-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FaKdpktQ7BwI2LOY/L6LQ4KaFeuRB9Cr4VB4/k5+GgPcjNP7DE3IxMt8Q+LkI+Er GYjnnzvtpF0eO+3jauLv9g== 0000950137-07-003200.txt : 20070302 0000950137-07-003200.hdr.sgml : 20070302 20070302134154 ACCESSION NUMBER: 0000950137-07-003200 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070302 DATE AS OF CHANGE: 20070302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATX FINANCIAL CORP CENTRAL INDEX KEY: 0000357019 STANDARD INDUSTRIAL CLASSIFICATION: TRANSPORTATION SERVICES [4700] IRS NUMBER: 941661392 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08319 FILM NUMBER: 07666814 BUSINESS ADDRESS: STREET 1: 500 W MONROE ST CITY: CHICAGO STATE: IL ZIP: 60661-3676 BUSINESS PHONE: 4159553200 FORMER COMPANY: FORMER CONFORMED NAME: GATX CAPITAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GATX LEASING CORP DATE OF NAME CHANGE: 19900405 10-K 1 c12743e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8319 ------------ GATX FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-1661392 (State of incorporation ) (I.R.S. Employer Identification No.)
500 WEST MONROE STREET CHICAGO, IL 60661-3676 (Address of principal executive offices, including zip code) (312) 621-6200 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X] 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 (sec.229.405) is not contained herein, and will not be contained, to the best of 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. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). [ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The registrant had 1,051,250 shares of $1 par value common stock outstanding (all owned by GATX Corporation) as of January 31, 2007. The registrant meets the conditions set forth in General Instructions I (1) (a) and (b) of Form 10-K and, therefore, is filing this form with the reduced disclosure format. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GATX FINANCIAL CORPORATION 2006 FORM 10-K INDEX
PAGE ITEM NO. NO. - -------- ---- PART I Item 1. Business......................................................... 2 General....................................................... 2 Business Segments............................................. 2 Rail........................................................ 2 Specialty................................................... 4 ASC......................................................... 4 Trademarks, Patents and Research Activities................... 5 Seasonal Nature of Business................................... 5 Customer Base................................................. 6 Employees..................................................... 6 Environmental Matters......................................... 6 Available Information......................................... 6 Item 1A. Risk Factors..................................................... 6 Item 1B. Unresolved Staff Comments........................................ 10 Item 2. Properties....................................................... 10 Item 3. Legal Proceedings................................................ 11 Item 4. Submission of Matters to a Vote of Security Holders.............. 14 Executive Officers of the Registrant............................. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................ 14 Item 6. Selected Financial Data.......................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 15 Discussion of Operating Results............................... 15 Comparison of Year ended December 31, 2006 to year ended December 31, 2005 and Year ended December 31, 2005 to year ended December 31, 2004..................................... 19 Liquidity and Capital Resources............................... 28 Critical Accounting Policies and Estimates.................... 32 New Accounting Pronouncements................................. 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 33 Item 8. Financial Statements and Supplementary Data...................... 35 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................................. 68 Item 9A. Controls and Procedures.......................................... 68 Item 9B. Other Information................................................ 70 PART III Item 10. Directors, Executive Officers and Corporate Governance........... 70 Item 11. Executive Compensation........................................... 70 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.................................. 70 Item 13. Certain Relationships and Related Transactions, and Director Independence..................................................... 70 Item 14. Principal Accounting Fees and Services........................... 70 PART IV Item 15. Exhibits, Financial Statement Schedules.......................... 70 Signatures....................................................... 72 Exhibits......................................................... 73
1 PART I ITEM 1. BUSINESS. GENERAL GATX Financial Corporation ("GFC" or the "Company") is a wholly owned subsidiary of GATX Corporation ("GATX" or the "Parent Company"). GFC leases, manages, operates and invests in long-lived, widely used assets in the rail, marine and industrial equipment markets. Headquartered in Chicago, Illinois, GFC has three financial reporting segments: Rail, Specialty and American Steamship Company ("ASC"). At December 31, 2006, GFC had balance sheet assets of $4.6 billion, comprised largely of railcars and marine vessels. GFC also utilized approximately $1.3 billion of assets, primarily railcars, which were leased-in under operating leases and therefore were not recorded on the balance sheet. In 2006, GFC agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited ("MALL"). The sale was completed in two stages: the sale of the wholly owned aircraft closed on November 30, 2006, and the sale of the partnered aircraft closed on January 17, 2007. Separately in 2006, GFC sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GFC's aircraft leasing operation (formerly the "Air" segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. In 2004, GFC completed the sale of the assets and related nonrecourse debt of its former Technology segment ("Technology"). Financial data for Technology has also been segregated and reported as discontinued operations for all periods presented. See discussion in Note 20 to the consolidated financial statements for additional details regarding foreign operations and see Note 21 to the consolidated financial statements for details regarding each segment's operating results. BUSINESS SEGMENTS RAIL Rail is principally engaged in leasing tank and freight railcars and locomotives. At December 31, 2006, Rail had total assets of $4.7 billion including $1.3 billion of off balance sheet assets. Rail's railcar leasing customers are comprised primarily of shippers of chemical, petroleum and food products as well as railroads. Rail's locomotive leasing customers are primarily Class I, regional and short-line railroads and industrial users. Worldwide, Rail provides more than 125 railcar types used to ship over 600 different commodities. During 2006, approximately 29% of Rail's revenue was derived from shipments of chemical products, 27% from shipments of petroleum products, 15% from shipments of food and agricultural products, 13% from leasing to railroads and 16% attributable to other revenue sources. Rail had approximately 1,000 customers in 2006, with no single customer accounting for more than 4% of Rail's lease income. Rail primarily provides railcars pursuant to full-service leases, under which it maintains the railcars, pays ad valorem taxes and insurance and provides other ancillary services. Rail also offers net leases for railcars and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes. As of December 31, 2006, Rail's worldwide fleet comprised of wholly owned and leased-in railcars totaled approximately 129,000 railcars. The cars in this fleet have depreciable lives of 30 to 38 years and an average age of approximately 17 years in North America and 23 years in Europe. Rail also had an ownership interest in approximately 27,000 railcars worldwide through investments in affiliated companies, including 5,800 railcars in North America and 21,200 railcars in Europe. Affiliate fleets consist primarily of freight and intermodal railcars. In addition, Rail manages approximately 4,800 railcars for third party owners. 2 The following table sets forth Rail's fleet data as of December 31, 2006:
TANK FREIGHT AFFILIATE RAILCARS RAILCARS TOTAL RAILCARS TOTAL -------- -------- ------- --------- ------- North America........................ 61,347 49,131 110,478 5,792 116,270 Europe............................... 18,245 226 18,471 21,220 39,691 ------ ------ ------- ------ ------- 79,592 49,357 128,949 27,012 155,961 ====== ====== ======= ====== =======
At the end of 2006, there were approximately 1.4 million freight cars and 291,000 tank cars operating in North America. Rail's freight car fleet comprised approximately 3% of all North American freight cars. Rail's tank car fleet comprised approximately 21% of all North American tank cars and 30% of lessor owned tank cars. Rail's primary competitors in North America are Union Tank Car Company, General Electric Railcar Services Corporation and various other lessors. Rail principally competes on the basis of customer relationships, service, price and availability of railcars. In North America, Rail leases new railcars for terms that generally range from five to ten years. Renewals on existing leases are typically for periods ranging from three to seven years. The average remaining lease term of the North American fleet is four years as of December 31, 2006. Rail purchases new railcars from a number of manufacturers, including Trinity Industries, Union Tank Car Company, American Railcar Industries, Inc., Freight Car America, National Steel Car Ltd. and The Greenbrier Companies. In 2002, Rail entered into agreements with Trinity Industries and Union Tank Car Company for the purchase of 5,000 and 2,500 newly manufactured railcars, respectively, which will be delivered through early 2008. As of December 31, 2006, a total of 5,832 railcars have been delivered under these agreements. During 2006, Rail signed a purchase agreement with American Railcar Industries, Inc. for delivery, beginning in 2008, of up to 4,000 newly manufactured railcars to be delivered through 2011. Rail operates a network of major service centers across North America that perform significant repair and regulatory compliance work on its fleet. The major service centers are supplemented by a number of mini and fast track service centers and a fleet of service trucks (mobile repair units) for repairs that do not require the resources of a major shop. Rail also utilizes third- party service centers for approximately 32% of fleet repairs. Rail's North American operation also includes its locomotive leasing business, which consists of the purchase, reconditioning and leasing of four axle, medium horsepower locomotives. These locomotives have not been manufactured in any material quantity since the mid-1980s; however, they remain in demand by railroads and shippers. As a result, with periodic maintenance and refurbishments Rail expects these locomotives to continue to be marketable and to yield an attractive return. At December 31, 2006, the locomotive fleet consisted of 517 locomotives. Additionally, Rail manages 332 locomotives for an affiliate. Locomotives are generally leased for terms that range from month-to- month up to 15 years. Rail's locomotives have remaining depreciable lives of 10 to 20 years. Rail's major competitors in the North American locomotive leasing market are Helm Financial Corporation and National Railway Equipment Corporation. Competitive factors in the market are similar to railcar leasing and include equipment condition, availability, customer service and pricing. In December 2004, Rail purchased the remaining 50% interest in its Locomotive Leasing Partners, LLC ("LLP") joint venture, which owned 465 four-axle locomotives as of the acquisition date. In Europe, the railcar fleet generally has lease terms ranging from one to five years. Rail's operations consist of its German, Austrian and Polish wholly owned subsidiaries. Rail operates in the home countries of its subsidiaries and leases railcars to customers in those countries as well as most other countries in Western and Central Europe. Rail also operates two repair facilities in Europe that perform significant repairs and regulatory compliance for owned railcars. The owned service centers are also supplemented by a number of third party service centers. Rail principally competes on the basis of customer relationships, service, price and availability of railcars. Rail's primary competitors in Europe are VTG Aktiengesellschaft, CTL Logistics Group, Emerwa and Orlen Koltrans. Rail also has a 37.5% ownership interest in AAE Cargo AG, the leading standard freight car rental company in Europe. AAE is headquartered in Switzerland and has a fleet of approximately 21,200 freight and intermodal railcars. 3 SPECIALTY The Specialty portfolio consists primarily of leases, affiliate investments, loans and interests in residual values involving a variety of underlying asset types, including marine vessels, aircraft, rail, industrial and other equipment. The portfolio provides recurring lease and interest income and uneven periodic income primarily related to the remarketing of assets. At December 31, 2006, total investments in the Specialty portfolio, including off balance sheet assets, were $499.9 million, of which approximately 40% (including joint venture investments) were marine assets. Specialty also provides equipment residual value guarantees, which enable it to share in any asset value in excess of the guaranteed amount. As of December 31, 2006, Specialty was party to approximately 100 such residual value guarantees that expire between 2007 and 2012. Specialty further leverages its equipment knowledge by managing portfolios of assets for third parties. The majority of these managed assets are in markets where GFC has a high level of expertise. Specialty generates fee income through portfolio administration and asset remarketing of these managed assets. As of December 31, 2006, the approximate net book value equivalent of Specialty's managed portfolio was $470 million. The following table sets forth information on Specialty's assets as of December 31 (in millions):
ON BALANCE OFF BALANCE MANAGED SHEET SHEET TOTAL ASSETS ---------- ----------- ------ ------- 2006..................................... $491.9 $ 8.0 $499.9 $470.4 2005..................................... 455.5 11.7 467.2 555.8 2004..................................... 505.5 12.8 518.3 728.7
Prior to 2005, the former Venture Finance business unit, whose portfolio is managed by Specialty, provided loan and lease financing to early-stage, venture- capital backed companies. The financing was typically secured by equipment and/or by a lien on the customer's property, including intellectual property. The Venture Finance portfolio was substantially liquidated as of December 31, 2005. The principal competitors of Specialty are captive leasing companies of equipment manufacturers, leasing subsidiaries of commercial banks and independent leasing companies. Factors that affect Specialty's ability to compete are GFC's relative cost of capital, size and scale of our competitors, and the availability of many different financing alternatives for our potential customers. ASC ASC operates a fleet of self-unloading marine vessels on the Great Lakes and is exclusively engaged in the waterborne transportation of dry bulk commodities. ASC's sailing season is generally late March through mid-December; however, weather conditions permitting, certain vessels may operate through mid- January. At December 31, 2006, ASC had total assets of $299.6 million. In June 2006, ASC acquired six vessels from Oglebay Norton Marine Services for $126.3 million, increasing the size of its fleet to 18 vessels. Included in the acquisition were a warehouse and the spare parts inventory of the acquired vessels. Fifteen of ASC's vessels are motor powered vessels constructed in the 1970's and early 1980's, having an average age of 29 years and an estimated useful life of 50 years. The three remaining vessels are steam powered vessels built in the 1940's and 1950's and have an estimated remaining useful life of ten years. Notwithstanding these useful life estimates, these vessels, operating exclusively in the fresh water conditions of the Great Lakes, may achieve extended use with proper care and maintenance. All of ASC's vessels are equipped with self-unloading equipment, enabling them to discharge dry bulk cargo without assistance from shore-side equipment or personnel. This equipment enables the vessels to operate twenty-four hours a day, seven days a week. ASC's vessels are capable of transporting and unloading almost any free flowing, dry bulk commodity. 4 The following table sets forth ASC's fleet as of December 31, 2006:
LENGTH CAPACITY GREAT LAKES VESSELS (FEET) (GROSS TONS) - ------------------- ------- ------------ M/V American Spirit.................................... 1004 62,400 M/V Burns Harbor....................................... 1000 80,900 M/V Indiana Harbor..................................... 1000 80,900 M/V Walter J. McCarthy, Jr. ........................... 1000 80,900 M/V American Century................................... 1000 78,850 M/V American Integrity................................. 1000 78,850 M/V St. Clair.......................................... 770 44,800 M/V American Mariner................................... 730 37,300 M/V H. Lee White....................................... 704 35,400 M/V John J. Boland..................................... 680 34,000 M/V Adam E. Cornelius.................................. 680 29,200 Str. American Victory.................................. 730 26,300 Str. American Valor.................................... 767 25,500 Str. American Fortitude................................ 690 22,300 M/V American Republic.................................. 634-10" 25,600 M/V Buffalo............................................ 634-10" 24,300 M/V Sam Laud........................................... 634-10" 24,300 M/V American Courage................................... 634-10" 23,800
ASC's customers are comprised primarily of consumers of iron ore, western and eastern coal, and metallurgical limestone and limestone aggregates. During 2006, approximately 49% of ASC's revenue was derived from shipments of iron ore pellets for integrated steel producers, 32% from shipments of coal for electric utility and power generation companies, 13% from shipments of limestone for construction and industrial users, and 6% from other revenue sources. ASC served over 30 customers in 2006 with the top five customers comprising 67% of ASC's total revenue. ASC negotiates transportation agreements for 17 of its vessels with terms that range from one to fifteen years. ASC's customer portfolio has remained relatively stable over the past three years, and includes a mix of companies in the steel production, power generation and construction industries. Additionally, one vessel operates under a long-term time charter agreement that expires in 2015. At the end of 2006, there were approximately 112 million net tons of vessel freight capacity on the Great Lakes distributed among approximately 50 vessels. ASC's fleet represents approximately 37% of the total Great Lakes capacity. ASC's primary competitors on the domestic Great Lakes are Interlake Steamship Company, Great Lakes Fleet, Inc., Key Lakes, Inc., VanEnkevort Tug and Barge, Grand River Navigation, and Wisconsin & Michigan Steamship Company. ASC principally competes on the basis of price, customer relationships and service capabilities ranging from multiple dock loads/discharges, cargo blending, and range of vessel size, which provides customers with optimal shipping flexibility. TRADEMARKS, PATENTS AND RESEARCH ACTIVITIES Patents, trademarks, licenses and research and development activities are not material to GFC's businesses taken as a whole. SEASONAL NATURE OF BUSINESS Seasonality is not considered significant to the operations of GFC and its subsidiaries taken as a whole. 5 CUSTOMER BASE GFC, taken as a whole, is not dependent upon a single customer nor does it have any significant customer concentrations. GFC's segment concentrations, if material, are described above. EMPLOYEES As of December 31, 2006, GFC employed approximately 2,130 persons, of whom 56% were covered by union contracts. ENVIRONMENTAL MATTERS GFC's operations, as well as those of its competitors, are subject to extensive federal, state, local and foreign environmental regulations. These laws cover discharges to waters; air emissions; toxic substances; and the generation, handling, storage, transportation and disposal of waste and hazardous materials. These regulations have the effect of increasing the cost and liability associated with leasing and operating assets. Environmental risks are also inherent in rail operations, which frequently involve transporting chemicals and other hazardous materials. Some of GFC's current and previously owned properties have been used for industrial or transportation-related purposes that may have resulted in the discharge of contaminants. As a result, GFC is now subject to, and will from time to time continue to be subject to, environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the Superfund law, generally imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current and former owners and operators of a site. Accordingly, GFC may be responsible under CERCLA and other federal and state statutes for all or a portion of the costs to clean up sites at which certain substances may have been released by GFC, its current lessees, former owners or lessees of properties, or other third parties. Environmental remediation and other environmental costs are accrued when considered probable and amounts can be reasonably estimated. As of December 31, 2006, environmental costs were not material to GFC's results of operations, financial position or liquidity. For further discussion, see Note 15 to the consolidated financial statements. AVAILABLE INFORMATION GFC makes available free of charge at GATX's website, www.gatx.com, its most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Charters for the Audit Committee, Compensation Committee and Governance Committee, the Corporate Governance Guidelines, a Code of Ethics and a Code of Ethics for Senior Officers are posted under Corporate Governance in the Investor Relations section of the GATX website, and are available in print upon request by any shareholder. Within the time period prescribed by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics for Senior Officers and any waiver thereof. The information on GATX's website is not incorporated by reference into this report. ITEM 1A. RISK FACTORS GFC is subject to a number of risks which investors should consider. GFC MAY NOT BE ABLE TO SECURE FINANCING TO FUND ITS OPERATIONS OR CONTRACTUAL COMMITMENTS. GFC is dependent, in part, upon the issuance of unsecured and secured debt to fund its operations and contractual commitments. A number of factors could cause GFC to incur increased borrowing costs and to have greater difficulty accessing public and private markets for both secured and unsecured debt. These factors include the global capital market environment and outlook, GFC's financial performance and GFC's credit ratings and outlook as determined primarily by rating agencies such as Standard & Poor's ("S&P") and Moody's Investor Service ("Moody's"). It is also possible that GFC's other sources of funds, including available cash, bank facilities, 6 cash flow from operations and portfolio proceeds may not provide adequate liquidity to fund its operations and contractual commitments. UNITED STATES AND WORLD ECONOMIC AND POLITICAL CONDITIONS, INCLUDING ACTS OR THREATS OF TERRORISM AND/OR WAR, COULD ADVERSELY AFFECT GFC. National and international political developments, instability and uncertainties, including continuing political unrest and threats of terrorist attacks, could result in global economic weakness in general and in the United States in particular, and could have an adverse impact on GFC. The effects may include: legislation or regulatory action directed toward improving the security of railcars and marine vessels against acts of terrorism, which could affect the construction and/or operation of railcars and marine vessels, a decrease in demand for rail and marine services, lower utilization of new and existing rail and marine equipment, lower rail lease and marine charter rates; impairments of rail and marine assets or capital market disruption, which may raise GFC's financing costs or limit its access to capital, and liability or losses resulting from acts of terrorism involving GFC's assets. Depending upon the severity, scope and duration of these effects, the impact on GFC's financial position, results of operations and cash flows could be material. COMPETITION COULD RESULT IN DECREASED PROFITABILITY. GFC is subject to intense competition in its businesses. In many cases, competitors are larger entities that have greater financial resources, higher credit ratings and a lower cost of capital than GFC. These factors may enable competitors to offer leases and loans to customers at lower rates than GFC is able to provide, thus impacting GFC's asset utilization or GFC's ability to lease assets or make loans on a profitable basis. GFC DEPENDS UPON CONTINUED DEMAND FROM CUSTOMERS FOR ITS ASSETS. GFC relies upon continued demand from its customers for its assets. This demand depends upon the stability and growth of customer operating requirements. A number of our customers operate in cyclical markets, such as the steel, chemical and construction industries, and demand for our assets is tied to cycles in those markets. Other factors influencing customer operating requirements include changes in production volumes, potential changes in supply chains, choices regarding type of transportation asset, availability of substitutes, and other operational needs. In many cases, demand for GFC's assets is also dependent on customers' desire to lease, rather than purchase assets. There are a number of items that factor into the customer's decision whether to lease or purchase assets, such as tax considerations, interest rates, balance sheet considerations and operational flexibility. GFC has no control over these external considerations and changes in these factors could negatively impact demand for its assets held for lease. GFC CANNOT PREDICT WHETHER INFLATION WILL CONTINUE TO HAVE A POSITIVE IMPACT ON ITS FINANCIAL RESULTS. Inflation in leasing rates as well as inflation in residual values for rail, marine and other equipment has historically benefited GFC's financial results. Effects of inflation are unpredictable as to timing and duration and depend on market conditions and economic factors. GFC'S ASSETS MAY BECOME OBSOLETE. GFC's assets are subject to functional, regulatory or economic obsolescence. Although GFC believes it is adept at managing obsolescence risk, there is no guarantee that changes in various market fundamentals or the adoption of new regulatory requirements will not unexpectedly cause asset obsolescence in the future. GFC'S ALLOWANCE FOR POSSIBLE LOSSES MAY BE INADEQUATE TO PROTECT AGAINST LOSSES. GFC's allowance for possible losses on gross receivables may be inadequate if unexpected adverse changes in the economy differ from the expectations of management, or if discrete events adversely affect specific customers, industries or markets. If the allowance for possible losses is insufficient to cover losses related to gross receivables, then GFC's financial position or results of operations could be negatively impacted. 7 THE FAIR MARKET VALUE OF ITS LONG-LIVED ASSETS MAY DIFFER FROM THE VALUE OF THOSE ASSETS REFLECTED IN ITS FINANCIAL STATEMENTS. GFC's assets consist primarily of long-lived assets such as railcars, marine vessels and industrial equipment. The carrying value of these assets in the financial statements may at times differ from their fair market value. These valuation differences may be positive or negative and may be material based on market conditions and demand for certain assets. GFC regularly reviews its long- lived assets for impairment. GFC MAY INCUR FUTURE ASSET IMPAIRMENT CHARGES. An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact GFC's estimates of expected cash flows to be generated from its long-lived assets or joint venture investments. GFC regularly reviews long-lived assets and joint ventures for impairment, including when events or changes in circumstances indicate the carrying value of an asset or investment may not be recoverable. GFC may be required to recognize asset impairment charges in the future as a result of a weak economic environment, challenging market conditions, events related to particular customers or asset types, or as a result of asset or portfolio sale decisions by management. GFC MAY NOT BE ABLE TO PROCURE INSURANCE ON A COST-EFFECTIVE BASIS. The ability to insure its assets and their associated risks is an important aspect of GFC's ability to manage risk. There is no guarantee that such insurance will be consistently available on a cost-effective basis in the future. GFC IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS AND THE COSTS OF REMEDIATION MAY BE MATERIAL. GFC is subject to federal and state requirements for protection of the environment, including those for discharge of contaminated materials and remediation of contaminated sites. Environmental exposure is routinely assessed, including obligations and commitments for remediation of contaminated sites and assessments of ranges and probabilities of recoveries from other responsible parties. Due to the regulatory complexities and risk of unidentified contaminants on its properties, the potential exists for environmental and remediation costs to be materially different from the costs GFC has estimated. GFC HAS BEEN, AND MAY IN THE FUTURE BE, INVOLVED IN VARIOUS TYPES OF LITIGATION. The nature of assets which GFC owns exposes the Company to the potential for various claims and litigation related to, among other things, personal injury and property damage, environmental claims and other matters. The transportation of certain commodities by GFC's railcars and marine vessels, particularly those classified as hazardous materials, pose risks resulting in potential liabilities and losses that could have a significant effect on GFC's consolidated financial condition or results of operations. HIGH ENERGY AND COMMODITY PRICES COULD HAVE A NEGATIVE EFFECT ON THE DEMAND FOR GFC'S PRODUCTS AND SERVICES. Energy prices, including the price of natural gas and oil, are significant cost drivers for many of our customers, either directly in the form of raw material costs in industries such as the chemical and steel industries, or indirectly in the form of increased transportation cost. Sustained high energy or commodity prices could negatively impact these industries resulting in a corresponding adverse effect on the demand for GFC's operating assets and assets held for lease, as well as related services. In addition, sustained high steel prices could result in sustained high new railcar acquisition costs for GFC. NEW REGULATORY RULINGS COULD NEGATIVELY AFFECT GFC'S PROFITABILITY GFC's rail and marine operations are subject to the jurisdiction of a number of federal agencies, including the Department of Transportation. State agencies regulate some aspects of rail operations with respect to health and safety matters not otherwise preempted by federal law. GFC's operations are also subject to the jurisdiction of 8 regulatory agencies of foreign countries. New domestic or foreign regulatory rulings may negatively impact GFC's financial results through higher maintenance costs or reduced economic value of its assets. EVENTS OR CONDITIONS NEGATIVELY AFFECTING CERTAIN ASSETS, CUSTOMERS OR GEOGRAPHIC REGIONS IN WHICH GFC HAS A LARGE INVESTMENT COULD HAVE A NEGATIVE IMPACT ON ITS RESULTS OF OPERATIONS. GFC's revenues are generally derived from a number of different asset types, customers, industries and geographic locations. However, from time to time, GFC could have a large investment in a particular asset type, a large revenue stream associated with a particular customer, or a large number of customers located in a particular geographic region. Decreased demand from a discrete event impacting a particular asset type, discrete events with a specific customer or industry, or adverse regional economic conditions, particularly for those assets, customers or regions in which GFC has a concentrated exposure, could have a negative impact on GFC's results of operations. FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD HAVE A NEGATIVE IMPACT ON GFC'S RESULTS OF OPERATIONS. GFC's results are exposed to foreign exchange rate fluctuations as the financial results of certain subsidiaries are translated from their local currency into U.S. dollars upon consolidation. As exchange rates vary, the operating results of foreign subsidiaries, when translated, may differ materially from period to period. GFC is also subject to gains and losses on foreign currency transactions, which could vary based on fluctuations in exchange rates and the timing of the transactions and their settlement. In addition, fluctuations in foreign exchange rates can have an effect on the demand and relative price for services provided by GFC domestically and internationally, and could have a negative impact on GFC's results of operations. GFC MAY BE UNABLE TO MAINTAIN ASSETS ON LEASE OR CHARTER AT SATISFACTORY RATES. GFC's profitability is largely dependent on its ability to maintain assets on lease (utilization) at satisfactory lease rates or charter rates. A number of factors can adversely affect utilization, lease and charter rates, including, but not limited to: an economic downturn causing reduced demand or oversupply in the markets in which GFC operates, changes in customer behavior, or any other change in supply or demand caused by factors discussed in this Risk section. GFC MAY BE SUBJECT TO RISK FACTORS INHERENT IN ITS JOINT VENTURE INVESTMENTS. GFC's investments include noncontrolling interests in a number of affiliates and joint ventures managed and operated by third parties. These entities are subject to many of the same risk factors outlined herein. GFC may be indirectly exposed to these risks through its ownership interest in these entities, and adverse developments at the entity level could potentially have a negative impact on GFC's results of operations. CHANGES IN ASSUMPTIONS USED TO CALCULATE POST-RETIREMENT COSTS COULD ADVERSELY AFFECT GFC'S RESULTS OF OPERATIONS. GFC's pension and other post-retirement costs are dependent on various assumptions used to calculate such amounts, including discount rates, long-term return on plan assets, salary increases, health care cost trend rates and other factors. Changes to any of these assumptions could adversely affect GFC's results of operations and financial condition. GFC'S EFFECTIVE TAX RATE COULD BE ADVERSELY AFFECTED BY CHANGES IN THE MIX OF EARNINGS IN THE U.S. AND FOREIGN COUNTRIES. GFC is subject to taxes in both the U.S. and various foreign jurisdictions. As a result, GFC's effective tax rate could be adversely affected by changes in the mix of earnings in the U.S. and foreign countries with differing statutory tax rates, legislative changes impacting statutory tax rates, including the impact on recorded deferred tax assets and liabilities, changes in tax laws or by material audit assessments. 9 GFC'S INTERNAL CONTROL OVER FINANCIAL ACCOUNTING AND REPORTING MAY NOT DETECT ALL ERRORS OR OMISSIONS IN THE FINANCIAL STATEMENTS. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of internal control over financial reporting and a report by the Company's independent auditors addressing these assessments. If GFC fails to maintain the adequacy of internal control over financial accounting, the Company may not be able to ensure that GFC can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and related regulations. Although GFC's management has concluded that adequate internal control procedures are in place, no system of internal control can provide absolute assurance that the financial statements are accurate and free of error. As a result, the risk exists that GFC's internal control may not detect all errors or omissions in the financial statements. