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1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[_] SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-5666
UNION TANK CAR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3104688
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 W. Washington Street, Chicago, Illinois 60606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 372-9500
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------------
None -
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ].
There is no voting stock held by non-affiliates of the registrant. This Annual
Report is being filed by the registrant as a result of undertakings made
pursuant to Section 15(d) of the Securities Exchange Act of 1934.
UNION TANK CAR COMPANY
FORM 10-K
Year Ended December 31, 1999
CONTENTS
Section Page
- ------- ----
Part I.
Item 1 Business........................................................... 2
Item 2 Properties......................................................... 9
Item 3 Legal Proceedings.................................................. 10
Item 4 Submission of Matters to a Vote of Security Holders................ 10
Part II.
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters................................... 11
Item 6 Selected Financial Data............................................ 11
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Item 7A Disclosures about Market Risk...................................... 15
Item 8 Financial Statements and Supplementary Data........................ 15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 36
Part III.
Item 10 Directors and Executive Officers of the Registrant................. 36
Item 11 Executive Compensation............................................. 38
Item 12 Security Ownership of Certain Beneficial Owners and Management..... 39
Item 13 Certain Relationships and Related Transactions..................... 39
Part IV.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 40
Signatures...................................................................... 41
-1-
PART I
ITEM 1. BUSINESS
General
UNION TANK CAR COMPANY (with its wholly-owned subsidiaries herein collectively
referred to, unless the context otherwise requires, as the "Company") was
organized under the laws of Delaware on September 23, 1980 and is the successor
to a business which was originally incorporated in New Jersey in 1891. The
Company is a wholly-owned subsidiary of Marmon Industrial LLC, a wholly-owned
subsidiary of Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock
of Holdings is owned, directly or indirectly, by trusts for the benefit of
certain members of the Pritzker family. As used herein, "Pritzker family" refers
to the lineal descendants of Nicholas J. Pritzker, deceased.
Railcar Leasing, Services and Sales
The principal activity of the Company is the leasing of railway tank cars and
other railcars to North American manufacturers and other shippers of chemical
products, including liquid fertilizers, petroleum products, including liquefied
petroleum gas, food products and bulk plastics. The Company owns and operates
one of the largest fleets of privately-owned railway tank cars in the world.
As of December 31, 1999, the Company's fleet was comprised of 62,207 tank cars
and 15,971 railway cars of other types. A total of 30,704 cars were added to the
lease fleet during the ten years ended December 31, 1999. These cars accounted
for approximately 42% of total railcar lease revenues during 1999. Most of the
Company's cars were built by the Company or to its specifications and the
balance was purchased from other sources.
Management estimates that tank cars carrying chemicals and acids account for the
greatest portion of total leasing revenues, followed in order by compressed
gases (particularly liquefied petroleum gas and anhydrous ammonia), refined
petroleum products (such as gasoline, fuel oils and asphalt), food products and
liquid fertilizers.
A significant portion of the revenues from the Company's non-tank car fleet
derives from hopper cars carrying bulk plastics. The remaining non-tank car
revenues are attributable to cars which serve the lumber, dry bulk chemical and
coal industries.
The Company builds tank cars primarily for use in its leasing business. In
addition, the Company builds cars for sale to others. Generally, the Company
manufactures a car following the receipt of a firm order for the lease or sale
of such car.
-2-
Substantially all of the Company's cars are leased directly to several hundred
manufacturers and other shippers under leases covering from one to several
thousand cars and for periods ranging from one to twenty years. The average term
of leases entered into during 1999 for newly-manufactured railcars was
approximately seven years. The average term of leases entered into during 1999
for used tank cars and other railcars was approximately four years. Under the
terms of most leases, the Company agrees to provide a full range of services,
including car repair and maintenance. The Company supplies relatively few cars
directly to railroads. The Company markets its cars through regional sales
offices located throughout the United States and Canada and through a sales
agent in Mexico. To ensure optimum utilization of the North American lease
fleets, the Company maintains fleet data processing systems which contain
information relative to each car, including its mechanical specifications,
maintenance and repair data and lease terms.
The Company employs a variety of methods to meet its railcar financing needs.
During 1999, the Company entered into a sale-leaseback transaction for $13.2
million, and issued $70.0 million of unsecured medium term notes and $100.0
million of senior secured notes. The Company expects that future railcar
financing needs will be met primarily with a combination of secured and
unsecured borrowings and sale-leaseback transactions.
Approximately 25% of the Company-owned fleet of railcars is pledged to secure
equipment obligations and secured notes. The remaining cars are free of liens.
The Company maintains repair facilities located at strategic points throughout
the United States and Canada. In addition to the work performed by the Company,
certain maintenance and repair work is performed for the Company's account by
railroads when railroad inspection determines the need for such work under the
interchange rules of the Association of American Railroads ("AAR").
The Company is not a common carrier and is not subject to regulation or
supervision as such. The Company's railcars are subject to regulations governing
construction, safety and maintenance promulgated by the Department of
Transportation and various other government agencies and by the AAR. These
regulations have required and may in the future require the Company to make
significant modifications to certain of its cars from time to time.
The Company's facilities for manufacturing and assembling tank cars are located
in East Chicago, Indiana; Oakville, Ontario, Canada; and Sheldon, Texas. The
Company also operates the largest network of shops in North America for
repairing and servicing railcars, as well as a fleet of specially equipped
trucks to perform repairs at customer plant sites. The principal shops are
located in Valdosta, Georgia; Muscatine, Iowa; El Dorado, Kansas; Ville Platte,
Louisiana; Marion, Ohio; Altoona, Pennsylvania; Cleveland, Longview and Sheldon,
Texas; Evanston, Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario;
Montreal, Quebec; and Regina, Saskatchewan.
-3-
Other Activities
The Company is engaged in several other activities, as described below.
Sulphur Processing
A subsidiary of the Company provides sulphur producers in Canada with various
services, including the processing of liquefied sulphur into crystalline slates
and granules and the storage and shipping of the product. The subsidiary also
designs, manufactures and sells sulphur processing plants worldwide. The
subsidiary is also engaged in the manufacturing and distribution of sulphur
bentonite products and micronutrients to the agricultural industry.
Fasteners
The Company's fastener business, which is conducted through several wholly-owned
subsidiaries, consists of manufacturing and distributing a wide range of
fasteners worldwide to the construction industry and manufacturers of furniture,
household appliances, industrial and agricultural equipment.
Containment Vessel Head Manufacturing
A subsidiary of the Company manufactures and distributes metal containment
vessel heads, primarily made of steel, to the metal containment vessel
construction industry.
Liquefied Petroleum Gas Storage
A subsidiary of the Company operates several underground liquefied petroleum gas
storage caverns in Canada as a service to producers and sellers of liquefied
petroleum gas.
Other Railway Equipment and Services
A subsidiary of the Company manufactures mobile railcar moving vehicles for
in-plant and yard switching. Other subsidiaries provide contract switching
services to companies with on-site rail yards.
Other Services
A subsidiary of the Company buys, manages, hires, and maintains intermodal tank
containers for the transport of liquids and gas.
