elected to follow Accounting Principles Board Opinion No. 25– Accounting for Stock Issued to Employees, in accounting for its employee stock options. Under these guidelines, no compensation expense is recognized because the exercise price of GATX’s employee stock options equals the market price of the underlying stock on the measurement date. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123–Accounting for Stock-Based Compensation (SFAS No. 123), and has been deter- mined as if GATX had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the follow- ing assumptions for 1999, 1998 and 1997: dividend yield of 3.1%, 3.1% and 2.8%, respectively; volatility factor of the expected market price of GATX’s common stock of .20, .19 and .16, respectively; expected life of the option of six years, six years and four years, respectively; and weighted average risk-free interest rate of 6.5%, 4.8% and 5.9%, respectively. The Black-Scholes model, one of the most frequently referenced models to value options, was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because GATX’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option vesting period.The resultant pro forma net income (loss) and earnings (loss) per share were (in millions, except for earnings per share information): YEAR ENDED DECEMBER 31 1999 Pro forma net income (loss) ...................................................................................................................................................... $148.5 Pro forma earnings (loss) per share: Basic .................................................................................................................................................................................................. $ 3.01 Diluted ............................................................................................................................................................................................. $ 2.95 1998 $129.8 $ 2.64 $ 2.57 1997 $(52.2) $(1.30) $(1.30) Because SFAS No. 123’s provisions are prospective (retroactive application is prohibited), awards granted prior to 1995 are not to be considered in pro forma disclosures. Additionally, because options generally are granted late in the year and vest over a three-year period, the pro forma amounts for 1997 above do not reflect a full annualized effect. NOTE N—COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK GATX’s revenues are derived from a wide range of industries and companies. Approximately 19% of total rev- enues are generated from the transportation or storage of products for the chemical industry; for similar services, 19% of revenues are derived from the petroleum industry. GATX also provides services and products to the chemical, petroleum, and technology markets through its affiliates, which are accounted for under the equity method. In addition, approximately 12% of GATX’s assets consist of commercial aircraft operated by various domestic and international airlines. Under its lease agreements, GATX retains legal ownership of the asset except where such assets have been financed by sale-leasebacks. With most loan financings, the loan is collateralized by the equipment. GATX per- forms credit evaluations prior to approval of a lease or loan contract. Subsequently, the creditworthiness of the customer and the value of the collateral are monitored on an ongoing basis. GATX maintains an allowance for possible losses and other reserves to provide for potential losses which could arise should customers become unable to discharge their obligations to GATX and to provide for permanent declines in investment value. At December 31, 1999, GATX and its aircraft joint ventures had commitments of $1.5 billion for orders and options for interests in 54 new aircraft to be delivered between 2000 and 2006. GATX also had other firm commitments totaling $472.1 million, primarily to acquire railcars and other equipment, fund technology and telecommunications ventures, and to upgrade terminal and repair facilities. GATX’s subsidiaries issued $381.6 million of residual and rental guarantees at December 31, 1999. Guarantees are commitments issued to guarantee performance of an affiliate to a third party, generally in the form of lease and loan payment guarantees, or to guarantee the value of an asset at the end of a lease. Lease and loan pay- ment guarantees generally involve guaranteeing repayment of the financing required to acquire assets being leased by an affiliate to third parties, and are in lieu of making direct equity investments in the affiliate. Asset value guarantees represent GATX Capital’s commitment to a third party that an asset or group of assets will be worth a specified amount at the end of a lease term. Exposure to GATX’s subsidiaries for certain supplier and loan pay- ment guarantees is mitigated by, among other things, a third party cross guaranty. Based on known and expected market conditions, management does not believe that the asset value guarantees will result in any adverse finan- cial impact to GATX. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GATX CORPORATION AND SUBSIDIARIES GATX’s subsidiaries are also parties to letters of credit and bonds totaling $38.3 million and $23.8 million at December 31, 1999 and 1998, respectively. In GATX’s past experience, virtually no claims have been made against these financial instruments. Management does not expect any material losses to result from these off-balance sheet instruments because performance is not expected to be required, and, therefore, is of the opinion that the fair value of these instruments is zero. GATX and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management believes that damages, if any, required to be paid by GATX and its subsidiaries 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 GATX’s consolidated financial position. NOTE O—RESTRUCTURING CHARGES During 1997, strategic decisions resulted in a $224.8 million ($162.8 million after-tax) restructuring charge related to ISG. Part of the restructuring charge was based on the decision to close, sell or revalue certain domestic and foreign terminal locations to reflect permanent changes in market conditions. Included in the restructuring charge was a $185.8 million pretax charge ($123.8 million after-tax) which primarily represented the write-down of asset values with minor costs related to closure activities. The remaining charge of $39.0 million represented the write-down of goodwill to reflect the impairment of certain acquired logistics and warehousing facilities. The carrying values of certain assets at ISG were written down to fair value as described in Note A. Subsequently, terminal locations, most notably the sale of six of its wholly owned terminal sites in the United Kingdom. ISG management acted upon its restructuring plan by divesting certain domestic and foreign 54 CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) AND COMMON STOCK INFORMATION GATX CORPORATION AND SUBSIDIARIES IN MILLIONS, EXCEPT PER SHARE DATA GROSS INCOME OWNERSHIP COSTS AND OPERATING EXPENSES 1999 First Quarter ...................................................................................... $ 451.4 476.3 Second Quarter ................................................................................ 464.4 Third Quarter .................................................................................... 466.8 Fourth Quarter ................................................................................. Total ......................................................................................................... $ 1,858.9 1998 First Quarter........................................................................................ $ Second Quarter ................................................................................. Third Quarter ..................................................................................... Fourth Quarter .................................................................................. 430.0 459.2 479.9 481.0 $ 327.1 345.3 330.4 344.6 $ 1,347.4 $ 310.6 342.8 352.9 362.4 NET INCOME $ 39.2 38.1 42.2 31.8 BASIC NET INCOME PER SHARE (A) DILUTED NET INCOME PER SHARE (A) $ .79 .77 .85 .65 $ .78 .75 .83 .64 $ 151.3 $ 3.07 $ 3.01 $ 37.4 30.8 38.1 25.6 $ .76 .63 .78 .52 $ .74 .61 .76 .51 Total ......................................................................................................... $ 1,850.1 $ 1,368.7 $ 131.9 $ 2.68 $ 2.62 (A) Quarterly results may not be additive, as per share amounts are computed independently for each quarter and the full year based on the respective weighted average common shares and common stock equivalents outstanding. COMMON STOCK INFORMATION GATX common shares are listed on the New York and Chicago Stock Ex- COMMON STOCK INFORMATION GATX common shares are listed on the New York and Chicago Stock changes under ticker symbol GMT. Exchanges under ticker symbol GMT. The approximate number of common stock holders of record as of February 18, 2000 was 3,652. The following table shows the reported high and low sales price of GATX common shares on the New York Stock Exchange, which is the principal market for GATX shares, and the dividends declared per share: COMMON STOCK HIGH LOW COMMON STOCK HIGH LOW 55 1999 First Quarter......................................................................... Second Quarter................................................................... Third Quarter....................................................................... Fourth Quarter.................................................................... $39.31 40.19 40.69 35.44 $32.56 29.75 30.44 29.25 1998 First Quarter............................................... Second Quarter ........................................ Third Quarter ............................................ Fourth Quarter ......................................... $40.56 44.13 47.56 39.00 $34.00 38.75 31.69 26.25 Annual Dividends Declared $1.10 Annual Dividends Declared $1.00 SELECTED CONSOLIDATED FINANCIAL DATA GATX CORPORATION AND SUBSIDIARIES IN MILLIONS, EXCEPT PER SHARE DATA/YEAR ENDED OR AT DECEMBER 31 1999 1998 1997 (A) 1996 1995 Results of Operations Gross Income ............................................................................................................................................................................................................................................................................................................................. $1,858.9 Costs and Expenses ................................................................................................................................................................................................................................................................................................................ 1,605.0 Income (Loss) Before Income Taxes ............................................................................................................................................................................................................................................................................... Income Taxes .............................................................................................................................................................................................................................................................................................................................. 253.9 102.6 $ 1,850.1 1,618.3 231.8 99.9 $ 1,767.1) 1,805.3) (38.2) 12.7) Net Income (Loss) .................................................................................................................................................................................................................................................................................................................. $ 151.3 $ 131.9 $ (50.9) Per Share Data Net Income (Loss) Applicable to Common Stock, as Adjusted ....................................................................................................................................................................................................................... $ 151.2 Per Share of Common Stock and Common Stock Equivalents: Net Income (Loss), Basic ...................................................................................................................................................................................................................................................................................................... $ Shares Used in Computation (in thousands) ........................................................................................................................................................................................................................................................ 3.07 49,296 Per Share Assuming Conversion, Except in 1997, of All Outstanding Preferred Stock: Net Income (Loss), Diluted ................................................................................................................................................................................................................................................................................................ $ Shares Used in Computation (in thousands) ........................................................................................................................................................................................................................................................ Dividends Declared Per Share of Common Stock ................................................................................................................................................................................................................................................. $ 3.01 50,301 1.10 56 Financial Condition Total Assets.................................................................................................................................................................................................................................................................................................................................. $5,866.8 Total Long-term Debt and Capital Lease Obligations ........................................................................................................................................................................................................................................... 3,432.6 836.0 Shareholders’ Equity ................................................................................................................................................................................................................................................................................................................ 835.4 Common Shareholders’ Equity .......................................................................................................................................................................................................................................................................................... 