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES. Information regarding the location and general character of certain properties of GFC is included in ITEM 1, BUSINESS, of this document. At December 31, 2006, locations of operations were as follows: GFC HEADQUARTERS Chicago, Illinois RAIL BUSINESS OFFICES San Francisco, California Alpharetta, Georgia Chicago, Illinois Marlton, New Jersey Raleigh, North Carolina York, Pennsylvania Houston, Texas Calgary, Alberta Cambridge, Ontario Ennismore, Ontario Montreal, Quebec Vienna, Austria Hamburg, Germany Mexico City, Mexico Warsaw, Poland MAJOR SERVICE CENTERS Colton, California Waycross, Georgia Hearne, Texas Red Deer, Alberta Sarnia, Ontario Coteau-du-Lac, Quebec Montreal, Quebec Moose Jaw, Saskatchewan Hanover, Germany Tierra Blanca, Mexico Gdansk, Poland Ostroda, Poland MINI SERVICE CENTERS Donaldsonville, Louisiana Geismar, Louisiana Cincinnati, Ohio Catoosa, Oklahoma Freeport, Texas Plantersville, Texas Gdansk, Poland Plock, Poland Slotwiny, Poland FAST TRACK SERVICE CENTERS Macon, Georgia East Chicago, Indiana Terre Haute, Indiana Schreveport, Louisiana Kansas City, Missouri Masury, Ohio Galena Park, Texas Houston, Texas MOBILE SERVICE UNITS Mobile, Alabama Colton, California Tampa, Florida Sioux City, Iowa Donaldsonville, Louisiana Lake Charles, Louisiana Albany, New York Cooperhill, Tennessee Galena Park, Texas Olympia, Washington Edmonton, Alberta Vancouver, British Columbia Clarkson, Ontario Quebec City, Quebec SPECIALTY BUSINESS OFFICES San Francisco, California Alpharetta, Georgia AMERICAN STEAMSHIP COMPANY BUSINESS OFFICES Williamsville, New York Toledo, Ohio 10 ITEM 3. LEGAL PROCEEDINGS. SCHNEIDER, ET AL. V. CSX TRANSPORTATION, INC., ET AL. On May 25, 2001, a suit was filed in Civil District Court for the Parish of Orleans, State of Louisiana, Schneider, et al. v. CSX Transportation, Inc., Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The Public Belt Railroad Commission for The City of New Orleans, GATX Corporation, GATX Capital Corporation, The City of New Orleans, and The Alabama Great Southern Railroad Company, Number 2001-8924. The suit asserts that on May 25, 2000, a tank car owned by the Rail division of GATX Financial Corporation ("GFC"), a wholly owned subsidiary of GATX, leaked the fumes of its cargo, dimethyl sulfide, in a residential area in the western part of the city of New Orleans and that the tank car, while still leaking, was subsequently taken by defendant, New Orleans Public Belt Railroad, to another location in the City of New Orleans, where it was later repaired. The plaintiffs are seeking compensation for alleged personal injuries and property damages. The petition alleges that a class should be certified, but plaintiffs have not yet moved to do so. The defendants have offered to settle this suit by funding an escrow of $415,000, which will be disbursed upon receipt of releases from the plaintiffs and the dismissal of the uncertified class action by the Court. The parties are proceeding to finalize the settlement documents and processes and will then seek appropriate Court orders and approvals. GRABINGER V. CANADIAN PACIFIC RAILWAY COMPANY, ET AL. On December 29, 2003, a wrongful death action was filed in the District Court of the State of Minnesota, County of Hennepin, Fourth Judicial District, MeLea J. Grabinger, individually, as Personal Representative of the Estate of John T. Grabinger, and as Representative/Trustee of the beneficiaries in the wrongful death action, v. Canadian Pacific Railway Company, et al. The lawsuit sought damages arising out of a derailment on January 18, 2002 of a Canadian Pacific Railway ("CP") train containing anhydrous ammonia cars near Minot, North Dakota. As a result of the derailment, several tank cars (including tank cars owned by GFC) fractured, releasing anhydrous ammonia which formed a vapor cloud. One person died, as many as 100 people received medical treatment, of whom fifteen were admitted to the hospital, and a number of others were purportedly affected. The plaintiffs alleged among other things that the incident (i) caused the wrongful death of their husband/son, and (ii) caused permanent physical injuries and emotional and physical pain. The complaint alleged that the incident was proximately caused by the defendants who were liable under a number of legal theories. On June 18, 2004, the plaintiff filed an amended complaint based on the findings of the National Transportation Safety Board ("NTSB") report released on March 9, 2004, which concluded that the catastrophic fracture of tank cars increased the severity of the accident and added GFC and others as defendants. Specifically, the allegations against GFC were that the steel shells of the tank cars were defective and that GFC knew the cars were vulnerable and nonetheless failed to warn of the extreme hazard and vulnerability. GFC filed a motion for summary judgment at the close of discovery and in December 2005, the court granted summary judgment in favor of GFC. CP subsequently settled with the Grabinger plaintiffs and on February 7, 2006, the trial court entered final judgment in GFC's favor. No appeals of this order were taken and judgment in GFC's favor is final. In addition to the Grabinger matter, a number of other individuals who alleged to have been affected by the derailment had previously initiated litigation asserting that car owners, including GFC, were in part responsible for damage caused by the incident. GFC was joined to nine of these suits but was subsequently dismissed without prejudice from these actions. Numerous lawsuits remain pending against CP relating to the Minot derailment. FLIGHTLEASE LITIGATION In 1999, GATX Third Aircraft Corporation ("Third Aircraft"), an indirect wholly owned subsidiary of GFC, entered into a joint venture with Flightlease Holdings (Guernsey) Ltd. ("FHG"), an indirect wholly owned subsidiary of the SAirGroup, and formed a joint venture entity, GATX Flightlease Aircraft Ltd. ("GFAC") to purchase a number of aircraft. In September 1999, GFAC entered into an agreement (the "GFAC Agreement") with Airbus S.A.S. (formerly known as Airbus Industrie) ("Airbus") and by October 1, 2001, GFAC had ordered a total of 41 aircraft (the "GFAC Aircraft") from Airbus and had made aggregate unutilized pre-delivery payments ("PDPs") to Airbus of approximately $227.6 million. Subsequently, on October 4, 2001, Third Aircraft and FHG entered into 11 an agreement (the "Split Agreements") pursuant to which the parties to the joint venture agreed (i) to divide responsibility for the GFAC Aircraft, (ii) to allocate the PDPs between them in the amounts of approximately $77.8 million to Third Aircraft and approximately $149.8 million to FHG, and (iii) that each would enter into separate agreements with Airbus to purchase its allocated aircraft or equivalent aircraft (such aircraft allocated to Third Aircraft being the "GATX Allocated Aircraft"). Subsequently, GFC and AVSA S.A.R.L., an affiliate of Airbus, entered into a new purchase agreement (the "GATX Agreement") and AVSA S.A.R.L. credited approximately $77.8 million of the PDPs to GFC. In connection with the GATX Agreement, GFC agreed that in certain specified circumstances it will pay to Airbus any amount Airbus is required to pay to GFAC in reimbursement of PDPs paid by GFAC with respect to the GATX Allocated Aircraft (such agreement being the "Reimbursement Agreement"). GFC's liability under the Reimbursement Agreement is capped at approximately $77.8 million. Under the Split Agreements, FHG was to take the benefit of the remaining PDPs allocated to it (approximately $149.8 million) and enter into a new contract with Airbus but, following SAirGroup's bankruptcy, FHG did not enter into such a contract, and Airbus then declared GFAC in default and retained the approximately $149.8 million in PDPs held by it as damages. On October 14, 2005, FHG, acting by its liquidators (the "FHG Liquidators"), filed a complaint in the United States District Court for the Northern District of California, purportedly as a derivative complaint on behalf of GFAC, against GFC, Third Aircraft, and Mr. James H. Morris and Mr. Alan M. Reinke, then officers of a division of GFC (the "FHG Action"). The complaint alleged (1) that Messrs. Morris and Reinke, as directors of GFAC, breached fiduciary duties to GFAC; (2) that GFC and Third Aircraft knowingly and/or dishonestly assisted such breaches; (3) that all defendants conspired to deprive GFAC of assets and advance the interests of GFC and Third Aircraft at the expense of GFAC; and (4) that Third Aircraft was unjustly enriched. The complaint seeks damages (in respect of claims (1), (2) and (3)) in an amount including, but not necessarily limited to, approximately $227.6 million, and (in respect of claim (4)) in an amount including, but not necessarily limited to, approximately $77.8 million. GFC has indemnified Messrs. Morris and Reinke against losses they suffer or incur as a result of their service as GFAC directors. The Company believes there is no valid basis for any claim made by the FHG Liquidators in the complaint against GFC, Third Aircraft, and/or Messrs. Morris and Reinke. On October 13, 2006, the parties entered into a Tolling and Standstill Agreement (the "Tolling Agreement") which, among other things, provides for a standstill of claims or potential claims between or among the parties to the FHG Action. Pursuant to the Tolling Agreement, on October 24, 2006, this action was dismissed without prejudice and the governing statutes of limitation were tolled with respect to any claims, counterclaims and defenses asserted in the FHG Action. The Tolling Agreement also provides that FHG shall not bring any claims asserted in the FHG Action (or any substantially similar claims) against GFC, Third Aircraft, GFAC, or Messrs. Morris or Reinke until the conclusion of GFAC's action against Airbus pending in the Supreme Court of the State and County of New York (the "Airbus Action") described below. In the event that GFC or Third Aircraft seek and are permitted to intervene in the Airbus Action, FHG can seek to amend its intervenor's complaint in this action to include claims against GFC or Third Aircraft, including claims made in the FHG Action, but GFC and Third Aircraft can oppose any such effort by FHG. The Tolling Agreement does not resolve the merits or liability for (or against) any claims nor require payment of any monetary compensation by any party to another party. In connection with the Tolling Agreement, FHG and Messrs. Morris and Reinke, as directors of GFAC, executed an agreement which provides, among other things, that FHG would take the lead role in litigating the Airbus Action and would fund all fees, costs and expenses of the litigation other than those fees, costs and expenses incurred by GFAC at the direction, or related to the depositions, of Messrs. Morris and Reinke. On October 10, 2005, GFAC filed a complaint in the Supreme Court of the State and County of New York against Airbus alleging (1) that Airbus' termination of the GFAC Agreement was wrongful and a material breach and repudiation by Airbus of the GFAC Agreement; (2) that Airbus, by retaining PDPs paid by GFAC under the GFAC Agreement, unjustly enriched itself at GFAC's expense; (3) that Airbus breached an implied duty of good faith and fair dealing to GFAC; and (4) that the liquidated damages provision in the GFAC Agreement is unenforceable as a penalty. The complaint seeks restitution and damages in an unspecified amount in the "millions of dollars." On December 7, 2005, FHG, acting by the FHG Liquidators, filed a motion seeking permission to intervene in GFAC's action, to protect its interest in the action, and to file an intervenor's complaint. The intervenor's complaint repeats the material allegations made in GFAC's complaint and seeks restitution from Airbus 12 of the approximately $227.6 million in unutilized PDPs paid by GFAC prior to October 1, 2001, and damages and interest in unspecified amounts. On February 16, 2006, the Court granted FHG permission to intervene and deemed FHG's intervenor's complaint to be filed against Airbus. On December 9, 2005, Airbus filed an answer and counterclaim to GFAC's complaint which (1) denies the material allegations of GFAC's complaint, (2) asserts affirmative defenses, (3) seeks a declaratory judgment that Airbus validly terminated the GFAC Agreement and is entitled to retain the approximately $227.6 million in unutilized PDPs made by GFAC prior to October 1, 2001, and (4) in the alternative, if the liquidated damages provision in the GFAC Agreement is deemed to be unenforceable as a penalty, asserts a claim for breach of contract and damages in an amount to be determined at trial but allegedly "well in excess of $228 million." On February 10, 2006, GFAC filed a reply to Airbus' counterclaims which (1) denies the material allegations of the counterclaims, and (2) asserts affirmative defenses. On April 4, 2006, Airbus moved for partial summary judgment on GFAC's and FHG's claims for breach of contract and the implied covenant of good faith and fair dealing. By order dated, December 20, 2006, the court denied Airbus' motion for partial summary judgment. Discovery is ongoing. Should GFAC ultimately succeed in recovering from Airbus PDPs with respect to the GATX Allocated Aircraft, GFC may be obligated to make a payment to Airbus under the Reimbursement Agreement in an amount equal to the lesser of (x) the amount so recovered or (y) approximately $77.8 million. The Company believes it unlikely Airbus will be required to make such a payment to GFAC and, in consequence, that it is unlikely GFC will be required to make a corresponding payment to Airbus under the Reimbursement Agreement. Furthermore, in the unlikely event GFC is required to make a payment to Airbus under the Reimbursement Agreement, the Company believes that Third Aircraft should recover at least such amount from GFAC, the 50% subsidiary of Third Aircraft. HUNTINGTON RELEASE LITIGATION GFC has been named in a series of civil actions filed in the Circuit Court of Wayne County, West Virginia. The suits were filed by residents and businesses who occupy property near a hazardous material transloading facility in Huntington, West Virginia. On October 28, 2004, approximately 22,000 gallons of coal tar light oil were released from a GFC tank car leased to Marathon Ashland Petroleum Company during an unloading operation at that facility. Some of the commodity is alleged to have escaped into a local sewer system and a nearby creek. Immediately following the release, residents of 500 nearby homes, at least one school and several businesses were evacuated. The allegations in each of the suits are essentially identical. The approximately 780 plaintiffs in the suits generally allege to have suffered physical and mental harm, diminished property values, lost profits or increased risk of disease for which the defendants are responsible under various theories. In each suit, the plaintiffs seek compensatory and punitive damages and injunctive relief. In addition to the foregoing claims, co-defendant Marathon Ashland Petroleum Co. asserted cross claims against GFC alleging that GFC failed to provide a suitable tank car and failed to adequately maintain the tank car. Those claims have been resolved by agreement of the parties, with GFC paying nothing. GFC has negotiated settlements with plaintiffs in all but two of the cases. One of the settlements will resolve eight of the cases filed by one attorney group representing approximately 440 plaintiffs. In exchange for a complete release of all claims, GFC agreed to pay $390,000 to be disbursed among the parties by their counsel. Under the terms of the remaining settlements, GFC, in exchange for full releases and dismissals of the actions, will pay $115,000 for approximately 340 plaintiffs. In September 2006, GFC was named as a co-defendant in a CERCLA cost recovery action filed in the United States District Court Eastern District of Kentucky, Veolia ES Special Services, Inc. (f/ka Onyx Special Services, Inc.) v. TechSol Chemical Company, et al Case No. 0:06cv-136-HRW. The plaintiff is the environmental remediation contractor retained by a co-defendant, TechSol Chemical Co., the entity that was offloading the tank car at the time of the spill. Since TechSol is no longer operating, the contractor is seeking to recover more than $640,000 in response costs from "potentially responsible parties" ("PRPs") which currently include GFC and three other named defendants. GFC believes that the claim is without merit and intends to vigorously defend against it. In connection with the same spill, in November 2006, GFC was named as a co- defendant in an action filed in the Circuit court of Wayne County, West Virginia, Kellogg Company; Kellogg Sales Company; and Keebler Company v. TechSol Chemical Company, et al, Civil Action No.: 06-C-237. The plaintiff seeks compensation for 13 lost profits, property damage and punitive damages alleged suffered as a result of the release which was in proximity to the plaintiff's distribution center. GFC believes that it has meritorious defenses against all of the above claims and that there is no basis for any liability to the plaintiff or other defendants. POLSKIE KOLEJE PANSTWOWE S.A. V. DEC SP. Z O.O. In December 2005, Polskie Koleje Panstwowe S.A. ("PKP") filed a complaint, Polskie Koleje Panstwowe S.A. v. DEC sp. z o.o., in the Regional Court in Warsaw, Poland against DEC sp. z o.o. ("DEC"), an indirect wholly owned subsidiary of the Company, currently named GATX Rail Poland, sp. Zo.o. The complaint alleges that DEC breached a Conditional Sales Agreement ("Agreement") to purchase shares of Kolsped S.A. ("Kolsped") which was an indirect subsidiary of PKP. The condition allegedly breached was that DEC was to obtain a release of Kolsped's ultimate parent company, PKP, from its guarantee of Kolsped's promissory note securing a $9.8 million bank loan. The Agreement had been amended by Kolsped and DEC to permit DEC to satisfy this condition by providing PKP with a blank promissory note (the "DEC Note") and a promissory note declaration which allowed PKP to fill in the DEC Note up to $10 million in the event a demand was made upon it as guarantor of Kolsped's note to the bank ("Kolsped Note"). On November 7, 2002, the then current holder of the Kolsped Note, a bank, secured a judgment against PKP which was subsequently upheld by the Court of Appeal. After exhausting its appeals of the judgment entered against it, PKP filed suit against DEC alleging that DEC failed to fulfill its obligation to release PKP as a guarantor of the Kolsped Note, and is purportedly liable to PKP, as a third party beneficiary of the Agreement, for approximately $30 million, the amount, based on current exchange rates, including interest and costs, PKP allegedly paid to the bank. On February 20, 2006, DEC answered the complaint, denying the material allegations and raising numerous defenses including, among others, that: (i) the Agreement did not create an actionable obligation, but rather was a condition precedent to the purchase of shares in Kolsped; (ii) DEC fulfilled that condition by issuing the DEC Note, which was subsequently lost by PKP and declared invalid by a Polish court; (iii) PKP was not a third party beneficiary of the Agreement; and (iv) the action is barred by the governing limitations period. On November 13, 2006, PKP served a writ amending its complaint demanding that DEC issue a new promissory note to replace the note previously annulled. DEC responded with a number of defenses, including that such an amendment was time barred, and requested dismissal of this new claim. DEC has been notified that Nafta Polska, the former owner of DEC, will intervene in support of DEC. The parties intend to engage in mediation although no hearing date has been set. DEC believes that it has meritorious defenses to the complaint and intends to vigorously defend this lawsuit. OTHER LEGAL PROCEEDINGS Information concerning other claims and litigation is described under "Other Contingencies" in Note 15 of the consolidated financial statements and is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not required. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. GATX Corporation owns all of the outstanding common stock of GFC. ITEM 6. SELECTED FINANCIAL DATA. Not required. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW General information and characteristics of GATX Financial Corporation ("GFC" or the "Company"), which is a wholly owned subsidiary of GATX Corporation ("GATX" or the "Parent Company"), including reporting segments, is included in ITEM 1, BUSINESS, of this document. The following discussion and analysis should be read in conjunction with the audited financial statements included herein. Certain statements within this document may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," or "project" and similar expressions. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In addition, certain factors, including Risk Factors identified in Part I of this document may affect GFC's businesses. As a result, past financial results may not be a reliable indicator of future performance. GFC leases, manages, operates, and invests in long-lived, widely used assets in the rail, marine and industrial equipment markets. Headquartered in Chicago, Illinois, GFC has three financial reporting segments: Rail, Specialty and American Steamship Company ("ASC"). The Company's former Air and Technology segments have been segregated and presented as discontinued operations for all periods presented, see "Discontinued Operations" for additional information. DISCUSSION OF OPERATING RESULTS The following table presents a financial summary of GFC's operating segments:
YEARS ENDED DECEMBER 31 ------------------------------ 2006 2005 2004 -------- -------- -------- IN MILLIONS GROSS INCOME Rail............................................ $ 883.0 $ 821.9 $ 746.5 Specialty....................................... 135.7 140.3 122.1 ASC............................................. 209.8 138.3 111.8 -------- -------- -------- Total segment gross income.................... 1,228.5 1,100.5 980.4 Other items and eliminations.................... 23.5 26.7 143.0 -------- -------- -------- CONSOLIDATED GROSS INCOME.................. 1,252.0 1,127.2 1,123.4 ======== ======== ======== SEGMENT PROFIT Rail............................................ 247.9 201.5 159.5 Specialty....................................... 98.9 106.1 91.8 ASC............................................. 30.6 17.8 12.3 -------- -------- -------- TOTAL SEGMENT PROFIT....................... 377.4 325.4 263.6 Less: Selling, general and administrative expenses.... 98.1 88.5 90.5 Over allocated interest expense, net............ (14.7) (14.7) (0.4) Other items and eliminations.................... (24.0) (14.9) (141.4) Income taxes.................................... 107.4 100.0 114.0 -------- -------- -------- Income from continuing operations............... 210.6 166.5 200.9 (Loss) Income from discontinued operations, net of taxes...................................... (38.8) (119.9) 14.2 -------- -------- -------- CONSOLIDATED NET INCOME.................... $ 171.8 $ 46.6 $ 215.1 ======== ======== ========
15 2006 HIGHLIGHTS - Income from continuing operations of $210.6 million was higher by $44.1 million or 26% compared to the prior year. The impact of a larger active fleet and rate increases at Rail combined with vessel purchases at ASC contributed to the increased earnings. Specialty also posted solid results, driven by strong remarketing gains and affiliate earnings. - Investment volume exceeded levels achieved in 2005 and 2004. Total investment volume reached $755.4 million in 2006, up from $498.7 million in 2005 and $533.2 million in 2004. Rail acquired nearly 7,000 railcars and locomotives worldwide in 2006, Specialty added marine and industrial assets to its portfolio and ASC significantly increased its fleet with the addition of six vessels. SEGMENT OPERATIONS Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including affiliate earnings, attributable to the segments, as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, asset impairment charges and other operating costs such as litigation, provisions for losses, environmental costs, and asset storage costs. Segment profit excludes selling, general and administrative expenses, income taxes and certain other amounts not allocated to the segments; these items are discussed below under Other. GFC allocates debt balances and related interest expense to each segment based upon a fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. In 2006, the Company revised its recourse leverage ratio levels for its segments to better align segment leverage with the Parent Company's consolidated leverage. The revised levels for Rail, Specialty and ASC are 4:1, 3:1 and 1.5:1, respectively. Management believes this leverage and interest expense allocation methodology provides a reasonable approximation of each operating segment's risk-adjusted financial return. Historical financial information has been restated and all periods presented reflect the revised leverage levels. Certain other reclassifications have also been made to the 2005 and 2004 financial statements to conform to the 2006 presentation. RAIL SEGMENT SUMMARY The North American railcar market continued to strengthen in 2006, marking its third straight year of improving market conditions. Record highs were set in a number of industry wide indicators, such as railcar loadings and ton miles. Rail continued to achieve lease rate increases and maintained a 99% fleet utilization throughout the entire year. This was accomplished through renewals of leases with current lessees, assignments of railcars (whose lease term had expired) to new lessees, and the scrapping of older, generally inactive railcars. The strong market conditions have enabled Rail to put a greater emphasis on renewing contracts with current customers at attractive lease rates while also extending lease terms. Rail expects that this strategy should help reduce future revenue volatility. In addition, renewals of leases typically result in lower maintenance and transition costs than if the railcars are assigned to new customers. Rail expects lease income to continue to increase in 2007 as the full year effects of the 2006 lease rate increases will be fully realized. Additionally, leases for approximately 20,000 North American and 8,300 European railcars are scheduled to expire in 2007. Based on current market conditions, Rail generally expects to renew or assign these railcars at higher rates, which should also contribute to higher lease income in 2007. Notwithstanding the improving conditions of the last few years, segments of the North American railcar leasing market have recently shown signs of weakness. In certain freight car types, Rail has identified situations at competitors where idle cars have increased and new cars have been delivered into storage. In addition, near term delivery opportunities are currently available for freight cars and tank cars at some manufacturers. Although Rail's utilization remains at 99% at year end 2006, these developments will continue to be monitored closely in 2007. 16 In North America, Rail acquired 6,300 new and used railcars in 2006. High demand for railcars and high steel prices have increased current market prices for both new and used railcars. In 2002, Rail entered into committed purchase contracts ("committed purchase program") with two railcar manufacturers in order to secure favorable pricing for new railcar purchases in exchange for specific volume purchase commitments. The committed purchase program, which expires in early 2008, has enabled Rail to purchase new railcars at a lower price than would otherwise have been available in the spot market. In 2006, approximately one third of new railcars were acquired through the committed purchase program. During 2006, Rail signed a purchase agreement with American Railcar Industries, Inc. for delivery, beginning in 2008, of up to 4,000 newly manufactured railcars. Rail will continue to invest in the North American market during 2007 through the use of the committed purchase program, other new car orders and through select secondary market purchases. Costs for maintaining the North American fleet continued to increase in 2006, primarily due to an increase in conversions of railcars for use in different types of services (which also increases their marketability), a greater number of regulatory inspections and repairs and a larger fleet. The trend of increasing maintenance costs is expected to continue in 2007 due to growth in the size of the fleet as well as price increases for railcar components and an anticipated increase in the number of certain types of higher cost repairs. Additional security and safety regulations, if enacted, may also increase future maintenance costs. In December 2004, Rail purchased the remaining 50% interest in its Locomotive Leasing Partners LLC ("LLP") joint venture. In 2005 and 2006, the earnings of the locomotive business are fully consolidated in Rail's operating results, whereas in 2004, only 50% of the earnings from LLP were reflected as affiliate earnings. Rail's locomotive business continued to experience growth in 2006. Higher lease rates and the placement of reconditioned locomotives on lease contributed to increases in locomotive lease income. As of December 31, 2006, Rail had 517 locomotives in its owned fleet and managed an additional 332 for an affiliate. Rail expects to expand its locomotive business in 2007. Rail's European operations also benefited from improving market conditions during 2006. Utilization in Europe was 96% at the end of 2006, up from 91% at the end of 2005, primarily due to the scrapping of older, generally inactive railcars. Rates on new and renewed leases increased, resulting in higher lease income; however, at a lesser increment than seen in North America. Rail expects lease rates in Europe to continue to rise in 2007. Rail also realized cost savings and operating efficiencies at its European operations in 2006, benefiting from the consolidation efforts executed over the prior two years. During 2006, Rail placed new cars in its primary markets of Austria, Germany and Poland and to a lesser extent into the emerging eastern European markets. Rail expects to make further investments in these markets during 2007 and will evaluate other European markets for potential expansion in the future. AAE Cargo AG ("AAE") also experienced strong demand for its fleet, particularly intermodal railcars, due to high seaport volumes, growth in container freight traffic, and increased demand from private operators. During 2006, Rail invested $533.6 million, acquiring approximately 6,300 railcars for its North American fleet, 600 railcars for its European fleet and 55 locomotives. Rail also exercised two purchase options on approximately 4,700 railcars previously leased in under operating leases for an aggregate cost of $260.9 million. Investment volume in 2005 totaled $402.9 million, with Rail acquiring approximately 5,900 railcars and 12 locomotives. In 2005, Rail also completed a sale leaseback transaction for 2,900 railcars with a net book value of $170.0 million. 17 Components of Rail's operating results are outlined below (in millions):
YEARS ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ GROSS INCOME Lease income........................................ $780.0 $729.4 $659.5 Asset remarketing income............................ 19.7 13.3 8.1 Fees................................................ 1.6 1.7 4.0 Other income........................................ 59.0 63.8 58.3 ------ ------ ------ Revenues.......................................... 860.3 808.2 729.9 Affiliate earnings.................................. 22.7 13.7 16.6 ------ ------ ------ 883.0 821.9 746.5 OWNERSHIP COSTS Depreciation........................................ 146.1 132.1 124.2 Interest expense, net............................... 98.6 77.9 77.0 Operating lease expense............................. 163.0 176.2 166.0 ------ ------ ------ 407.7 386.2 367.2 OPERATING COSTS Maintenance expense................................. 201.7 193.3 186.8 Asset impairment charges............................ 1.1 3.0 1.2 Other operating expense............................. 24.6 37.9 31.8 ------ ------ ------ 227.4 234.2 219.8 ------ ------ ------ SEGMENT PROFIT...................................... $247.9 $201.5 $159.5 ====== ====== ======
RAIL'S LEASE INCOME Components of Rail's lease income as of December 31 are outlined below:
2006 2005 2004 ------ ------ ------ North America....................................... $644.7 $603.2 $566.5 Europe.............................................. 108.0 102.0 93.0 Locomotives......................................... 27.3 24.2 -- ------ ------ ------ $780.0 $729.4 $659.5 ------ ------ ------
RAIL'S FLEET DATA The following table summarizes fleet activity for Rail's North American railcars as of December 31:
2006 2005 2004 ------- ------- ------- Beginning balance................................ 108,151 106,819 105,248 Cars added....................................... 6,302 5,400 6,236 Cars scrapped or sold............................ (3,975) (4,068) (4,665) Ending balance................................... 110,478 108,151 106,819 Utilization rate at year end..................... 99% 98% 98%
18 The following table summarizes fleet activity for Rail's European railcars as of December 31:
2006 2005 2004 ------ ------ ------ Beginning balance................................... 18,854 18,446 18,229 Cars added.......................................... 607 518 971 Cars scrapped or sold............................... (990) (110) (754) Ending balance...................................... 18,471 18,854 18,446 Utilization rate at year end........................ 96% 91% 88%
COMPARISON OF YEAR ENDED DECEMBER 31, 2006 TO YEAR ENDED DECEMBER 31, 2005 SEGMENT PROFIT Rail's segment profit rose 23.0% or $46.4 million over 2005. The increase in profit was primarily the result of an average of 2,800 more railcars on lease, rate increases versus expiring rates on both lease renewals and assignments of existing cars and strong affiliate earnings in Europe. This was partially offset by the costs of a larger fleet including ownership and maintenance costs. GROSS INCOME Rail continued to benefit from improving conditions in its markets during 2006 and as a result, revenues increased $52.1 million, reflecting higher lease rates and an average of 2,800 more cars on lease. In North America, Rail had an average of 2,300 more cars on lease. Additionally, strong demand contributed to high lease renewal success, increased lease rates and near full utilization of the fleet. In combination, these factors resulted in a 6.9% increase in lease income. For the year ended December 31, 2006, the average North American renewal lease rate on a basket of common car types increased 14.3% over the expiring rate and fleet utilization for the entire year was 99%. Additionally, Rail extended the term on certain renewals, an action that is expected to temper future revenue volatility. Rail's locomotive business also experienced growth during 2006 as higher lease rates and the placement of additional locomotives on lease contributed $3.1 million to the increase in lease income. Rail expects lease income to continue to increase into 2007 as lease rates on railcar renewals and assignments are expected to increase versus expiring rates, the full year effects of the 2006 lease rate increases are fully realized, and additional locomotives are placed on lease. Rail's European operations continued to improve; an average of over 500 more cars on lease and increased demand contributed to high lease renewal success and slightly higher lease rates, resulting in a 3.0% increase in lease income. The effect of the strengthening Euro and Polish Zloty on European sourced revenues also contributed favorably to results. Asset remarketing income was $6.4 million higher as Rail took advantage of the strong market and sold certain railcar types out of its fleet. Other income decreased due to fewer billable repairs of third-party railcars. As Rail's fleet of cars under full service leases has grown, service center activities have become increasingly focused on fleet repairs and regulatory compliance. Gains on the scrapping of railcars, resulting primarily from higher scrap steel prices, partially offset the decrease in billable repairs. The increase in affiliate earnings reflects improved operating results at Rail's affiliates as they also benefited from the strong market conditions. Additionally, mark to market gains of $4.9 million on certain derivative hedging instruments at the AAE affiliate also contributed to the increase. Prior year affiliates' earnings were affected by the write down of an investment in a non- core foreign logistics business, partially offset by an asset remarketing gain recognized by a domestic affiliate. OWNERSHIP COSTS Ownership costs increased $21.5 million primarily due to depreciation and interest associated with the larger fleet. Partially offsetting the increase were lower interest rates resulting from improved credit spreads for GFC. The comparative mix of ownership costs was affected by the purchase in 2006 of approximately 4,700 railcars that had been previously leased in under operating leases and the sale and leaseback in 2005 of approximately 2,900 railcars. 19 OPERATING COSTS Maintenance expenses increased $8.4 million, reflective of the increased costs associated with maintaining a larger fleet. Additionally, higher costs for increased repairs performed by railroads, component price increases for regular maintenance and conversion work, and higher European expenses due to the stronger Euro and Zloty also contributed to the higher costs. Asset impairment charges were $1.9 million lower than 2005, which included the write down of a North American repair facility that was sold in 2006 and the write down of certain locomotives in Europe. In 2006, asset impairment charges consisted primarily of the loss on the sale of a European repair facility. Other operating expenses decreased $13.3 million, driven by lower car and foreign franchise tax expenses, lower legal costs associated with claim defenses and favorable translation gains on U.S. denominated liabilities at Rail's European operations. Additionally, 2005 included $5.0 million of debt extinguishment costs related to the termination of a structured financing in Canada. COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004 SEGMENT PROFIT Rail's segment profit rose 26.3% or $42.0 million primarily as a result of higher lease income from more railcars on lease and rate increases on both lease renewals and assignments of existing cars. The increase in lease income was partially offset by the costs of a larger fleet including ownership and maintenance costs. GROSS INCOME Lease income was higher in both North American and European markets. North American renewal and assignment activity was strong and fleet utilization was 98%. Rail's secondary market acquisitions and new railcar investments increased the average size of the active fleet by approximately 4,000 railcars over 2004, leading to a corresponding increase in lease income. In 2005, lease rates continued to improve as the average renewal rate on a basket of common railcar types increased 9.7% versus the expiring rate. Rail's European leasing operations also improved as an increase in the average active fleet of 1,100 railcars, rising lease rates and stronger foreign exchange rates contributed to additional lease income. These results reflect Rail's success in new markets, expanded investment in current markets and the transition of Rail Poland's trip lease (pay as you go) business model to a term rental business model. Lease income also increased $24.2 million as a result of the acquisition of the locomotive business. No lease income from locomotives was reported in 2004 as Rail's 50% share of LLP's results was reported in share of affiliates' earnings. Asset remarketing income in 2005 primarily included a gain from the sale of certain six axle locomotives. Other income of $63.8 million increased $5.5 million primarily due to higher revenue for customer and railroad damage reimbursements and higher third party repair billings. This increase was partially offset by lower scrapping gains resulting from the combination of higher net book values of scrapped railcars as well as fewer railcars scrapped. Share of affiliates' earnings of $13.7 million decreased $2.9 million. Prior year results included the earnings from the LLP joint venture of $2.7 million. Additionally, 2005 included the write off of a non-core logistics investment. Excluding the effect of the locomotive change and the write down, share of affiliates' earnings increased $2.4 million due to improved results at AAE. OWNERSHIP COSTS Ownership costs increased $19.0 million primarily due to the impact of significant investment volume during 2004 and 2005 and the consolidation of LLP. The increase was partially offset by lower interest rates resulting from improved credit spreads for GFC. The mix of ownership costs was affected primarily by the sale and leaseback of railcars with a net book value of approximately $170.0 million. 20 OPERATING COSTS Maintenance expense increased $6.5 million. In North America, maintenance costs increased primarily due to costs associated with moving cars from idle to active service; conversion of railcars to new services; maintaining a larger fleet; and additional regulatory compliance, including the installation of long travel constant contact side bearings on certain railcars. Additionally, higher maintenance costs reflect higher railroad repairs driven by the new regulatory requirement to replace wheels more frequently. Asset impairment charges increased $1.8 million primarily due to an impairment on a North American repair facility subsequently sold in 2006 and the write down of certain locomotives in Europe. Other operating expenses increased $6.1 million primarily due to $5.0 million of debt extinguishment costs related to the termination of a structured financing in Canada, which was an important component of a company-wide initiative to repatriate foreign earnings in 2005. RAILCAR REGULATORY ISSUES Recent railroad derailments have led to calls for increased regulation to address safety and security issues associated with the transportation of hazardous materials. One area of focus has been pressurized railcars built prior to 1989 that were manufactured with non-normalized steel. The National Transportation Safety Board ("NTSB") issued a report in 2004 recommending that the Federal Railroad Administration ("FRA") conduct a comprehensive analysis to determine the impact resistance of pressurized tank cars built prior to 1989, use the results of that analysis to rank cars according to risk and to implement measures to eliminate or mitigate such risks. In July 2005, federal legislation was passed which requires the FRA to (1) within one year validate a predictive model to quantify the relevant dynamic forces acting on railroad tank cars under accident conditions, (2) within eighteen months initiate rulemaking to develop and implement an appropriate design standard for pressurized tank cars and (3) within one year conduct a comprehensive analysis to determine the impact resistance of steel shells of pre-1989 built pressurized tank cars. The FRA's analysis is ongoing. To date, the NTSB has not recommended that pressurized tank cars built prior to 1989 be removed from service, nor has the FRA issued any rules or orders curtailing use of these cars. The Company owns or leases approximately 4,600 pre-1989 built pressurized tank cars in North America (4% of its North American fleet). In December 2006, the Tank Car Committee of the Association of American Railroads ("AAR") implemented new performance standards for tank cars that transport two hazardous materials, chlorine and anhydrous ammonia, in order to reduce the probability of a release of these materials in the event of a rail accident. The Tank Car Committee is a standing committee within the AAR Safety and Operations Department and develops and publishes specifications for the design, construction, maintenance and operation of tank cars. Pursuant to these new rules, all cars transporting these materials must comply with the new performance standards by December 31, 2018. Car owners are required to submit plans to the AAR for complying with the new standards by December 31, 2008. GFC owns or leases approximately 3,200 tank cars (3% of its North American fleet) that carry these materials and, based upon management's review, GFC does not expect that the new rules will have a material impact on the Company's financial position or results of operations. In December 2006, the Pipeline and Hazardous Materials Administration ("PHMSA") issued a notice of proposed rulemaking to revise requirements applicable to the safe and secure transportation of hazardous materials by rail. The proposed new rules would require rail carriers to analyze safety and security risks along transportation routes, assess alternative routing options, and make routing decisions based on those assessments. The PHMSA proposal also addresses en route storage, delays in transit, delivery notification and additional security inspection requirements. Also in December 2006, the Transportation Security Administration ("TSA") issued a notice of proposed rulemaking that, among other things, requires freight carriers and certain facilities to be equipped to report location and shipping information to TSA upon request. The TSA also proposes implementation of chain of custody requirements to ensure a positive and secure exchange of specified hazardous materials. The Company does not expect adoption of the proposed PHMSA and TSA rules to have a material impact on its financial position or results of operations. 21 In January 2007, the FRA announced that it had signed a Memorandum of Cooperation with industry participants in connection with the Next Generation Rail Tank Car Project, a research program intended to improve the safety of rail shipments of commodities such as toxic inhalation materials and high risk gases and liquids. The FRA is considering issuing new federal design standards for tank cars that transport hazardous materials and hopes to issue a final rule in 2008. At this time, GFC cannot reasonably determine what effect, if any, new federal design standards might have in the event such standards are adopted by the FRA. The Company continues to work actively with trade associations and others to participate in the legislative and regulatory process affecting the safe and secure transportation of hazardous materials by rail. At this time, the effect on GFC of the mandates made on the FRA in the legislation described above, the probability of adoption of other legislation and the resulting impact on GFC should such legislation be adopted cannot be reasonably determined. SPECIALTY SEGMENT SUMMARY Specialty invests in marine assets and other long-lived industrial equipment in targeted industries. Such investments may be originated through direct or indirect channels. Specialty also manages portfolios of assets for third parties, earning management and remarketing fees. Specialty's revenues have historically fluctuated due to the uncertain timing of asset remarketing income, fees and gains from the sales of securities; however, over time lease and affiliate income are expected to comprise a greater proportion of gross income. The Specialty portfolio grew in 2006 due to new investments of $94.1 million, primarily in industrial equipment and marine assets. Specialty's total asset base, including off balance sheet assets, was $499.9 million at December 31, 2006 compared to $467.2 million and $518.3 million at December 31, 2005 and 2004, respectively. The run-off of Specialty's former Venture Finance portfolio was essentially completed in 2005. The estimated net book value equivalent of managed assets was $470.4 million at December 31, 2006. Prospectively, Specialty expects its owned portfolio to grow based on anticipated new investment volume. Components of Specialty's operating results are outlined below:
YEARS ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ GROSS INCOME Lease income........................................ $ 42.0 $ 31.4 $ 29.8 Interest income on loans............................ 3.6 7.7 17.6 Asset remarketing income............................ 27.9 28.1 25.0 Fees................................................ 3.3 3.4 5.4 Other income........................................ 5.5 9.7 6.8 ------ ------ ------ Revenues.......................................... 82.3 80.3 84.6 Affiliate earnings.................................. 53.4 60.0 37.5 ------ ------ ------ 135.7 140.3 122.1 OWNERSHIP COSTS Depreciation........................................ 7.0 4.2 4.2 Interest expense, net............................... 16.9 16.8 23.9 Operating lease expense............................. 3.9 4.1 4.1 ------ ------ ------ 27.8 25.1 32.2
22
YEARS ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ OPERATING COSTS Maintenance expense................................. 0.1 0.8 0.8 Asset impairment charges............................ 4.4 3.2 1.6 Other operating expenses............................ 4.5 5.1 (4.3) ------ ------ ------ 9.0 9.1 (1.9) ------ ------ ------ SEGMENT PROFIT...................................... $ 98.9 $106.1 $ 91.8 ====== ====== ======
COMPARISON OF YEAR ENDED DECEMBER 31, 2006 TO YEAR ENDED DECEMBER 31, 2005 SEGMENT PROFIT Specialty's segment profit of $98.9 million was 6.8% or $7.2 million lower than the prior year. The decrease was primarily due to lower interest income, gains from the sale of securities and affiliate earnings, and higher ownership costs. This was partially offset by significantly higher lease income in the current year. Asset remarketing income was significant in 2006 and 2005; both years included a large residual sharing fee from one managed portfolio transaction. GROSS INCOME Revenues of $82.3 million were $2.0 million higher than the prior year. Lease income increased primarily due to investments in new operating assets over the past two years and higher usage rents from marine vessels. Interest income decreased $4.1 million as a result of the run-off of Venture Finance loans in 2005. Asset remarketing for both 2006 and 2005 primarily reflects gains and fees received in each period from sales of assets. Significant residual sharing fees of $14.0 million and $12.8 million were received in 2006 and 2005, respectively, related to one transaction in the managed portfolio. The timing of asset remarketing income is dependent on transactional opportunities and market conditions and is expected to be uneven in nature. Other income decreased $4.2 million primarily due to a $3.7 million gain from the sale of securities recorded in the prior year. Affiliate earnings of $53.4 million decreased $6.6 million primarily as a result of decreased operating earnings from the marine joint ventures, partially offset by increased remarketing gains, primarily in an aircraft engine leasing joint venture. The marine joint ventures continued to post strong earnings in 2006; however, not at the historically high levels experienced in 2005. OWNERSHIP COSTS Ownership costs of $27.8 million were $2.7 million higher primarily due to depreciation on new operating assets. OPERATING COSTS Asset impairment charges in both years primarily reflect the write downs of certain cost method investments. Other operating expenses include net bad debt recoveries of $3.1 million and $2.3 million in 2006 and 2005, respectively. Excluding the recoveries from both years, other operating expenses increased primarily due to higher operating expenses associated with greater marine vessel utilization. COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004 SEGMENT PROFIT Specialty's segment profit of $106.1 million increased 15.6% or $14.3 million from the prior year. The increase was primarily due to the strong performance of marine affiliates and lower ownership costs. This was partially offset by lower interest income and higher operating expenses. Asset remarketing income was significant in both years; 2005 included a large residual sharing fee from one managed portfolio transaction. 23 GROSS INCOME Specialty's gross income of $140.3 million was $18.2 million higher primarily as a result of higher asset remarketing income and share of affiliate earnings, offset by lower interest and fee income. Asset remarketing income increased $3.1 million due to gains from the sale of assets from Specialty's owned portfolio as well as residual sharing fees from the sale of managed assets. The increase of $22.5 million in share of affiliates' earnings is primarily attributable to higher freight rates and vessel utilization in the marine joint ventures. The decrease of $9.9 million in interest income was the result of the run-off of Venture Finance loans in 2004 and 2005. Fee income decreased $2.0 million due to large asset management fees received in 2004. OWNERSHIP COSTS Ownership costs of $25.1 million decreased $7.1 million due to lower interest expense resulting from a smaller investment portfolio and lower debt balances. OPERATING COSTS Operating costs increased primarily as a result of a reversal of provision for possible losses recognized in 2004. Specialty reversed $9.4 million of provision for possible losses in 2004 compared with a reversal of $2.3 million in 2005. The reversals in both years were primarily due to favorable credit experience during the run-off of the Venture Finance portfolio, improvements in overall portfolio quality and recoveries of previously provided for bad debts. Additionally, other operating expenses increased in 2005 related to marine vessels that experienced higher utilization levels. Asset impairment charges in both years primarily reflect write downs of certain cost method investments. ASC SEGMENT SUMMARY Demand for waterborne transportation on the Great Lakes remained strong across all market segments during 2006, although there were some signs of softening in the iron ore sector in the fourth quarter. Great Lakes shipments of iron ore and limestone aggregates exceeded 2005 levels, while coal shipments were slightly below previous year levels. ASC's fleet was fully utilized throughout the 2006 navigating season, with 95% of cargo carried under term contracts. Based on current market conditions and industry forecasts of future activity, ASC believes that while high steel inventory levels may result in some softening of demand for iron ore in 2007, any shortfall in iron ore demand should be offset by increased demand for other commodities. ASC purchased six vessels from Oglebay Norton Marine Services ("ONMS") on June 6, 2006, for $126.3 million. Included in the acquisition were a warehouse and the spare parts inventory of the acquired vessels. The vessels acquired include two 1,000-footers, three Class II steamships and one river-sized vessel. The majority of ONMS's customer contracts were assigned to ASC concurrent with the purchase, and the acquired vessels actively operated through the end of the 2006 navigation season. In addition, on the vessel acquisition date, ASC and Oglebay Norton Minerals Company, a subsidiary of ONMS entered into a ten-year transportation agreement covering the vessel delivery of approximately 4 million tons of limestone annually. In June 2005, a 1,000-foot vessel was transferred from Specialty to ASC and placed on a long-term time charter lease, which expires in 2015. Components of ASC's operating results are outlined below:
YEARS ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ GROSS INCOME Marine operating revenues........................... $205.6 $135.7 $110.9 Lease income........................................ 4.2 2.4 -- Other income........................................ -- 0.2 0.9 ------ ------ ------ 209.8 138.3 111.8
24
YEARS ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ OWNERSHIP COSTS Depreciation........................................ 10.2 6.5 6.5 Interest expense, net............................... 8.1 5.1 5.1 ------ ------ ------ 18.3 11.6 11.6 OPERATING COSTS Marine operating expense............................ 161.2 108.9 87.7 Asset impairment charges............................ -- -- 0.2 Other operating expenses............................ (0.3) -- -- ------ ------ ------ 160.9 108.9 87.9 ------ ------ ------ SEGMENT PROFIT...................................... $ 30.6 $ 17.8 $ 12.3 ====== ====== ======
ASC'S FLEET DATA The following table summarizes fleet activity for ASC's Great Lakes fleet as of December 31:
2006 2005 2004 ---- ---- ---- Beginning balance........................................ 12 11 11 Vessels added............................................ 6 1 -- Ending balance........................................... 18 12 11
COMPARISON OF YEAR ENDED DECEMBER 31, 2006 TO YEAR ENDED DECEMBER 31, 2005 SEGMENT PROFIT ASC's segment profit of $30.6 million increased 71.9% or $12.8 million primarily as a result of the operating contribution generated by the six acquired vessels, a full year of income from the time charter vessel, which commenced operation in June 2005, and freight rate increases for ASC's existing fleet, partially offset by higher vessel operating and ownership costs. GROSS INCOME ASC's gross income of $209.8 million increased $71.5 million primarily due to the impact of the vessel acquisition, a full year of operating revenue and lease income from the time charter vessel, higher freight rates and increased fuel surcharges. The fuel surcharges were offset by higher fuel costs in marine operating expenses. The six acquired vessels contributed $51.2 million of additional freight revenue. Time charter freight revenue and operating lease income increased a total of $6.4 million, reflecting a full year of operation compared to seven months of operation in 2005. Revenue generated from the balance of ASC's fleet increased $13.9 million primarily due to contractual freight rate increases and fuel surcharges. OWNERSHIP COSTS ASC's ownership costs of $18.3 million increased $6.7 million primarily due to the impact of the vessel acquisitions. OPERATING COSTS ASC's operating costs increased $52.0 million primarily due to higher marine operating costs as a result of the vessel acquisitions, a full year of operating expenses related to the time charter vessel and higher fuel costs. The six acquired vessels added $37.6 million of operating expenses. Time charter operating expenses increased a total of $5.1 million, reflecting a full year of operation, compared to seven months of operation in 2005. Fuel prices 25 increased approximately 16%; however, the increased fuel costs were largely recovered through fuel surcharges. Higher vessel labor costs resulting from a new labor agreement, executed in September 2006, also contributed to the increase. COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004 SEGMENT PROFIT ASC's segment profit of $17.8 million increased 44.7% or $5.5 million primarily attributable to the contribution from the time charter vessel added in June 2005 and an increase in net tons carried related to an increase in demand. GROSS INCOME Marine operating revenue increased $24.8 million primarily due to fuel surcharges. The fuel surcharges are largely offset by higher fuel costs in marine operating expenses. Freight rate increases, increased net tons carried and the addition of the time charter vessel also contributed to the increase. OWNERSHIP COSTS Ownership costs of $11.6 million in 2005 were comparable to the prior year. OPERATING COSTS Operating costs increased $21.0 million primarily due to increased fuel costs, costs associated with the time charter vessel and increased cargo transported. The increased fuel costs were largely recovered through fuel surcharges. ASC REGULATORY ISSUES ASC vessels take on ballast water when not loaded in order to ensure proper vessel control and safe operation. The United States Coast Guard has initiated a rulemaking to promulgate new federal regulations on ballast water discharge standards. The rulemaking is focusing upon, among other issues, the use of various ballast water treatment technologies designed to prevent the introduction and spread of non-indigenous aquatic species into U.S. waters. To date, no federal or state regulations have been promulgated with respect to ballast water discharge and such treatment technologies for vessels that operate solely on the Great Lakes. Accordingly, ASC cannot determine the impact such regulations would have, if enacted. OTHER Other is comprised of over allocated interest expense, selling, general and administrative expenses ("SG&A"), miscellaneous income and expense not directly associated with the reporting segments and eliminations. Components of Other are outlined below (in millions):
YEARS ENDED DECEMBER 31 ------------------------- 2006 2005 2004 ------ ------ ------- Other items and eliminations....................... $ 23.5 $ 26.7 $ 143.0 ------ ------ ------- Gross Income..................................... $ 23.5 $ 26.7 $ 143.0 ====== ====== ======= Unallocated Expenses Selling, general and administrative expenses..... $ 98.1 $ 88.5 $ 90.5 Over allocated interest expense, net............. (14.7) (14.7) (0.4) Other items and eliminations..................... (24.0) (14.9) (141.4) Income taxes..................................... 107.4 100.0 114.0
26 GROSS INCOME Gross income primarily includes interest income on loan advances to GATX, which amounted to $22.9 million, $26.0 million and $23.2 million for the years ended 2006, 2005 and 2004, respectively. Gross income in 2004 also included a $68.1 million gain from the sale of an idle property and $48.4 million of insurance recoveries related to a prior litigation matter. SG&A, OVER ALLOCATED INTEREST AND OTHER ITEMS AND ELIMINATIONS SG&A include support costs such as information technology, human resources, legal, tax, financial support and management costs. SG&A expenses in 2006 increased $9.6 million from 2005 primarily due to higher compensation expense, including allocated stock option expense from GATX, and higher information technology spending. SG&A expenses in 2005 decreased $2.0 million primarily as a result of the absence of depreciation on certain SG&A assets, which were fully depreciated by the end of 2004. As noted previously, interest expense is allocated to the segments based upon an assigned leverage ratio designed to align aggregate segment leverage with the Parent Company's consolidated leverage. Over allocated interest represents the amount by which interest expense allocated to the segments (which may reflect interest expense incurred at the Parent Company) exceeds GFC's consolidated interest expense (net of interest income, which is reported on a net basis with interest expense). Over allocated interest in 2006 approximated 2005 amounts and was marginally impacted by higher interest income on the net cash proceeds received from the sale of Air in November. The lower level of over allocated interest in 2004 was primarily due to excess liquidity carried throughout the year. Other items include interest income on loan advances to GATX and the previously discussed gains in 2004. Excluding the effects of such items, the difference in the expense among the three years was primarily due to $11.9 million of debt extinguishment costs recognized in 2005. Eliminations were immaterial for all periods presented. INCOME TAXES GFC's effective income tax rate from continuing operations in 2006 of 33.8% was impacted by a $5.9 million deferred tax benefit recognized in connection with a statutory rate change enacted in Canada. GFC's effective tax rate in 2005 of 37.5% was impacted by $9.9 million of taxes related to the repatriation of foreign subsidiary earnings. To take advantage of the one-time dividends received deduction in the American Jobs Creation Act of 2004, GFC repatriated $94.5 million of foreign earnings in 2005. Partially offsetting the repatriation expense was a tax benefit of $6.6 million recognized in 2005 in connection with costs related to the termination of a structured financing. GFC's effective tax rate of 36.2% in 2004 was impacted primarily by deferred tax reductions of $2.4 million due to lower rates enacted in foreign jurisdictions. Excluding the impacts of the items noted herein from all years, GFC's effective tax rate from continuing operations would have been 35.6%, 36.3% and 37.0% for 2006, 2005 and 2004, respectively. See Note 13 to the consolidated financial statements for additional information about income taxes. DISCONTINUED OPERATIONS In 2006, GFC agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited ("MALL"). The sale was completed in two stages: the sale of the wholly owned aircraft closed on November 30, 2006, and the sale of the partnered aircraft closed on January 17, 2007. Separately in 2006, GFC sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GFC's aircraft leasing operation (formerly the "Air" segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. In 2004, GFC completed the sale of the assets of its former Technology segment ("Technology") with $291.5 million of related nonrecourse debt assumed by the acquirer. Financial data for Technology has also been segregated and reported as discontinued operations for all periods presented. 27 GFC had been in the commercial aircraft leasing business since 1968, building a valuable operating lease platform and portfolio of aircraft. GFC believes that, relative to competitors in the industry, its lower scale and higher cost of capital resulted in a competitive disadvantage and that the sale of the Air business will enable it to realize greater value for its shareholders than could have been realized from continuing to own and operate the business. Gross proceeds from these sales in 2006 totaled $1.3 billion, of which approximately $0.8 billion was used to retire debt and pay transaction costs. The remaining proceeds are expected to be used to fund new investments in rail, marine and industrial assets. The following table summarizes certain operating data for Discontinued Operations (in millions).
YEARS ENDED DECEMBER 31 ------------------------- 2006 2005 2004 ------ ------- ------ Revenues........................................... $133.5 $ 133.9 $206.6 (Loss) income before taxes......................... (8.9) (198.7) 22.9 Income (loss) from operations, net of taxes........ 32.1 (0.5) 21.4 Loss on disposal of segment, net of taxes.......... (70.9) (119.4) (7.2) ------ ------- ------ Net (loss) income from discontinued operations..... $(38.8) $(119.9) $ 14.2 ====== ======= ======
GFC's loss on disposals of wholly owned and partnered aircraft was comprised of $60.3 million ($70.9 million after tax) of losses realized on dispositions in 2006 and impairment charges of $196.4 million ($119.4 million after tax) recorded in 2005. Taxes associated with the disposals include an estimated expense of $37.2 million related to the recapture of previously deducted foreign losses related to GFC's interests in certain foreign affiliates. Results of discontinued operations reflect directly attributable revenues and expenses, ownership, operating, interest and SG&A expenses, and income taxes. Results also reflect intercompany allocations for interest and certain SG&A expenses. Interest expense allocated was $16.4 million, $26.7 million and $21.0 million for 2006, 2005 and 2004, respectively. Interest was allocated consistent with GFC's risk adjusted approach for continuing operations. SG&A allocated was $6.1 million, $6.9 million and $12.1 million for 2006, 2005 and 2004, respectively. SG&A was allocated based on management's best estimate and judgment of the direct cost of support services provided to discontinued operations and amounts allocated approximate the amounts expected to be eliminated from continuing operations. See Note 18 to the consolidated financial statements for additional information about discontinued operations. LIQUIDITY AND CAPITAL RESOURCES GENERAL GFC's operations fund investments and meet debt, lease and dividend obligations through cash from continuing operating activities, portfolio proceeds (including proceeds from asset sales), commercial paper issuances, committed revolving credit facilities and the issuance of secured and unsecured debt. GFC utilizes both domestic and international capital markets and banks. 28 Principal sources and uses of cash for continuing operations were as follows for the years ended December 31 (in millions):
2006 2005 2004 --------- --------- --------- PRINCIPAL SOURCES OF CASH Net cash provided by operating activities...... $ 376.5 $ 300.1 $ 340.0 Portfolio proceeds............................. 122.7 166.5 307.7 Proceeds from sale-leaseback................... -- 201.3 -- Proceeds from other asset sales................ 24.8 46.0 129.6 Proceeds from issuance of debt................. 572.4 549.5 20.5 --------- --------- --------- $ 1,096.4 $ 1,263.4 $ 797.8 ========= ========= ========= PRINCIPAL USES OF CASH Portfolio investments and capital additions.... $ (755.4) $ (498.7) $ (533.2) Repayments of debt............................. (389.9) (666.8) (346.7) Loan advances to GATX.......................... (94.7) (97.9) (46.3) Purchase of leased in assets................... (260.9) -- -- Payments on capital lease obligations.......... (10.8) (16.8) (21.6) Cash dividends................................. (59.2) (73.3) (106.9) --------- --------- --------- $(1,570.9) $(1,353.5) $(1,054.7) ========= ========= =========
CASH FLOWS OF DISCONTINUED OPERATIONS Net cash provided by discontinued operations of $558.7 million in 2006 consisted primarily of $1.3 billion of proceeds received from the Air disposal transactions partially offset by $796.0 million of related debt prepayments. CREDIT FACILITIES In 2005, GFC entered into a five-year $525.0 million senior unsecured revolving credit facility. The facility was amended in December 2006 to add GATX as a guarantor of GFC's obligations under the facility and also to change the financial covenants contained therein such that they are based on GATX's financial statements rather than GFC's. At December 31, 2006, availability under the credit facility was $510.4 million, with $14.6 million of letters of credit issued and backed by the facility. This facility along with commercial paper issuances are the primary sources of cash used to fund daily operations. This short-term debt is paid down using cash flow from operations or proceeds from long-term debt issuances. The facility also backs up the commercial paper issuances. RESTRICTIVE COVENANTS GATX is subject to various restrictive covenants, including requirements to maintain a defined net worth, a fixed charge coverage ratio and an asset coverage test. GFC is also subject to various restrictive covenants, and certain negative pledge provisions. GFC does not anticipate any covenant violation in the credit facility, bank financings, or indenture, or other financings, nor does GFC anticipate that any of these covenants will restrict its operations or its ability to procure additional financing. DEBT FINANCING During 2006, all of GATX's debt issuances were through GFC and its subsidiaries. As of December 31, 2006, GFC had a shelf registration for $1.0 billion of debt securities and pass through certificates, of which $696.5 million of senior unsecured notes had been issued. 29 See Note 11 to the consolidated financial statements for detailed information on GFC's credit facilities, debt obligations and related restrictive covenants. CREDIT RATINGS The availability of GFC's funding options may be affected by certain factors including the global capital market environment and outlook as well as GFC's financial performance. Access to capital markets at competitive rates is dependent on GFC's credit rating and rating outlook, as determined by rating agencies such as Standard & Poor's (S&P) and Moody's Investor Service (Moody's). During 2006, S&P upgraded its credit rating on GFC's long-term unsecured debt to BBB from BBB- and changed the rating outlook to stable. Also, S&P's credit rating for short-term unsecured debt was upgraded to A-2 from A-3. Subsequent to December 31, 2006, S&P further upgraded its credit rating on GFC's long-term unsecured debt to BBB+. During 2006, Moody's upgraded its rating on GFC's long- term unsecured debt to Baa1 from Baa3. Moody's also upgraded the credit rating for short-term unsecured debt to P-2 from P-3. 2007 LIQUIDITY POSITION GFC expects that it will be able to meet its contractual obligations for 2007 through a combination of projected cash from continuing operations, portfolio proceeds and its revolving credit facilities, as well as available cash. OFF BALANCE SHEET ARRANGEMENTS AND OTHER CONTINGENCIES Contractual Commitments At December 31, 2006, GFC's contractual commitments, including debt maturities, lease payments, and unconditional purchase obligations were (in millions):
PAYMENTS DUE BY PERIOD ------------------------------------------------------------------ TOTAL 2007 2008 2009 2010 2011 THEREAFTER -------- ------ ------ ------ ------ ------ ---------- Debt(a)...................... $1,893.5 $ 61.1 $206.8 $386.9 $254.9 $220.9 $ 762.9 Bank credit facilities....... 22.4 22.4 -- -- -- -- -- Capital lease obligations.... 72.8 10.0 9.4 9.6 7.2 5.9 30.7 Operating leases -- recourse......... 1,427.8 127.1 127.2 127.2 130.4 113.8 802.1 Operating leases -- nonrecourse...... 520.2 41.7 38.9 41.0 42.2 42.2 314.2 Unconditional purchase obligations................ 522.3 310.2 124.7 87.4 -- -- -- -------- ------ ------ ------ ------ ------ -------- $4,459.0 $572.5 $507.0 $652.1 $434.7 $382.8 $1,909.9 ======== ====== ====== ====== ====== ====== ========
- -------- (a) Excludes fair value of debt derivatives of $2.0 million which does not represent a contractual commitment with a fixed amount or maturity date. Unconditional Purchase Obligations At December 31, 2006, GFC's unconditional purchase obligations of $522.3 million were primarily for railcars to be acquired during the period of 2007 through 2009. At December 31, 2006, GFC's unconditional purchase obligations by segment were (in millions):
PAYMENTS DUE BY PERIOD ----------------------------------------------------------- TOTAL 2007 2008 2009 2010 2011 THEREAFTER ------ ------ ------ ----- ---- ---- ---------- Rail......................... $429.8 $217.7 $124.7 $87.4 $-- $-- $-- Specialty.................... 92.5 92.5 -- -- -- -- -- ------ ------ ------ ----- --- --- --- $522.3 $310.2 $124.7 $87.4 $-- $-- $-- ====== ====== ====== ===== === === ===
30 Future cash inflows The Company's primary projected cash inflow commitments arising from minimum future lease receipts from finance leases, net of debt payments for leveraged leases, and minimum future rental receipts from noncancelable operating leases as of December 31, 2006 were as follows (in millions):
PROJECTED CASH INFLOW COMMITMENTS BY PERIOD ------------------------------------------------------------------ TOTAL 2007 2008 2009 2010 2011 THEREAFTER -------- ------ ------ ------ ------ ------ ---------- Finance leases.......... $ 549.2 $ 51.7 $ 39.2 $ 42.5 $ 37.1 $ 41.2 $337.5 Operating leases........ 2,663.1 733.0 561.5 435.7 314.3 196.4 422.2 -------- ------ ------ ------ ------ ------ ------ Total................... $3,212.3 $784.7 $600.7 $478.2 $351.4 $237.6 $759.7 ======== ====== ====== ====== ====== ====== ======
Commercial Commitments In connection with certain investments or transactions, GFC has entered into various commercial commitments, such as guarantees and standby letters of credit, which could require performance in the event of demands by third parties. Similar to GFC's balance sheet investments, these guarantees expose GFC to credit, market and equipment risk; accordingly, GFC evaluates its commitments and other contingent obligations using techniques similar to those used to evaluate funded transactions. Affiliate guarantees generally involve guaranteeing repayment of the financing utilized to acquire or lease in assets being leased by an affiliate to customers, and are in lieu of making direct equity investments in the affiliate. GFC is not aware of any event of default which would require it to satisfy these guarantees, and expects the affiliates to generate sufficient cash flow to satisfy their lease and loan obligations. Asset residual value guarantees represent GFC's commitment to third parties that an asset or group of assets will be worth a specified amount at the end of a lease term. Approximately 36% of the Company's asset residual value guarantees are related to rail equipment. Based on known facts and current market conditions, management does not believe that the asset residual value guarantees will result in any negative financial impact to GFC. Historically, gains associated with the residual value guarantees have exceeded any losses incurred. GFC believes these asset residual value guarantees will likely generate future income in the form of fees and residual sharing proceeds. Lease payment guarantees represent GFC's guarantees to financial institutions of finance and operating lease payments to unrelated parties in exchange for a fee. Other guarantees consists of GFC's indemnification of Airbus Industrie ("Airbus") related to the dissolution of Flightlease Holdings Limited ("FHG") and the allocation by Airbus of $77.8 million of pre-delivery payments to GFC towards the purchase of aircraft in 2001. These pre-delivery payments are also the subject of litigation as discussed in Item 3. Legal Proceedings. No liability has been recorded with respect to this indemnification as GFC believes that the likelihood of having to perform under the indemnity is remote. GFC and its subsidiaries are also parties to standing letters of credit and bonds primarily related to workers' compensation and general liability insurance coverages. No material claims have been made against these obligations. At December 31, 2006, GFC does not expect any material losses to result from these off balance sheet instruments because performance is not anticipated to be required. 31 GFC's commercial commitments for continuing operations at December 31, 2006 were (in millions):
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD ------------------------------------------------------------ TOTAL 2007 2008 2009 2010 2011 THEREAFTER ------ ------ ------ ----- ----- ---- ---------- Affiliate guarantees............. $ 24.2 $ 3.0 $ 3.0 $ 2.2 $ 2.8 $ -- $13.2 Asset residual value guarantees.. 144.5 16.9 19.9 29.1 12.3 6.1 60.2 Lease payment guarantees......... 20.8 -- -- -- -- -- 20.8 Loan payment guarantee -- GATX convertible debt............... 249.3 124.3 125.0 -- -- -- -- Other guarantees(a).............. 77.8 -- -- -- -- -- -- ------ ------ ------ ----- ----- ---- ----- Guarantees....................... 516.6 144.2 147.9 31.3 15.1 6.1 94.2 Standby letters of credit and bonds.......................... 15.8 15.8 -- -- -- -- -- ------ ------ ------ ----- ----- ---- ----- $532.4 $160.0 $147.9 $31.3 $15.1 $6.1 $94.2 ====== ====== ====== ===== ===== ==== =====
- -------- (a) No specific maturity date. Subsequent to December 31, 2006, GFC provided a guarantee for future lease payments under a lease agreement assumed by the buyer of the Air business. The guarantee covers lease payments totaling $52.4 million payable during the years 2007 -- 2019. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to use judgment in making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. The Company regularly evaluates its estimates and judgments based on historical experience and other relevant factors and circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company considers the following as critical accounting policies: - - Operating assets and facilities -- Operating assets and facilities are stated principally at historical cost. Assets acquired under capital leases are included in operating assets and the related obligations are recorded as liabilities. Provisions for depreciation include the amortization of the cost of capital lease assets. Operating assets and facilities are depreciated using the straight-line method to an estimated residual value. Depending on the asset, depreciable term may be either the estimated useful life of the asset or the lease term. The Company periodically reviews the appropriateness of depreciable lives and residual values based on physical and economic factors, as well as existing market conditions. - - Impairment of long-lived assets -- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, GFC performs a review for impairment of long- lived assets, such as operating assets and facilities, whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. GFC measures recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net cash flows expected to be generated by it. Estimated future cash flows are based on a number of assumptions including lease rates, lease term, operating costs, life of the asset and disposition proceeds. If such assets are determined to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds estimated fair value. Fair value is based on internal estimates supplemented with independent appraisals and/or market comparables when available and appropriate. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less selling costs. - - Impairment of investments in affiliated companies -- In accordance with Accounting Principles Board Opinion ("APB") No. 18, The Equity Method of Accounting for Investments in Common Stock, GFC reviews the carrying amount of its investments in affiliates annually, or whenever events or changes in circumstances indicate that a decline in value may have occurred. 32 If management determines that indicators of impairment are present for an investment, an analysis is performed to estimate the fair value of that investment. Management defines fair value, for purposes of this policy, as the price that would be received for an investment in a current transaction between a willing buyer and seller. While quoted prices in active markets provide the best evidence of fair value, an active market does not exist for the majority of our affiliate investments. Thus, an estimate of their fair value must be made. Some examples of acceptable valuation techniques that GFC may use to estimate fair value are discounted cash flows at the investee level, capitalized earnings or the present value of expected distributable cash from the investee. Additionally, price/earnings ratios based on comparable businesses may also be acceptable in certain circumstances. Other valuation techniques that are appropriate for the particular circumstances of the affiliate and for which sufficient data are available may also be used. Once an estimate of fair value is made, it is compared to the investment's carrying value. If the investment's estimated fair value is less than its carrying value, then the investment is deemed impaired. If an investment is deemed impaired, then a determination is made as to whether the impairment is other-than-temporary. Factors that management considers in making this determination include expected operating results for the near future, the length of the economic life cycle of the underlying assets of the investee and the ability of GFC to hold the investment through the end of the underlying assets' useful life. Anticipated actions that are probable of being taken by investee management that may improve its business prospects are also considered. If management reasonably determines an investment to be only temporarily impaired, no impairment loss is recorded. Alternatively, if management determines that an investment is impaired on an other-than-temporary basis, a loss equal to the difference between the estimated fair value of the investment and its carrying value is recorded in the period of identification. - - Impairment of goodwill -- In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, GFC reviews the carrying amount of its recorded goodwill annually or in interim periods if circumstances indicate a potential impairment. The impairment review is performed at the reporting unit level, which is one level below an operating segment. The goodwill impairment test is a two-step process and requires management to make certain judgments in determining what assumptions to use in the calculation. The first step in the process consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenue and profit forecasts. Management then compares its estimate of the fair value of the reporting unit with the reporting unit's carrying amount, which includes goodwill. If the estimated fair value is less than the carrying amount, an additional step is performed that compares the implied fair value of the reporting unit's goodwill with the carrying amount of the goodwill. The determination of a reporting unit's implied fair value of the goodwill requires management to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the implied fair value of the goodwill. To the extent that the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recorded in the period of identification. - - Income Taxes -- GFC evaluates the need for a deferred tax asset valuation allowance by assessing the likelihood of whether deferred tax assets, will be realized in the future. The assessment of whether a valuation allowance is required involves judgment, including the forecast of future taxable income and the evaluation of tax planning initiatives, if applicable. Taxes have not been provided on undistributed earnings of foreign subsidiaries as the Company has historically maintained that undistributed earnings of its foreign subsidiaries and affiliates were intended to be permanently reinvested in those foreign operations. If, in the future, these earnings are repatriated to the U.S., or if the Company expects such earnings will be remitted in the foreseeable future, a provision for additional taxes would be required. GFC's operations are subject to taxes in the U.S., various states and foreign countries and as result, may be subject to audit in all of these jurisdictions. Tax audits may involve complex issues and disagreements with taxing authorities could require several years to resolve. Accruals for tax contingencies require management to make estimates and assessments with respect to the ultimate outcome of tax audit issues. 