-4-
Segment Information
The principal activity of the Company's primary industry segment is railcar
leasing, services and sales. Other activities of the Company, as described
above, plus corporate headquarters items, are shown as All Other in the
following table:
Consolidated
Railcar All Other Totals
---------- ----------- -------------
(Dollars in Millions)
1999
----
Revenues from external customers $ 767.7 $ 196.4 $ 964.1
Interest income 1.0 12.7 13.7
Interest expense 72.6 0.5 73.1
Depreciation and amortization 118.3 12.3 130.6
Income before income taxes 163.0 19.1 182.1
Segment assets 2,079.6 317.7 2,397.3
Expenditures for long-lived assets 205.0 8.2 213.2
1998
----
Revenues from external customers $ 715.3 $ 161.3 $ 876.6
Interest income 0.1 13.2 13.3
Interest expense 70.5 0.6 71.1
Depreciation and amortization 113.3 8.7 122.0
Income before income taxes 175.3 25.6 200.9
Segment assets 1,992.5 219.7 2,212.2
Expenditures for long-lived assets 254.3 4.7 259.0
1997
----
Revenues from external customers $ 710.0 $ 132.4 $ 842.4
Interest income 0.2 13.0 13.2
Interest expense 74.7 0.7 75.4
Depreciation and amortization 107.9 5.8 113.7
Income before income taxes 142.4 16.0 158.4
Segment assets 1,897.9 331.8 2,229.7
Expenditures for long-lived assets 253.6 7.7 261.3
-5-
Geographic Information
The following table presents geographic information for the Company. Revenues
are attributed to countries based on the location of customers.
Long-lived
Revenues Assets
---------- ------------
(Dollars in Millions)
1999
----
United States $ 788.5 $ 1,365.8
Canada 153.8 530.7
Other countries 21.8 33.1
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Consolidated total $ 964.1 $ 1,929.6
========== ============
1998
----
United States $ 676.6 $ 1,312.9
Canada 167.8 491.0
Other countries 32.2 34.6
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Consolidated total $ 876.6 $ 1,838.5
========== ============
1997
----
United States $ 653.5 $ 1,256.1
Canada 171.1 502.6
Other countries 17.8 35.5
---------- ------------
Consolidated total $ 842.4 $ 1,794.2
========== ============
Major Customers
Revenues from any one customer did not exceed 10% of consolidated or industry
segment revenues.
Raw Materials
The Company purchases raw materials from a variety of suppliers, with no one
supplier being significant. In the opinion of management, the Company will have
adequate availability of raw materials in the future.
-6-
Foreign Operations
The Company does not believe that there are other than normal business risks
attendant to its foreign operations.
Competition
All the activities of the Company are in competition with similar activities
carried on by other companies. In particular, there are several companies
engaged in the business of leasing tank cars in the United States and Canada.
The principal competitors are General American Transportation Corporation
(including its Canadian affiliate, Canadian General Transit Company, Limited),
General Electric Railcar Services Corporation, and ACF Industries, Incorporated.
The principal competitive factors are price, service and product design. The
Company's integration of its North American engineering, manufacturing, repair
and leasing activities has enhanced its ability to provide competitive products
and services to its customers.
Railcar Supply and Demand
The demand for tank cars and bulk plastic hopper cars is generally met with a
combination of the industry's existing fleet and new car additions. The
industry's generally high overall utilization of the tank car and bulk plastic
covered hopper car fleets is evidence of an appropriate level and mix of
equipment to meet existing car demands. New railcars are needed to satisfy
growth, specialized requirements, or the desire of certain customers to utilize
newer equipment. Since railcars are generally built to customer order, the
supply of new railcars generally stays in reasonable balance with demand.
The major underlying factors affecting demand for new railcars are: (a) the rate
of growth of the overall economy, (b) growth of certain industry segments,
manufacturers, or shippers, particularly involving significant new or expanded
production operations, and (c) replacement of aged, obsolete, or worn out
railcars.
Manufacturing Backlog
The Company builds tank cars primarily for use in its leasing business and the
number of cars added in any one year is a small percentage of the Company's
lease fleet. Additionally, for tank cars built for sale to customers, the
Company delivers against orders within a relatively brief period of time.
Therefore, backlog is not material to the Company's business or an understanding
thereof.
Employees
As of December 31, 1999, the Company had approximately 4,910 employees.
-7-
Environmental Matters
The Company believes that all of its facilities are in substantial compliance
with applicable laws and regulations relating to environmental protection. Over
the past several years, the Company has attempted to identify and remediate
potential problem areas. In 1999, the Company spent approximately $6.6 million
on remediation and related matters, compared with $5.7 million and $7.8 million
in 1998 and 1997, respectively. The Company expects to spend approximately $7.0
million in 2000 on similar activities.
The Company has been designated as a Potentially Responsible Party ("PRP") by
the EPA at two sites: Auto Ion Chemical Company, Kalamazoo, Michigan and
Whitehouse Waste Oil Pits Site, Jacksonville, Florida. Costs incurred to date
have not been material, either individually or in the aggregate. Because of the
level of the Company's involvement at these sites, management believes that
future costs related to these sites will not be material, either individually or
in the aggregate. The Company has not entered into any cost sharing arrangements
with other PRP's that make it reasonably possible the Company will incur
material costs beyond its pro rata share. Further, management does not believe
that any problems or uncertainties as to the financial liabilities of other
PRP's make it reasonably possible the Company will incur material costs beyond
its pro rata share at these sites. The Company's accruals for these sites are
based on the amount it reasonably expects to pay with respect to the sites.
Management believes that amounts accrued for remedial activities and
environmental liabilities (which in the aggregate are not material) are
adequate.
-8-
ITEM 2. PROPERTIES
In the opinion of management, the Company's properties are in good condition,
substantially utilized and adequate to meet the Company's current and reasonably
anticipated future needs.
The Company estimates that its plant facilities were utilized during the year at
an average of approximately 80% of productive capacity for railcar
manufacturing, 75% for railcar servicing and repair, 75% for sulphur processing,
85% for fastener production, 65% for containment vessel head manufacturing, 95%
for liquefied petroleum gas storage, and 60% for railcar moving vehicles
manufacturing.
Railcars
The Company owns approximately 86% of its total lease fleet of 78,178 railcars,
of which 62,207 are tank cars and 15,971 are other railway freight cars. Of the
approximately 67,060 owned cars, 50,053 are free of liens. Cars which are not
owned are leased from others under long-term net leases.
Railcar Manufacturing and Assembling Facilities
The facilities for the manufacturing and assembling of railcars are located at
East Chicago, Indiana; Oakville, Ontario, Canada; and Sheldon, Texas, together
occupying approximately 170 acres.
Car Servicing and Repair Shops
The Company operates a network of shops for repairing and servicing railcars.
The principal shops owned by the Company are located at Valdosta, Georgia;
Muscatine, Iowa; El Dorado, Kansas; Ville Platte, Louisiana; Marion, Ohio;
Altoona, Pennsylvania; Cleveland, Longview, and Sheldon, Texas; Evanston,
Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario; Montreal, Quebec; and
Regina, Saskatchewan. Several other repair shops and small repair points are
strategically located throughout the United States and Canada.
Sulphur Processing
A subsidiary of the Company owns facilities in Canada which process liquefied
sulphur into crystalline slates and granules and handle the formed product. The
Company also owns facilities in North America for the manufacture and
distribution of sulphur bentonite products and micronutrients.
Fasteners
The Company owns (either directly or through its subsidiaries) fastener
manufacturing facilities in Ashland, Ohio; Milton, Ontario; Montreal, Quebec;
and Gaffney, South Carolina. In addition, the Company leases several small
plants in the United States, Canada, China, and Sweden.
Containment Vessel Head Manufacturing Facilities
A subsidiary of the Company owns a metal containment vessel head manufacturing
facility in Sheldon, Texas.
Liquefied Petroleum Gas Storage Facilities
A subsidiary of the Company owns several underground liquefied petroleum gas
storage caverns in Canada.