17.17 Common Shareholders’ Equity Per Share .................................................................................................................................................................................................................................................................... (A) The 1997 restructuring charge was $224.8 million on a pretax basis, $162.8 million on an after-tax basis. $ $ 131.8 2.68 49,178 $ $ 2.62 50,426 1.00 $ 5,006.8 2,821.7 732.9 732.1 14.84 $ $ (57.6) (1.28) 45,084) $ $ (1.28) 45,084) .92) $ 4,990.2) 2,841.7) 655.4) 654.7) 13.36) $ 1,473.5 1,298.3 175.2 72.5 $ 102.7 $ $ 89.5 2.22 40,379 $ $ 2.10 48,924 .86 $ 4,784.1 2,664.1 774.9 609.2 14.79 $ 1,308.3 1,140.7 167.6 66.8 $ 100.8 $ $ 87.6 2.19 40,005 $ $ 2.07 48,731 .80 $ 4,057.8 2,092.5 717.8 551.8 13.44 57 MANAGEMENT’S DISCUSSION AND ANALYSIS 1998 COMPARED TO 1997 GATX CORPORATION AND SUBSIDIARIES GATX RAIL (RAIL) Rail’s gross income of $535 million increased 8.3% from 1997, with approximately 4,000 more railcars on lease throughout North America. Average rental rates in 1998 were also slightly higher. At year end 1998, there were 81,600 railcars on lease, representing 95% utilization of the total North American fleet of 85,700 cars. Utilization at the end of 1997 was almost 96%, with 77,700 cars on lease. Rail’s share of its two European affiliates’ earnings was $3 million in 1998 compared to $1 million in the prior year. The increase was primarily due to owning one of the affiliates for an entire year as Rail’s interest was acquired in the fourth quarter of 1997. Based on the revenues generated by the growing fleet, net income increased 7.0% to $67 million. Repair costs increased $10 million to support a larger fleet, but as a percentage of revenues, were consistent with 1997. Selling, general and administrative expenses increased, primarily to support a major information systems initiative. Asset ownership costs increased by 6.6% primarily due to an increase in operating lease expense. Though the fleet grew substantially, depreciation and interest did not change appreciably from 1997 due to Rail’s continued use of sale-leaseback financing. In 1998, $208 million of railcars were sold and leased back, and the resultant cost is included in operating lease expense. FINANCIAL SERVICES Financial Services’ gross income of $730 million increased $26 million from 1997. Higher lease, interest and asset remarketing income were offset in part by a significant decrease in technology equip- ment sales. Lease income was $22 million higher predominantly due to the growing leasing technology portfolio. Interest income increased $11 million as market opportunities resulted in Financial Services extending $162 mil- lion in new loans in 1998. Asset remarketing income of $93 million exceeded 1997’s record $85 million. Asset remarketing, which does not fall evenly from period to period, includes both gains from the sale of assets out of Financial Services’ own portfolio as well as residual sharing fees from the sale of managed assets. While tech- nology investing and leasing continued to grow, value-added reselling (VAR) sales of technology equipment in the U.S. and Europe experienced difficulties; sales of technology equipment decreased $31 million from the prior year. During 1998, Financial Services continued to emphasize its strategy of joining with partners to finance and manage assets. Financial Services’ share of earnings in such joint ventures was $46 million in 1998, a 64.2% increase over the prior year. Most of the increase was attributable to the joint venture formed with Pitney Bowes at the end of 1997. A number of new joint ventures were formed in 1998, including GATX Flightlease Ltd. (aircraft), Rolls-Royce and Partners Finance Ltd. (aircraft engines), and GATX Telecom Investors (telecommunications). Financial Services also made incremental investments in several existing joint ventures to acquire additional aircraft. Net income for 1998 was $67 million, exceeding 1997 by 8.1%. The earnings were achieved despite absorbing a $6 million goodwill write-down related to the VAR sector due to the market difficulties facing the business. Marine operations contributed $7 million to net income in 1998 versus $8 million in 1997, which included a $1 million remarketing gain. Financial Services’ allowance for possible losses increased by $8 million to $130 million, representing 5.9% of net investments, up from 5.4% at the end of 1997. The loss provision for 1998 was consistent with the prior year. Compared to the prior year, the asset mix of Financial Services’ portfolio at the end of 1998 showed a higher percentage of technology leasing equipment and a lower percentage of rail assets. Over $300 million was added to the technology leasing portfolio and approximately $170 million of rail assets were sold. 58 MANAGEMENT’S DISCUSSION AND ANALYSIS 1998 COMPARED TO 1997 (CONTINUED) GATX CORPORATION AND SUBSIDIARIES GATX INTEGRATED SOLTIONS GROUP GATX Integrated Solutions Group’s gross income of $587 million increased by 2.9% over 1997 with new business and growth initiatives being partially offset by the sale of the Norco, Louisiana, terminal facility in 1997. For ongoing wholly owned operations, gross income grew by 5.0% reflecting new business and improved pricing. In ISG’s ongoing bulk liquid terminal and pipeline operation, throughput and capacity utilization were 531 million barrels and 94% in 1998 compared to 527 million barrels and 92% in 1997. Space