33 NEW ACCOUNTING PRONOUNCEMENTS See Note 2 to the consolidated financial statements for a summary of new accounting pronouncements that may impact GFC's business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. In the normal course of business, GFC is exposed to interest rate and foreign currency exchange rate risks that could impact results of its operations. To manage these risks, GFC, pursuant to authorized policies, may enter into certain derivative transactions, principally interest rate swaps, Treasury note derivatives and currency forwards and swaps. These instruments and other derivatives are entered into only for hedging existing underlying exposures. GFC does not hold or issue derivative financial instruments for speculative purposes. Interest Rate Exposure -- GFC's interest expense is affected by changes in interest rates, primarily LIBOR, as a result of its use of variable rate debt instruments. GFC generally manages its variable rate debt instruments in relation to its variable rate investments. Based on GFC's variable rate debt instruments at December 31, 2006, and giving affect to related derivatives, a hypothetical increase in market interest rates of 100 basis points would cause an increase in interest expense of $2.9 million after-tax in 2007. Comparatively, at December 31, 2005, a hypothetical 100 basis point increase in interest rates would have resulted in a $10.4 million increase in after-tax interest expense in 2006. The decrease in sensitivity to interest rates is primarily due to the repayment of variable rate debt resulting from the sale of the former Air segment, which is reported as discontinued operations. Excluding variable rate liabilities related to the Air segment at December 31, 2005, a 100 basis point increase in interest rates would have resulted in an increase in after-tax interest expense of approximately $4.3 million in 2006. Functional Currency/Reporting Currency Exchange Rate Exposure -- GFC conducts operations in foreign countries, principally Poland, Germany, Austria and Canada. As a result, changes in the value of the U.S. dollar as compared to foreign currencies, primarily the Canadian dollar, Euro and Polish zloty, would affect GFC's reported earnings when they are converted to U.S. dollars upon consolidation. Based on earnings from continuing operations in 2006, a uniform and hypothetical 10% strengthening in the U.S. dollar versus applicable foreign currencies would decrease after-tax income from continuing operations in 2007 by approximately $7.3 million. Comparatively, at December 31, 2005, a uniform and hypothetical 10% increase in the U.S. dollar versus applicable foreign currencies would have resulted in a decrease in after-tax income from continuing operations in 2006 of approximately $4.0 million. GFC generally hedges material non-functional currency assets and liabilities with currency forwards and swaps, largely eliminating the effect on income of changes in foreign exchange rates on these balances. 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 offsetting effects. For example, offsetting effects are present to the extent that floating rate debt is associated with floating rate assets, including cash and cash equivalents. Changes in interest rates and foreign exchange rates can also have an effect on the demand and relative price for services provided by GFC domestically and internationally. Equity Price Exposure -- GFC also has equity price risk inherent in stock and warrants of companies in which it has invested. At December 31, 2006, the fair values of the stock and warrants were $0.7 million and $1.2 million, respectively. The hypothetical change in value resulting from a 10% sensitivity test would not be material to GFC's results of operations. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of GATX Financial Corporation We have audited the accompanying consolidated balance sheets of GATX Financial Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholder's equity, cash flows, and comprehensive income for each of the three years in the period ended December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of GATX Financial Corporation and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of GATX Financial Corporation's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois March 1, 2007 35 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 --------------------- 2006 2005 --------- --------- IN MILLIONS ASSETS CASH AND CASH EQUIVALENTS.................................... $ 195.6 $ 105.7 RESTRICTED CASH.............................................. 48.0 53.1 RECEIVABLES Rent and other receivables................................... 102.4 81.2 Finance leases............................................... 402.6 313.6 Loans........................................................ 36.0 37.3 Less: allowance for possible losses.......................... (9.6) (12.7) --------- --------- 531.4 419.4 OPERATING ASSETS AND FACILITIES Rail......................................................... 4,352.4 3,728.1 Specialty.................................................... 113.6 90.8 ASC.......................................................... 361.2 234.4 Less: allowance for depreciation............................. (1,798.0) (1,741.6) --------- --------- 3,029.2 2,311.7 DUE FROM GATX CORPORATION.................................... -- 393.2 INVESTMENTS IN AFFILIATED COMPANIES.......................... 291.9 283.9 GOODWILL..................................................... 92.8 86.0 OTHER ASSETS................................................. 151.9 166.0 ASSETS OF DISCONTINUED OPERATIONS............................ 232.2 1,706.8 --------- --------- TOTAL ASSETS................................................. $ 4,573.0 $ 5,525.8 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY ACCOUNTS PAYABLE AND ACCRUED EXPENSES........................ $ 229.6 $ 133.7 DEBT Commercial paper and bank credit facilities.................. 22.4 57.0 Recourse..................................................... 1,888.8 2,415.4 Nonrecourse.................................................. 2.7 37.7 Capital lease obligations.................................... 51.5 62.5 --------- --------- 1,965.4 2,572.6 DEFERRED INCOME TAXES........................................ 695.0 665.7 OTHER LIABILITIES............................................ 249.3 258.6 LIABILITIES OF DISCONTINUED OPERATIONS....................... -- 126.3 --------- --------- TOTAL LIABILITIES............................................ 3,139.3 3,756.9 SHAREHOLDER'S EQUITY Preferred stock ($1.00 par value, 2,000,000 authorized, 1,027,250 shares of Series A Convertible Preferred Stock issued and outstanding as of December 31, 2006 and 2005)... 125.0 125.0 Common stock ($1.00 par value, 4,000,000 authorized, 1,051,250 shares issued and outstanding as of December 31, 2006 and 2005)............................................. 1.1 1.1 Additional paid in capital................................... 569.1 569.1 Retained earnings............................................ 696.4 1,071.7 Accumulated other comprehensive income....................... 42.1 2.0 --------- --------- TOTAL SHAREHOLDER'S EQUITY................................... 1,433.7 1,768.9 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................... $ 4,573.0 $ 5,525.8 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 36 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------ 2006 2005 2004 -------- -------- -------- IN MILLIONS GROSS INCOME Lease income.......................................... $ 826.2 $ 763.2 $ 689.3 Marine operating revenue.............................. 205.6 135.7 110.9 Interest income on loans.............................. 3.6 8.1 17.6 Asset remarketing income.............................. 47.6 41.4 33.2 Fees.................................................. 4.9 5.1 9.4 Other................................................. 88.0 100.0 208.9 -------- -------- -------- Revenues............................................ 1,175.9 1,053.5 1,069.3 Share of affiliates' earnings......................... 76.1 73.7 54.1 -------- -------- -------- TOTAL GROSS INCOME.................................... 1,252.0 1,127.2 1,123.4 OWNERSHIP COSTS Depreciation.......................................... 163.3 142.8 134.9 Interest expense, net................................. 108.9 85.1 105.6 Operating lease expense............................... 166.6 180.0 169.8 -------- -------- -------- TOTAL OWNERSHIP COSTS................................. 438.8 407.9 410.3 OTHER COSTS AND EXPENSES Maintenance expense................................... 201.8 194.1 187.6 Marine operating expenses............................. 161.2 108.9 87.7 Selling, general and administrative................... 98.1 88.5 90.5 Asset impairment charges.............................. 5.5 6.2 3.0 Other................................................. 28.6 55.1 29.4 -------- -------- -------- TOTAL OTHER COSTS AND EXPENSES........................ 495.2 452.8 398.2 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................................... 318.0 266.5 314.9 INCOME TAXES.......................................... 107.4 100.0 114.0 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS..................... 210.6 166.5 200.9 (LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES............................................... (38.8) (119.9) 14.2 -------- -------- -------- NET INCOME............................................ $ 171.8 $ 46.6 $ 215.1 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 37 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------------- 2006 2005 2004 -------- ------- ------- IN MILLIONS OPERATING ACTIVITIES Net income............................................... $ 171.8 $ 46.6 $ 215.1 Less: (Loss) income from discontinued operations......... (38.8) (119.9) 14.2 -------- ------- ------- Income from continuing operations........................ 210.6 166.5 200.9 Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: Gains on sales of assets and securities................ (22.3) (41.0) (106.5) Depreciation........................................... 170.5 150.6 144.9 Reversal of provision for possible losses.............. (2.1) (2.8) (13.1) Asset impairment charges............................... 5.5 6.2 3.0 Deferred income taxes.................................. 87.8 74.1 126.2 Share of affiliates' earnings, net of dividends........ (39.9) (33.5) (23.3) Current income taxes................................... 3.5 10.3 58.1 Decrease in operating lease payable.................... (16.5) (17.2) (2.8) Decrease (increase) in prepaid pension................. (0.3) (1.0) (12.9) Other.................................................. (20.3) (12.1) (34.5) -------- ------- ------- Net cash provided by operating activities of continuing operations............................. 376.5 300.1 340.0 INVESTING ACTIVITIES Additions to operating assets, net of nonrecourse financing for leveraged leases, and facilities......... (726.0) (399.8) (480.5) Loans extended........................................... (19.2) -- (14.2) Investments in affiliates................................ (8.2) (24.9) (5.6) Other.................................................... (2.0) (74.0) (32.9) -------- ------- ------- Portfolio investments and capital additions............ (755.4) (498.7) (533.2) Purchases of leased in assets............................ (260.9) -- -- Portfolio proceeds....................................... 122.7 166.5 307.7 Transfer of assets to GATX Corporation................... -- -- (11.1) Proceeds from sale-leaseback............................. -- 201.3 -- Proceeds from sales of other assets...................... 24.8 46.0 129.6 Net decrease in restricted cash.......................... 0.6 6.4 0.4 Other.................................................... (0.5) 5.3 1.0 -------- ------- ------- Net cash used in investing activities of continuing operations.......................................... (868.7) (73.2) (105.6) FINANCING ACTIVITIES Proceeds from issuances of debt (original maturities longer than 90 days)................................... 572.4 549.5 20.5 Repayments of debt (original maturities longer than 90 days).................................................. (355.2) (654.0) (404.5) Net (decrease) increase in debt with original maturities of 90 days or less..................................... (34.7) (12.8) 57.8 Payments on capital lease obligations.................... (10.8) (16.8) (21.6) Equity contributions from GATX Corporation............... -- 47.6 -- Advances to GATX Corporation............................. (94.7) (97.9) (46.3) Cash dividends........................................... (59.2) (73.3) (106.9) Other.................................................... 3.6 (22.5) (0.4) -------- ------- ------- Net cash provided by (used in) financing activities of continuing operations............................... 21.4 (280.2) (501.4) EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS.... 2.0 (1.4) 2.9 CASH FLOWS OF DISCONTINUED OPERATIONS (SEE NOTE 18) Net cash provided by operating activities.............. 91.4 97.0 131.7 Net cash provided by investing activities.............. 1,263.3 82.7 39.8 Net cash used in financing activities.................. (796.0) (82.4) (55.5) -------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE PERIOD...................................... 89.9 42.6 (148.1) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 105.7 63.1 211.2 CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 195.6 $ 105.7 $ 63.1 ======== ======= ======= NON-CASH TRANSACTION Non-cash distribution to Parent Company.................. $ 487.9 $ -- $ -- ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 38 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
ACCUMULATED OTHER PREFERRED COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCK STOCK CAPITAL EARNINGS INCOME TOTAL --------- ------ ---------- -------- ------------- -------- IN MILLIONS Balance at December 31, 2003...... $125.0 $1.0 $521.6 $ 990.2 $(27.5) $1,610.3 Comprehensive income: Net income...................... 215.1 215.1 Foreign currency translation gain......................... 55.5 55.5 Unrealized gain on securities... 2.2 2.2 Unrealized loss on derivatives.. (1.6) (1.6) -------- Comprehensive income.............. 271.2 Dividends declared................ (106.9) (106.9) ------ ---- ------ -------- ------ -------- Balance at December 31, 2004...... $125.0 $1.0 $521.6 $1,098.4 $ 28.6 $1,774.6 Comprehensive income: Net income...................... 46.6 46.6 Foreign currency translation loss......................... (37.3) (37.3) Unrealized loss on securities... (3.1) (3.1) Unrealized gain on derivatives.. 13.8 13.8 -------- Comprehensive income.............. 20.0 Capital contribution.............. 0.1 47.5 47.6 Dividends declared................ (73.3) (73.3) ------ ---- ------ -------- ------ -------- Balance at December 31, 2005...... $125.0 $1.1 $569.1 $1,071.7 $ 2.0 $1,768.9 Comprehensive income: Net income...................... 171.8 171.8 Foreign currency translation gain......................... 33.1 33.1 Unrealized loss on securities... (1.2) (1.2) Unrealized gain on derivatives.. 8.2 8.2 -------- Comprehensive income.............. 211.9 Dividends declared................ (547.1) (547.1) ------ ---- ------ -------- ------ -------- Balance at December 31, 2006...... $125.0 $1.1 $569.1 $ 696.4 $ 42.1 $1,433.7 ====== ==== ====== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. 39 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ IN MILLIONS Net income................................................ $171.8 $ 46.6 $215.1 Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss)................ 33.1 (37.3) 55.5 Unrealized (loss) gain on securities.................... (1.2) (3.1) 2.2 Unrealized gain (loss) on derivative instruments........ 8.2 13.8 (1.6) ------ ------ ------ Other comprehensive income (loss)......................... 40.1 (26.6) 56.1 ------ ------ ------ COMPREHENSIVE INCOME...................................... $211.9 $ 20.0 $271.2 ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS GATX Financial Corporation ("GFC" or the "Company") is a wholly owned subsidiary of GATX Corporation ("GATX" or the "Parent Company). GFC leases, manages, operates, and invests in long-lived, widely used assets in the rail, marine and industrial equipment markets. Headquartered in Chicago, Illinois, GFC has three financial reporting segments: Rail, Specialty and American Steamship Company ("ASC"). NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation -- The consolidated financial statements include the accounts of GFC and its wholly owned subsidiaries. Investments in affiliated companies (discussed herein) are not consolidated. The consolidated financial statements reflect the operations of the former Air and Technology segments as discontinued operations for all periods presented. GFC has ownership interests in certain investments that are considered Variable Interest Entities ("VIEs") in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). GFC does not believe it is the primary beneficiary with respect to any of the VIEs. As a result, GFC does not consolidate these entities. Use of Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. The Company regularly evaluates estimates and judgments based on historical experience and other relevant facts and circumstances. Actual amounts could differ from those estimates. Reclassification -- Certain amounts in the 2005 and 2004 financial statements have been reclassified to conform to the 2006 presentation. Cash and Cash Equivalents -- GFC considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Restricted cash -- Restricted cash represents cash and cash equivalents that are restricted as to withdrawal and usage. GFC's restricted cash primarily relates to amounts maintained, as required by contract, for three wholly owned bankruptcy remote, special-purpose corporations. Loans -- GFC records loans at the principal amount outstanding plus accrued interest. The loan portfolio is reviewed regularly and a loan is classified as impaired when it is probable that GFC will be unable to collect all amounts due under the loan agreement. Since most loans are collateralized, impairment is generally measured as the amount by which the carrying value of the loan exceeds expected payments plus the fair value of the underlying collateral. Generally, interest income is not recognized on impaired loans until the loan has been paid up to contractually current status or as conditions warrant. Operating Assets and Facilities -- Operating assets and facilities are stated principally at cost. Assets acquired under capital leases are included in operating assets and the related obligations are recorded as liabilities. Provisions for depreciation include the amortization of capital lease assets. Operating assets and facilities are depreciated over their estimated useful lives or lease terms to estimated residual values using the straight-line method. The estimated useful lives of depreciable assets are as follows: Railcars.................................................... 30 - 38 years Reconditioned locomotives................................... 10 - 20 years Buildings................................................... 40 - 50 years Leasehold improvements...................................... 5 - 40 years Marine vessels.............................................. 40 - 50 years
Impairment of Long-Lived Assets -- A review for impairment of long-lived assets, such as operating assets and facilities, is performed whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If an asset is determined to be impaired, the impairment loss to be recognized is the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are classified as held for sale and reported at the lower of their carrying amount or fair value less costs to sell. Investments in Affiliated Companies -- GFC has investments in 20 to 50 percent-owned companies and joint ventures and other investments in which GFC does not have effective or voting control (collectively "affiliates"). These affiliates are accounted for using the equity method. Investments in affiliated companies are initially recorded at cost, including goodwill at the acquisition date. In certain instances, GFC's cost basis may be different from its share of the affiliates' net assets. These differences are primarily attributable to loans to and from affiliates and purchase accounting adjustments. Income/expense on these loans offsets GFC's proportional share of the affiliates' earnings. The carrying amount of GFC's investments in affiliated companies is affected by GFC's share of the affiliates' undistributed earnings and losses, distributions of dividends and loan payments to or from the affiliate. See Note 6 for additional information. Impairment of investments in affiliated companies -- In accordance with Accounting Principles Board Opinion ("APB") No. 18, The Equity Method of Accounting for Investments in Common Stock, GFC reviews the carrying amount of its investments in affiliates annually, or whenever events or changes in circumstances indicate that a decline in value may have occurred. If an investment is determined to be impaired on an other-than-temporary basis, a loss equal to the difference between the estimated fair value of the investment and its carrying value is recorded in the period of identification. Inventory -- GFC has inventory that consists of railcar and locomotive repair components and marine vessel spare parts. All inventory balances are stated at lower of cost or market. Railcar repair components are valued using the average cost method. Vessel spare parts inventory is valued using the first- in, first-out method. Inventory is included in other assets on the balance sheet. Goodwill -- Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, established accounting and reporting standards for goodwill. Under these standards, goodwill is no longer amortized, but rather subject to an annual impairment test. GFC's impairment review is performed at the reporting unit level, which is one level below the operating segment level. GFC recognizes an impairment charge for any amount by which the carrying amount of a reporting unit's goodwill exceeds its fair value. The impairment test is performed annually in the fourth quarter or in interim periods if events or circumstances indicate a potential impairment. Fair values are estimated using a discounted cash flow model. See Note 8 for additional information. Maintenance and Repair Costs -- Maintenance and repair costs are expensed as incurred. Costs incurred by GFC in connection with planned major maintenance activities such as rubber linings and conversions that improve or extend the useful life of an asset are capitalized and depreciated over their estimated useful life. Allowance for Possible Losses -- The purpose of the allowance is to provide an estimate of credit losses with respect to gross receivables. Gross receivables include rent, direct finance leases (including leveraged leases net of nonrecourse debt), and loan receivables and direct finance lease residual values. For the purpose of discussion of the allowance for losses, gross receivables exclude direct finance lease residual values. Losses on these residual values are recognized via a charge to earnings and do not affect the allowance. GFC's estimate of the amount of provision (reversal) for losses incurred in each period requires consideration of historical loss experience, judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GFC participates. GFC may also record specific provisions for known troubled accounts. GFC charges off amounts that management considers unrecoverable from obligors or the disposition of collateral. GFC assesses the recoverability of its receivables by considering several factors, including customer payment history and financial position. The allowance for possible losses is periodically reviewed for adequacy, taking into consideration changes in economic conditions, collateral values, credit quality indicators and customer-specific circumstances. GFC believes that the allowance is adequate to cover losses inherent in the gross receivables portfolio as of December 31, 2006. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes -- United States ("U.S.") income taxes have not been provided on the undistributed earnings of foreign subsidiaries and affiliates that GFC intends to permanently reinvest in these foreign operations. The cumulative amount of such earnings was $319.3 million at December 31, 2006. To take advantage of the one-time dividends received deduction in the American Jobs Creation Act of 2004, GFC repatriated $94.5 million of foreign earnings in 2005. See Note 13 for additional information. Derivatives -- SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those derivatives at fair value. GFC records the fair value of all derivatives as either other assets or other liabilities in the balance sheet. Classification of derivative activity in the statements of operations and cash flows is generally determined by the nature of the hedged item. Gains and losses on derivatives that are not accounted for as hedges are classified as other operating expenses and related cash flows are included in cash flows from operating activities. Instruments that meet established accounting criteria are formally designated as qualifying hedges at the inception of the contract. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure both at the inception of the hedging relationship and on an ongoing basis. GFC primarily uses derivatives, such as interest rate and currency swap agreements, Treasury rate locks, and forward sale agreements, as hedges to manage its exposure to interest rate and foreign currency exchange rate risk on existing and anticipated transactions. For qualifying derivatives designated as fair value hedges, changes in both the derivative and the hedged item attributable to the risk being hedged are recognized in earnings. For qualifying derivatives designated as cash flow hedges, the effective portion of the derivative's gain or loss is recorded as part of other comprehensive income (loss) in shareholder's equity and subsequently recognized in the income statement when the hedged transaction affects earnings. The change in fair value of the ineffective portion of all hedges is immediately recognized in earnings. For the years ended December 31, 2006, 2005, and 2004, amounts recognized in earnings for hedge ineffectiveness were immaterial. Gains and losses resulting from the early termination of derivatives designated as cash flow hedges are included in other comprehensive income (loss) and recognized in income when the original hedged transaction affects earnings. Although GFC does not hold or issue derivative financial instruments for purposes other than hedging, certain derivatives may not meet the established criteria to qualify as hedges. These derivatives are adjusted to fair value through earnings immediately. See Note 12 for further information. Environmental Liabilities -- Expenditures that relate to current or future operations are expensed or capitalized 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 GFC's liability for environmental cleanup is probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as required. See Note 15 for additional information. Revenue Recognition -- Gross income includes rents on operating leases, accretion of income on direct finance leases, interest on loans, marine operating revenue, fees, asset remarketing gains and losses, gains and losses on the sale of portfolio investments and equity securities and share of affiliates' earnings. Operating lease income is recognized on a straight-line basis over the term of the underlying leases. Finance lease income is recognized on the basis of the interest method, which produces a constant yield over the term of the lease. Marine operating revenue is recognized as shipping services are performed and revenue is allocated among reporting periods based on the relative transit time in each reporting period for shipments in process at any month end. Asset remarketing income includes gains and losses from the sale of assets from GFC's portfolio as well as residual sharing fees from the sale of managed assets. Asset remarketing income is recognized upon completion of the sale of assets. Fee income, including management fees received from joint ventures, is recognized as services are performed, which may be over the period of a management contract or as contractual obligations are met. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Marine Operating Expenses -- Marine operating expenses are categorized as either direct or indirect. Direct expenses consist primarily of crewing costs, fuel, tugs, vessel supplies, running repairs and insurance costs, and are recognized as incurred. Indirect expenses consist of repairs and maintenance, and depreciation. Indirect expenses incurred prior to the beginning of the sailing season are deferred and amortized ratably over the anticipated sailing season, generally April 1 - December 15. Indirect expenses incurred during the sailing season are recognized as incurred. Lease and Loan Origination Costs -- Initial direct costs of leases are deferred and amortized over the lease term, either as an adjustment to the yield for direct finance leases or on a straight-line basis for operating leases. Loan origination fees and related direct loan origination costs for a given loan are offset, and the net amount is deferred and amortized over the term of the loan as an adjustment to interest income. Residual Values -- GFC has investments in the residual values of its operating assets. The residual values represent the estimate of the values of the assets at the end of the lease contracts. GFC initially records these based on appraisals and estimates. Realization of the residual values is dependent on GFC's ability to market the assets under future market conditions. GFC reviews residual values periodically to determine that recorded amounts are appropriate. For finance lease investments, GFC reviews the estimated residual values of leased equipment at least annually, and any other-than-temporary declines in value are immediately charged to income. In addition to a periodic review, events or changes in circumstances may trigger an earlier review of residual values. Investment Securities -- GFC's portfolio includes warrants received in connection with the financing of non-public, venture-backed companies, common stock received upon the exercise of warrants and debt securities. Equity securities are classified as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The securities are carried at fair value and unrealized gains and losses arising from re- measuring securities to fair value are included on an after tax basis as a separate component of accumulated other comprehensive income (loss). The Company uses specific identification as the basis to determine the amount reclassified from accumulated other comprehensive income (loss) upon sale of the securities. Under the provisions of SFAS No. 133, warrants are accounted for as derivatives, with changes in fair value recorded in current earnings. Upon conversion of the warrants to shares of common stock, the warrants are reclassified in the balance sheet as equity securities. Debt securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Interest on debt securities, including amortization of premiums and accretion of discounts, are included in interest expense, net. Debt securities are written down to fair value when a decline in fair value below the security's amortized cost basis is determined to be other-than-temporary. Foreign Currency Translation -- The assets and liabilities of GFC's operations having non-U.S. dollar functional currencies are translated at exchange rates in effect at year end, and statements of operations and cash flows are translated at weighted average exchange rates for the year. In accordance with SFAS No. 52, Foreign Currency Translation, gains and losses resulting from the translation of foreign currency financial statements are deferred and recorded as a separate component of accumulated other comprehensive income or loss in the shareholder's equity section of the balance sheet. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued Staff Position ("FSP") FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. This guidance applies to all transactions classified as leveraged leases in accordance with SFAS No. 13 and provides that if the expected timing of income tax cash flows generated by a leveraged lease transaction changes, then the rate of return and the allocation of income should be recalculated which may result in a one-time, non-cash charge to earnings in the period of changed expectations. The effective date for this FSP is January 1, 2007. GFC has completed its assessment of the impact of this FSP with respect to two structured leverage lease transactions and as a result expects to record a reduction to retained earnings of approximately $15.0 million, net of taxes, effective January 1, 2007 for the cumulative effect of adopting this 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provision. The amount of this adjustment will be recognized as income over the remaining terms of the affected leases, 2007 to 2021. The impact on 2007 results will not be material. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), which is an interpretation of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 does not prescribe a recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FIN 48 clarifies the application of SFAS No. 109 by defining criteria that an individual tax position must meet for any tax benefit to be recognized in an enterprise's financial statements. Upon adoption, any required adjustment to recorded tax benefits is recognized as an adjustment to opening retained earnings as of January 1, 2007. GFC is in the process of completing its evaluation of this interpretation, however, the application of it is not expected to be material to GFC's financial position. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure requirements related to the use of fair value measures in financial statements. SFAS No. 157 does not modify the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability. SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own assumptions as the lowest level. The statement is effective for financial statements issued in 2008; however, earlier application is encouraged. The application of this statement is not expected to be material to the Company's financial position or results of operations. FSP AUG AIR-1, Accounting for Planned Major Maintenance Activities, was also released by the FASB in September 2006. FSP AUG AIR-1 amends the guidance on the accounting for planned major maintenance activities; specifically it precludes the use of the previously acceptable "accrue in advance" method. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. The application of this FSP is not expected to be material to the Company's financial position or results of operations. NOTE 3. LEASES The following information pertains to GFC as a lessor: Finance Leases -- GFC's finance leases are comprised of direct financing leases and leveraged leases. Investment in direct finance leases consists of lease receivables, plus the estimated residual value of the equipment at the lease termination dates, less unearned income. Lease receivables represent the total rent to be received over the term of the lease reduced by rent already collected. Initial unearned income is the amount by which the original sum of the lease receivable and the estimated residual value exceeds the original cost of the leased equipment. Unearned income is amortized to lease income over the lease term in a manner that produces a constant rate of return on the net investment in the lease. Finance leases that are financed principally with nonrecourse borrowings at lease inception and that meet certain criteria are accounted for as leveraged leases. Leveraged lease receivables are stated net of the related nonrecourse debt. Initial unearned income represents the excess of anticipated cash flows (including estimated residual values, net of the related debt service) over the original investment in the lease. The Company recognized income from leveraged leases (net of taxes) of $3.8 million, $3.8 million and $5.7 million in 2006, 2005 and 2004, respectively. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the investment in finance leases at December 31 were (in millions):
LEVERAGED DIRECT TOTAL LEASES FINANCING FINANCE LEASES ----------------- ----------------- ------------------- 2006 2005 2006 2005 2006 2005 ------- ------- ------- ------- -------- -------- Total minimum lease payments receivable....................... $ 975.1 $ 991.1 $ 420.8 $ 305.8 $1,395.9 $1,296.9 Principal and interest on third- party nonrecourse debt........... (846.7) (861.5) -- -- (846.7) (861.5) ------- ------- ------- ------- -------- -------- Net minimum future lease receivable....................... 128.4 129.6 420.8 305.8 549.2 435.4 Estimated non-guaranteed residual value of leased assets........... 95.7 81.0 70.5 58.6 166.2 139.6 Unearned income.................... (73.1) (72.2) (239.7) (189.2) (312.8) (261.4) ------- ------- ------- ------- -------- -------- Investment in finance leases....... 151.0 138.4 251.6 175.2 402.6 313.6 Allowance for possible losses...... (6.3) (6.3) -- -- (6.3) (6.3) Deferred taxes..................... (107.1) (106.3) -- -- (107.1) (106.3) ------- ------- ------- ------- -------- -------- Net investment..................... $ 37.6 $ 25.8 $ 251.6 $ 175.2 $ 289.2 $ 201.0 ======= ======= ======= ======= ======== ========
Operating Leases -- Rental income from operating leases is generally reported on a straight-line basis over the term of the lease. Rental income on certain leases is based on equipment usage. Rental income from usage rents was $20.7 million, $18.3 million and $29.2 million, in 2006, 2005 and 2004, respectively. Minimum Future Receipts -- Minimum future lease receipts from finance leases, net of debt payments for leveraged leases, and minimum future rental receipts from noncancelable operating leases at December 31, 2006 were (in millions):
FINANCE OPERATING LEASES LEASES TOTAL ------- --------- -------- 2007............................................. $ 51.7 $ 733.0 $ 784.7 2008............................................. 39.2 561.5 600.7 2009............................................. 42.5 435.7 478.2 2010............................................. 37.1 314.3 351.4 2011............................................. 41.2 196.4 237.6 Years thereafter................................. 337.5 422.2 759.7 ------ -------- -------- $549.2 $2,663.1 $3,212.3 ====== ======== ========
The following information pertains to GFC as a lessee: Capital Leases -- GFC assets that are financed with capital lease obligations and subsequently leased to customers under either operating or finance leases, or otherwise utilized in operations at December 31 were (in millions):
2006 2005 ------- ------- Railcars and other equipment............................. $ 48.0 $ 92.6 Marine vessels........................................... 98.0 98.0 ------- ------- 146.0 190.6 Less: allowance for depreciation......................... (108.7) (142.7) ------- ------- $ 37.3 $ 47.9 ======= =======
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation of capital lease assets is classified as depreciation in the consolidated statement of operations. Interest expense on the above capital leases was $4.3 million, $5.3 million and $8.0 million in 2006, 2005 and 2004, respectively. Operating Leases -- GFC has financed railcars and other assets through sale-leasebacks that are accounted for as operating leases. A subsidiary of GFC has provided a guarantee for a portion of the residual values related to two operating leases. GFC also leases office facilities and certain related administrative assets. Operating lease expense related to these leases is included in selling, general and administrative expense. Total operating lease expense was $169.3 million, $182.9 million and $174.6 million, in 2006, 2005 and 2004, respectively. Certain operating leases provide options for GFC to renew the leases or purchase the assets at the end of the lease term. The specific terms of the renewal and purchase options vary. In 2005, GFC completed a sale leaseback transaction for approximately 2,900 of its railcars (net book value of $170.0 million) for net proceeds of $201.3 million. The transaction resulted in a gain of $31.3 million, which was deferred and is being amortized as a component of operating lease expense over the 21- year term of the resulting operating lease. Future Minimum Rental Payments -- Future minimum rental payments due under noncancelable leases at December 31, 2006 were (in millions):
RECOURSE NONRECOURSE CAPITAL OPERATING OPERATING LEASES LEASES LEASES ------- --------- ----------- 2007............................................ $ 10.0 $ 127.1 $ 41.7 2008............................................ 9.4 127.2 38.9 2009............................................ 9.6 127.2 41.0 2010............................................ 7.2 130.4 42.2 2011............................................ 5.9 113.8 42.2 Years thereafter................................ 30.7 802.1 314.2 ------ -------- ------ 72.8 $1,427.8 $520.2 ======== ====== Less: amounts representing interest............. (21.3) ------ Present value of future minimum capital lease payments...................................... $ 51.5 ======