-9-
Other Railway Equipment Facilities
A subsidiary of the Company owns a mobile railcar moving vehicle manufacturing
facility in LaGrange, Georgia.
Other Properties
The Company and its subsidiaries maintain numerous sales and business offices
and warehouses, most of which are leased, throughout North America and Europe.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries have been named as defendants in a number of
lawsuits and certain claims are pending. The Company has accrued what it
reasonably expects to pay to resolve such claims, including legal fees, and, in
the opinion of management, the ultimate resolution of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity. See discussion of Environmental Matters in Item 1 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-10-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
For the year ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------- ------------- ------------
(Dollars in Thousands)
Services and net sales $ 964,109 $ 876,643 $ 842,354 $ 680,642 $ 725,712
Net income 116,557 127,421 101,250 102,583 84,465
Ratio of earnings to
fixed charges 2.96 x 3.23 x 2.74 x 2.84 x 2.41 x
At year end:
Total assets $ 2,397,319 $ 2,212,175 $ 2,229,664 $ 2,006,820 $ 2,003,346
Long-term obligations 941,551 821,470 858,656 528,344 732,207
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This annual report on Form 10-K for the year ended December 31, 1999 contains
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth herein.
1999 versus 1998
Results of Operations
- ---------------------
Service revenues increased $44.7 million primarily due to the effects of
railcars added to the lease fleet and the acquisition in the fourth quarter of
1998 of a company which provides contract switching services, partly offset by
weaker sulphur processing activities.
Sales revenues increased $42.7 million primarily due to increased sales of
railcars and sales of mobile railcar moving vehicles by a company which was
acquired in the fourth quarter of 1998.
General and administrative expenses increased $11.1 million primarily due to the
acquisition of businesses in the fourth quarter of 1998.
Gross margin percentages decreased from the comparable period in 1998 primarily
due to increased railcar maintenance expenses and weaker demand for sulphur
products.
-11-
Financial Condition
- -------------------
Operating activities provided $288.7 million of cash in 1999. These funds, along
with the proceeds from the issuance of debt and sale-leaseback transaction, were
used to provide for railcar additions, advance funds to parent, pay dividends to
the Company's stockholder, service borrowed debt obligations, and fund the
acquisition of businesses. It is the Company's policy to pay to its stockholder
a quarterly dividend equal to 70% of net income. To the extent that the Company
generates cash in excess of its operating needs, such funds are advanced to its
parent and bear interest at commercial rates. Conversely, when the Company
requires additional funds to support its operations, prior advances are repaid
by its parent. No restrictions exist regarding the amount of dividends which may
be paid or advances which may be made by the Company to its parent.
In 1999, the Company spent $213.2 million for the construction and purchase of
railcars and other fixed assets and $11.8 million for the purchase of assets
engaged in managing intermodal tank containers, and other assets.
Of the capital expenditures for construction and purchase of railcars and other
fixed assets over the past five years, approximately 89% have been for railcars.
Since all material capital expenditures for railcars are incurred subsequent to
receipt of firm customer orders, such expenditures are discretionary to the
Company based on its desire to invest in those particular railcars.
In 1999, the Company issued $70.0 million in unsecured medium term notes, $100.0
million in senior secured notes, and entered into a sale-leaseback transaction
for $13.2 million. Other financing activities of the Company included $62.9
million for principal repayments on borrowed debt and $82.0 million for cash
dividends. Net cash provided by financing activities was $43.6 million.
Management expects that the future cash to be provided by operating activities,
long-term financings, and repayment of funds previously advanced to parent will
be adequate to provide for the continued expansion of the Company's business and
enable it to meet its debt service obligations.
The following table presents the scheduled cash inflows and outflows over the
next five years based on leases and indebtedness outstanding as of December 31,
1999:
2000 2001 2002 2003 2004
----------- ------------ ------------ ------------ -----------
(Dollars in Millions)
Cash Inflows
- ------------
Minimum future lease rentals $ 419.1 $ 336.5 $ 262.3 $ 191.4 $ 125.9
Cash Outflows
- -------------
Minimum future lease payments 55.5 59.7 57.1 57.7 60.7
Principal amount of obligations 42.5 77.8 76.2 47.3 79.9
----------- ------------ ------------ ------------ -----------
Excess (Deficit) of inflows over outflows $ 321.1 $ 199.0 $ 129.0 $ 86.4 $ ( 14.7)
=========== ============ ============ ============ ===========
The minimum future lease rentals above relate to leases in effect at December
31, 1999. Based upon its historical experience, the Company expects that the
railcars (other than those which are retired in the ordinary course of business)
will be re-leased at the expiration of such leases. The rentals under such
future leases cannot be ascertained and are not reflected above.
-12-
The Company has consistently maintained high fleet utilization. Although the
Company's lease fleet utilization decreased during 1999, utilization has
averaged 98% during the last five years. Utilization rates of the Company's
existing railcars are driven by the long-term requirements of manufacturers and
shippers of chemical products, petroleum products, food products, and bulk
plastics, and the suitability of the Company's fleet to meet such demand. The
potential impact of short-term fluctuations in demand is tempered by the
longer-term nature of the leases, which average four years for existing
equipment and longer for new equipment.
The Company has not experienced any significant impact of inflation and changing
prices on its financial position or results of operations over the last several
years.
The Company's Canadian subsidiaries periodically enter into foreign currency
forward contracts to hedge against U.S. dollar exposures. Foreign currency
forward contracts, all with initial maturities of less than one year, amounted
to $9.1 million and $3.4 million at December 31, 1999 and 1998, respectively.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which the Company is required to adopt effective
January 1, 2001. This Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not believe the
effect of adoption will have a material impact on the Company's financial
statements.
1998 versus 1997
Results of Operations
- ---------------------
Services revenues increased $19.9 million, primarily due to the effect of
railcars added to the lease fleet in 1997 and 1998.
Net sales revenues increased $14.4 million. The increase primarily resulted from
the Company's sulphur service processing operations with the remaining increase
primarily due to increased fastener sales, partially offset by lower sales of
covered hopper railcars.
Gain on sale of assets increased due to the sale of certain future income rights
retained as a condition of the May 1996 sale of a storage facility used in the
liquefied petroleum gas storage operations.
Gross margin percentages increased from the comparable period in 1997 due to
decreased railcar maintenance expenses, and improved sale margins for tank cars,
sulphur products and fasteners.
-13-
Financial Condition
- -------------------
Operating activities provided $256.0 million of cash in 1998. These funds, along
with the issuance of unsecured debt and the sale-leaseback transaction, were
used to provide financing for railcar additions, service borrowed debt
obligations, advance funds to parent and pay dividends to the Company's
stockholder. It is the Company's policy to pay to its stockholder a quarterly
dividend equal to 70% of net income. To the extent that the Company generates
cash in excess of its operating needs, such funds are advanced to its parent and
bear interest at commercial rates. Conversely, when the Company requires
additional funds to support its operations, prior advances are repaid by its
parent. No restrictions exist regarding the amount of dividends which may be
paid or advances which may be made by the Company to its parent.
In 1998, the Company spent $259.0 million for the construction and purchase of
railcars and other fixed assets and $22.7 million for the purchase of assets
engaged in the manufacturing and distribution of sulphur bentonite and
micronutrients, and other assets.
Of the capital expenditures for construction and purchase of railcars and other
fixed assets over the past five years, approximately 90% have been for railcars.
Since all material capital expenditures for railcars are incurred subsequent to
receipt of firm customer orders, such expenditures are discretionary to the
Company based on its desire to invest in those particular railcars.