utilization for the dry goods integrated logistics operation remained at 95% in 1998 as it was in 1997. ISG’s joint ventures, which primarily serve the European and Asian markets, contributed $21 million, up 2.5% from 1997. Results in 1998 were hampered by unfavorable foreign exchange and the economic downturn in Asia but overall were comparable to 1997. During 1997, ISG recorded an after-tax charge of $163 million related to restructuring and a write-down of goodwill. Specifically, a $124 million after-tax charge was taken for the sale or closure of certain nonstrategic terminal locations and other impaired facilities. Also during 1997, ISG recorded a $39 million after-tax charge for the write-down of goodwill related to the public warehousing logistics operations. Net income of $18 million in 1998 increased significantly from 1997’s operating earnings of $9 million (before the $163 million after-tax restructuring charge and goodwill write-down) based primarily on improving chemical and petroleum market conditions, benefits from the restructuring, and lower selling, general and administrative expenses in 1998. Partially offsetting these improvements was a $3 million write-off for a customer that ceased operations and lower volumes with certain customers. CORPORATE AND OTHER Corporate and Other net expense of $18 million in 1998 was $3 million favorable to 1997 reflecting a decrease in interest expense. 59 GATX LOCATIONS OF OPERATIONS GATX CORPORATION AND SUBSIDIARIES GATX RAIL FINANCIAL SERVICES GATX INTEGRATED SOLUTIONS GROUP 60 HEADQUARTERS Chicago, Illinois BUSINESS OFFICES Valencia, California Atlanta, Georgia Chicago, Illinois Hackensack, New Jersey Philadelphia, Pennsylvania Pittsburgh, Pennsylvania Houston,Texas Mexico City, Mexico Calgary, Alberta Toronto, Ontario Montreal, Quebec MAJOR SERVICE CENTERS Colton, California Waycross, Georgia East Chicago, Indiana Hearne,Texas Tierra Blanca, Mexico Red Deer, Alberta Montreal, Quebec Moose Jaw, Saskatchewan Sarnia, Ontario HEADQUARTERS San Francisco, California OFFICES Burbank, California Tampa, Florida Chicago, Illinois Williamsville, New York HEADQUARTERS Chicago, Illinois WAREHOUSING AND LOGISTICS LOCATIONS Conway, Arkansas Little Rock, Arkansas Bell, California Industry, California Mira Loma, California Ontario, California Stockton, California Walnut, California Danbury, Connecticut Jacksonville, Florida Atlanta, Georgia Dacula, Georgia Doraville, Georgia Duluth, Georgia Bedford Park, Illinois Bloomington, Illinois Bolingbrook, Illinois Hodgkins, Illinois Normal, Illinois Romeoville, Illinois Woodridge, Illinois Indianapolis, Indiana Richmond, Indiana Seymour, Indiana Hebron, Kentucky Shreveport, Louisiana Elkridge, Maryland Coloma, Michigan Grand Rapids, Michigan Kalamazoo, Michigan Delisle, Mississippi Sardis, Mississippi Berkeley Heights, New Jersey West Patterson, New Jersey New York, New York Syracuse, New York Greensboro, North Carolina Winston-Salem, North Carolina Columbus, Ohio MINI SERVICE CENTERS Macon, Georgia Terre Haute, Indiana Geismar, Louisiana Plaquemine, Louisiana Midland, Michigan Cincinnati, Ohio Catoosa, Oklahoma Copper Hill,Tennessee Freeport,Texas (2) Cd Valles, Mexico Coatcacoalcos, Mexico Guaymas, Mexico Hibueras, Mexico Miramar, Mexico Monterrey, Mexico Orizaba, Mexico Tlalnepantla, Mexico MOBILE SERVICE UNITS Mobile, Alabama Colton, California Lake City, Florida East Chicago, Indiana Norco, Louisiana Toledo, Ohio Sydney, Australia Toronto, Canada Blagnac, France Frankfurt, Germany Singapore, Republic of Singapore Tokyo, Japan Grove City, Ohio Westerville, Ohio Oklahoma City, Oklahoma Bedford, Pennsylvania Exton, Pennsylvania Langhorn, Pennsylvania Pottstown, Pennsylvania Smyrna,Tennessee Arlington,Texas Carrolton,Texas DeSoto,Texas El Paso,Texas Grand Prairie,Texas Greenville,Texas Clearfield, Utah Seattle,Washington Racine,Wisconsin Sturtevant,Wisconsin Toronto, Canada Juarez, Mexico Mexico City, Mexico Corby, Northamptonshire Puerto Rico WAREHOUSING AND LOGISTICS AFFILIATES Los Angeles, California San Francisco, California Denver, Colorado Atlanta, Georgia Chicago, Illinois Cranberry, New Jersey Cincinnati, Ohio Dallas,Texas Pacheo, Argentina Santiago, Chile San Jose, Costa Rica TERMINAL LOCATIONS Carson, California Richmond, California San Pedro, California Orlando, Florida Tampa, Florida Argo, Illinois Carteret, New Jersey Las Cruces, New Mexico Albany, New York Masury, Ohio Galena Park,Texas Nederland,Texas Olympia,Washington Altamira, Mexico Coatcacoalcos, Mexico Guaymas, Mexico Edmonton, Alberta Red Deer, Alberta Vancouver, British Columbia Montreal, Quebec Moose Jaw, Saskatchewan AFFILIATES Buenos Aires, Argentina Vienna, Austria Hamburg, Germany Zug, Switzerland AFFILIATES Sydney, Australia San Francisco, California LaGrange, Illinois Toronto, Ontario Zug, Switzerland Elstree, United Kingdom Woking, United Kingdom Carteret, New Jersey Paulsboro, New Jersey Portland, Oregon (2) Philadelphia, Pennsylvania Galena Park,Texas Pasadena,Texas Seattle,Washington Altamira, Mexico TERMINAL AFFILIATES Antwerpen/Lillo, Belgium Lanshan, China Kawasaki, Japan Kobe, Japan Yokohama, Japan Kertih, Malaysia Jurong Town, Singapore Pulau