The payments do not include the costs of licenses, taxes, insurance, and maintenance, for which GFC is required to pay. The amounts shown for nonrecourse operating leases primarily reflect rental payments of three bankruptcy remote, special-purpose corporations that are wholly owned by GFC. These rentals are consolidated for accounting purposes, but do not represent legal obligations of GFC. NOTE 4. LOANS Loans are recorded at the principal amount outstanding plus accrued interest. The loan portfolio, which consists primarily of equipment related loans, is reviewed regularly and a loan is classified as impaired when it is probable that GFC will be unable to collect all amounts due under the loan agreement. Since most loans are collateralized, impairment is generally measured as the amount by which the recorded investment in the loan exceeds expected repayments plus the fair value of the underlying collateral. Generally, interest income is not recognized on impaired loans until the loan has been paid up to contractually current status or conditions warrant. Total loans of $36.0 million and $37.3 million at December 31, 2006 and 2005, respectively, included impaired loans of $0.1 million and $8.9 million, respectively. The Company has recorded an allowance for possible losses of $0.1 million and $2.4 million on impaired loans at December 31, 2006 and 2005, respectively. The average balance of impaired loans was $4.5 million, $11.2 million and $20.9 million during 2006, 2005 and 2004, respectively. Interest income recognized related to impaired loans was $1.0 million, zero and $3.1 million in 2006, 2005 and 2004, respectively. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2006, scheduled loan principal due by year was as follows (in millions):
LOAN PRINCIPAL -------------- 2007......................................................... $14.4 2008......................................................... 4.5 2009......................................................... 4.6 2010......................................................... 3.0 2011......................................................... 4.7 Years thereafter............................................. 4.8 ----- $36.0 =====
NOTE 5. ALLOWANCE FOR POSSIBLE LOSSES The purpose of the allowance is to provide an estimate of credit losses inherent in its reservable assets. Reservable assets include rent and other receivables, loans and finance leases. GFC's estimate of the amount of loss incurred in each period requires consideration of historical loss experience, judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GFC participates, in addition to specific losses for known troubled accounts. GFC charges off amounts that management considers unrecoverable either from obligors or through the disposition of collateral. GFC assesses the recoverability of investments by considering factors such as a customer's payment history, financial position and the value of the related collateral. The following summarizes changes in the allowance for possible losses at December 31 (in millions):
2006 2005 2004 ----- ----- ------ Balance at the beginning of the year................. $12.7 $18.3 $ 38.9 Reversal of provision for losses..................... (2.1) (2.8) (13.1) Charges to allowance................................. (1.9) (4.7) (8.6) Recoveries and other................................. 0.9 1.9 1.1 ----- ----- ------ Balance at the end of the year....................... $ 9.6 $12.7 $ 18.3 ===== ===== ======
The reversals of provision for losses were primarily due to favorable credit experience. There were no material changes in estimation methods or assumptions for the allowance during 2006. GFC believes that the allowance is adequate to cover losses inherent in the gross receivables portfolio as of December 31, 2006. Since the allowance is based on judgments and estimates, it is possible that those judgments and estimates could change in the future, causing a corresponding change in the recorded allowance. NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES Investments in affiliated companies represent investments in, and loans to and from, domestic and foreign companies and joint ventures that are in businesses similar to those of GFC, such as lease financing and related services for customers operating rail, marine and industrial equipment assets, as well as other business activities, including ventures that provide asset residual value guarantees in both domestic and foreign markets. At December 31, 2006 and 2005, these investments include net loans to affiliated companies of $0.1 million and $23.3 million, respectively, and $54.0 million and $50.7 million, respectively, of net loans from affiliated companies. Distributions received from affiliates were $74.8 million, $68.8 million and $120.1 million in 2006, 2005 and 2004, respectively. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows GFC's investments in affiliated companies by segment at December 31 (in millions):
2006 2005 ------ ------ Rail...................................................... $109.7 $ 99.7 Specialty................................................. 182.2 184.2 ------ ------ $291.9 $283.9 ====== ======
The table below provides detail on the five largest investments in affiliates at December 31, 2006 ($'s in millions):
GFC'S GFC'S PERCENTAGE NAME SEGMENT INVESTMENT OWNERSHIP - ---- --------- ---------- ---------- AAE Cargo AG................................... Rail $80.6 37.5% Cardinal Marine Investments, LLC............... Specialty 47.5 50.0% Clipper Fourth Ltd. ........................... Specialty 30.3 45.0% Rolls-Royce & Partners Finance (US) LLC........ Specialty 27.9 50.0% Clipper Third Ltd. ............................ Specialty 26.8 50.0%
The following table shows GFC's pre-tax share of affiliates' earnings by segment as of December 31 (in millions):
2006 2005 2004 ----- ----- ----- Rail.................................................. $22.7 $13.7 $16.6 Specialty............................................. 53.4 60.0 37.5 ----- ----- ----- $76.1 $73.7 $54.1 ===== ===== =====
Operating results for all affiliated companies held at December 31, assuming GFC held a 100% interest, would be (in millions):
2006 2005 2004 ------ ------ ------ Revenues............................................ $559.2 $540.6 $449.1 Pre-tax income reported by affiliates............... 191.7 186.6 102.4
Summarized balance sheet data for all affiliated companies held at December 31, assuming GFC held a 100% interest, would be (in millions):
2006 2005 -------- -------- Total assets............................................ $3,464.3 $3,331.7 Long-term liabilities................................... 2,345.0 2,306.1 Other liabilities....................................... 369.8 380.1 Shareholder's equity.................................... 749.5 645.5
At December 31, 2006 and 2005, GFC provided $24.2 million and $27.3 million, respectively, in lease and loan payment guarantees and $62.0 million and $87.5 million, respectively, in residual value guarantees related to affiliated companies. NOTE 7. VARIABLE INTEREST ENTITIES GFC has ownership interests in certain investments that are considered Variable Interest Entities ("VIEs") in accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities ("FIN 46(R)"). GFC does not believe it is the primary beneficiary with respect to any of the VIEs. As a result, GFC does not consolidate these 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) entities. These entities are generally involved in railcar and equipment leasing activities. The nature of GFC's involvement with these entities primarily consists of equity investments and leveraged leases, which were acquired or entered into between 1994 and 2005. GFC continues to evaluate new investments for the application of FIN 46(R) and regularly reviews all existing VIE's in connection with any reconsideration events as defined in FIN 46(R) that may result in GFC becoming the primary beneficiary. GFC's maximum exposure to loss with respect to these VIEs is approximately $191.8 million of which $167.5 million was the aggregate carrying value of these investments recorded on the balance sheet at December 31, 2006. NOTE 8. GOODWILL Goodwill was $92.8 million and $86.0 million as of December 31, 2006 and 2005, respectively. In accordance with SFAS No. 142, an annual review for impairment of goodwill was performed in the fourth quarter of 2006 and 2005. GFC's impairment review consists of two steps and is performed at the reporting unit level, which is one level below an operating segment. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit exceeds its fair value, an additional step is performed that compares the implied fair value of the reporting unit's goodwill (as defined in SFAS No. 142) with the carrying amount of the goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Reporting units were determined based on the composition of GFC's operating segments, taking into consideration whether the operating segments consisted of more than one business and, if so, whether the businesses operated in different economic environments. Goodwill resulting from each business combination was assigned to the same reporting unit that the assets and liabilities of the acquired businesses were assigned to. Fair values of the reporting units were estimated using discounted cash flow models. The key assumptions used in the discounted cash flow models included projected cash flow periods ranging from five to ten years; estimated terminal values; growth rates ranging from 2% to 8%; and discount rates ranging from 5% to 11%, which were based on the Company's cost of capital adjusted for the risk associated with the operations. GFC's reviews for 2006 and 2005 indicated there was no impairment of goodwill. The following reflects the changes in the carrying value of goodwill, all of which pertains to Rail, for the periods of December 31, 2004 to December 31, 2006 (in millions): Balance at December 31, 2004..................................... $93.9 Foreign currency translation adjustment.......................... (7.9) ----- Balance at December 31, 2005..................................... 86.0 Foreign currency translation adjustment.......................... 6.8 ----- Balance at December 31, 2006..................................... $92.8 =====
NOTE 9. INVESTMENT SECURITIES The following table summarizes GFC's investment securities as of December 31 (in millions):
2006 2005 ----- ----- Available-for-sale securities.............................. $ 0.7 $ 3.6 Held-to-maturity securities................................ 41.6 37.6 Warrants................................................... 1.2 1.1 ----- ----- $43.5 $42.3 ===== =====
Proceeds from sales of available-for-sale securities totaled $7.2 million in 2006, $9.3 million in 2005, and $7.1 million in 2004. The held-to-maturity securities at December 31, 2006 are scheduled to mature in January 2007. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. OTHER ASSETS AND OTHER LIABILITIES The following table summarizes the components of other assets reported on the consolidated balance sheets (in millions):
DECEMBER 31 --------------- 2006 2005 ------ ------ Investment securities..................................... $ 43.5 $ 42.3 Other investments......................................... 17.9 31.8 Fair value of derivatives................................. 1.9 7.2 Deferred financing costs.................................. 30.2 33.5 Prepaid items............................................. 15.4 16.3 Office furniture, fixtures and other equipment, net of accumulated depreciation................................ 4.6 4.8 Inventory................................................. 31.9 23.6 Other..................................................... 6.5 6.5 ------ ------ $151.9 $166.0 ====== ======
The following table summarizes the components of other liabilities reported on the consolidated balance sheets (in millions):
DECEMBER 31 --------------- 2006 2005 ------ ------ Accrued operating lease expense........................... $113.3 $129.8 Environmental reserves.................................... 34.4 34.8 Deferred gain on sale-leaseback........................... 30.8 32.7 Fair value of derivatives................................. 11.0 12.5 Other..................................................... 59.8 48.8 ------ ------ $249.3 $258.6 ====== ======
NOTE 11. DEBT COMMERCIAL PAPER AND BANK CREDIT FACILITIES
DECEMBER 31 ------------- 2006 2005 ----- ----- IN MILLIONS Balance.................................................... $22.4 $57.0 Weighted average interest rate............................. 4.15% 4.42%
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECOURSE AND NONRECOURSE DEBT OBLIGATIONS Debt obligations and the range of interest rates as of year end were ($ in millions):
DECEMBER 31 ------------------- VARIABLE RATE INTEREST RATES FINAL MATURITY 2006 2005 - ------------- -------------- -------------- -------- -------- Term notes and other obligations... 3.74% - 6.14% 2007 - 2013 $ 204.8 $ 900.8 Nonrecourse obligations............ 5.49% - 6.50% 2007 - 2015 1.9 35.4 -------- -------- 206.7 936.2 FIXED RATE Term notes and other obligations... 3.45% - 8.88% 2007 - 2016 1,684.0 1,514.6 Nonrecourse obligations............ 8.30% 2007 0.8 2.3 -------- -------- 1,684.8 1,516.9 -------- -------- $1,891.5 $2,453.1 ======== ========
Maturities of GFC's recourse and nonrecourse debt obligations as of December 31, 2006, were as follows (in millions):
TERM NOTES AND OTHER NONRECOURSE TOTAL ---------- ----------- -------- 2007.......................................... $ 58.4 $2.7 $ 61.1 2008.......................................... 206.8 -- 206.8 2009.......................................... 386.9 -- 386.9 2010.......................................... 254.9 -- 254.9 2011.......................................... 220.9 -- 220.9 Thereafter.................................... 762.9 -- 762.9 -------- ---- -------- Sub-total................................... 1,890.8 2.7 1,893.5 Fair value of debt derivatives................ (2.0) -- (2.0) -------- ---- -------- Total debt.................................. $1,888.8 $2.7 $1,891.5 ======== ==== ========
Interest paid for continuing operations, which consists of interest on debt obligations, interest rate swaps (net of interest received) and capital lease interest, was $122.6 million, $112.4 million and $134.0 million for 2006, 2005 and 2004, respectively. At December 31, 2006, debt securities, railcars and other equipment with a net carrying value of $22.2 million were pledged as collateral for $18.0 million of notes and obligations. Capital lease obligations were $51.5 million and $62.5 million at December 31, 2006 and 2005, respectively. GFC has a shelf registration for $1.0 billion of debt securities and pass through certificates of which, at December 31, 2006, a total of $696.5 million of senior unsecured notes had been issued. GFC also has a $525.0 million senior unsecured revolving facility which matures in June 2010. At December 31, 2006, availability under the revolving credit facility was $510.4 million, with $14.6 million of letters of credit issued and backed by the facility. The revolving credit facility contains various restrictive covenants, including requirements to maintain a defined net worth, a fixed charge coverage ratio and an asset coverage test. The facility was amended in December 2006 to add GATX as a guarantor of GFC's obligations under the facility and also to change the financial covenants contained therein such that they are based on GATX's financial statements rather than GFC's. GFC also has revolving lines of credit totaling $36.5 million in Europe. At December 31, 2006, availability under the revolving lines of credit was $14.2 million. The net worth of GATX at December 31, 2006 was $1.2 billion, which was in excess of the minimum net worth requirement of $800 million. Additionally, the ratio of earnings to fixed charges, as defined in the credit facility, was 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2.0x for the period ended December 31, 2006, in excess of the minimum covenant ratio of 1.2x. At December 31, 2006, GATX and GFC were in compliance with all covenants and conditions of the credit facility. Annual commitment fees for the revolving credit facility are based on a percentage of the commitment and were approximately $0.7 million, $1.0 million and $1.2 million for 2006, 2005 and 2004, respectively. The indentures for GFC's public debt also contain restrictive covenants, including limitations on loans, advances or investments in related parties (including GATX), and dividends it may distribute to GATX. Some of the indentures also contain limitation on lien provisions that limit the amount of secured indebtedness that GFC may incur, subject to several exceptions, including those permitting an unlimited amount of purchase money indebtedness and nonrecourse indebtedness. In addition to the other specified exceptions, GFC would be able to incur liens securing a maximum of $821.8 million of additional indebtedness as of December 31, 2006 based on the most restrictive limitation on liens provision. At December 31, 2006, GFC was in compliance with all covenants and conditions of the indentures. The covenants in the indentures effectively limit the ability of GFC to transfer funds to GATX in the form of loans, advances or dividends. At December 31, 2006, the maximum amount that GFC could transfer to GATX without violating its financial covenants was $887.2 million, implying that $546.5 million of subsidiary net assets were restricted. Restricted net assets are defined as the GFC's equity, less intercompany receivables from GATX, less the amount that could be transferred to GATX. A subsidiary's bank financing contains leverage and cash flow covenants that are specific to that subsidiary. Another subsidiary's financing, guaranteed by GFC and GATX, contains various restrictive covenants, including requirements for GATX to maintain a defined net worth and a fixed charge coverage ratio, both of which are less restrictive than the requirements of the credit facility. GFC does not anticipate any covenant violation in the credit facility, bank financings, indenture, or other financings, nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing. NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS GFC may enter into derivative transactions for purposes of reducing earnings volatility and hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on debt securities. These instruments are entered into only for hedging underlying exposures. GFC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated qualifying accounting hedges, even though GFC believes they are effective economic hedges. Fair Value Hedges -- GFC uses interest rate swaps to convert fixed rate debt to floating rate debt and to manage the fixed to floating rate mix of its debt obligations. The fair value of interest rate swap agreements is determined based on the differences between the contractual rate of interest and the rates currently quoted for agreements of similar terms and maturities. As of December 31, 2006, maturities for fair value hedges range from 2009-2015. Cash Flow Hedges -- GFC'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. GFC uses interest rate swaps and forward starting interest rate swaps to convert floating rate debt to fixed rate debt and to manage the floating to fixed rate ratio of the debt portfolio. The fair value of interest rate swap agreements is determined based on the differences between the contractual rate of interest and the rates currently quoted for agreements of similar terms and maturities. GFC enters into cross currency and interest rate swaps, currency and interest rate forwards, and Treasury rate locks as hedges to manage its exposure to interest rate and foreign currency exchange rate risk on existing and anticipated transactions. The fair values of these derivatives are based on interest rate swap rates, Treasury and LIBOR futures, currency rates, and forward foreign exchange rates. As of December 31, 2006, maturities for qualifying cash flow hedges range from 2007-2015. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 2006, GFC reclassified $0.1 million of net losses on a derivative instrument from accumulated other comprehensive income to earnings in conjunction with the termination of a cash flow hedge resulting from the prepayment of the hedged debt. As of December 31, 2006, GFC expects to reclassify $0.8 million of net losses on derivative instruments from accumulated other comprehensive income to earnings within the next twelve months when expenses related to the hedged debt and lease payments affect earnings. Other Financial Instruments -- The fair value of other financial instruments represents the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash and cash equivalents, restricted cash, rent receivables, accounts payable, commercial paper and bank credit facilities approximate fair value due to the short maturity of those instruments. The carrying amounts of held-to-maturity securities, which are variable rate, and variable rate loans also approximate their fair values. Available-for-sale securities and warrants are carried at fair value. The fair value of fixed rate loans was estimated using discounted cash flow analyses, at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The fair value of variable and fixed rate debt was estimated by performing a discounted cash flow calculation using the term and market interest rate for each note based on an estimate of GFC's current incremental borrowing rates for similar borrowing arrangements. Portions of variable rate debt have effectively been converted to fixed rate debt by utilizing interest rate swaps (GFC pays fixed rate interest, receives floating rate interest). Portions of fixed rate debt have effectively been converted to floating rate debt by utilizing interest rate swaps (GFC pays floating rate interest, receives fixed rate interest). In such instances, the increase (decrease) in the fair value of the variable or fixed rate debt would be offset in part by the increase (decrease) in the fair value of the interest rate swap. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the carrying amounts and fair values of GFC's financial instruments as of December 31 (in millions):
2006 2006 2006 2005 2005 2005 NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE -------- -------- -------- -------- -------- -------- ASSETS Loans -- fixed.................. n/a $ 16.5 $ 15.4 n/a $ 16.2 $ 13.9 Investment securities........... n/a 43.5 43.5 n/a 42.3 42.3 Derivative instruments: Cash flow hedges.............. $ 30.8 0.5 0.5 $282.2 3.5 3.5 Fair value hedges............. 70.0 1.4 1.4 288.5 3.3 3.3 Non-qualifying................ -- -- -- 23.1 0.4 0.4 ------ -------- -------- ------ -------- -------- Total derivative instruments.... 100.8 1.9 1.9 593.8 7.2 7.2 ------ -------- -------- ------ -------- -------- $100.8 $ 61.9 $ 60.8 $593.8 $ 65.7 $ 63.4 ====== ======== ======== ====== ======== ======== LIABILITIES Commercial paper and bank credit facilities.................... n/a $ 22.4 $ 22.4 n/a $ 57.0 $ 57.0 Debt -- fixed................... n/a 1,934.1 2,085.8 n/a 1,816.9 1,964.6 Debt -- variable................ n/a 206.7 207.1 n/a 936.2 935.7 Derivative instruments: Cash flow hedges.............. $183.1 5.0 5.0 $233.3 9.4 9.4 Fair value hedges............. 185.0 3.1 3.1 303.9 1.6 1.6 Non-qualifying................ 23.0 2.9 2.9 23.8 1.5 1.5 ------ -------- -------- ------ -------- -------- Total derivative instruments.... 391.1 11.0 11.0 561.0 12.5 12.5 ------ -------- -------- ------ -------- -------- $391.1 $2,174.2 $2,326.3 $561.0 $2,822.6 $2,969.8 ====== ======== ======== ====== ======== ========
In the event that a counterparty fails to meet the terms of the interest rate swap agreement or a foreign exchange contract, GFC's exposure is limited to the fair value of the swap if in GFC's favor. GFC 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. GFC considers the risk of non-performance by a counterparty to be remote. For the years ended December 31, 2006, 2005 and 2004, (losses) gain of $(1.1) million, $2.1 million and $(3.8) million, respectively, were recognized in earnings for derivatives that did not qualify as hedges. The decrease in notional amounts outstanding from 2005 was primarily related to the termination of derivatives in connection with the sale of Air. NOTE 13. 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. U.S. income taxes have not been provided on the undistributed earnings of foreign subsidiaries and affiliates that GFC intends to permanently reinvest in these foreign operations. The cumulative amount of such earnings was $319.3 million at December 31, 2006. In prior years, GATX assumed a portion of GFC's deferred tax liability in exchange for cash payments received from GFC. GATX contributed an amount equal to the aggregate of cash received to GFC in exchange for shares of preferred stock which are currently outstanding. Subsequently, GFC reacquired a portion of these deferred taxes and 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) at December 31, 2006, the remaining balance assumed by GATX was $78.9 million, which is shown as a deferred tax adjustment in the table below. Significant components of GFC's deferred tax liabilities and assets were (in millions):
DECEMBER 31 --------------- 2006 2005 ------ ------ DEFERRED TAX LIABILITIES Book/tax basis difference due to depreciation............. $389.3 $374.2 Leveraged leases, continued operations.................... 107.1 106.3 Investments in affiliated companies....................... 102.0 107.2 Lease accounting (other than leveraged)................... 204.7 197.9 Other..................................................... 33.1 47.1 ------ ------ Total deferred tax liabilities............................ 836.2 832.7 DEFERRED TAX ASSETS Accruals not currently deductible for tax purposes........ 34.3 47.6 Allowance for possible losses............................. 3.8 5.0 Other..................................................... 24.2 35.5 ------ ------ Total deferred tax assets................................. 62.3 88.1 Deferred Tax Adjustments.................................. 78.9 78.9 ------ ------ Net deferred tax liabilities.............................. $695.0 $665.7 ====== ======
GFC and its U.S. subsidiaries are included in the consolidated federal income tax return of GATX. Income taxes are allocated based on GFC's contribution to the consolidated tax position. The components of income from continuing operations before income taxes consisted of (in millions):
YEAR ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ Domestic............................................ $201.3 $167.7 $246.2 Foreign............................................. 116.7 98.8 68.7 ------ ------ ------ $318.0 $266.5 $314.9 ====== ====== ======
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income taxes for continuing operations consisted of (in millions):
YEAR ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ CURRENT Domestic: Federal........................................... $ 3.8 $ -- $(30.6) State and local................................... 0.6 0.3 3.7 ------ ------ ------ 4.4 0.3 (26.9) Foreign............................................. 15.2 25.6 14.7 ------ ------ ------ 19.6 25.9 (12.2) DEFERRED Domestic: Federal........................................... 67.5 55.2 113.3 State and local................................... 7.4 6.0 11.7 ------ ------ ------ 74.9 61.2 125.0 Foreign............................................. 12.9 3.0 1.2 ------ ------ ------ 87.8 64.2 126.2 Repatriated foreign earnings........................ -- 9.9 -- ------ ------ ------ Income taxes........................................ $107.4 $100.0 $114.0 ====== ====== ====== Income taxes paid (recovered)....................... $ 16.1 $ 15.6 $(70.3) ====== ====== ======
The reasons for the difference between GFC's effective income tax rate and the federal statutory income tax rate were (in millions):
YEAR ENDED DECEMBER 31 ------------------------ 2006 2005 2004 ------ ------ ------ Income taxes at federal statutory rate.............. $111.3 $ 93.3 $110.2 Adjust for effect of: U.S. Tax on foreign earnings...................... 3.1 9.9 0.6 Foreign income tax rates.......................... (7.6) (6.7) (3.0) Tax rate decrease on deferred taxes............... (5.9) -- (2.4) Extraterritorial income exclusion................. (0.5) (0.5) (1.4) State income taxes................................ 5.2 4.2 9.9 Other............................................. 1.8 (0.2) 0.1 ------ ------ ------ Income tax provision................................ $107.4 $100.0 $114.0 ====== ====== ====== Effective income tax rate........................... 33.8% 37.5% 36.2% ====== ====== ======
During 2005, GFC repatriated $94.5 million of foreign earnings, pursuant to the special one-time dividends received deduction provided by the American Jobs Creation Act of 2004, at a tax cost of $9.9 million. The tax cost includes federal and state income taxes on the taxable portion of the dividends and related non-deductible costs, and foreign withholding taxes. The effective income tax rate is impacted by foreign taxes on the earnings of foreign subsidiaries and affiliates which are imposed at rates that are different than the U.S. federal statutory rate. Foreign taxes are also withheld on certain payments received by the Company from foreign sources. The net amount of foreign tax that exceeds or is 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) less than the U.S. statutory rate of tax on foreign earnings is shown above. The foreign income tax rate effects exclude the impact on deferred taxes of enacted changes in foreign rates, which are identified separately. The tax rate decreases on deferred taxes recorded in 2006 and in 2004 are the result of changes in foreign income tax rates enacted in those years. The extraterritorial income exclusion ("ETI") is an exemption from U.S. federal income tax for the lease of U.S. manufactured equipment to foreign lessees. ETI was repealed for years after 2004 with a reduced benefit allowable in 2005 and 2006 under transition rules. State income taxes are provided on domestic pre-tax income or loss. The effect of state income tax on the overall income tax rate is impacted by the amount of domestic income subject to state taxes relative to total income from all sources. U.S. income tax returns have been audited through 1997 and all issues through that period have been settled with the IRS. During 2006, the IRS substantially completed its audit of the Company's income tax returns for the years 1998 though 2002. As part of this audit, the Company has entered the IRS appeals process to address one remaining issue related to a structured lease transaction. GFC believes that its tax position related to this issue was proper based upon applicable statutes, regulations and case law. GFC believes that this issue may ultimately be litigated. Additionally during 2006, the IRS began its examination of the Company's U.S. income tax returns for the period 2003 through 2005. The Company expects this audit to be completed during 2008. Certain of the Company's subsidiaries are also under audits for various periods in various state and foreign jurisdictions. The Company believes its reserves established for potential assessments, including potential interest and penalties with respect to the open issue noted above, and other open tax issues are reasonable. Once established, reserves are adjusted only when circumstances, including final resolution of an issue, require. NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFITS GFC participates in pension plans sponsored by GATX that cover substantially all employees. Benefits payable under the pension plans are based on years of services and/or final average salary. In addition, GFC employees participate in GATX's other post-retirement plans that provide health care, life insurance and other benefits for certain retired domestic employees who meet established criteria. Most domestic employees are eligible for health care and life insurance benefits if they retire from GATX with immediate benefits under the GATX pension plan. Periodic costs pertaining to the GATX plans are allocated to GFC on the basis of payroll costs with respect to normal cost and on the basis of actuarial determinations for prior service cost. Allocated costs for continuing operations for 2006, 2005 and 2004 were $3.7 million, $2.8 million and $2.4 million, respectively. The previous amounts include amounts allocated each year to discontinued operations, all of which were immaterial. Plan benefit obligations, plan assets, and the components of net periodic costs for individual subsidiaries of GATX, including GFC, have not been determined. NOTE 15. CONCENTRATIONS, COMMITMENTS AND OTHER CONTINGENCIES CONCENTRATIONS Concentration of Revenues -- GFC's revenues are derived from a wide range of industries and companies. Approximately 21% of total revenues are generated from customers in the chemical industry, 20% are derived from the petroleum industry, and 12% are derived from each of the transportation industry and food/agricultural industry. GFC's foreign identifiable revenues include fully consolidated railcar operations in Canada, Mexico, Poland, Austria and Germany. The Company did not derive revenues in excess of 10% of consolidated revenues from any one foreign country for any of the years ended December 31, 2006, 2005 and 2004. Concentration of Credit Risk -- Under its lease agreements with lessees, GFC retains legal ownership of the asset except where such assets have been financed by sale-leasebacks. For most loan financings to customers, the 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loan is collateralized by specifically related equipment. GFC performs 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. GFC maintains an allowance for possible losses to provide for credit losses inherent in its reservable assets portfolio. The Company did not derive revenues in excess of 10% of consolidated revenues from any one customer for any of the years ended December 31, 2006, 2005 and 2004. Concentration of Labor Force -- 56% of GFC employees were covered by union contracts at December 31, 2006. The shipboard personnel at ASC belong to the United Steelworkers of America ("USWA"), the American Maritime Officers ("AMO") and the Seafarers International Union ("SIU"), as the case may be. During 2006, ASC and the unions agreed on new contract terms, resulting in agreements with the SIU and AMO that are effective until 2011 and an agreement with the AMO that is effective until 2009. The hourly employees at Rail U.S. service centers belong to the USWA. In February 2007, agreement was reached on a new contract that will be in effect through February 2010. COMMITMENTS Unconditional Purchase Obligations -- At December 31, 2006, GFC's unconditional purchase obligations of $522.3 million were primarily for railcars to be acquired during the period of 2007 through 2009. Commercial Commitments -- In connection with certain investments or transactions, GFC has entered into various commercial commitments, such as guarantees and standby letters of credit, which could potentially require performance in the event of demands by third parties. Similar to GFC's balance sheet investments, these guarantees expose GFC to credit, market and equipment risk; accordingly, GFC evaluates its commitments and other contingent obligations using techniques similar to those used to evaluate funded transactions. The following table shows GFC's commercial commitments for continuing operations (in millions):
DECEMBER 31 --------------- 2006 2005 ------ ------ Affiliate guarantees...................................... $ 24.2 $ 27.3 Asset residual value guarantees........................... 144.5 368.6 Lease payment guarantees.................................. 20.8 21.6 Loan payment guarantee -- GATX convertible debt........... 249.3 300.0 Other guarantees.......................................... 77.8 77.8 ------ ------ Total guarantees........................................ 516.6 795.3 Standby letters of credit and bonds....................... 15.8 23.0 ------ ------ $532.4 $818.3 ====== ======