In 1998, the Company issued $80.0 million in unsecured notes and entered into a
sale-leaseback transaction for $130.0 million. Other financing activities of the
Company included $188.8 million for principal repayments on borrowed debt and
$48.0 million for cash dividends. Net cash used in financing activities was
$26.2 million.
Year 2000 Readiness Disclosure
- ------------------------------
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $5.5 million in cumulative costs of projects dedicated
solely to the Year 2000 remediation. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
-14-
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments is the potential
loss in fair value arising from adverse changes in interest rates. Under its
current policies, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes.
The following table provides information about the Company's debt obligations
that are sensitive to changes in interest rates. The table presents principal
cash flows and related weighted-average interest rates by expected maturity
dates and estimated fair value of the Company's debt obligations.
Fair Value
2000 2001 2002 2003 2004 Thereafter Total 12-31-99
------- ------- ------- ------- ------- ------------ ------- -----------
(Dollars in Millions)
Fixed rate debt $ 42.3 $ 77.8 $ 75.9 $ 47.1 $ 79.9 $ 660.3 $ 983.3 $ 1,010.6
Average interest rate 8.76% 7.73% 7.28% 8.30% 7.44% 6.98% 7.32%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors........................................... 16
Financial Statements
Consolidated statement of income for each of the three years in
the period ended December 31, 1999..................................... 17
Consolidated balance sheet - December 31, 1999 and 1998.................. 18
Consolidated statement of stockholder's equity for each of the three
years in the period ended December 31, 1999............................ 19
Consolidated statement of cash flows for each of the three
years in the period ended December 31, 1999............................ 20
Notes to consolidated financial statements............................... 21
-15-
REPORT OF INDEPENDENT AUDITORS
TO UNION TANK CAR COMPANY
We have audited the accompanying consolidated balance sheet of Union Tank Car
Company and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholder's equity 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
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Union
Tank Car Company and subsidiaries at December31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 2000
-16-
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
Revenues
Services (leasing and other) $ 624,818 $ 580,092 $ 560,174
Net sales 339,291 296,551 282,180
--------- --------- ---------
964,109 876,643 842,354
Interest income 13,665 13,255 13,234
(Loss) Gain on sale of assets (1,659) 6,383 102
Other income 12,190 10,338 5,165
--------- --------- ---------
988,305 906,619 860,855
Costs and expenses
Cost of services 364,383 320,280 318,294
Cost of sales 293,976 250,720 251,008
General and administrative 74,703 63,610 57,828
Interest expense 73,117 71,131 75,356
--------- --------- ---------
806,179 705,741 702,486
--------- --------- ---------
Income before income taxes 182,126 200,878 158,369
Provision for income taxes
Current 41,800 60,867 51,727
Deferred income taxes
and investment tax credits 23,769 12,590 5,392
--------- --------- ---------
65,569 73,457 57,119
--------- --------- ---------
Net income $ 116,557 $ 127,421 $ 101,250
========= ========= =========
Ratio of earnings to fixed charges 2.96 x 3.23 x 2.74 x
========= ========= =========
See Notes to Consolidated Financial Statements.
-17-
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
December 31,
------------------------
1999 1998
----------- -----------
Assets
- ------
Cash and cash equivalents $ 50,607 $ 58,423
Accounts receivable, primarily due within one year,
less allowance for doubtful accounts of $3,952 in
1999 and $4,121 in 1998 76,160 82,729
Inventories 85,165 90,123
Prepaid expenses and deferred charges 9,635 11,411
Advances to parent company,
principally at LIBOR plus 1% 246,168 130,940
Railcar lease fleet, net 1,653,495 1,575,014
Fixed assets, net 189,803 177,055
Investment in direct financing lease 34,012 32,629
Other assets 52,274 53,851
----------- -----------
Total assets $ 2,397,319 $ 2,212,175
=========== ===========
Liabilities, Deferred Items and Stockholder's Equity
- ----------------------------------------------------
Accounts payable $ 24,361 $ 20,082
Accrued rent 70,173 62,056
Accrued liabilities 185,286 190,841
Borrowed debt 984,067 868,421
----------- -----------
1,263,887 1,141,400
Deferred items
Deferred income taxes and investment tax credits 465,793 437,693
Stockholder's equity
Common stock, no par value; 1,000 shares authorized
and issued 106,689 106,689
Additional capital 6,346 6,346
Retained earnings 554,604 520,047
----------- -----------
Total stockholder's equity 667,639 633,082
Total liabilities, deferred items and ----------- -----------
stockholder's equity $ 2,397,319 $ 2,212,175
=========== ===========
See Notes to Consolidated Financial Statements.
-18-
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Common Additional Retained
Stock Capital Earnings Total
----- ------- -------- -----
Balance at December 31, 1996 $ 106,689 $ 6,346 $ 450,715 $ 563,750
Net income - - 101,250 101,250
Cash dividends - - (70,000) (70,000)
--------- ------- --------- ---------
Balance at December 31, 1997 106,689 6,346 481,965 595,000
Net income - - 127,421 127,421
Cash dividends - - (48,000) (48,000)
Non-cash dividends - - (41,339) (41,339)
--------- ------- --------- ---------
Balance at December 31, 1998 106,689 6,346 520,047 633,082
Net income - - 116,557 116,557
Cash dividends - - (82,000) (82,000)
--------- ------- --------- ---------
Balance at December 31, 1999 $ 106,689 $ 6,346 $ 554,604 $ 667,639
========= ======= ========= =========
See Notes to Consolidated Financial Statements.
19
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
For the Year Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income $ 116,557 $ 127,421 $ 101,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 130,611 121,998 113,663
Gain on disposition of railcars and other fixed assets (3,895) (5,699) (4,951)
Deferred taxes 23,769 12,590 5,392
Other non-cash income and expenses 493 799 1,863
Changes in operating assets and liabilities 21,176 (1,062) 134
--------- --------- ---------
Net cash provided by operating activities 288,711 256,047 217,351
Cash flows from investing activities:
Construction and purchase of railcars and
other fixed assets (213,246) (259,007) (261,306)
Increase in advance to parent (126,314) (520) (57,105)
(Increase) Decrease in other assets and investments (3,646) 7,679 12,849
Proceeds from disposals of railcars
and other fixed assets 11,618 9,814 9,767
Purchases of businesses, net of cash acquired (11,764) (22,731) (10,642)
--------- --------- ---------
Net cash used in investing activities (343,352) (264,765) (306,437)
Cash flows from financing activities:
Proceeds from issuance of borrowed debt 175,234 80,550 400,000
Proceeds from sale-leaseback transactions 13,200 130,018 -
Principal payments of borrowed debt (62,855) (188,771) (210,143)
Cash dividends (82,000) (48,000) (70,000)
--------- --------- ---------
Net cash provided by (used in) financing activities 43,579 (26,203) 119,857
Effect of exchange rates on cash and cash equivalents 3,246 (6,365) (2,977)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (7,816) (41,286) 27,794
Cash and cash equivalents at beginning of year 58,423 99,709 71,915
--------- --------- ---------
Cash and cash equivalents at end of year $ 50,607 $ 58,423 $ 99,709
========= ========= =========
See Notes to Consolidated Financial Statements
-20-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Ownership
UNION TANK CAR COMPANY (with its wholly-owned subsidiaries herein collectively
referred to, unless the context otherwise requires, as the "Company") is a
wholly-owned subsidiary of Marmon Industrial LLC ("MIC") and a subsidiary of
Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock of Holdings
is owned, directly or indirectly, by trusts for the benefit of certain members
of the Pritzker family. As used herein, "Pritzker family" refers to the lineal
descendants of Nicholas J. Pritzker, deceased.