Busing, Singapore Barcelona, Spain Bilboa, Spain Tarragona, Spain Valencia, Spain Seal Sands, United Kingdom Wymondham, United Kingdom PIPELINE LOCATIONS CALNEV PIPELINE Adelanto, California Barstow, California Colton, California Las Vegas, Nevada CENTRAL FLORIDA PIPELINE Orlando, Florida Tampa, Florida MANCHESTER JET LINE Manchester, United Kingdom PIPELINE AFFILIATE OLYMPIC PIPELINE Renton,Washington DISTILLATE AND BLENDING DISTRIBUTION AFFILIATE Houston,Texas GATX OFFICERS AND DIRECTORS GATX CORPORATION AND SUBSIDIARIES GATX BOARD OF DIRECTORS Rod F. Dammeyer Managing Partner, Equity Group Corporate Investments James M. Denny 2,3 Senior Advisor, William Blair Capital Partners, LLC Richard Fairbanks1,3 President and Chief Executive Officer, Center for Strategic & International Studies William C. Foote1,3 Chairman, President and Chief Executive Officer, USG Corporation Deborah M. Fretz1,4 Senior Vice President, Lubricants and Logistics, Sunoco, Inc. Richard A. Giesen2,4 Chairman and Chief Executive Officer, Continental Glass & Plastic, Inc. Miles L. Marsh2,3 Chairman, President and Chief Executive Officer, Fort James Corporation Michael E. Murphy 2,4 Retired: Former Vice Chairman and Chief Administrative Officer, Sara Lee Corporation John W. Rogers, Jr.1,4 President and Co-Chief Investment Officer, Ariel Capital Management, Inc. Ronald H. Zech Chairman, President and Chief Executive Officer, GATX Corporation 1 Member, Audit Committee 2 Member, Compensation Committee 3 Member, Nominating Committee 4 Member, Retirement Funds Review Committee 61 GATX OFFICERS Ronald H. Zech Chairman, President and Chief Executive Officer (Shown on page 2) David M. Edwards Senior Vice President (Shown on page 2) David B. Anderson Vice President, Corporate Development, General Counsel and Secretary Gail L. Duddy Vice President, Human Resources William J. Hasek Treasurer Brian A. Kenney Vice President and Chief Financial Officer Ralph L. O’Hara Controller Clifford J. Porzenheim Vice President, Corporate Strategy GATX CORPORATE INFORMATION GATX CORPORATION AND SUBSIDIARIES ANNUAL MEETING Friday, April 28, 2000, 9:00 a.m. Northern Trust Company Assembly Room, 6th Floor 50 South LaSalle Street Chicago, Illinois 60675 FINANCIAL INFORMATION AND PRESS RELEASES A copy of the company’s annual report on Form 10-K for 1999 and selected other information are available without charge. Corporate information and press releases may be found at http://www.gatx.com. A variety of current financial information, historical financial information, press releases and photographs are available at this site. INQUIRIES Inquiries regarding dividend checks, the dividend reinvestment plan, stock certificates, replacement of lost certificates, address changes, account consolidation, transfer procedures and year end tax information should be addressed to GATX Corporation’s Transfer Agent and Registrar: Chase Mellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 Telephone: (800) 851-9677 Internet: http://www.chasemellon.com Information relating to shareholder ownership, dividend payments, or share transfers: GATX press releases may be obtained by automated PR Newswire Company News On-Call’s automated fax service at (800) 758-5804. The company identification number for GATX is 105121. Lisa M. Ibarra, Assistant Corporate Secretary Telephone: (312) 621-6603 Fax: (312) 621-6647 Email: lmibarra@gatx.com 62 GATX Corporation welcomes and encourages questions and comments from its shareholders, potential investors, financial professionals and the public at large.To better serve interested parties, the following GATX personnel may be contacted by letter, telephone and/or fax. Requests for information or brochures may be made through GATX’s website. Many GATX publications may be directly viewed or downloaded from it. To request published financial information and financial reports, contact: GATX CORPORATION Investor Relations Department 500 West Monroe Street Chicago, Illinois 60661-3676 Telephone: (800) 428-8161 Email: ir@gatx.com Automated request line for materials: (312) 621-6300 Individual investors inquiries: Tammy McKinney, Investor Relations Coordinator Telephone: (312) 621-8799 Fax: (312) 621-6698 Email: tlmckinney@gatx.com Analysts, institutional shareholders and financial community professionals: Robert C. Lyons, Director of Investor Relations Telephone: (312) 621-6633 Email: rclyons@gatx.com Questions regarding sales, service, lease information, or customer solutions Email: cs@gatx.com GATX Rail—(312) 621-6564 Financial Services: GATX Capital Corporation—(415) 955-3200 American Steamship Company—(716) 635-0222 GATX Integrated Solutions Group—(877) 558-8784 GATX Chemical Logistics, Inc. GATX Logistics Corporation GATX Rail Logistics, Inc. GATX Terminals Corporation INDEPENDENT AUDITORS Ernst & Young LLP . S R E P A P D E L C Y C E R N O D E T N R P I S I T R O P E R L A U N N A S I H T • i x h p a r g o h t i L R E T N R P I • s u P l l a t o T Y H P A R G O P Y T • n a m r e t s e W e i l r a h C R E H P A R G O T O H P • u s t a M S N O T A R T S U L L I I • n g i s e D s i o b u D a r d n a S R E N G I S E D 

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