At December 31, 2006, the maximum potential amount of guarantees under which GFC could be required to perform was $516.6 million. The related carrying value of the guarantees on the balance sheet, including deferred revenue primarily associated with residual value guarantees entered into prior to the effective date of FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, was a liability of $6.7 million. The expirations of these guarantees range from 2007 to 2017. Subsequent to December 31, 2006, GFC provided a guarantee for future lease payments under a lease agreement assumed by the buyer of the Air business. The guarantee covers lease payments totaling $52.4 million payable during the years 2007 -- 2019. Affiliate guarantees generally involve guaranteeing repayment of the financing utilized to acquire or lease in assets being leased by an affiliate to customers, and are in lieu of making direct equity investments in the affiliate. GFC is not aware of any event of default which would require it to satisfy these guarantees, and expects the affiliates to generate sufficient cash flow to satisfy their lease and loan obligations. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Asset residual value guarantees represent GFC's commitment to third parties that an asset or group of assets will be worth a specified amount at the end of a lease term. Revenue is earned for providing these asset value guarantees in the form of an initial fee (which is amortized into income over the guarantee period) and by sharing in any proceeds received upon disposition of the assets to the extent such proceeds are in excess of the amount guaranteed (which is recorded when realized). Any liability resulting from GFC's performance pursuant to the residual value guarantees will be reduced by the value realized from the underlying asset or group of assets. Historically, gains associated with the residual value guarantees have exceeded any losses and were recorded in asset remarketing income in the consolidated statements of income. Based on known facts and current market conditions, management does not believe that the asset residual value guarantees will result in any significant adverse financial impact to the Company. GFC believes these asset residual value guarantees will likely generate future income in the form of fees and residual sharing proceeds. Lease payment guarantees represent GFC's guarantees to financial institutions of finance and operating lease payments of unrelated parties in exchange for a fee. Other guarantees consists of GFC's indemnification of Airbus Industrie ("Airbus") related to the dissolution of Flightlease Holdings Limited ("FHG") and the allocation by Airbus of $77.8 million of pre-delivery payments to GFC towards the purchase of aircraft in 2001. These pre-delivery payments are also the subject of active litigation. No liability has been recorded with respect to this indemnification as GFC believes that the likelihood of having to perform under the indemnity is remote. GFC and its subsidiaries are also parties to standing letters of credit and bonds primarily related to workers' compensation and general liability insurance overages. No material claims have been made against these obligations. At December 31, 2006, management does not expect any material losses to result from these off balance sheet instruments since performance is not expected to be required. OTHER CONTINGENCIES Environmental -- The Company's operations are subject to extensive federal, state and local environmental regulations. GFC's operating procedures include practices to protect the environment from the risks inherent in railcar leasing, which frequently involve transporting chemicals and other hazardous materials. Additionally, some of GFC's land holdings, including previously owned properties, are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, GFC is subject to environmental cleanup and enforcement actions. In particular, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. If there are other potentially responsible parties ("PRPs"), GFC generally participates in the cleanup of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on the relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. GFC has been notified that it is a PRP, among many PRPs, for study and cleanup costs at one Superfund site for which investigation and remediation payments are yet to be determined. At the time a potential environmental issue is identified, initial reserves for environmental liability are established when such liability is probable and a reasonable estimate of associated costs can be made. Costs are estimated based on the type and level of investigation and/or remediation activities that our internal environmental staff (and where appropriate, independent consultants) have determined to be necessary to comply with applicable laws and regulations. Activities include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. In addition, GFC has provided indemnities for potential environmental liabilities to buyers of divested companies. In these instances, reserves are based on the scope and duration of the respective indemnities together with the extent of known contamination. Estimates are periodically reviewed and adjusted as required to reflect additional information about 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) facility or site characteristics or changes in regulatory requirements. GFC conducts an ongoing environmental contingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and the ability of other PRPs to pay for cleanup, and historical trend analyses. GFC does not believe that a liability exists for known environmental risks beyond what has been provided for in its environmental reserves. GFC is involved in administrative and judicial proceedings and other voluntary and mandatory cleanup efforts at 12 sites, including the Superfund site, at which it is participating in the study or cleanup, or both, of alleged environmental contamination. The Company recognized a net reversal of environmental expense in 2006 of $0.4 million, resulting primarily from the favorable resolution of a foreign environmental matter and recognized net expense in 2004 of $13.3 million, consisting primarily of a $15.5 million charge for a sold property. GFC did not recognize any environmental expense in 2005. GFC paid $0.6 million, $2.3 million and $1.4 million during 2006, 2005 and 2004, respectively, for mandatory and unasserted claims cleanup efforts, including amounts expended under federal and state voluntary cleanup programs. GFC has recorded liabilities for remediation and restoration of all known sites of $34.4 million at December 31, 2006, compared with $34.8 million at December 31, 2005. These amounts are included in other liabilities on GFC's balance sheet. GFC's environmental liabilities are not discounted. GFC anticipates that the majority of the accrued costs at December 31, 2006, will be paid over the next five years and no individual site is considered to be material. The Company did not materially change its methodology for identifying and calculating environmental liabilities in the three years presented. There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to occur and materially affect the methodology or assumptions described above. Recorded liabilities include GFC's best estimates of all costs for remediation and restoration of affected sites, without reduction for anticipated recoveries from third parties, and include both asserted and unasserted claims However, GFC's total cleanup costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required; evolving environmental laws and regulations; advances in environmental technology, the extent of other parties' participation in cleanup efforts; developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, future charges for environmental liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, management believes it is unlikely any identified matters, either individually or in the aggregate, will have a material adverse effect on GFC's financial position or liquidity. Legal -- GFC and its subsidiaries have been named as defendants in a number of other legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters, workers' compensation claims by GFC employees and other personal injury claims. Some of the legal proceedings include claims for punitive as well as compensatory damages. Several of the Company's subsidiaries have also been named as defendants or co-defendants in cases alleging injury relating to asbestos. In these cases, the plaintiffs seek an unspecified amount of damages based on common law, statutory or premises liability or, in the case of ASC, the Jones Act, which makes limited remedies available to certain maritime employees. In addition, demand has been made against the Company under a limited indemnity given in connection with the sale of a subsidiary by the purchaser for asbestos-related claims filed against the former subsidiary. As of February 15, 2007, there were 1,295 asbestos- related cases pending against the Company's subsidiaries or the former subsidiary where the Company has provided a limited indemnity. Out of the total number of pending cases, 1,190 are Jones Act claims, which were primarily filed against ASC prior to the year 2000. During 2006, 124 new asbestos-related cases were filed and 112 cases were dismissed or settled. During 2005, 22 new cases were filed and 46 cases were dismissed or settled. For this two-year period, the aggregate amount paid to settle asbestos-related cases filed against the Company's subsidiaries and the former subsidiary was less than $185,000. It 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) is possible that the number of these cases could begin to grow and that the cost of these cases, including costs to defend, could correspondingly increase in the future. The amounts claimed in some of the above described proceedings are substantial and while the final outcome of these matters cannot be predicted with certainty at this time, considering among other things meritorious legal defenses available and reserves that have been recorded along with applicable insurance, it is the opinion of management that none of these matters, when ultimately resolved, will have a material adverse effect on GFC's consolidated financial position or liquidity. However, an unexpected adverse resolution of one or more of these matters could have a material adverse effect on the results of operations in a particular quarter or fiscal year. NOTE 16. RELATED PARTY TRANSACTIONS Interest income on advances to GATX, which is included in gross income was $22.9 million in 2006, $26.0 million in 2005 and $23.2 million in 2004. These advances have no maturity date. Interest income on advances to GATX is based on an interest rate that is adjusted annually in accordance with an estimate of applicable rates. As of December 31, 2006, GFC made a non-cash distribution to GATX of $487.9 million, representing the full amount of the advances to GATX. GATX Corporation allocates to GFC an estimate of various corporate costs incurred on its behalf. These costs include direct expenses that are clearly applicable to GFC as well as an allocation of expenses that relate to administration and support activities performed at the corporate office. Directly attributable expenses include occupancy, insurance, pension, other post-retirement benefits, employee group insurance, savings plan benefits and share based compensation. These expenses are allocated based on specific identification if available, or otherwise readily available measures such as square footage for occupancy or headcount for employee related programs. Administration and support includes services such as information technology, human resources, employee benefits, risk management, legal, and tax. Generally, these amounts are allocated based on an estimate of corporate resources utilized by GFC. The method of allocation in these instances may vary depending on the services provided, and may include a proportional method, incremental cost method or other methodology as applicable. The total amounts allocated to GFC for 2006, 2005 and 2004 were $27.8 million, $20.7 million and $26.2 million, respectively. The Company's management believes this allocation methodology to be reasonable. NOTE 17. ACCUMULATED OTHER COMPREHENSIVE INCOME The change in components for accumulated other comprehensive income are as follows (in millions):
FOREIGN UNREALIZED UNREALIZED CURRENCY GAIN LOSS ON TRANSLATION (LOSS) ON DERIVATIVE GAIN (LOSS) SECURITIES INSTRUMENTS TOTAL ----------- ---------- ----------- ------ Balance at December 31, 2003............ $ 13.3 $ 1.7 $(42.5) $(27.5) Change in component................... 55.5 1.1 (1.9) 54.7 Reclassification adjustments into earnings........................... -- 2.5 (0.2) 2.3 Income tax effect..................... -- (1.4) 0.5 (0.9) ------ ----- ------ ------ Balance at December 31, 2004............ 68.8 3.9 (44.1) 28.6 Change in component................... (38.0) (0.6) 18.7 (19.9) Reclassification adjustments into earnings........................... 0.7 (4.4) 3.2 (0.5) Income tax effect..................... -- 1.9 (8.1) (6.2) ------ ----- ------ ------ Balance at December 31, 2005............ 31.5 0.8 (30.3) 2.0 Change in component................... 33.1 (0.9) 7.2 39.4 Reclassification adjustments into earnings........................... -- (1.0) 2.2 1.2 Income tax effect..................... -- 0.7 (1.2) (0.5) ------ ----- ------ ------ Balance at December 31, 2006............ $ 64.6 $(0.4) $(22.1) $ 42.1 ====== ===== ====== ======
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18. DISCONTINUED OPERATIONS In 2006, GFC agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited ("MALL"). The sale was completed in two stages: the sale of the wholly owned aircraft closed on November 30, 2006, and the sale of the partnered aircraft closed on January 17, 2007. Separately in 2006, GFC sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GFC's aircraft leasing operation (formerly the "Air" segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. In 2004, GFC completed the sale of the assets of its former Technology segment ("Technology") with $291.5 million of related nonrecourse debt assumed by the acquirer. Financial data for Technology has also been segregated and reported as discontinued operations for all periods presented. The following table summarizes certain operating data for discontinued operations, for all periods presented (in millions):
2006 2005 2004 ------ ------- ------ Revenues........................................... $133.5 $ 133.9 $206.6 (Loss) income before taxes......................... (8.9) (198.7) 22.9 Income (loss) from operations, net of taxes........ 32.1 (0.5) 21.4 Loss on disposal of segment, net of taxes.......... (70.9) (119.4) (7.2) ------ ------- ------ Net (loss) income from discontinued operations... $(38.8) $(119.9) $ 14.2 ====== ======= ======
The following tables summarize the components of discontinued operations reported on the consolidated statements of cash flows (in millions):
2006 2005 2004 -------- ------ ------- OPERATING ACTIVITIES Net cash provided by operating activities....... $ 91.4 $ 97.0 $ 131.7 INVESTING ACTIVITIES Portfolio investments and capital additions....... (94.2) (17.3) (353.8) Proceeds from disposal of segment................. 1,307.5 9.1 256.2 Proceeds from other investing activities.......... 50.0 90.9 137.4 -------- ------ ------- Net cash provided by investing activities....... 1,263.3 82.7 39.8 FINANCING ACTIVITIES Net proceeds from issuance of debt.............. -- -- 183.8 Repayments of debt (original maturities longer than 90 days)................................... (796.0) (82.4) (239.3) -------- ------ ------- Net cash used in financing activities........... (796.0) (82.4) (55.5) -------- ------ ------- CASH PROVIDED BY DISCONTINUED OPERATIONS, NET..... $ 558.7 $ 97.3 $ 116.0 ======== ====== =======
GFC's loss on disposals of wholly owned and partnered aircraft was comprised of $60.3 million ($70.9 million after tax) of losses realized on dispositions in 2006 and impairment charges of $196.4 million ($119.4 million after tax) recorded in 2005. Taxes associated with the disposals include an estimated expense of $37.2 million related to the recapture of previously deducted foreign losses related to GFC's interests in certain foreign affiliates. Results of discontinued operations reflect directly attributable revenues, ownership, operating, interest and SG&A expenses and income taxes. Results also reflect intercompany allocations for interest and certain SG&A expenses. Interest expense allocated was $16.4 million, $26.7 million and $21.0 million for 2006, 2005 and 2004, respectively. Interest was allocated consistent with GFC's risk adjusted approach for continuing operations. SG&A allocated was $6.1 million, $6.9 million and $12.1 million for 2006, 2005 and 2004, respectively. SG&A was 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) allocated based on management's best estimate and judgment of the direct cost of support services provided to discontinued operations and amounts allocated approximate the amounts expected to be eliminated from continuing operations. NOTE 19. FOREIGN OPERATIONS GFC has a number of investments in subsidiaries and affiliated companies that are located in or derive revenues from various foreign countries. GFC's foreign identifiable assets include investments in affiliated companies as well as fully consolidated railcar operations in Canada, Mexico, Poland, Austria and Germany, and foreign leases, loans and other investments. Foreign entities contribute significantly to GFC's share of affiliates' earnings. Revenues and identifiable assets are determined to be foreign or U.S. based upon location of the customer; classification of affiliates' earnings as foreign or domestic is made based on the office location of the affiliate. The Company did not derive revenues in excess of 10% of consolidated revenues from continuing operations from any one foreign country for the years ended December 31, 2006, 2005 and 2004. No foreign country represented more than 10% of GFC's identifiable assets from continuing operations at December 31, 2006 or 2004. At December 31, 2005, 11.2% of the Company's identifiable assets were in Canada. The table below presents certain GFC data for continuing operations (in millions):
YEAR ENDED OR AT DECEMBER 31 ------------------------------ 2006 2005 2004 -------- -------- -------- REVENUES Foreign......................................... $ 253.8 $ 215.2 $ 206.0 United States................................... 922.1 838.3 863.3 -------- -------- -------- $1,175.9 $1,053.5 $1,069.3 ======== ======== ======== SHARE OF AFFILIATES' EARNINGS Foreign......................................... $ 64.2 $ 62.1 $ 42.1 United States................................... 11.9 11.6 12.0 -------- -------- -------- $ 76.1 $ 73.7 $ 54.1 ======== ======== ======== IDENTIFIABLE BALANCE SHEET ASSETS Foreign......................................... $1,614.6 $1,465.8 $1,186.4 United States................................... 2,726.2 2,353.2 2,657.6 -------- -------- -------- $4,340.8 $3,819.0 $3,844.0 ======== ======== ========
Foreign generated cash flows are used to meet local operating needs and for reinvestment. For non-U.S. dollar functional currency entities, the translation of the financial statements into U.S. dollars results in an unrealized foreign currency translation adjustment, which is a component of accumulated other comprehensive income. NOTE 20. FINANCIAL DATA OF BUSINESS SEGMENTS The financial data presented below conforms to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and depicts the profitability, financial position and capital expenditures of each of GFC's continuing business segments. GFC leases, manages, operates, and invests in long-lived, widely used assets in the rail, marine and industrial equipment markets. Headquartered in Chicago, Illinois, GFC has three financial reporting segments: Rail, Specialty and ASC. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rail is principally engaged in leasing tank and freight railcars and locomotives. Rail primarily provides railcars pursuant to full-service leases, under which it maintains the railcars, pays ad valorem taxes and insurance, and provides other ancillary services. Rail also offers net leases for railcars and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes. The Specialty portfolio consists primarily of leases, affiliate investments, loans and interests in residual values involving a variety of underlying asset types, including marine vessels, aircraft, rail, industrial and other equipment. The portfolio provides recurring lease and interest income and uneven periodic income primarily related to the remarketing of assets. ASC operates a fleet of self-unloading marine vessels on the Great Lakes and is exclusively engaged in the waterborne transportation of dry bulk commodities. Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including affiliate earnings, attributable to the segments, as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, asset impairment charges and other operating costs such as litigation, provisions for losses, environmental costs, and asset storage costs. Segment profit excludes selling, general and administrative expenses, income taxes and certain other amounts not allocated to the segments. GFC allocates debt balances and related interest expense to each operating segment based upon a fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. In 2006, the Company revised its recourse leverage ratio levels for its segments to better align segment leverage with the Parent Company's consolidated leverage. The revised levels for Rail, Specialty and ASC are 4:1, 3:1 and 1.5:1, respectively. Management believes this leverage and interest expense allocation methodology provides a reasonable approximation of each operating segment's risk-adjusted financial return. Historical financial information has been restated and all periods presented reflect the revised leverage levels. In previous periods ASC was included in Other. As a result of its increased asset base and income contribution, ASC is now a reportable segment. Also in previous periods, SG&A expenses and income taxes were included in the measure of segment performance. All information in the following tables has been restated accordingly. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables present certain segment data for the years ended December 31, 2006, 2005 and 2004 (in millions):
GFC RAIL SPECIALTY ASC OTHER CONSOLIDATED -------- --------- ------ ------- ------------ 2006 PROFITABILITY REVENUES Lease income.......................... $ 780.0 $ 42.0 $ 4.2 $ -- $ 826.2 Marine operating income............... -- -- 205.6 -- 205.6 Asset remarketing income.............. 19.7 27.9 -- -- 47.6 Other income.......................... 60.6 12.4 -- 23.5 96.5 -------- ------ ------ ------- -------- TOTAL REVENUES.......................... 860.3 82.3 209.8 23.5 1,175.9 Share of affiliates' earnings........... 22.7 53.4 -- -- 76.1 -------- ------ ------ ------- -------- TOTAL GROSS INCOME...................... 883.0 135.7 209.8 23.5 1,252.0 Depreciation.......................... 146.1 7.0 10.2 -- 163.3 Interest expense, net................. 98.6 16.9 8.1 (14.7) 108.9 Operating lease expense............... 163.0 3.9 -- (0.3) 166.6 -------- ------ ------ ------- -------- TOTAL OWNERSHIP COSTS................... 407.7 27.8 18.3 (15.0) 438.8 Other operating costs................... 227.4 9.0 160.9 (0.2) 397.1 -------- ------ ------ ------- -------- SEGMENT PROFIT.......................... 247.9 98.9 30.6 38.7 416.1 SG&A.................................... 98.1 -------- Income from continuing operations before taxes................................. 318.0 Income taxes............................ 107.4 -------- Income from continuing operations....... 210.6 ======== SELECTED BALANCE SHEET DATA Investments in affiliated companies..... 109.7 182.2 -- -- 291.9 Identifiable assets..................... 3,365.6 491.9 299.6 183.7 4,340.8 CAPITAL EXPENDITURES Portfolio investments and capital additions............................. 533.6 94.1 127.7 -- 755.4 2005 PROFITABILITY REVENUES Lease income.......................... $ 729.4 $ 31.4 $ 2.4 $ -- $ 763.2 Marine operating income............... -- -- 135.7 -- 135.7 Asset remarketing income.............. 13.3 28.1 -- -- 41.4 Other income.......................... 65.5 20.8 0.2 26.7 113.2 -------- ------ ------ ------- -------- TOTAL REVENUES.......................... 808.2 80.3 138.3 26.7 1,053.5 Share of affiliates' earnings........... 13.7 60.0 -- -- 73.7 -------- ------ ------ ------- -------- TOTAL GROSS INCOME...................... 821.9 140.3 138.3 26.7 1,127.2 Depreciation.......................... 132.1 4.2 6.5 -- 142.8 Interest expense, net................. 77.9 16.8 5.1 (14.7) 85.1 Operating lease expense............... 176.2 4.1 -- (0.3) 180.0 -------- ------ ------ ------- -------- TOTAL OWNERSHIP COSTS................... 386.2 25.1 11.6 (15.0) 407.9 Other operating costs................... 234.2 9.1 108.9 12.1 364.3 -------- ------ ------ ------- -------- SEGMENT PROFIT.......................... 201.5 106.1 17.8 29.6 355.0 SG&A.................................... 88.5 -------- Income from continuing operations before taxes................................. 266.5 Income taxes............................ 100.0 -------- Income from continuing operations....... 166.5 ======== SELECTED BALANCE SHEET DATA Investments in affiliated companies..... 99.7 184.2 -- -- 283.9 Identifiable assets..................... 2,719.4 455.5 162.9 481.2 3,819.0 CAPITAL EXPENDITURES Portfolio investments and capital additions............................. 402.9 92.6 3.2 -- 498.7
66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GFC RAIL SPECIALTY ASC OTHER CONSOLIDATED -------- --------- ------ ------- ------------ 2004 PROFITABILITY REVENUES Lease income.......................... $ 659.5 $ 29.8 $ -- $ -- $ 689.3 Marine operating income............... -- -- 110.9 -- 110.9 Asset remarketing income.............. 8.1 25.0 -- 0.1 33.2 Other income.......................... 62.3 29.8 0.9 142.9 235.9 -------- ------ ------ ------- -------- TOTAL REVENUES.......................... 729.9 84.6 111.8 143.0 1,069.3 Share of affiliates' earnings........... 16.6 37.5 -- -- 54.1 -------- ------ ------ ------- -------- TOTAL GROSS INCOME...................... 746.5 122.1 111.8 143.0 1,123.4 Depreciation.......................... 124.2 4.2 6.5 -- 134.9 Interest expense, net................. 77.0 23.9 5.1 (0.4) 105.6 Operating lease expense............... 166.0 4.1 -- (0.3) 169.8 -------- ------ ------ ------- -------- TOTAL OWNERSHIP COSTS................... 367.2 32.2 11.6 (0.7) 410.3 Other operating costs................... 219.8 (1.9) 87.9 1.9 307.7 -------- ------ ------ ------- -------- SEGMENT PROFIT.......................... 159.5 91.8 12.3 141.8 405.4 SG&A.................................... 90.5 -------- Income from continuing operations before taxes................................. 314.9 Income taxes............................ 114.0 -------- Income from continuing operations....... 200.9 ======== SELECTED BALANCE SHEET DATA Investments in affiliated companies..... 102.5 167.4 -- -- 269.9 Identifiable assets..................... 2,721.2 505.5 144.3 473.0 3,844.0 CAPITAL EXPENDITURES Portfolio investments and capital additions............................. 489.9 22.7 20.6 -- 533.2
- -------- (a) Other income included a $68.1 million gain from the sale of an idle property and $48.4 million of insurance recoveries related to a prior litigation matter. 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. MANAGEMENT'S REPORT REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, the Company's disclosure controls and procedures were effective. MANAGEMENT'S REPORT REGARDING THE EFFECTIVENESS OF INTERNAL CONTROL AND PROCEDURES The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act for the Company. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate as a result of changes in conditions, or that the degree of compliance with the applicable policies and procedures may deteriorate. The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company's internal control over financial reporting as of the end of the period covered by this annual report based on the framework in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Such evaluation included reviewing the documentation of the Company's internal controls, evaluating the design effectiveness of the internal controls and testing their operating effectiveness. Based on such evaluation, the Company's management has concluded that as of the end of the period covered by this annual report, the Company's internal control over financial reporting was effective. Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this annual report has issued an attestation report on management's assessment of the Company's internal control over financial reporting. That report appears below. 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of GATX Financial Corporation We have audited management's assessment, included in the accompanying Management's Report Regarding the Effectiveness of Internal Control and Procedures, that GATX Financial Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). GATX Financial Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that GATX Financial Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, GATX Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholder's equity, cash flows, and comprehensive income for each of the three years in the period ended December 31, 2006 of GATX Financial Corporation and our report dated March 1, 2007 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois March 1, 2007 69 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) occurred during the fiscal quarter ended December 31, 2006 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Not required. ITEM 11. EXECUTIVE COMPENSATION. Not required. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Not required. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Not required. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Not required. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) 1. Financial Statements
PAGE ---- Documents Filed as Part of this Report: Report of Independent Registered Public Accounting Firm with respect to the consolidated financial statements........... 35 Consolidated Balance Sheets -- December 31, 2006 and 2005.... 36 Consolidated Statements of Income -- Years Ended December 31, 2006, 2005, and 2004....................................... 37 Consolidated Statements of Cash Flows -- Years Ended December 31, 2006, 2005, and 2004................................... 38 Consolidated Statements of Changes in Shareholder's Equity -- December 31, 2006, 2005 and 2004................. 39 Consolidated Statements of Comprehensive Income -- Years Ended December 31, 2006, 2005, and 2004.................... 40 Notes to Consolidated Financial Statements................... 41 Report of Independent Registered Public Accounting Firm with respect to management's assessment of internal controls.... 69
70 2. Financial Statement Schedules: All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted. 3. Exhibits. See the Exhibit Index included herewith and incorporated by reference hereto. 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GATX FINANCIAL CORPORATION (Registrant) /s/ Brian A. Kenney --------------------------------------- Brian A. Kenney Chairman, President, Chief Executive Officer and Director March 2, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Brian A. Kenney Chairman, President, March 2, 2007 - ------------------------------- Chief Executive Officer and Director Brian A. Kenney (Principal Executive Officer) Vice President March 2, 2007 /s/ Robert C. Lyons Chief Financial Officer and Director - ------------------------------- (Principal Financial Officer) Robert C. Lyons Vice President, Controller and March 2, 2007 /s/ William M. Muckian Chief Accounting Officer - ------------------------------- (Principal Accounting Officer) William M. Muckian
72 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE ------- ------------------- ---- FILED WITH THIS REPORT: 2.2 Supplemental Agreement dated as of November 30, 2006 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited. 2.3 Second Supplemental Agreement dated as of January 17, 2007 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited. 2.4 Third Supplemental Agreement dated as of January 29, 2007 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited. 2.5 Fourth Supplemental Agreement dated as of January 31, 2007 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited. 2.6 Fifth Supplemental Agreement dated as of February 6, 2007 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited. 10.23 Amendment No. 1 to the Amended and Restated Five Year Credit Agreement dated as of December 11, 2006 between GATX Financial Corporation, the lenders listed therein, and Citicorp USA, Inc., as Administrative Agent. 12 Statement regarding computation of ratios of earnings to fixed 103 charges. 23 Consent of Ernst & Young LLP, Independent Registered Public 105 Accounting Firm. 31.1 Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule 106 15d-14(a) (CEO Certification). 31.2 Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule 107 15d-14(a) (CFO Certification). 32 Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO 108 Certification). INCORPORATED BY REFERENCE: 2.1 Sale and Purchase Agreement dated as of September 28, 2006 between GATX Financial Corporation and Macquarie Aircraft Leasing Limited is incorporated herein by reference to Exhibit 10 to GFC's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, file number 1-2328. 4A. Indenture dated July 31, 1989 between GATX Capital Corporation and The Chase Manhattan Bank is incorporated herein by reference to Exhibit 4(a) to GATX Capital Corporation's Form S-3, file number 33-30300. 4B. Supplemental Indenture dated as of December 18, 1991 between GATX Capital Corporation and The Chase Manhattan Bank is incorporated herein by reference to Exhibit 4(b) to GATX Capital Corporation's Form S-3, file number 33-64474. 4C. Second Supplemental Indenture dated as of January 2, 1996 between GATX Capital Corporation and The Chase Manhattan Bank is incorporated herein by reference to Exhibit 4.3 to GATX Capital Corporation's Form 8-K dated October 15, 1997, file number 1- 8319. 4D. Third Supplemental Indenture dated as of October 14, 1997 between GATX Capital Corporation and The Chase Manhattan Bank is incorporated herein by reference to Exhibit 4.4 to GATX Capital Corporation's Form 8-K dated October 15, 1997, file number 1- 8319. 4E. Indenture dated as of October 1, 1987 between General American Transportation Corporation and The Chase Manhattan Bank (National Association) is incorporated herein by reference to General American Transportation Corporation's Form S-3, file number 33- 17692. 4F. First Supplemental Indenture dated as of May 15, 1988 between General American Transportation Corporation and The Chase Manhattan Bank is incorporated herein by reference to General American Transportation Corporation's Form 10-Q for the quarterly period ended June 30, 1988, file number 2-54754. 4G. Second Supplemental Indenture dated as of March 15, 1990 between General American Transportation Corporation and The Chase Manhattan Bank is incorporated herein by reference to General American Transportation Corporation's Form 8-K dated March 15, 1990, file number 2-54754.
73
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE ------- ------------------- ---- 4H. Third Supplemental Indenture dated as of June 15, 1990 between General American Transportation Corporation and The Chase Manhattan Bank is incorporated herein by reference to General American Transportation Corporation's Form 8-K dated June 29, 1990, file number 2-54754. 4I. Fourth Supplemental Indenture dated as of June 15, 1996 between General American Transportation Corporation and the Chase Manhattan Bank is incorporated herein by reference to Exhibit 4.1 to General American Transportation's Form 8-K dated January 26, 1996, file number 2-54754. 4J. Indenture dated as of November 1, 2003 between GATX Financial Corporation and JP Morgan Chase Bank is incorporated herein by reference to Exhibit 4Q to GATX Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, file number 1-8319. 4L. Indenture dated as of August 15, 2003 between GATX Corporation, GATX Financial Corporation and JP Morgan Chase Bank, is incorporated herein by reference to Exhibit 4.3 to Form S-3 dated November 13, 2003, file number 33-110451. 10A. Amended and Restated Five Year Credit Agreement dated as of June 27, 2005 between GATX Financial Corporation, the lenders listed therein, and Citicorp USA, Inc., as Administrative Agent is incorporated herein by reference to GATX Financial Corporation's Form 8-K dated June 27, 2005, file number 1-8319. 99B. Certain instruments evidencing long-term indebtedness of GATX Financial Corporation are not being filed as exhibits to this Report because the total amount of securities authorized under any such instrument does not exceed 10% of GATX Corporation's total assets. GATX Corporation will furnish copies of any such instruments upon request of the Securities and Exchange Commission.
74 EX-2.2 2 c12743exv2w2.txt SUPPLEMENTAL AGREEMENT Exhibit 2.2 Execution Version DATED AS OF NOVEMBER 30, 2006 BETWEEN GATX FINANCIAL CORPORATION as Seller and MACQUARIE AIRCRAFT LEASING LIMITED as Buyer RELATING TO THE SALE AND PURCHASE of THE GATX AIR BUSINESS ------------------------------------------- SUPPLEMENTAL AGREEMENT ------------------------------------------- SUPPLEMENTAL AGREEMENT dated as of November 30, 2006 between GATX Financial Corporation, a Delaware corporation ("SELLER"), and Macquarie Aircraft Leasing Limited, a company incorporated under the laws of the Republic of Ireland ("BUYER"). WITNESSETH: WHEREAS, Seller and Buyer entered into that certain Sale and Purchase Agreement dated as of September 28, 2006 (the "SALE AND PURCHASE AGREEMENT") relating to the Business. WHEREAS, Seller and Buyer wish to make certain amendments to the Sale and Purchase Agreement and supplement certain of the agreements set forth in the Sale and Purchase Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. DEFINITIONS 1.1 Definitions As used in this Supplemental Agreement (including the recitals hereto) and save as otherwise defined herein, terms defined in the Sale and Purchase Agreement shall bear the same respective meanings ascribed to them in the Sale and Purchase Agreement when used in this Supplemental Agreement. 1.2 Other Definitional and Interpretative Provisions Clause 1.2 of the Sale and Purchase Agreement is hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Supplemental Agreement. 2. AMENDMENTS The Sale and Purchase Agreement is amended as follows: 2.1 The expression ", Jim Robinson" which appears in lines 4 and 5 of the definition ascribed to the term "Knowledge" in Clause 1.1 is deleted; 2.2 The following definitions are inserted in alphabetical order in Clause 1.1: ""AERCAP" means AerCap B.V. or any of its Affiliates. ""EAST CONSENT" means the consent identified in paragraph 8 of Schedule 3." ""EXCEPTED WHOLLY OWNED ASSET OWNING ENTITIES" means together GATX/Caljet Corp., Huntsmen Corporation and GATX Air Leasing, Inc., the respective details of which are set forth in Part 1 of Schedule 2 (each an "EXCEPTED WHOLLY OWNED ASSET OWNING ENTITY")." ""OVERSEAS OFFICE LEASES" means together the lease agreement, business centre services agreement and deed of lease identified in paragraphs 30, 31 and 32, respectively, of Part 2 of Schedule 5 (each an " OVERSEAS OFFICE LEASE")." -1- 2.3 The following expression is inserted in line 2 of Clause 2.1.2 immediately following the term "except": "(a) as in the case of each Excepted Wholly Owned Asset Owning Entity as specified in Clause 2.1.3, and (b)". 2.4 The following provision is inserted as a new sub-clause numbered 2.1.3: "Notwithstanding any other provision of this Agreement, the completion and sale of the Specified Ownership Interest in each Excepted Wholly Owned Asset Owning Entity shall take place only on the Deferred Date on which the Specified Ownership Interest in the Partnership Asset Owing Entity held by such Excepted Wholly Owned Asset Owning Entity is to take place in accordance with the terms of this Agreement." 2.5 The following expression is inserted in line 6 of Clause 2.10.2 immediately following the expression ", as the case may be": ", provided that, in the case of the completion of the sale and purchase of any Remaining Ownership Interests on any Deferred Date which occurs on or prior to January 31, 2007 (or, in the event of the relevant sale and purchase not having occurred on or prior to such date as a direct result of the failure of Seller to use all reasonable expedition in having such sale and purchase completed on or prior to such date, any later date), Buyer's obligation hereunder to pay the relevant Deferred Date Allocated Amount shall be satisfied by Buyer paying to Seller such relevant Deferred Date Allocated Amount less the sum of all cash distributions made in the ordinary course of business by the relevant Partnership Aircraft Owning Entity to the JV members thereof after the Closing Date and prior to the earlier of (a) the relevant Deferred Date and (b) January 31, 2007 (or such later date as aforesaid) and received by Seller." 2.6 The following expression is inserted in line 4 of Clause 3 immediately following the term "document 23.01.02": "or Virtual Data Room document 23.01.03". 2.7 The first sentence of Clause 6.3 is deleted entirely and replaced with the following: "Buyer acknowledges and agrees that neither Buyer nor any Affiliate of Buyer shall as part of the transactions contemplated by this Agreement or as a consequence hereof acquire any rights to use the term "GATX" and agrees to cause the Transferred Employees, other than the Deferred Employees, to cease using the GATX name or any derivative thereof; provided, that, the Transferred Employees shall be permitted to use the GATX name or any derivate thereof for a period of sixty (60) days following the Closing Date in connection with ordinary course business meetings and correspondence (such as distributing business cards) so long as in doing so such Transferred Employees (i) clearly state that they are employees of Buyer and that they have no authority to act on behalf of Seller or any of its Affiliates and (ii) in no way take any actions that legally bind, or purport to legally bind, Seller or any of its Affiliates; and provided, further that, notwithstanding the foregoing provision, after the Closing Date, Buyer shall, and shall cause the Transferred Employees to, only use forms of leases, letters of intent, -2- agreements and similar legal documents that do not contain the GATX name or any derivative thereof, and which do not impose any liability on or otherwise obligate Seller or any of its Affiliates in any way." 2.8 The existing Clause 6.5 is deleted entirely and replaced with the following: "6.5 Moneys Received by Buyer Group with respect to Focused Air Aircraft after Closing If closing of the Focused Air Arrangements is delayed beyond the Closing Date (in whole or in part), Buyer will hold all: 6.5.1 sale and/or rental proceeds received and retained by members of Buyer Group with respect to Focused Air Aircraft on trust for Seller and will pay such proceeds to Seller promptly after receipt; and 6.5.2 fees received and retained under the GATX/CL Air JV Management Agreement by members of Buyer Group with respect to the sale of a Focused Air Aircraft to AerCap on trust for Seller and will pay such fees to Seller promptly after receipt. For the avoidance of doubt, it is hereby agreed that all assets and amounts set forth in Clauses 6.5.1 and 6.5.2 (but no other moneys received by Buyer Group with respect to the Focused Air Aircraft) are not being purchased by Buyer are and shall remain the property of Seller (including for United States federal income tax purposes). If and to the extent Buyer or any of its Affiliates is obligated to make a payment to GATX/CL Air in respect of any Focused Air Aircraft as a result of Buyer or any such Affiliate being a JV Member (each such payment being a "CAPITAL CONTRIBUTION"), Seller shall reimburse the amount of such Capital Contribution to Buyer promptly after Buyer's first written demand." 2.9 The expression "date hereof" which appears in the final line of Clause 6.6 is deleted and replaced by the expression "Closing Date". 2.10 The existing Clause 7.10 is deleted entirely and replaced with the following: "7.10 Arrangements in relation to the ATA Aircraft 7.10.1 If the ATA Aircraft Financier consent referred to in #1 of Schedule 3 is not obtained by the Closing Date, as soon as reasonably practicable following the Closing Date, (i) Seller will, subject to the same not constituting a Default (as such term is defined in the Leases to which the ATA is subject), transfer its Specified Ownership Interest in relation to the ATA Aircraft to an owner trust, and (ii) subject to Clause 10, Seller will sell and Buyer will buy Seller's Specified Ownership Interest in such owner trust at no additional consideration. 7.10.2 If pursuant to Clause 7.10.1 Buyer buys Seller's Specified Ownership Interest in the owner trust referred to in Clause 7.10.1 and Seller remains a guarantor under the guarantee given by Seller to the ATA Aircraft Financiers, Buyer shall promptly, but in any event within three (3) Business Days of receipt of notice from Seller that Buyer is -3- obligated to reimburse Seller pursuant to this Clause 7.10.2, reimburse to Seller any and all amounts Seller is required to pay under such guarantee, together with any expenses (including reasonable expenses of investigation and reasonable attorney's fees and expenses) incurred by Seller in connection therewith (it being understood and agreed that any disputes with respect to any such reimbursement shall be governed in accordance with the provisions of Clause 11.3). 2.11 The following provision is inserted as Clause 7.17: "7.17 Arrangements in relation to the Ex-Im 2001 Financings 7.17.1 In the event of all consents of JV Members of any Partnership Asset Owning Entity which is a participant in any Ex-Im 2001 Financing required for the sale and purchase of the Specified Ownership Interest in such Partnership Asset Owning Entity pursuant to this Agreement being obtained prior to all the consents of the Ex-Im 2001 Financiers and the accomplishment of the actions identified in paragraph 2 of Schedule 3 in relation to the relevant Ex-Im 2001 Financing being obtained or taken, as the case may be, subject to Clause 10, the sale and purchase of such Specified Ownership Interest will be effected on the third (3rd.) Business Day (or such later date as may be agreed between Seller and Buyer) following the date on which all such consents have been obtained. 