2. Summary of Accounting Principles and Practices
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid debt instruments purchased
with an original maturity of three months or less.
Lessor Accounting
Operating Leases - Most of the Company's railcar leases are classified as
operating leases. Aggregate rentals from operating leases are reported as
revenue ratably over the life of the lease. Expenses, including depreciation and
maintenance, are charged as incurred.
Direct Financing Leases - Some of the Company's railcar and other rental
equipment leases are classified as direct financing leases. Gross investment in
leases (minimum lease payments plus estimated residual values) less the cost of
the equipment is designated as unearned income. This unearned income is
recognized over the life of the lease based upon the "constant yield method" or
similar methods which generally result in an approximate level rate of return on
the investment.
Revenue Recognition
Revenue from sales of products is generally recognized upon shipment to
customers.
Depreciation and Fixed Assets Accounting
Railcars and fixed assets are recorded at cost less accumulated depreciation.
These assets are depreciated to salvage value over their estimated useful lives
on the straight-line method. The estimated useful lives are principally:
railcars, 25-30 years; buildings and improvements, 20-30 years; and machinery
and equipment, 3-20 years.
-21-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cost of major conversions and betterments are capitalized and depreciated
over their estimated useful lives or, if shorter, the remaining useful lives of
the related assets. Maintenance and repairs are charged to expense when
incurred.
Gains or losses on disposals are included in other income, except for those
related to railcar disposals which are included in cost of services.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
Deferred Investment Tax Credits
United States investment tax credits (as generated through 1986 and to the
extent not transferred to lessees) and Canadian investment tax credits result in
a reduction of current or deferred income taxes and are due primarily to
investments in certain new railcars. Investment tax credits retained are
deferred and amortized over the estimated useful lives of the related assets.
Foreign Currency Translation
All assets and liabilities are translated at exchange rates in effect at the
date of translation. Average exchange rates are used for revenues, costs and
expenses and income taxes.
Translation adjustments and transaction gains and losses are assumed by the
Company's parent. For the years ended December 31, 1999, 1998 and 1997, MIC
absorbed a loss of $585, a gain of $1,968, and a gain of $504, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Fair Value of Financial Instruments
All book value amounts for financial instruments approximate the instruments'
fair value except for the borrowed debt discussed in Note 7.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
-22-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Railcar Lease Data
Railcars are leased directly to several hundred shippers, located throughout
North America. The Company leases to a wide variety of customers, and no
customer accounted for more than 10% of consolidated lease revenues. Each lease
involves one to several thousand cars, normally for periods ranging from one to
twenty years. The average term of leases entered into during 1999 for
newly-manufactured cars was approximately seven years. The average term of
leases entered into during 1999 for used tank cars and other railcars was
approximately four years. Under the terms of most of the leases, the Company
agrees to provide a full range of services including car repair and maintenance.
Minimum future lease rentals to be received on the railcar lease fleet
(including railcars leased from others) were as follows as of December 31, 1999:
Direct
Financing Operating
Leases Leases Total
--------- ----------- -----------
2000 $ 3,932 $ 415,150 $ 419,082
2001 2,138 334,395 336,533
2002 - 262,327 262,327
2003 - 191,362 191,362
2004 - 125,880 125,880
2005 and thereafter - 296,041 296,041
--------- ----------- -----------
Totals $ 6,070 $ 1,625,155 $ 1,631,225
========= =========== ===========
The investment in railcars on direct financing leases is recoverable from future
lease payments and estimated residual values. Details of this investment, which
is classified in the accompanying consolidated balance sheet under railcar lease
fleet, are as follows:
December 31,
-------------------------
1999 1998
-------- --------
Minimum future lease rentals $ 6,070 $ 9,261
Estimated residual values 8,238 7,785
-------- --------
Gross investment 14,308 17,046
Less unearned income (181) (1,598)
-------- --------
Net investment $ 14,127 $ 15,448
======== ========
Classified as
Railcar lease fleet (cost) $ 27,459 $ 25,951
Less accumulated depreciation (13,332) (10,503)
-------- --------
$ 14,127 $ 15,448
======== ========
-23-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Railcar Lease Fleet and Fixed Assets
December 31,
----------------------------
1999 1998
----------- -----------
Railcar lease fleet
Gross cost $ 2,935,954 $ 2,769,163
Less accumulated depreciation (1,282,459) (1,194,149)
----------- -----------
$ 1,653,495 $ 1,575,014
=========== ===========
Fixed assets, at cost
Land $ 8,196 $ 7,882
Buildings and improvements 121,859 118,740
Machinery and equipment 297,318 265,306
----------- -----------
427,373 391,928
Less accumulated depreciation (237,570) (214,873)
----------- -----------
$ 189,803 $ 177,055
=========== ===========
5. Investment in Direct Financing Lease
In 1987, one of the Company's Canadian subsidiaries entered into a Canadian
dollar denominated lease of a passenger airplane to a scheduled commercial air
carrier for an 18 year period.
Minimum future rentals to be received on the lease are as follows at December
31, 1999:
2000 $ 5,802
2001 5,802
2002 5,802
2003 5,802
2004 5,802
2005 5,802
--------
Total $ 34,812
========
-24-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The investment is recoverable from future lease payments and estimated residual
value, as follows:
December 31,
--------------------------
1999 1998
--------- --------
Minimum future lease rentals $ 34,812 $ 36,859
Estimated residual value 16,436 15,533
--------- --------
Gross investment 51,248 52,392
Less unearned income (17,236) (19,763)
--------- --------
Net investment $ 34,012 $ 32,629
========= ========
6. Lease Commitments
The Company as lessee has entered into long-term leases for certain railcars and
various manufacturing, office and warehouse facilities.
The railcar lease fleet includes the following capitalized leases:
December 31,
-------------------------
1999 1998
-------- --------
Capitalized lease cost $ 16,384 $ 16,415
Less accumulated depreciation (9,494) (8,980)
-------- --------
$ 6,890 $ 7,435
======== ========
In 1999, the Company entered into a sale-leaseback transaction with a financial
institution pursuant to which it sold and leased back an aggregate of $13,200 in
railcars. The Company has an option to purchase all of the railcars at a fixed
purchase price on January 31, 2019.
In 1998, the Company entered into a sale-leaseback transaction with a trust for
the benefit of an institutional investor pursuant to which it sold and leased
back an aggregate of $130,018 in railcars. The Company has an option to purchase
all or a portion of the railcars at a fixed purchase price on (i) January 2,
2009, (ii) March 30, 2014 (the base term lease expiration date) and (iii) March
30, 2021 (the end of the optional lease renewal term).
The exercise price of the fixed price purchase options is equal to the projected
future fair market value of the subject railcars, as determined by an
independent appraiser.
-25-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1999, future minimum rental commitments for all noncancelable
leases are as follows:
Operating Leases
---------------------------------------------
Capitalized Sale- Other Total
Leases Leaseback Operating Operating
----------- --------- --------- ---------
2000 $ 91 $ 52,645 $ 2,763 $ 55,408
2001 84 57,130 2,472 59,602
2002 - 55,360 1,726 57,086
2003 - 56,030 1,628 57,658
2004 - 59,170 1,482 60,652
2005 and thereafter - 519,280 19,855 539,135
--------- --------- --------- ---------
175 $ 799,615 $ 29,926 $ 829,541
========= ========= =========
Less amount representing interest (32)
---------
Present value of minimum lease payments 143
Less current portion (69)
---------
Long-term obligation at December 31, 1999 $ 74
=========
Minimum future sublease revenue to be received under existing capitalized and
sale-leaseback leases as of December 31, 1999 is presented below. Future
sublease revenue under other existing operating leases is not material and is
primarily included in other income. The Company expects that the subleased
railcars will be re-leased at the expiration of such leases. The rentals under
such future subleases cannot be ascertained and therefore are not reflected in
this table.