7.17.2 So long as Seller remains a guarantor under any of the guarantees given by Seller in connection with any of the Ex-Im 2001 Financing Documents, Buyer shall promptly, but in any event within three (3) Business Days of receipt of notice from Seller that Buyer is obligated to reimburse Seller pursuant to this Clause 7.17.3, reimburse to Seller any and all amounts Seller is following the Closing Date required to pay under such guarantees (or any of them), together with any expenses (including reasonable expenses of investigation and reasonable attorney's fees and expenses) incurred by Seller in connection therewith (it being understood and agreed that any disputes with respect to any such reimbursement shall be governed in accordance with the provisions of Clause 11.3). In the event that Seller remains as such a guarantor as of the expiration of the second anniversary of the Closing Date, Buyer shall within the thirty (30) day period commencing on the such anniversary procure that (a) all GATX Retained Entity Obligations under all the Ex-Im 2001 Financing Documents are released, or (b) letters of credit are issued by Macquarie Bank Limited, or another bank with a credit rating not less than the credit rating then held by Macquarie Bank Limited and otherwise reasonably acceptable to Seller, in the respective percentages of the principal amount from time to time of each loan guaranteed by Ex-Im Bank under any of the Ex-Im 2001 Financing Documents to the extent that the same is a "full recourse" obligation of Seller under its guarantee issued in relation to such loan each of which letter of credit is by its terms to remain in effect so long as Seller continues to have liability under the relevant such guarantee and to be able to be drawn at any time by Seller in the event of Buyer failing to make any related payment mentioned in this Clause 7.17.2 in the amount which Buyer has so failed to pay. -4- 7.10.3 Buyer shall not purchase or procure the purchase of all of the Ownership Interests in any of the 737 Partners, unless prior thereto, or concurrently therewith, all GATX Retained Entity Obligations under all the related Ex-Im 2001 Financing Documents have been released. 2.12 The following provision is inserted as Clause 7.18: 7.18 Arrangements in relation to the Office Leases 7.18.1 Buyer acknowledges that all of the Liabilities of the relevant GATX Retained Entity under each of the Overseas Office Leases are Assumed Liabilities and that Buyer shall promptly, but in any event within three (3) Business Days of receipt of notice from Seller that the relevant GATX Retained Entity has had to make any payment in respect of any such Liability with details of such payment, Buyer is obligated to reimburse Seller (either on its own behalf or on behalf of the relevant other GATX Retained Entity), such amount so paid by the relevant GATX Retained Entity, together with any expenses (including reasonable expenses of investigation and reasonable attorney's fees and expenses) incurred by Seller or the relevant other GATX Retained Entity in connection therewith (it being understood and agreed that any disputes with respect to any such reimbursement shall be governed in accordance with the provisions of Clause 11.3). 7.18.2 Buyer shall, no later than December 31, 2006, give notice to Seller as to whether it desires that Seller gives, or procures that there is given, notice terminating the Overseas Office Leases in relation to the offices in Toulouse and Tokyo. In the event of Buyer notifying Seller that either or both such Overseas Office Leases should be terminated or failing to give any such notice by January 1, 2007, Seller shall promptly (but in any event within ten (10) Business Days of the relevant notice being given to Seller), give, or procure that there is given, notice of such termination to be effective at the earliest date possible pursuant to the terms of the relevant Overseas Office Lease. 2.13 The following expression is inserted in line 1 of Clause 10.5.3 immediately following the expression "Schedule 3": "(other than the EAST Consent")", it being agreed for the avoidance of doubt that such amendment is made without any consequential effect on the obligations of the parties under Clause 7.1.1 of the Sale and Purchase Agreement. 2.14 The existing Clause 11.2.2 is deleted entirely and replaced with the following: "Buyer hereby indemnifies Seller and its Affiliates against and agrees to hold each of them harmless from any and all Damages actually suffered by Seller or any of its Affiliates and their respective officers, directors, employees, successors and permitted assigns in connection with, arising out of or resulting from (i) any breach of the representations and warranties of Buyer, (ii) any breach of or failure to comply with any -5- covenant or agreement made or to be performed by Buyer pursuant to this Agreement, (iii) any Assumed Liability, (iv) the ownership by Seller or its Affiliates of the Transferred Specified Ownership Interests, or (v) Buyer's offer of employment (including the content of such offer of employment) or failure to offer employment to any U.S. Employee or group of U.S. Employees; provided, that (a) Buyer shall not indemnify Seller or its Affiliates for any Damages pursuant to this item (v) to the extent arising out of actions taken or not taken by Seller or any of its Affiliates not related to any decision by Buyer to make and/or to not make an offer of employment to any such U.S. Employee and (b) in no event shall Buyer or any of its Affiliates be responsible in connection with, or be required to provide any indemnity hereunder in connection with, any Retained Liabilities.". 2.15 The term "of" which appears in the first line of Clause 11.8 is deleted and replaced by the following expression: "commencing on the earlier of (a) the date on which the insurances hereinafter described in this Clause 11.8 are effected and (b) April 1, 2007 and ending on the date occurring". 2.16 The following expression is inserted as an additional sentence at the send of Clause 12.2: "It is hereby confirmed for the avoidance of doubt that each of Seller's rights of termination under Clause 12.1 is available for exercise only prior to the Closing." 3. MISCELLANEOUS 3.1 The provisions of Clauses 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.8 and 13.10 are hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Supplemental Agreement. 3.2 References to "this Agreement" in the Sale and Purchase Agreement are deemed to be references to the Sale and Purchase Agreement as amended by this Supplemental Agreement. -6- IN WITNESS WHEREOF, the parties to this Supplemental Agreement have caused this Supplemental Agreement to be duly executed by their respective authorized officers as of the day and year first above written. Seller GATX FINANCIAL CORPORATION By: /s/ Robert C. Lyons -------------------------------------------- Name: Robert C. Lyons Vice President and Chief Title: Financial Officer Buyer MACQUARIE AIRCRAFT LEASING LIMITED By: /s/ Stephen Cook -------------------------------------------- Name: Stephen Cook Title: Attorney in Fact -------------------------------------------- EX-2.3 3 c12743exv2w3.txt SECOND SUPPLEMENTAL AGREEMENT Exhibit 2.3 Execution Version DATED AS OF JANUARY 17, 2007 BETWEEN GATX FINANCIAL CORPORATION as Seller and MACQUARIE AIRCRAFT LEASING LIMITED as Buyer RELATING TO THE SALE AND PURCHASE of THE GATX AIR BUSINESS ------------------------------------------- SECOND SUPPLEMENTAL AGREEMENT ------------------------------------------- SECOND SUPPLEMENTAL AGREEMENT dated as of January 17, 2007 between GATX Financial Corporation, a Delaware corporation ("SELLER"), and Macquarie Aircraft Leasing Limited, a company incorporated under the laws of the Republic of Ireland ("BUYER"). WITNESSETH: WHEREAS, Seller and Buyer entered into the Sale and Purchase Agreement. WHEREAS, Seller and Buyer entered into the First Supplemental Agreement amending the Sale and Purchase Agreement and agreeing certain additional matters. WHEREAS, Seller and Buyer wish to make certain further amendments to the Sale and Purchase Agreement and supplement certain of the agreements set forth in the Sale and Purchase Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. DEFINITIONS 1.1 Definitions As used in this Second Supplemental Agreement (including the recitals hereto) and save as otherwise defined herein, terms defined in the Sale and Purchase Agreement shall bear the same respective meanings ascribed to them in the Sale and Purchase Agreement when used in this Second Supplemental Agreement and: "FIRST SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of November 30, 2006 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement. "SALE AND PURCHASE AGREEMENT" means the Sale and Purchase Agreement dated as of September 28, 2006 between Seller and Buyer. 1.2 Other Definitional and Interpretative Provisions Clause 1.2 of the Sale and Purchase Agreement is hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Second Supplemental Agreement. 2. AMENDMENTS The Sale and Purchase Agreement is amended as follows: 2.1 The definition of the expressions ""KNOWLEDGE", "KNOWLEDGE" or any other similar knowledge qualification in this Agreement with respect to Seller" as set forth in Clause 1.1 is deleted and replaced with the following: ""KNOWLEDGE", "KNOWLEDGE" or any other similar knowledge qualification in this Agreement with respect to Seller means the actual knowledge of (i) (other than with respect to Clauses 3.9.3 or 3.9.9 (solely with respect to Manuals and Technical Records), -1- 3.13 and 8.2) Jim Morris or Sue Noack, (ii) (solely with respect to Clauses 3.9.3 and 3.9.9 (but solely with respect to Manuals and Technical Records)) Phil Nassar, and (iii) (solely with respect to Clause 8.2) Jeff Young and Stanton Brunner provided that for all purposes of this Agreement none of the foregoing Persons shall be deemed to have actual knowledge of any matter of which any of such Persons obtained actual knowledge of on or after November 30, 2006 and of which any director or employee of Buyer or any Affiliate of Buyer has obtained the same actual knowledge on or after November 30, 2006 as a consequence of, or in connection with, Buyer providing the management services to which reference is made in Clauses 6.4 and 6.9 or in relation to the EAST Management Agreement.". 2.2 The following definitions are inserted in alphabetical order in Clause 1.1: "EAST MANAGEMENT AGREEMENT ASSIGNMENT AGREEMENT" means the assignment, assumption and amendment agreement relating to the East Management Agreement in the agreed form. "EX-IM 2001 MANAGEMENT AGREEMENTS" means together the management agreements to which Seller is a party which constitute Virtual Data Room documents 11.49.31, 11.50.29 and 11.51.31 (each an "EX-IM 2001 MANAGEMENT AGREEMENT").", and ""MANAGEMENT AGREEMENT EVENT OF DEFAULT" has the meaning ascribed to such term in the Ex-Im 2001 Financing Documents.". 2.3 The following expressions are inserted as new additional final sentences in Clause 2.2: "Buyer shall use all commercially reasonable efforts to ensure that all ancillary documentation needed to be executed and delivered in connection with the transfer of the EAST Management Agreement to Buyer is so executed and delivered as soon as practicable. The Parties acknowledge that as from January 17, 2007 Clifford Chance LLP is holding in escrow execution pages of the East Management Agreement Assignment Agreement executed by Seller and Buyer respectively and that upon the delivery to Clifford Chance LLP of execution pages of the East Management Agreement Assignment Agreement executed by EAST, the transfer of the East Management Agreement from Seller to Buyer shall be unconditionally effective. In addition, the Parties hereto shall use all good faith efforts to complete the transfer of all of the Material Contracts and Designated Contracts to Buyer no later than March 31, 2007.". 2.4 The following expression is inserted in the final line of Clause 2.5 immediately following the expression "any GATX Retained Entity": "and provided further that as between Seller and Buyer the provisions of Clause 2.5 shall apply notwithstanding that the stated terms of any relevant document transferring the relevant Liabilities to which reference is made therein may otherwise provide that the relevant GATX Retained Entity or Buyer may bear any other liability in favour of any other party and Seller and Buyer agree to bear such other liability in accordance with the provisions of Clause 2.5 and indemnify and hold harmless the relevant GATX Retained Entity or Buyer, as the case may be, in respect thereof.". -2- 2.5 The expression "and" which appears as the end of Clause 2.5.7 is deleted. 2.6 The punctuation mark "," which appears at the end of line 4 of Clause 2.5.8 is deleted and replaced with the expression "; and". 2.7 The following provision is inserted as Clause 2.5.9: "2.5.9 notwithstanding anything to the contrary in this Agreement, all Liabilities in respect of any claim in damages made by any JV Member or other third party in relation to, or as a consequence of, the use of any particular form of document, or the terms thereof, which is, or are, agreed by Buyer to transfer any Specified Ownership Interest (or Material Contract or Designated Contract) transferred on any Deferred Date rather than any other form (or terms thereof) or the manner in which any Specified Ownership Interest (or Material Contract or Designated Contract) is transferred,". 2.8 The following expression is inserted at the end of the final line of Clause 2.5 immediately following the expression "GATX Retained Entity": "and for the avoidance of doubt it is confirmed that the Liabilities under each Designated Contract and each Material Contract specified in Clauses 2.5.2 and 2.5.3 shall, without any further action on the part of any Party, be Assumed Liabilities as of the Closing Date or the applicable Deferred Date, as the case may be, whether or not such Designated Contract or Material Contract is transferred to Buyer". 2.9 The following expression is inserted as an additional sentence commencing in the final line of Clause 2.10.2 immediately following the expression "by Seller.": "In the event that any cash distribution as aforesaid is received by Seller following the Deferred Date on which the related Remaining Ownership Interest is transferred to Buyer and receipt of the same had not been anticipated for the purposes of calculating the sum payable by Buyer in order to satisfy Buyer's obligation to pay the relevant Deferred Date Allocated Amount, Seller shall promptly pay to Buyer the amount equal to such cash distribution so received by Seller.". 2.10 The following expression is inserted as an additional sentence commencing in the final line of Clause 2.10.3 immediately following the expression "Assumed Liabilities.": "Buyer and Seller acknowledge that, notwithstanding anything to the contrary contained in this Agreement, neither Seller nor any other GATX Retained Entity will have any liability to Buyer and, save as set forth in Clause 2.5.9, Buyer will not have any liability to Seller or any other GATX Retained Entity, in relation to, or as a consequence of, the use of any particular form of document, or the terms thereof, which is, or are, agreed by Seller and Buyer to transfer any Specified Ownership Interest (or Material Contract or Designated Contract) transferred on any Deferred Date rather than any other form (or terms thereof) or the manner in which any Specified Ownership Interest (or Material Contract or Designated Contract) is transferred.". 2.11 The expression "to Seller" which appears in line 3 of Clause 3 is deleted and replaced with the expression "by Seller". -3- 2.12 The expression "or" which appears in line 4 of Clause 3 immediately prior to the expression "document" is deleted and replaced with "," and the following expression is inserted in such line 4 immediately following the term "document 23.01.03": "or Virtual Data Room document 23.01.04". 2.13 The following expression is inserted in line 6 of Clause 3 immediately following the term "of such date": ", or (iii) for any matter of which any director or employee of Buyer or any Affiliate of Buyer has obtained actual knowledge on or after November 30, 2006 as a consequence of, or in connection with, Buyer providing management services to which reference is made in Clauses 6.4 and 6.9 or in relation to the EAST Management Agreement or in connection with the obtaining of the consent of any JV Member to which reference is made in this Agreement or the process of agreeing any documentation needed to effect the transfer of any Remaining Ownership Interest". 2.14 Clause 3.13 is deleted and replaced with the following: "3.13 Deliberately Omitted". 2.15 The expression "or EAST" is inserted in line 2 of Clause 5.6 immediately following the expression "Asset Owning Entity". 2.16 The following provision is inserted as Clause 7.1.5: "7.1.5 Each of Buyer and Seller shall pay fifty per cent. (50%) of the fees and expenses of (a) any external counsel (i) which acts for any JV Member (other than Seller or any Affiliate of Seller) incurred in connection with the provision of the relevant JV Member's consent to the transfer of Seller's Specified Ownership Interest in the relevant Partnership Asset Owning Entity or the effecting of such transfer or any substitution of a guarantee provided by Seller or any other GATX Retained Entity with a guarantee provided by Buyer, or (ii) which acts for Continental Airlines, Inc. or the Ex-Im 2001 Financiers in connection with the arrangements contemplated by this Agreement so far as they relate to the Ex-Im 2001 Financed Aircraft, and (b) Clifford Chance LLP and Vedder, Price, Kaufman & Kammholz, P.C. in relation to the preparation of a bible of transaction documents in relation to the transactions contemplated by this Agreement.". 2.17 The following provisions are inserted as Clauses 7.10.3 and 7.10.4, respectively: "7.10.3 If pursuant to Clause 7.10.1 Buyer buys Seller's Specified Ownership Interest in the owner trust referred to in Clause 7.10.1 and Seller remains a guarantor under the guarantee given by Seller to the ATA Aircraft Financiers and Seller procures the issue of any letter of credit to which reference is made in Section 4.02(a) of the trust agreement to which such Specified Ownership Interest is constituted, Buyer shall promptly, but in any event within three (3) Business Days of receipt of notice from Seller that Buyer is obligated to reimburse -4- Seller pursuant to this Clause 7.10.3, reimburse to Seller any and all amounts or costs Seller is required to pay or bear under, or in connection with, any indemnity which Seller provides to the issuer of such letter of credit (but not including any amount paid by Seller in order to procure the issue of such letter of credit), together with any expenses (including reasonable expenses of investigation and reasonable attorney's fees and expenses) incurred by Seller in connection therewith (it being understood and agreed that any disputes with respect to any such reimbursement shall be governed in accordance with the provisions of Clause 11.3). 7.10.4 It is hereby confirmed, for the avoidance of doubt, that following the acquisition of Seller's Specified Ownership Interest in the trust to which reference is made in Clause 7.10.1, Buyer shall be able to transfer such Specified Ownership Interest to any other person in accordance with the provisions of the trust agreement pursuant to which such Specified Ownership Interest is constituted without the need for the prior approval of Buyer provided that any such transfer shall not release Buyer from, or otherwise have any effect on, the liability of Buyer under Clause 7.10.2 or Clause 7.10.3 in relation to any payment which Seller is required to make under the guarantee to which reference is made in Clause 7.10.2 or any amount or cost which Seller is required to pay or bear to which reference is made in Clause 7.10.3.". 2.18 Clause 7.17 is amended as follows: (a) the sub-clause forming part thereof which is erroneously numbered "7.10.3" is correctly numbered "7.17.3"; and (b) the following provision is inserted as Clause 7.17.4: "7.17.4 If by April 17, 2007 Seller has not been released from its obligations under any of the Ex-Im 2001 Management Agreements, Seller shall formally request the Ex-Im 2001 Financiers to release Seller from each of the Ex-Im 2001 Management Agreements from which Seller has not been released and use all commercially reasonable efforts to procure such releases. In the event that any such release has not been obtained by July 17, 2007, Seller shall within the period of ten (10) days thereafter procure the issue in favour of Seller of a letter of credit issued by Macquarie Bank Limited, or another bank with a credit rating not less than the credit rating then held by Macquarie Bank Limited and otherwise reasonably acceptable to Seller, in the sum equal to the then net present value, as reasonably determined by Seller, of the aggregate fee (based on an arm's length quotation obtained by Seller from a reputable entity (other than GECAS, ILFC or an affiliate of either thereof) generally engaged in providing management and administration services) which Seller would be required to pay to a person reasonably acceptable to Seller to provide the management and administration services required to be provided by Seller under each of the Ex-Im 2001 Management Agreements to which Seller remains a party for the then remaining term of the same and able to be drawn -5- at any time by Seller in the event, and during the continuance, of any Management Agreement Event of Default, such that Seller shall appoint such a person to provide such management and administration services and apply the proceeds of such letter of credit in effecting payment of such aggregate fee.". 2.19 The sign "(*)" which appears in paragraph 27 of Part 2 of Schedule 5 is deleted. 3. MISCELLANEOUS 3.1 The provisions of Clauses 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.8 and 13.10 are hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Second Supplemental Agreement. 3.2 References to "this Agreement" in the Sale and Purchase Agreement are deemed to be references to the Sale and Purchase Agreement as amended by this Second Supplemental Agreement. -6- IN WITNESS WHEREOF, the parties to this Second Supplemental Agreement have caused this Second Supplemental Agreement to be duly executed by their respective authorized officers as of the day and year first above written. Seller GATX FINANCIAL CORPORATION By: /s/ Robert C. Lyons -------------------------------------------- Name: Robert C. Lyons Title: Vice President and Chief Financial Officer Buyer MACQUARIE AIRCRAFT LEASING LIMITED By: /s/ Stephen Moulton -------------------------------------------- Name: Stephen Moulton Title: Attorney in Fact -------------------------------------------- -7- EX-2.4 4 c12743exv2w4.txt THIRD SUPPLEMENTAL AGREEMENT Exhibit 2.4 Execution Version DATED AS OF JANUARY 29, 2007 BETWEEN GATX FINANCIAL CORPORATION as Seller and MACQUARIE AIRCRAFT LEASING LIMITED as Buyer RELATING TO THE SALE AND PURCHASE of THE GATX AIR BUSINESS -------------------------------------------------- THIRD SUPPLEMENTAL AGREEMENT -------------------------------------------------- THIRD SUPPLEMENTAL AGREEMENT dated as of January 29, 2007 between GATX Financial Corporation, a Delaware corporation ("SELLER"), and Macquarie Aircraft Leasing Limited, a company incorporated under the laws of the Republic of Ireland ("BUYER"). WITNESSETH: WHEREAS, Seller and Buyer entered into the Sale and Purchase Agreement. WHEREAS, Seller and Buyer entered into the First Supplemental Agreement and Second Supplemental Agreement amending the Sale and Purchase Agreement and agreeing certain additional matters. WHEREAS, Seller and Buyer wish to make a certain further amendment to the Sale and Purchase Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. DEFINITIONS 1.1 Definitions As used in this Third Supplemental Agreement (including the recitals hereto) and save as otherwise defined herein, terms defined in the Sale and Purchase Agreement shall bear the same respective meanings ascribed to them in the Sale and Purchase Agreement when used in this Third Supplemental Agreement and: "FIRST SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of November 30, 2006 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; "SECOND SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of 17 January 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; and "SALE AND PURCHASE AGREEMENT" means the Sale and Purchase Agreement dated as of September 28, 2006 between Seller and Buyer. 1.2 Other Definitional and Interpretative Provisions Clause 1.2 of the Sale and Purchase Agreement is hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Third Supplemental Agreement. 2. AMENDMENT The Sale and Purchase Agreement is amended as follows: the expression "sixty (60)" which appears in line 1 of Clause 2.9.1 is deleted and replaced with the expression "one hundred and twenty (120)". -1- 3. MISCELLANEOUS 3.1 The provisions of Clauses 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.8 and 13.10 are hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Third Supplemental Agreement. 3.2 References to "this Agreement" in the Sale and Purchase Agreement are deemed to be references to the Sale and Purchase Agreement as amended by this Third Supplemental Agreement. -2- IN WITNESS WHEREOF, the parties to this Third Supplemental Agreement have caused this Third Supplemental Agreement to be duly executed by their respective authorized officers as of the day and year first above written. Seller GATX FINANCIAL CORPORATION By: /s/ Robert C. Lyons -------------------------------------------- Name: Robert C. Lyons Title: Vice President and Chief Financial Officer Buyer MACQUARIE AIRCRAFT LEASING LIMITED By: /s/ Stephen Moulton -------------------------------------------- Name: Stephen Moulton Title: Attorney-in-Fact -------------------------------------------- EX-2.5 5 c12743exv2w5.txt FOURTH SUPPLEMENTAL AGREEMENT Exhibit 2.5 Execution Version DATED AS OF JANUARY 31, 2007 BETWEEN GATX FINANCIAL CORPORATION as Seller and MACQUARIE AIRCRAFT LEASING LIMITED as Buyer RELATING TO THE SALE AND PURCHASE of THE GATX AIR BUSINESS ------------------------------------------------- FOURTH SUPPLEMENTAL AGREEMENT ------------------------------------------------- FOURTH SUPPLEMENTAL AGREEMENT dated as of January 31, 2007 between GATX Financial Corporation, a Delaware corporation ("SELLER"), and Macquarie Aircraft Leasing Limited, a company incorporated under the laws of the Republic of Ireland ("BUYER"). WITNESSETH: WHEREAS, Seller and Buyer entered into the Sale and Purchase Agreement. WHEREAS, Seller and Buyer entered into the First Supplemental Agreement, the Second Supplemental Agreement and the Third Supplemental Agreement amending the Sale and Purchase Agreement and agreeing certain additional matters. WHEREAS, Seller and Buyer wish to make certain further amendments to the Sale and Purchase Agreement and supplement certain of the agreements set forth in the Sale and Purchase Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. DEFINITIONS 1.1 Definitions As used in this Fourth Supplemental Agreement (including the recitals hereto) and save as otherwise defined herein, terms defined in the Sale and Purchase Agreement shall bear the same respective meanings ascribed to them in the Sale and Purchase Agreement when used in this Fourth Supplemental Agreement and: "FIRST SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of November 30, 2006 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; "SECOND SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of January 17, 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; "THIRD SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of January 29, 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; and "SALE AND PURCHASE AGREEMENT" means the Sale and Purchase Agreement dated as of September 28, 2006 between Seller and Buyer. 1.2 Other Definitional and Interpretative Provisions Clause 1.2 of the Sale and Purchase Agreement is hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Fourth Supplemental Agreement. 2. AMENDMENTS The Sale and Purchase Agreement is amended as follows: -1- 2.1 The following definitions are inserted in alphabetical order in Clause 1.1: "BUYER FRENCH EMPLOYER" means Macquarie Aircraft Leasing Services (France) SARL, a societe a responsabilite limitee created and existing under French law having its registered office at 41, avenue Georges V, 75008 Paris, France; and "BUYER UK EMPLOYER" means Macquarie Aircraft Leasing Services (UK) Limited, a company incorporated in England having its registered office at Level 35, CityPoint, 1 Ropemaker Street, London EC2Y 9HD, England. 2.2 Sub clause (e) of Clause 9.1.1 shall be deleted in its entirety and replaced with the following: "It is acknowledged that the UK Employees have transferred to the Buyer UK Employer and the Buyer shall procure that it or the Buyer UK Employer shall be responsible for all and any UK Buyer Assumed Claims. A UK Buyer Assumed Claim is any claim or right of action that a UK Employee or his or her "appropriate representative" may have or assert whether arising under English law, European Union law, common law, statute or otherwise in any jurisdiction whatsoever that may be or is brought by or on behalf of any UK Employee after Closing whether against the Buyer, the Buyer UK Employer, other Affiliate of the Buyer, the Seller or an Affiliate of the Seller (or any director, officer, employee or agent of any such entity) arising out of or in connection with the sale of the Business as contemplated by the Agreement, any allegation that the transfer of any UK Employee to the Buyer UK Employer has not been effective, the employment of the UK Employee, the relocation of that employment, the termination of that employment or any other matter whatsoever except for any UK Seller Retained Claim. A UK Seller Retained Claim is any claim or right of action that a UK Employee or his or her "appropriate representative" may have or assert whether arising under English law, European Union law, common law, statute or otherwise in any jurisdiction whatsoever whether against the Buyer, the Buyer UK Employer, other Affiliate of the Buyer, the Seller or an Affiliate of the Seller (or any director, officer, employee or agent of such entity) that does not arise out of or in connection with the sale of the Business as contemplated by the Agreement, any allegation that the transfer of any UK Employee to the Buyer UK Employer has not been effective or the relocation or termination of the employment of a UK Employee after Closing but that otherwise may be or is brought by or on behalf of any UK Employee because of any act or omission of the Seller or an Affiliate of the Seller relating to the employment of the UK Employee prior to Closing (but for the avoidance of doubt a Seller Retained Claim shall not include any claim for which the Buyer or Buyer UK Employer is otherwise liable but in respect of which the provision of any benefits or any payment, damages or compensation is determined (in whole or in part) by reference to the UK Employee's period of continuous employment and that includes employment with the Seller or an Affiliate of the Seller). The Buyer shall indemnify and hold harmless the Seller and any Seller Affiliate against all and any claim, liability, compensation, damages, cost (including reasonable legal costs) or expenses that any Seller or Seller Affiliate may incur arising out of or in connection with all and any UK Buyer Assumed Claim being brought or asserted against the Seller and/or Seller Affiliate." -2- 2.3 Sub clause (e) of clause 9.1.2 shall be deleted in its entirety and replaced with the following: "It is acknowledged that the French Employees have transferred to the Buyer French Employer and the Buyer shall procure that it or the Buyer French Employer shall be responsible for all French Buyer Assumed Claims. A French Buyer Assumed Claim is any claim or right of action that a French Employee may have or assert whether arising under French law, European Union law, statute or otherwise in any jurisdiction whatsoever that may be or is brought by any French Employee after Closing whether against the Buyer, the Buyer French Employer, other Affiliate of the Buyer, the Seller or an Affiliate of the Seller (or any director, officer, employee or agent of such entity) arising out of or in connection with the sale of the Business as contemplated by the Agreement, any allegation that the transfer of any French Employee to the Buyer French Employer has not been effective, the employment of any French Employee, the relocation of that employment, the termination of that employment or any other matter whatsoever except for any French Seller Retained Claim. A French Seller Retained Claim is any claim or right of action that a French Employee may have or assert whether arising under French law, European Union law, statute or otherwise in any jurisdiction whatsoever whether against the Buyer, the Buyer French Employer, other Affiliate of the Buyer, the Seller or an Affiliate of the Seller (or any director, officer, employee or agent of such entity) that does not arise out of or in connection with the sale of the Business as contemplated by the Agreement, any allegation that the transfer of any French Employee to the Buyer French Employer has not been effective or the relocation or termination of the employment of a French Employee after Closing but that otherwise may be or is brought by or on behalf of any French Employee because of any act or omission of the Seller or an Affiliate of the Seller relating to the employment of the French Employee prior to Closing (but for the avoidance of doubt a Seller Retained Claim shall not include any claim for which the Buyer or Buyer French Employer is otherwise liable but in respect of which the provision of any benefits or any payment, damages or compensation is determined (in whole or in part) by reference to the French Employee's period of continuous employment and that includes employment with the Seller or an Affiliate of the Seller). The Buyer shall indemnify and hold harmless the Seller and any Seller Affiliate against all and any claim, liability, compensation, damages, cost (including reasonable legal costs) or expenses that any Seller or Seller Affiliate may incur arising out of or in connection with all and any French Buyer Assumed Claim being brought against the Seller and/or Seller Affiliate." 2.4 The following expression is inserted as a new additional Clause 9.1.2A: "Procedures for claims under the indemnities in Clause 9.1.1(e) or 9.1.2(e) 9.1.2 A.1 Where the Seller or any Seller Affiliate seeks indemnification under Clause 9.1.1(e) or 9.1.2 (e) it will give prompt notice to the Buyer of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under that Clause and will provide the Buyer with all information that the Buyer may reasonably request. The failure to so notify the Buyer shall not relieve the -3- Buyer of its obligations under Clause 9.1.1(e) or 9.1.2 (e), except to the extent that such failure shall have materially adversely prejudiced the Buyer. 9.1.2 A.2 Subject to the terms of this Clause 9.1.2 A the Buyer shall be entitled to participate in the defense of any claim asserted by any UK Employee or French Employee and, subject only to the express limitations set forth in this Clause 9.1.2 A, shall be entitled to control and appoint lead counsel for that defense, in each case at its expense. If the Buyer shall acknowledge, in writing, to the Seller or Seller Affiliate as appropriate that without prejudice to any party's right to contest the validity of the claim the Buyer shall be obligated under the terms of its indemnity hereunder in connection with such claim by a UK Employee or French Employee, then the Buyer shall be entitled (a) to take control of the defense and investigation of such lawsuit or action (including the right to settle any such law suit or action) and, (b) to employ and engage attorneys of its own choice reasonably satisfactory to the Seller or Seller Affiliate to handle and defend the same unless the named parties to such action or proceeding include both the Buyer and/or a Buyer Affiliate and the Seller and/or a Seller Affiliate and the Seller/Seller Affiliate has been advised in writing by counsel that joint counsel for the Buyer and Seller Parties shall result in a conflict under the applicable rules of professional conduct, in which event the Seller/Seller Affiliate shall be entitled, at the Buyer's expense to separate counsel of its own choice reasonably satisfactory to the Buyer; provided that the Buyer shall not agree to any compromise or settlement with respect to the claim brought by the UK Employee or French Employee that (i) does not include a complete release of the Seller/Seller Affiliate from all liability with respect thereto and/or (ii) imposes any liability, restriction or damages on the Seller/Seller Affiliate without the consent of the Seller/Seller Affiliate, which consent shall not be unreasonably withheld or delayed. The Seller/Seller Affiliate may, at its own cost, participate in (but not control) the investigation, trial and defense of such claim by a UK Employee or French Employee and any appeal arising therefrom. If the Buyer fails to assume the defense of such claim within fourteen (14) calendar days after receipt of the notice of claim by the Seller/Seller Affiliate, the Seller/Seller Affiliate against which such claim has been asserted will (upon delivering notice to such effect to the Buyer) have the right to undertake, at the Buyer's cost, risk and expense, the defense of such claim on behalf of and for the account and risk of the Buyer. In no event shall the Seller/Seller Affiliate have authority to settle any such claim without the consent of the Buyer, which consent shall not be unreasonably withheld or delayed. 9.1.2 A.3 If the Buyer makes any payment on any claim by a UK Employee or French Employee, the Buyer shall be subrogated, to the extent of such payment, to all rights and remedies of the Seller/Seller Affiliate to any insurance benefits or other claims of the Seller/Seller Affiliate with respect to such claims. 9.1.2 A.4 Subject to the Seller/Seller Affiliate being reimbursed promptly by the Buyer in respect of any expenses incurred during and receiving from the Buyer -4- appropriate compensation to reflect any management time involved in such defense each party shall cooperate in good faith, and cause their respective Affiliates to cooperate, in the defense of any claims by any UK Employee or French Employee and shall furnish or cause to be furnished such personnel, records, information and testimony, and attend those conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection with any of the foregoing. 3. PAYMENT In consideration of the Buyer agreeing to the amendments set out in clause 2 above the Seller shall pay the Buyer within 7 Business Days after the date of this Fourth Supplemental Agreement the US $ equivalent of one million one hundred and fifty thousand Euro (1,150,000) such equivalence to be based on the exchange rate as at 31 January 2007 by payment to the account separately designated by Buyer. It is agreed that the US $ amount shall be US $ . 4. MISCELLANEOUS 4.1 The provisions of Clauses 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.8 and 13.10 are hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Fourth Supplemental Agreement. 4.2 References to "this Agreement" in the Sale and Purchase Agreement are deemed to be references to the Sale and Purchase Agreement as amended by this Fourth Supplemental Agreement. -5- IN WITNESS WHEREOF, the parties to this Fourth Supplemental Agreement have caused this Fourth Supplemental Agreement to be duly executed by their respective authorized officers as of the day and year first above written. Seller GATX FINANCIAL CORPORATION By: /s/ Robert C. Lyons -------------------------------------------- Name: Robert C. Lyons Title Vice President and Chief Financial Officer Buyer MACQUARIE AIRCRAFT LEASING LIMITED By: /s/ Stephen Moulton -------------------------------------------- Name: Stephen Moulton Title: Attorney-in-Fact -------------------------------------------- -6- EX-2.6 6 c12743exv2w6.txt FIFTH SUPPLEMENTAL AGREEMENT EXHIBIT 2.6 EXECUTION VERSION DATED AS OF FEBRUARY 6, 2007 BETWEEN GATX FINANCIAL CORPORATION as Seller and MACQUARIE AIRCRAFT LEASING LIMITED as Buyer RELATING TO THE SALE AND PURCHASE of THE GATX AIR BUSINESS ---------- FIFTH SUPPLEMENTAL AGREEMENT ---------- FIFTH SUPPLEMENTAL AGREEMENT dated as of February 6, 2007 between GATX Financial Corporation, a Delaware corporation ("SELLER"), and Macquarie Aircraft Leasing Limited, a company incorporated under the laws of the Republic of Ireland ("BUYER"). WITNESSETH: WHEREAS, Seller and Buyer entered into the Sale and Purchase Agreement. WHEREAS, Seller and Buyer entered into the First Supplemental Agreement, Second Supplemental Agreement, Third Supplemental Agreement and Fourth Supplemental Agreement amending the Sale and Purchase Agreement and agreeing certain additional matters. WHEREAS, Seller and Buyer wish to make a certain further amendment to the Sale and Purchase Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer agree as follows: 1. DEFINITIONS 1.1 Definitions As used in this Fifth Supplemental Agreement (including the recitals hereto) and save as otherwise defined herein, terms defined in the Sale and Purchase Agreement shall bear the same respective meanings ascribed to them in the Sale and Purchase Agreement when used in this Fifth Supplemental Agreement and: "FIRST SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of November 30, 2006 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; "FOURTH SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of January 31, 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; "SECOND SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of January 17, 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; and "THIRD SUPPLEMENTAL AGREEMENT" means the Supplemental Agreement dated as of January 29, 2007 between Seller and Buyer amending and supplementing the Sale and Purchase Agreement; and "SALE AND PURCHASE AGREEMENT" means the Sale and Purchase Agreement dated as of September 28, 2006 between Seller and Buyer. -1- 1.2 Other Definitional and Interpretative Provisions Clause 1.2 of the Sale and Purchase Agreement is hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Fifth Supplemental Agreement. 