Sale-
Capitalized Leaseback
Leases Leases
----------- ------------
2000 $ 2,508 $ 61,254
2001 1,675 54,198
2002 - 46,489
2003 - 34,100
2004 - 23,196
2005 and thereafter - 71,850
----------- ------------
$ 4,183 $ 291,087
=========== ============
Sublease rentals recorded as revenue for the years ended December 31, 1999, 1998
and 1997 were approximately $80,000, $71,000 and $65,000, respectively.
Rentals charged to costs and expenses were $61,531, $57,191, and $48,101 in
1999, 1998, and 1997, respectively.
-26-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Borrowed Debt
December 31,
------------------------
1999 1998
--------- ---------
Unsecured notes, due from 2001 - 2009 at 5.78% - 7.45%
(average rate 6.86% as of December 31, 1999 and 6.98% as of
December 31, 1998) $ 550,000 $ 480,000
Equipment obligations, payable periodically through 2009 at
6.50% - 11.80% (average rate 8.07% as of December 31, 1999
and 8.29% as of December 31, 1998) 308,307 367,627
Senior Secured Notes, 6.79%, due in 2010 100,000 -
Other long-term borrowings, payable periodically through
June 16, 2014 (average rate of 10.73% as of December 31,
1999 and 12.13% as of December 31, 1998) 25,760 20,794
--------- ---------
$ 984,067 $ 868,421
========= =========
Equipment obligations are secured by railcars with an original cost of $827,357
and $941,550 at December 31, 1999 and 1998, respectively. The above equipment
obligations include $136 and $188 of capitalized leases at December 31, 1999 and
1998, respectively.
In March 1999, the Company issued $45,000 principal amount of unsecured Medium-
Term Notes. The notes bear interest at rates between 6.00% and 6.35% with
maturities ranging from three to nine years. Interest is payable semiannually on
March 1 and September 1, commencing September 1, 1999.
In April 1999, the Company issued $25,000 principal amount of unsecured Medium-
Term Notes. The notes bear interest at 5.91% with maturity on May 1, 2002.
Interest is payable semiannually on March 1 and September 1, commencing
September 1, 1999.
In May 1999, the Company issued $100,000 principal amount of Senior Secured
Notes. The notes bear interest at 6.79% per annum and mature on May 1, 2010.
Interest on the notes is payable semiannually on May 1 and November 1,
commencing November 1, 1999. The notes are secured by railcars with an original
cost of $133,347.
The Company's Canadian subsidiaries have approximately $12,802 of credit lines
available on a no-fee basis. No amounts were outstanding as of December 31, 1999
and 1998.
Maturities of debt obligations for the years 2000 - 2004 are $323,736 as
follows: $42,516 in 2000, $77,790 in 2001, $76,190 in 2002, $47,315 in 2003 and
$79,925 in 2004.
-27-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair value of borrowed debt is as follows:
December 31,
----------------------------
1999 1998
----------- ---------
Unsecured notes $ 574,789 $ 510,586
Equipment obligations 313,691 399,669
Senior Secured Notes 94,453 -
Other long-term borrowings 28,422 26,090
----------- ---------
$ 1,011,355 $ 936,345
=========== =========
The current fair value of the Company's borrowed debt is estimated by
discounting the future interest and principal cash flows at the Company's
estimated incremental borrowing rate at the respective year-end for debt with
similar maturities.
8. Income Taxes
The Company is included in the consolidated U.S. federal income tax return of
Holdings. Under an arrangement with MIC, federal income taxes, before
consideration of investment tax credits, are computed as if the Company files a
separate consolidated return. For this computation, the Company generally uses
tax accounting methods which minimize the current tax liability (these methods
may differ from those used in the consolidated tax return). Tax liabilities are
remitted to, and refunds are obtained from, MIC on this basis. If deductions and
credits available to Holdings' entire consolidated group exceed those which can
be used on the return, allocation of the related benefits between the Company
and others will be at the sole discretion of Holdings. As a member of a
consolidated federal income tax group, the Company is contingently liable for
the federal income taxes of the other members of the consolidated group.
Undistributed earnings of the Company's non-U.S. subsidiaries reflect full
provision for non-U.S. income taxes. However, since the earnings are
indefinitely reinvested in non-U.S. operations, no provision has been made for
taxes that might be payable upon remittance of such earnings nor is it
practicable to determine the amount of any such liability.
-28-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the provision for income taxes:
1999 1998 1997
-------- -------- --------
State
Current $ 1,694 $ 2,232 $ 1,221
Deferred 1,014 277 860
Federal
Current 22,449 29,760 30,417
Deferred and investment tax credit 27,048 17,587 9,212
Foreign
Current 17,657 28,875 20,089
Deferred and investment tax credit (4,293) (5,274) (4,680)
--------- --------- ---------
Total $ 65,569 $ 73,457 $ 57,119
========= ========= =========
In 1999, 1998, and 1997, the Company paid foreign withholding taxes of $2,112,
$2,594, and $1,481, respectively.
Income tax expense is based upon domestic and foreign income before taxes as
follows:
1999 1998 1997
--------- --------- ---------
Domestic $ 153,029 $ 153,607 $ 125,309
Foreign 29,097 47,271 33,060
--------- --------- ---------
Total $ 182,126 $ 200,878 $ 158,369
========= ========= =========
Income tax effects of significant items which resulted in effective tax rates of
36.0% in 1999, 36.6% in 1998, and 36.1% in 1997 follow:
1999 1998 1997
--------- --------- ---------
Federal income taxes at 35% statutory rate $ 63,744 $ 70,307 $ 55,429
Increase (decrease) resulting from:
Amortization of investment tax credits (2,013) (2,139) (2,275)
State income taxes, net of federal income
tax benefit 2,115 1,728 1,654
Excess tax provided on foreign income 2,517 4,408 3,624
Other, net (794) (847) (1,313)
--------- --------- ---------
Total income taxes $ 65,569 $ 73,457 $ 57,119
========= ========= =========
The excess tax on foreign income represents differences due to higher foreign
tax rates and foreign tax credits not benefited.
-29-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Components of net
deferred tax balances are as follows:
1999 1998
---------- ----------
Excess of tax over book depreciation $ (470,850) $ (442,169)
Other (33,506) (34,764)
---------- ----------
Gross liabilities (504,356) (476,933)
Expenses per books not yet deductible for tax 29,476 31,326
Other 22,702 23,312
---------- ----------
Gross assets 52,178 54,638
Deferred investment tax credits (13,615) (15,398)
---------- ----------
Net deferred income tax liability $ (465,793) $ (437,693)
========== ==========
The above assets exclude certain state deferred income tax assets related to
loss carryforwards (which expire over the next nine years) in the gross amount
of $4,000 at December 31, 1999 and $5,200 at December 31, 1998.
9. Contingencies
The Company and its subsidiaries have been named as defendants in a number of
lawsuits and certain claims are pending. The Company has accrued what it
reasonably expects to pay to resolve such claims, and, in the opinion of
management, their ultimate resolution will not have a material effect on the
Company's consolidated financial position or results of operations.
As part of its risk management plan, the Company self-insures certain levels of
its property damage, general liability and products liability exposures, as well
as certain workers' compensation liabilities in states where it is authorized to
do so. The Company maintains no property damage insurance on its railcars. The
Company has accrued for the estimated costs of reported, as well as incurred but
not reported, self-insured claims. The Company reserves the full estimated value
of claims. It does not discount its claims liability.
The Company has certain environmental matters currently pending, none of which
are significant to the Company's results of operations or financial condition,
either individually or in the aggregate. See further discussion of such matters
under the "Environmental Matters" caption of Item 1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
-30-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Pension Benefits
Substantially all of the Company's employees are covered by discretionary
contribution or defined benefit retirement plans.
Costs of the discretionary contribution pension plans are accrued in amounts
determined on the basis of percentages, generally established annually by the
Company, of employee compensation of the various units covered by such plans.
The contributions are funded as accrued. Discretionary and defined contribution
plan expense for 1999, 1998 and 1997 was $9,602, $8,175, and $6,830,
respectively.
As of December 31, 1999, the Company's defined benefit plans either had their
benefits frozen or were terminated. The benefits are based on payment of a
specific amount, which varies by plan, for each year of service. The Company's
funding policy is to contribute the minimum amount required either by law or
union agreement. Contributions are intended to provide not only for benefits
attributed to service through the plans' termination dates, but also for those
expected to be earned in the future. Benefits are based on both years of service
and compensation. Defined benefit pension plan income was $441, $191, and $59
for 1999, 1998, and 1997, respectively. Accrued defined benefit pension
liability recognized in the consolidated balance sheet was $897 and $1,610 at
December 31, 1999 and 1998, respectively.
11. Retirement Health Care and Life Insurance Benefits
The Company provides limited health care and life insurance benefits for certain
retired employees. These benefits are subject to deductible and copayment
provisions, Medicare supplements and other limitations. At December 31, 1999 and
1998, the liability for postretirement health care and life insurance benefits
was $3,920 and $4,003 respectively, and was included in accrued liabilities in
the consolidated balance sheet.
Expense related to these benefits was $424, $422 and $333 in 1999, 1998, and
1997, respectively.
12. Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges represents the number of times that
interest expense, amortization of debt discount, and the interest component of
rent expense were covered by income before income taxes and such interest,
amortization, and the interest component of rentals.
-31-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Summarized Financial Information of Procor Limited
Summarized consolidated financial information for the Company's wholly-owned
subsidiary, Procor Limited, is as follows:
December 31,
------------------------
1999 1998
--------- ---------
Balance Sheet:
Railcar lease fleet, net $ 160,781 $ 165,270
All other assets 183,684 170,214
Borrowed debt 72,738 94,409
All other liabilities 117,849 109,431
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Statement of Income:
Services and net sales $ 115,693 $ 115,791 $ 111,856
Gross profit 34,753 41,088 39,292
Net income 14,156 21,707 18,377
Services and net sales in 1999, 1998, and 1997 includes $25,530, $23,497, and
$18,795, respectively, representing the sale of railcars to Procor Limited's
parent.
14. Related Party Transactions
The following table sets forth the major related party transaction amounts
included in the consolidated financial statements.
Interest Management Insurance
Income Expense Billed
--------- ---------- ---------
1999 $ 9,682 $ 4,153 $ 2,460
1998 9,056 4,435 1,999
1997 9,350 4,415 2,222
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UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company from time to time advances funds in excess of its current cash
requirements for domestic operations to MIC or MIC's subsidiaries on an
unsecured demand basis. Such advances, which bear interest principally at LIBOR
plus 1%, amounted to $200,994 and $110,481 at December 31, 1999 and 1998,
respectively.
Certain of the Company's Canadian operations and its affiliates enter into
intercompany loans utilizing their respective excess cash balances. These
advances between the Company and subsidiaries of MIC resulted in receivables of
$45,174 and $20,459 at December 31, 1999 and 1998, respectively, that are
included in advances to parent company.
An administrative services fee is paid to The Marmon Group, Inc. ("Marmon"), a
subsidiary of Holdings and an affiliate of MIC, for certain services provided by
Marmon's officers and employees including services with respect to accounting,
tax, finance, legal and related matters which Marmon provides to certain of
Holdings' divisions, subsidiaries and affiliates. Marmon provides these services
to the Company because it is considered more cost efficient to provide such
services in this manner.
The administrative fee which Marmon charges to the Company and other entities to
which it provides services is calculated using activity-based management
concepts. The various Marmon departments allocate both time and expenses to the
entities for which it provided services for the previous year.
Marmon takes the amount derived from this exercise and applies discretion to
determine the final administrative services fee to be charged. The factors which
are considered include matters such as the following: any known operating
problems and risks that require or may require additional time to be devoted to
the Company by Marmon; significant expansion programs; significant contracts;
unusual tax or accounting matters; and the experience and length of service of
the Company's management.
Included in the preceding table as insurance billed are $1,158 in 1999, $1,128
in 1998 and $896 in 1997 for insurance premiums for coverage that was insured or
reinsured with an insurance company which the Company has been advised is
controlled by trusts for the benefit of an individual related by marriage to a
member of the Pritzker family.
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UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1986, the Company entered into a partnership with an affiliate for the
purpose of purchasing used railcars. The Company's investment as of December 31,
1999 and 1998 was $61,189 and $57,614, respectively, which represents 80%
ownership in this partnership. The minority partner's interest in the
partnership at December 31, 1999 and 1998 is $15,297 and $14,403, respectively,
which is included in accrued liabilities. The minority interest in income, $894,
$900 and $887 for the years ended December 31, 1999, 1998 and 1997,
respectively, is included as a charge against other income.
15. Derivative Financial Instruments
The Company's Canadian subsidiaries periodically enter into foreign currency
forward contracts to hedge against U.S. dollar exposures. Foreign currency
forward contracts, all with initial maturities of less than one year, amounted
to $9,100 and $3,365 at December 31, 1999 and 1998, respectively.
16. Quarterly Data (Unaudited)
Three Months Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- ----------
1999
Net sales and services revenues $ 226,506 $ 257,328 $ 239,971 $ 240,304
Cost of sales and services 150,122 180,601 165,893 161,743
---------- ---------- ---------- ----------
Gross profit 76,384 76,727 74,078 78,561
Net income $ 28,451 $ 28,879 $ 27,570 $ 31,657
========== ========== ========== ==========
1998
Net sales and services revenues $ 195,614 $ 214,845 $ 219,610 $ 246,574
Cost of sales and services 123,189 141,382 144,289 162,140
---------- ---------- ---------- ----------
Gross profit 72,425 73,463 75,321 84,434
Net income $ 30,423 $ 27,476 $ 26,927 $ 42,595
========== ========== ========== ==========
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UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Supplementary Disclosures of Cash Flow Information
For the Year Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Changes in operating assets and liabilities:
Accounts receivable $ 9,167 $ 4,128 $ 1,419
Inventories 6,917 (8,991) (5,923)
Prepaid expenses and deferred charges 1,929 2,773 (41)
Accounts payable and accrued liabilities 3,163 1,028 4,679
---------- ---------- ----------
$ 21,176 $ (1,062) $ 134
========== ========== ==========
Cash paid during the year for:
Interest (net of amount capitalized) $ 73,579 $ 73,140 $ 72,647
Income taxes 52,747 54,855 54,233
Unrealized foreign currency translation gains and losses, which are non-cash
items, are excluded from the change in advances to parent.
18. Industry Segment Information
The Company's industry and geographic data are found under the "Segment
Information" caption of Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. The aforementioned data are an integral part
of the Notes to Consolidated Financial Statements.
-35-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
First Elected
Name Age Positions or Offices to Position
--------------------------- --- ------------------------------------------ --------------------
Frank D. Lester 59 District Sales Manager 1979
Vice President - Sales 1981
Vice President - Quality 1988
President - Procor Division 1994
Vice President and
President - Tank Car Division 1999
Mark J. Garrette 46 Vice President - Tank Car Division 1994
Vice President and Senior Vice President
and Controller - Tank Car Division 1994
Kenneth P. Fischl 50 Manager - Tank Car Marketing
and Administration 1979
Vice President - Fleet Management 1981
Vice President 1992
Executive Vice President and
General Manager - Tank Car Division 1992
President - Tank Car Division 1993
Director 1994
Robert C. Gluth 75 Director 1981
Executive Vice President 1981
and served as Treasurer between
February, 1986 and January, 1987
and since October, 1989
Robert A. Pritzker 73 Director 1981
President 1981
Robert W. Webb 60 General Counsel 1986
Secretary 1986
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Frank D. Lester
Mr. Lester joined the Tank Car Division in 1979 as a district sales manager. In
1981, he was promoted to Vice President - Sales, and in 1988, he was named Vice
President - Quality. In 1994, Mr. Lester was promoted to President of Procor
Division. In August, 1999, Mr. Lester was named President of the Tank Car
Division, replacing Kenneth P. Fischl, and appointed a Vice President of the
Company.
Mark J. Garrette
Mr. Garrette was appointed Senior Vice President and Controller of the Tank Car
Division and Vice President of the Company in August, 1994. He joined the Tank
Car Division as Vice President and Assistant Controller in May, 1994.
Kenneth P. Fischl
Mr. Fischl was elected as a Director in March, 1994, and appointed President of
the Tank Car Division in February, 1993. He was appointed a Vice President of
the Company and Executive Vice President and General Manager of the Tank Car
Division in July, 1992. He joined the Company in 1977 as a Market Analyst. Mr.
Fischl was promoted to Manager of Tank Car Marketing and Administration in 1979
and became Vice President of Fleet Management in 1981. Mr. Fischl was appointed
a Vice President of The Marmon Group, Inc. ("Marmon") in May, 1998.
Robert C. Gluth
Mr. Gluth is Executive Vice President and a Director of Marmon Industrial LLC
("MIC"), Vice President, Treasurer and a Director of Holdings, Executive Vice
President and Director of The Marmon Corporation ("TMC"), and Executive Vice
President and a Director of Marmon. Mr.Gluth is also Treasurer of each of TMC,
MIC and Marmon.
Robert A. Pritzker
Mr. Robert A. Pritzker is President and a Director of each of MIC, Holdings, TMC
and Marmon. Mr. Pritzker is also a director of Hyatt Corporation.
Robert W. Webb
Mr. Webb is Secretary and a Vice President of each of MIC, Holdings, TMC and
Marmon.
There are no family relationships among the directors and executive officers of
the Company.
Directors and executive officers are elected for a term of one year, or until a
successor is appointed.
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Other Directorships
Mr. Robert A. Pritzker is a Director of Southern Peru Copper Corporation and
Acxiom Corporation. Otherwise, none of the members of the Company's Board of
Directors are members of the board of directors of companies with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934 or subject to the requirements of Section 15(d) of that Act or of a company
registered as an investment company under the Investment Company Act of 1940.
ITEM 11. EXECUTIVE COMPENSATION
Frank D. Lester, Vice President, and Mark J. Garrette, Vice President, were the
only executive officers of the Company who in the year ended December 31, 1999,
received salary and bonus in excess of $100,000 from the Company and its
subsidiaries for services in all capacities to the Company.
All other officers of the Company received their 1999 compensation from Marmon
and are primarily involved in the management of MIC and Marmon. The Company,
together with the other subsidiaries of MIC, have been required to pay Marmon a
portion of such compensation which is encompassed in the charge for certain
common services provided by Marmon to the Company and such other subsidiaries.
The amount of such charge has been determined pursuant to a formula based upon
the dollar value of revenues, earnings and assets. See Note 14 to the
consolidated financial statements included in Item 8 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. Directors of the
Company do not receive any compensation in such capacity.
Shown below is the aggregate of all forms of compensation paid by the Company to
Mr. Lester and Mr. Garrette:
Summary Compensation Table
Annual Compensation All Other
---------------------------------
Name and Principal Position Year Salary Bonus Compensation*
- ----------------------------------- ------ -------- --------- -------------
Frank D. Lester
Vice President of the Company 1999 $220,200 $ 33,600 $ 15,000
and President of the Tank Car
Division
Mark J. Garrette,
Vice President of the Company 1999 180,300 38,000 21,000
and Senior Vice President of the 1998 171,700 35,000 20,200
Tank Car Division 1997 164,400 32,000 18,300
* Represents the aggregate amounts of Company contributions to defined
contribution plans on behalf of each of the named individuals.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MIC, a Delaware single member limited liability company having its principal
executive offices at 225 West Washington Street, Chicago, Illinois, owns 1,000
shares, or 100% of the Company's issued and outstanding common stock. MIC is a
subsidiary of Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 14 to the consolidated financial statements included in Item 8 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 for a
description of certain related party transactions.
-39-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Page
----
a) 1. Financial Statements -
Consolidated statement of income for each of the three years
in the period ended December 31, 1999............................ 17
Consolidated balance sheet - December 31, 1999 and 1998.......... 18
Consolidated statement of stockholder's equity for each of
the three years in the period ended December 31, 1999............ 19
Consolidated statement of cash flows for each of the three
years in the period ended December 31, 1999...................... 20
Notes to consolidated financial statements........................ 21
2. Schedules
Financial statement schedules are not submitted because they are not
applicable or because the required information is included in the
financial statements or notes thereto.
3. Index to Exhibits................................................... 42
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
December 31, 1999.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:
UNION TANK CAR COMPANY
(Registrant)
By: /s/ Robert C. Gluth
-------------------
Robert C. Gluth
Executive Vice President,
Director and Treasurer
Dated: March 8, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert A. Pritzker President and Director March 8, 2000
- ---------------------------
Robert A. Pritzker (principal executive officer)
/s/ Robert C. Gluth Executive Vice President, March 8, 2000
- ---------------------------
Robert C. Gluth Director and Treasurer
(principal financial officer
and principal accounting
officer)
/s/ Kenneth P. Fischl Director March 8, 2000
- ---------------------------
Kenneth P. Fischl
-41-
UNION TANK CAR COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
ITEM 14 (a)(3)
Exhibit 3 Articles of incorporation and by-laws
3(a) Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of Delaware on September
2, 1982 (which was filed as Exhibit 3(a) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1982, and is incorporated herein by reference)
3(b) By-Laws of the Company, as adopted November 25, 1987
(which was filed as Exhibit 3(b) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, and is
incorporated herein by reference)
Exhibit 12 Statements re computation of ratios
The computation of the Ratio of Earnings to Fixed Charges
(summarized in Note 12 to the consolidated financial
statements).............................................. 43
Exhibit 21 Subsidiaries of the registrant ........................... 44
Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors ........ 45
Exhibit 27 Financial Data Schedule (submitted with the electronic filing
of this document)
Instruments defining the rights of holders of long-term debt are not being filed
herewith pursuant to the provisions of paragraph 4(iii) of Item 601(b) of
Regulation S-K. The Company agrees to furnish a copy of any such instrument to
the Commission upon request.
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