2. AMENDMENT The Sale and Purchase Agreement is amended as follows: the expression "forty five (45)" which appears in line 2 of Clause 2.8.4(d) is deleted and replaced with the expression "sixty (60)". 3. MISCELLANEOUS 3.1 The provisions of Clauses 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.8 and 13.10 are hereby deemed to be incorporated herein as if all references therein to "this Agreement" were references to this Fifth Supplemental Agreement. 3.2 References to "this Agreement" in the Sale and Purchase Agreement are deemed to be references to the Sale and Purchase Agreement as amended by this Fifth Supplemental Agreement. -2- IN WITNESS WHEREOF, the parties to this Fifth Supplemental Agreement have caused this Fifth Supplemental Agreement to be duly executed by their respective authorized officers as of the day and year first above written. Seller GATX FINANCIAL CORPORATION By: /s/ Robert C. Lyons --------------------------------- Name: Robert C. Lyons Title: Vice President and Chief Financial Officer Buyer MACQUARIE AIRCRAFT LEASING LIMITED By: /s/ Stephen Moulton --------------------------------- Name: Stephen Moulton Title: Attorney-in-Fact -3- EX-10.23 7 c12743exv10w23.txt AMENDMENT NO.1 TO THE AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT Exhibit 10.23 EXECUTION VERSION AMENDMENT NO. 1 TO THE AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT Dated as of December 11, 2006 AMENDMENT NO. 1 TO THE AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT by and among GATX FINANCIAL CORPORATION, a Delaware corporation (the "Borrower), the banks, financial institutions and other institutional lenders (the "Initial Lenders") each parties to the Credit Agreement referred to below, GATX Corporation, a New York Corporation (the "Guarantor"), CITIGROUP GLOBAL MARKETS INC., as sole lead arranger and book manager, JPMORGAN CHASE BANK, N.A. and BANK OF AMERICA, N.A., as co-syndication agents, CALYON NEW YORK BRANCH and LASALLE BANK, NATIONAL ASSOCIATION, as co-documentation agents, and CITICORP USA, INC. ("CUSA"), as administrative agent (the "Agent") for the Lenders, agree as follows: PRELIMINARY STATEMENTS: (1) The Borrower, the Lenders and the Agent are parties to that certain Amended and Restated Five Year Credit Agreement dated as of June 27, 2005 (the "Credit Agreement"). Capitalized terms not otherwise defined in this Amendment (the "Amendment") have the same meanings as specified in the Credit Agreement. (2) The Borrower has requested changes and modifications to the Credit Agreement as hereinafter set forth; the Lenders are, on the terms and conditions stated below, willing to grant the request of the Borrower and the Lenders have agreed to further amend the Credit Agreement as hereinafter set forth. SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2, hereby amended in its entirety to read in full as set forth in Annex A hereto. By execution of this Amendment, the Guarantor agrees to be bound by the terms of the Credit Agreement, as amended hereby, the same as if the Guarantor were an actual signatory thereto. SECTION 2. Conditions of Effectiveness. This Amendment is subject to the provisions of Section 9.01 of the Credit Agreement. This Amendment shall become effective as of the date first above written (the "Amendment Effective Date") when and only when, on or before the Amendment Effective Date the Agent shall have received: (a) Counterparts of this Amendment executed by the Borrower, the Guarantor and the Required Lenders or, as to any of the Lenders, advice satisfactory to the Agent that such Lender has executed this Amendment. (b) Certified copies of (i) the resolutions of the Board of Directors or the Executive Committee of the Guarantor evidencing approval of this Amendment and the matters contemplated hereby and (ii) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Amendment and the matters contemplated hereby. (c) A certificate of the Secretary or an Assistant Secretary of each of the Borrower and the Guarantor certifying the names and true signatures of the respective officers of the Borrower and the Guarantor authorized to sign this Amendment. 2 (d) A certificate signed by a duly authorized officer of the Guarantor, dated the Amendment Effective Date, stating that: (i) The representations and warranties contained in Section 4.01 of the Credit Agreement, as amended hereby, are correct on and as of the Amendment Effective Date, and (ii) No event has occurred and is continuing that constitutes a Default. (e) A favorable opinion of John H. Bomgardner, assistant general counsel for the Guarantor, in substantially the form of Exhibit D to the Credit Agreement, and as to such other matters as any Lender through the Agent may reasonably request. SECTION 3. Reference to and Effect on the Credit Agreement and the Notes. (a) On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in (i) the Notes and (ii) each of the other documents entered into in connection with the Transactions, to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment. (b) The Credit Agreement and the Notes, as specifically amended by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Agent under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. SECTION 4. Costs, Expenses. The Borrower agrees to pay on demand all reasonable costs and expenses of the Agent in connection with the preparation, execution, delivery and administration, modification and amendment of this Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and expenses of counsel for the Agent) in accordance with the terms of Section 9.04 of the Credit Agreement. SECTION 5. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. GATX FINANCIAL CORPORATION By /s/ William J. Hasek ------------------------------------- Title: Vice President and Treasurer GATX CORPORATION By /s/ William J. Hasek ------------------------------------- Title: Vice President and Treasurer CITICORP USA, INC., as Administrative Agent and Lender By /s/ Anish M. Shah ------------------------------------- Title: Vice President Co-Syndication Agents JPMORGAN CHASE BANK, N.A. By /s/ Matthew H. Massie ------------------------------------- Title: Managing Director BANK OF AMERICA, N.A. By /s/ Andrew Bunton ------------------------------------- Title: Vice President Co-Documentation Agents CALYON NEW YORK BRANCH By /s/ Brian Bolotin ------------------------------------- Title: Managing Director By /s/ Angel Naranjo ------------------------------------- Title: Director LASALLE BANK NATIONAL ASSOCIATION By /s/ Joanna Gregory ------------------------------------- Title: Vice President Co-Agents BAYERISCHE LANDESBANK By /s/ Catherine Schilling ------------------------------------- Title: Vice President By /s/ Donna M. Quilty ------------------------------------- Title: Vice President BMO CAPITAL MARKETS FINANCING INC. (formerly known as Harris Nesbitt Financing Inc) By /s/ Pamela Schwartz ------------------------------------- Title: Vice President KEYBANK NATIONAL ASSOCIATION By /s/ Frank J. Jancar ------------------------------------- Title: Vice President U.S. BANK NATIONAL ASSOCIATION By /s/ Nicole J. Berthold ------------------------------------- Title: Senior Vice President Lenders PNC BANK, N.A. By /s/ Louis K. McLinden ------------------------------------- Title: Vice President MIZUHO CORPORATE BANK, LTD. By /s/ Robert Gallagher ------------------------------------- Title: Senior Vice President NORDDEUTSCHELANDESBANKGIROZENTRALE By /s/ Josef Haas ------------------------------------- Title: Vice President By /s/ Jutta Gieseler ------------------------------------- Title: Assistant Treasurer THE BANK OF NEW YORK By /s/ Mark O'Connor ------------------------------------- Title: Vice President ANNEX A AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT Dated as of June 27, 2005 As amended as of December 11, 2006 Among GATX FINANCIAL CORPORATION as Borrower GATX CORPORATION as Guarantor and THE INITIAL LENDERS NAMED HEREIN as Initial Lenders and CITICORP USA, INC. as Administrative Agent and CITIGROUP GLOBAL MARKETS INC. As Lead Arranger and Book Manager and JPMORGAN CHASE BANK, N.A. and BANK OF AMERICA, N.A. as Co-Syndication Agents and CALYON NEW YORK BRANCH and LASALLE BANK, NATIONAL ASSOCIATION as Co-Documentation Agents TABLE OF CONTENTS ARTICLE I SECTION 1.01. Certain Defined Terms 5 SECTION 1.02. Computation of Time Periods 16 SECTION 1.03. Accounting Terms 16 ARTICLE II SECTION 2.01. The Advances and Letters of Credit 16 SECTION 2.02. Making the Advances 17 SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit 19 SECTION 2.04. Fees 20 SECTION 2.05. Optional Termination or Reduction of the Commitments 20 SECTION 2.06. Repayment 20 SECTION 2.07. Interest on Advances 21 SECTION 2.08. Interest Rate Determination 22 SECTION 2.09. Optional Conversion of Advances 23 SECTION 2.10. Prepayments of Advances 23 SECTION 2.11. Increased Costs 23 SECTION 2.12. Illegality 24 SECTION 2.13. Payments and Computations 24 SECTION 2.14. Taxes 25 SECTION 2.15. Sharing of Payments, Etc. 26 SECTION 2.16. Evidence of Debt 26 SECTION 2.17. Use of Proceeds 27 SECTION 2.18. Increase in the Aggregate Commitments 27 ARTICLE III SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01 28
SECTION 3.03. Conditions Precedent to Each Borrowing, Commitment Increase and Issuance. 29 SECTION 3.03. Determinations Under Section 3.01 29 ARTICLE IV SECTION 4.01. Representations and Warranties 29 ARTICLE V SECTION 5.01. Affirmative Covenants 31 SECTION 5.02. Negative Covenants 33 SECTION 5.03. Financial Covenants 35 ARTICLE VI SECTION 6.01. Events of Default 36 SECTION 6.02. Actions in Respect of the Letters of Credit upon Default 38 ARTICLE VII SECTION 7.01. Guaranty 34 SECTION 7.02. Guaranty Absolute 34 SECTION 7.03. Waivers and Acknowledgments 35 SECTION 7.04. Subrogation 35 SECTION 7.05. Continuing Guaranty; Assignments 36 ARTICLE VIII SECTION 8.01. Authorization and Action 40 SECTION 8.02. Agent's Reliance, Etc. 41 SECTION 8.03. CUSA and Affiliates 41 SECTION 8.04. Lender Credit Decision 41 SECTION 8.05. Indemnification 41 SECTION 8.06. Successor Agent 42 SECTION 8.07. Other Agents. 42 ARTICLE IX SECTION 9.01. Amendments, Etc. 43
2 SECTION 9.02. Notices, Etc. 43 SECTION 9.03. No Waiver; Remedies 44 SECTION 9.04. Costs and Expenses 44 SECTION 9.05. Right of Set-off 45 SECTION 9.06. Binding Effect 45 SECTION 9.07. Assignments and Participations 45 SECTION 9.08. Confidentiality 47 SECTION 9.09. Governing Law 47 SECTION 9.10. Execution in Counterparts 47 SECTION 9.11. Jurisdiction, Etc. 47 SECTION 9.12. No Liability of the Issuing Banks 48 SECTION 9.13. Patriot Act 48 SECTION 9.14. Waiver of Jury Trial 49
3 Schedules Schedule I - List of Applicable Lending Offices Exhibits Exhibit A - Form of Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Assignment and Acceptance Exhibit D - Form of Opinion of Counsel for the Borrower 4 AMENDED AND RESTATED FIVE YEAR CREDIT AGREEMENT Dated as of June 27, 2005 As amended as of December 11, 2006 GATX FINANCIAL CORPORATION, a Delaware corporation (the "Borrower"), GATX Corporation, a New York corporation (the "Guarantor"), the banks, financial institutions and other institutional lenders (the "Initial Lenders") and initial issuing banks (the "Initial Issuing Banks") listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC., as sole lead arranger and book manager, JPMORGAN CHASE BANK, N.A. and BANK OF AMERICA, N.A., as co-syndication agents, CALYON NEW YORK BRANCH and LASALLE BANK, NATIONAL ASSOCIATION, as co-documentation agents, and CITICORP USA, INC. ("CUSA"), as administrative agent (the "Agent") for the Lenders (as hereinafter defined), agree as follows: PRELIMINARY STATEMENTS. (1) The Borrower, the lenders parties thereto and CUSA, as agent, were parties to that certain Five Year Credit Agreement dated as of May 18, 2004, which was amended and restated as of June 27, 2005 (the "Existing Credit Agreement"). (2) The Borrower, the Guarantor, certain lenders party thereto and the Agent entered into that certain Amendment No. 1 to the Amended and Restated Five Year Credit Agreement dated as of December 11, 2006 (the "Amendment"), pursuant to which the parties agreed, subject to the satisfaction of the conditions set forth in Section 2 of the Amendment, to amend the Existing Credit Agreement to read as herein set forth. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Advance" means a Revolving Credit Advance or a Swing Line Advance. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agent's Account" means the account of the Agent maintained by the Agent at Citibank at its office at 388 Greenwich Street, New York, New York 10013, Account No. 36852248, Attention: Bank Loan Syndications. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means as of any date, for Base Rate Advances under any Facility, a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances under such Facility less 1.00% (but 5 not less that 0.00%) and, for Eurodollar Rate Advances, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:
Public Debt Rating Applicable Margin for S&P/Moody's Eurodollar Rate Advances - ------------------ ------------------------ Level 1 A- / A3 or above 0.310% Level 2 BBB+ / Baa1 0.400% Level 3 BBB / Baa2 0.500% Level 4 BBB- / Baa3 0.600% Level 5 BB+ / Ba1 0.800% Level 6 Lower than Level 5 1.075%
"Applicable Percentage" means, as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:
Public Debt Rating Applicable S&P/Moody's Percentage - ------------------ ---------- Level 1 A- / A3 or above 0.090% Level 2 BBB+ / Baa1 0.100% Level 3 BBB / Baa2 0.125% Level 4 BBB- / Baa3 0.150% Level 5 BB+ / Ba1 0.200% Level 6 Lower than Level 5 0.300%
"Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto. "Assuming Lender" has the meaning specified in Section 2.18(b). "Assumption Agreement" has the meaning specified in Section 2.18(c)(ii). "Available Amount" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing). "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: 6 (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (b) 1/2 of one percent per annum above the Federal Funds Rate. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(i). "Borrower Information" has the meaning specified in Section 9.08. "Borrowing" means a Revolving Credit Borrowing or a Swing Line Borrowing. "Business Day" means a day of the year other than Saturday or Sunday or a day on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on June 27, 2005), of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Guarantor; or (b) for the period of 12 consecutive months, a majority of the Board of Directors of the Guarantor shall no longer be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said Board; or (c) the Borrower shall no longer be wholly owned by the Guarantor (unless the Borrower and the Guarantor merge). "Citibank" means Citibank, N.A. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Commitment" means a Revolving Credit Commitment, a Letter of Credit Commitment or a Swing Line Commitment. "Commitment Date" has the meaning specified in Section 2.18(b). "Commitment Increase" has the meaning specified in Section 2.18(a). "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.08 or 2.09. 7 "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Litigation" means litigation disclosed in any filing made by the Guarantor or any of its Subsidiaries prior to December 11, 2006 pursuant to the Securities and Exchange Act of 1934, as amended. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Effective Date" has the meaning specified in Section 3.01, which is June 27, 2005. "Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender that is in the business of making and/or buying loans of the type described therein; and (iii) any other Person approved by the Agent, each Issuing Bank and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 9.07, the Borrower, such approvals not to be unreasonably withheld or delayed; provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Guarantor or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Guarantor or the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30 day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Guarantor, the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Guarantor, the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Guarantor, the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Guarantor, the Borrower or any ERISA Affiliate of any notice, or the receipt by any 8 Multiemployer Plan from the Guarantor, the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Eurodollar Rate" means, for any Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) appearing on Moneyline Telerate Markets Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. If the Moneyline Telerate Markets Page 3750 (or any successor page) is unavailable, the Eurodollar Rate for any Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(ii). "Eurodollar Rate Reserve Percentage" for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Excluded Taxes" means, with respect to the Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Lender or such other recipient is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a 9 request by the Borrower under Section 9.07(a)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.14(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.14(a). "Facility" means the Revolving Credit Facility, the Letter of Credit Facility or the Swing Line Facility. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower or the Guarantor. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia. "GAAP" has the meaning specified in Section 1.03. "GARC" means a special purpose subsidiary, owned, directly or indirectly, by the Borrower, and organized for the purposes of (i) entering into one or more financings of equipment and related leases, (ii) subleasing of equipment pursuant to subleases and (iii) engaging in such other activities as are necessary, convenient or incidental thereto. Each GARC shall be formed in a manner so that in the event of a bankruptcy of the Borrower or any of its non-GARC subsidiaries, the assets and liabilities of such GARC will not be consolidated with the assets and liabilities of the Borrower or any of such subsidiaries. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Guaranteed Parties" or "Guaranteed Party" means the Agent and the Lenders together or individually. 10 "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Increase Date" has the meaning specified in Section 2.18(a). "Increasing Lender" has the meaning specified in Section 2.18(b). "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances; provided, however, that "Indebtedness" shall not include (x) Secured Nonrecourse Obligations and (y) nonrecourse obligations incurred in connection with leveraged lease transactions as determined in accordance with GAAP. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Information Memorandum" means the information memorandum dated June, 2005 used by the Agent in connection with the syndication of the Commitments. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two or three weeks or one, two, three or six months, as the Borrower may, upon notice received by the Agent not later than 1:00 P.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: (a) the Borrower may not select any Interest Period that ends after the Termination Date; (b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration; (c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day 11 of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. "Issuing Bank" means an Initial Issuing Bank, an Assuming Lender or any Eligible Assignee to which a portion of the Letter of Credit Commitment hereunder has been assigned pursuant to Section 9.07 so long as such Eligible Assignee expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an Issuing Bank and notifies the Agent of its Applicable Lending Office (which information shall be recorded by the Agent in the Register), for so long as the Initial Issuing Bank, Assuming Lender or Eligible Assignee, as the case may be, shall have a Letter of Credit Commitment. "L/C Cash Collateral Account" means an interest bearing cash collateral account to be established and maintained by the Agent, over which the Agent shall have sole dominion and control, upon terms as may be satisfactory to the Agent. "L/C Related Documents" has the meaning specified in Section 2.06(b)(i). "Lenders" means the Initial Lenders, each Issuing Bank, each Assuming Lender that shall become a party hereto pursuant to Section 2.18 and each Person that shall become a party hereto pursuant to Section 9.07. "Letter of Credit Agreement" has the meaning specified in Section 2.03(a). "Letter of Credit Commitment" means, with respect to each Initial Issuing Bank, the amount set forth opposite the Initial Issuing Bank's name on Schedule I hereto under the caption "Letter of Credit Commitment" or, if such Initial Issuing Bank has entered into one or more Assignment and Acceptances, the amount set forth for such Issuing Bank in the Register maintained by the Agent pursuant to Section 9.07(d) as such Issuing Bank's "Letter of Credit Commitment", as such amount may be reduced at or prior to such time pursuant to Section 2.05. "Letter of Credit Facility" means, at any time, an amount equal to the lesser of (a) the aggregate amount of the Issuing Banks' Letter of Credit Commitments at such time and (b) $50,000,000, as such amount may be reduced at or prior to such time pursuant to Section 2.05. "Letters of Credit" has the meaning specified in Section 2.01(b). "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset and (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset, other than an operating lease. "Loan Party" or "Loan Parties" means the Borrower and the Guarantor individually or together. "Material Adverse Effect" means a material adverse effect on (a) the business, financial condition, operations or properties of the Guarantor and its Subsidiaries taken as a whole, (b) the ability of the Borrower or the Guarantor to perform any of their respective obligations under this Agreement (including 12 the timely payment of all amounts due hereunder), (c) the rights of or benefits available to the Agent and the Lenders under this Agreement or (d) the validity or enforceability of this Agreement. "Material Indebtedness" means Indebtedness (other than the Advances), or obligations in respect of one or more Hedging Agreements, of any one or more of the Guarantor and its Subsidiaries in a principal amount exceeding $25,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Guarantor or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Guarantor or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Material Subsidiary" means each Subsidiary of the Borrower or the Guarantor that either (a) as of the end of the most recently completed fiscal year of the Borrower or the Guarantor for which audited financial statements are available, has assets that exceed 5% of the total consolidated balance sheet assets of the Borrower or the Guarantor and all their respective Subsidiaries, as of the last day of such period or (b) for the most recently completed fiscal year of the Borrower or the Guarantor for which audited financial statements are available, has revenues that exceed 10% of the consolidated revenue of the Borrower or the Guarantor and all of their respective Subsidiaries for such period. In any case, the Borrower shall constitute a Material Subsidiary of the Guarantor. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Worth" means, as at any date for any Person, the total stockholders' equity for such Person and its Subsidiaries (determined on a consolidated basis without duplication). "Note" means a promissory note of the Borrower payable to the order of any Lender, delivered pursuant to a request made under Section 2.16 in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Revolving Credit Advances made by such Lender. "Notice of Issuance" has the meaning specified in Section 2.03(a). "Notice of Revolving Credit Borrowing" has the meaning specified in Section 2.02(a). "Notice of Swing Line Borrowing" has the meaning specified in Section 2.02(b). "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes or under ERISA in respect of contingent liabilities thereunder that are not yet due or are being contested in compliance with Section 5.01(d); (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.01(d); 13 (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Guarantor or any of its Subsidiaries; and (f) banker's liens and rights of set-off; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Guarantor, the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Public Debt Rating" means, as of any date, the rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower or, if any such rating agency shall have issued more than one such rating, the lowest such rating issued by such rating agency. For purposes of the foregoing, (a) if only one of S&P and Moody's shall have in effect a Public Debt Rating, the Applicable Margin and the Applicable Percentage shall be determined by reference to the available rating; (b) if neither S&P nor Moody's shall have in effect a Public Debt Rating, the Applicable Margin and the Applicable Percentage will be set in accordance with Level 6 under the definition of "Applicable Margin" or "Applicable Percentage", as the case may be; (c) if the ratings established by S&P and Moody's shall fall within different levels, the Applicable Margin and the Applicable Percentage shall be based upon the higher rating unless such ratings differ by two or more levels, in which case the applicable level will be deemed to be one level below the higher of such levels; (d) if any rating established by S&P or Moody's shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P or Moody's shall change the basis on which ratings are established, each reference to the Public Debt Rating announced by S&P or Moody's, as the case may be, shall refer to the then equivalent rating by S&P or Moody's, as the case may be. "Ratable Share" of any amount means, with respect to any Lender at any time, the product of (a) a fraction the numerator of which is the amount of such Lender's Revolving Credit Commitment at such time and the denominator of which is the aggregate Revolving Credit Commitments at such time and (b) such amount. "Reference Banks" means CUSA, JPMorgan Chase Bank, N.A., Bank of America, N.A. and Calyon New York Branch or their successors. "Register" has the meaning specified in Section 9.07(d). 14 "Required Lenders" means at any time Lenders owed at least a majority in interest of the then aggregate unpaid principal amount of the Revolving Credit Advances owing to Lenders, or, if no such principal amount is then outstanding, Lenders having at least a majority in interest of the Revolving Credit Commitments. "Revolving Credit Advance" means an advance by a Lender to the Borrower as part of a Borrowing under Section 2.01(a) and refers to a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a "Type" of Advance). "Revolving Credit Borrowing" means a borrowing consisting of simultaneous Revolving Credit Advances of the same Type made by the Lenders. "Revolving Credit Commitment" means as to any Lender (a) the amount set forth opposite such Lender's name on Schedule I hereto as such Lender's "Revolving Credit Commitment", (b) if such Lender has become a Lender hereunder pursuant to an Assumption Agreement, the amount set forth in such Assumption Agreement or (c) if such Lender has entered into any Assignment and Acceptance, the amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 9.07(d), as such amount may be reduced pursuant to Section 2.05. "Revolving Credit Facility" means, at any time, the aggregate amount of the Lenders' Revolving Credit Commitments at such time. "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc. "Secured Nonrecourse Obligations" means (i) secured obligations of a Loan Party taken on a consolidated basis where recourse of the payee of such obligations is expressly limited to an assigned lease or loan receivable and the property related thereto, (ii) debt of Single Transaction Subsidiaries or (iii) liabilities of a Loan Party taken on a consolidated basis to manufacturers of leased equipment where such liabilities are payable solely out of revenues derived from the leasing or sale of such equipment; excluding, however, nonrecourse obligations incurred in connection with leveraged lease transactions as determined in accordance with GAAP. "Single Transaction Subsidiary" means any Subsidiary whose assets consist solely of financing transactions and the proceeds thereof with one or more obligors where the obligations of such Subsidiary are not guaranteed by a Loan Party or any other Subsidiary and for which neither such Loan Party nor such other Subsidiary is liable. "subsidiary" means, with respect to any Person (the "Parent") at any date, any other Person that, as of such date, the accounts of which would be consolidated with those of the Parent in the Parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP, as well as any other Person of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held. "Subsidiary" means any subsidiary of the Borrower or the Guarantor. "Swing Line Advance" means an advance made by any Swing Line Bank pursuant to Section 2.01(c) or any Lender pursuant to Section 2.02(b). "Swing Line Bank" means CUSA or its successors and assigns. "Swing Line Borrowing" means a borrowing consisting of a Swing Line Advance made by any Swing Line Bank. 15 "Swing Line Commitment" means with respect to any Swing Line Bank at any time the amount set forth opposite such Swing Line Bank's name on Schedule I hereto, as such amount may be reduced pursuant to Section 2.05. "Swing Line Facility" has the meaning specified in Section 2.01(c). "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Termination Date" means the earlier of (a) June 27, 2010 and (b) the date of termination in whole of the Revolving Credit Commitments pursuant to Section 2.05 or 6.01. "Transactions" means the execution, delivery and performance by the Borrower and the Guarantor of this Agreement, the Amendment, the borrowing of Advances, the issuance of Letters of Credit and the use of the proceeds thereof. "Unused Revolving Credit Commitment" means, with respect to each Lender at any time, (a) such Lender's Revolving Credit Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Advances made by such Lender (in its capacity as a Lender) and outstanding at such time, plus (ii) such Lender's Ratable Share of (A) the aggregate Available Amount of all the Letters of Credit outstanding at such time, (B) the aggregate principal amount of all Advances made by each Issuing Bank pursuant to Section 2.03(c) that have not been ratably funded by such Lender and outstanding at such time and (C) the aggregate principal amount of all Swing Line Advances then outstanding. "Voting Stock" means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles of the United States consistent with those in effect on the date, and applied in the preparation, of the financial statements referred to in Section 4.01(d) ("GAAP"). ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES AND LETTERS OF CREDIT SECTION 2.01. The Advances and Letters of Credit. (a) Revolving Credit Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Credit Advances to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date in an amount not to exceed at any time such Lender's Unused Revolving Credit Commitment. Each Borrowing shall be in an aggregate amount of $1,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Revolving Credit Advances of the same Type made on the same day by the Lenders ratably according to their respective Revolving Credit Commitments. Within the limits of each Lender's Revolving Credit Commitment, 16 the Borrower may borrow under this Section 2.01(a), prepay pursuant to Section 2.10 and reborrow under this Section 2.01(a). (b) Letters of Credit. Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, to issue letters of credit (each, a "Letter of Credit") for the account of the Borrower from time to time on any Business Day during the period from the Effective Date until 30 days before the Termination Date in an aggregate Available Amount (i) for all Letters of Credit not to exceed at any time the Letter of Credit Facility at such time, (ii) for all Letters of Credit issued by each Issuing Bank not to exceed at any time such Issuing Bank's Letter of Credit Commitment at such time and (iii) for each such Letter of Credit not to exceed an amount equal to the Unused Revolving Credit Commitments of the Lenders at such time. Each Letter of Credit shall be for an amount of $40,000 or more. No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary to require renewal) later than the earlier of (x) the date that is one year after the date of issuance thereof or (y) 10 Business Days prior to the Termination Date. Within the limits referred to above, the Borrower may request the issuance of Letters of Credit under this Section 2.01(b), repay any Revolving Credit Advances resulting from drawings thereunder pursuant to Section 2.03(c) and request the issuance of additional Letters of Credit under this Section 2.01(b). (c) The Swing Line Advances. Each Swing Line Bank severally agrees, on the terms and conditions hereinafter set forth, to make Swing Line Advances to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date (i) in an aggregate amount not to exceed at any time outstanding $30,000,000 (the "Swing Line Facility") and (ii) in an amount for each such Advance not to exceed the aggregate Unused Revolving Credit Commitments of the Lenders at such time. No Swing Line Advance shall be used for the purpose of funding the payment of principal of any other Swing Line Advance. Each Swing Line Borrowing shall be in an amount of $1,000,000 or an integral multiple of $1,000,000 in excess thereof. Within the limits referred to above, the Borrower may borrow under this Section 2.01(c), prepay pursuant to Section 2.10 and reborrow under this Section 2.01(c). SECTION 2.02. Making the Advances. (a) Except as otherwise provided in Section 2.02(b) or Section 2.03(c), each Borrowing shall be made on notice, given not later than (x) 1:00 P.M. (New York City time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances or (y) 1:00 P.M. (New York City time) on the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Borrowing (a "Notice of Revolving Credit Borrowing") shall be by telephone, confirmed immediately in writing, or telecopier in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Advance. Each Lender shall, before 3:00 P.M. (New York City time) on the date of such Borrowing make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, such Lender's ratable portion of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Borrower's account as specified in writing by two Financial Officers of the Borrower; provided, however, that the Agent shall first make a portion of such funds equal to the aggregate principal amount of any Swing Line Advances made by the Swing Line Banks and by any other Lender and outstanding on the date of such Revolving Credit Borrowing, plus interest accrued and unpaid thereon to and as of such date, available to the Swing Line Banks and such other Lenders for repayment of such Swing Line Advances. (b) Each Swing Line Borrowing shall be made on notice, given not later than 3:00 P.M. (New York City time) on the date of the proposed Swing Line Borrowing by the Borrower to each Swing Line Bank and the Agent, of which the Agent shall give prompt notice to the Lenders. Each such notice of a Swing Line Borrowing (a "Notice of Swing Line Borrowing") shall be by telephone, confirmed at once in writing, or telecopier, specifying therein the requested (i) date of such Borrowing, (ii) amount of such Borrowing and (iii) maturity of such Borrowing (which maturity shall be no later than the fifth Business Day after the requested date of such Borrowing). Each Swing Line Bank shall, before 5:00 P.M. (New York City time) on the date of such Swing Line Borrowing, make such Swing Line Bank's ratable portion of such Swing Line Borrowing available (based on the respective Swing Line Commitments of the Swing Line Banks) to the Agent at the Agent's Account, in same day funds. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent 17 will make such funds available to the Borrower at the Borrower's account as specified in writing by two Financial Officers of the Borrower. Upon written demand by any Swing Line Bank with a Swing Line Advance, with a copy of such demand to the Agent, each other Lender will purchase from such Swing Line Bank, and such Swing Line Bank shall sell and assign to each such other Lender, such other Lender's Ratable Share of such outstanding Swing Line Advance, by making available for the account of its Applicable Lending Office to the Agent for the account of such Swing Line Bank, by deposit to the Agent's Account, in same day funds, an amount equal to the portion of the outstanding principal amount of such Swing Line Advance to be purchased by such Lender. The Borrower hereby agrees to each such sale and assignment. Each Lender agrees to purchase its Ratable Share of an outstanding Swing Line Advance on (i) the Business Day on which demand therefor is made by the Swing Line Bank which made such Advance, provided that notice of such demand is given not later than 11:00 A.M. (New York City time) on such Business Day or (ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. Upon any such assignment by Swing Line Bank to any other Lender of a portion of a Swing Line Advance, such Swing Line Bank represents and warrants to such other Lender that such Swing Line Bank is the legal and beneficial owner of such interest being assigned by it, but makes no other representation or warranty and assumes no responsibility with respect to such Swing Line Advance, this Agreement, the Notes or the Borrower. If and to the extent that any Lender shall not have so made the amount of such Swing Line Advance available to the Agent, such Lender agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such Lender is required to have made such amount available to the Agent until the date such amount is paid to the Agent, at the Federal Funds Rate. If such Lender shall pay to the Agent such amount for the account of such Swing Line Bank on any Business Day, such amount so paid in respect of principal shall constitute a Swing Line Advance made by such Lender on such Business Day for purposes of this Agreement, and the outstanding principal amount of the Swing Line Advance made by such Swing Line Bank shall be reduced by such amount on such Business day. (c) Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances for any Borrowing if the aggregate amount of such Borrowing is less than $1,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.08 or 2.12 and (ii) the Eurodollar Rate Advances may not be outstanding as part of more than six separate Borrowings. (d) Each Notice of Revolving Credit Borrowing and Notice of Swing Line Borrowing shall be irrevocable and binding on the Borrower. In the case of any Revolving Credit Borrowing that the related Notice of Revolving Credit Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Revolving Credit Borrowing for such Revolving Credit Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits (including the Applicable Margin)), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds as a result of any failure to fulfill on or before the date specified in such Notice of Revolving Credit Borrowing or Notice of Swing Line Borrowing for such Borrowing the applicable conditions set forth in Article III. (e) Unless the Agent shall have received notice from a Lender or a Swing Line Bank prior to the time of any Revolving Credit Borrowing or Swing Line Borrowing, as the case may be, that such Lender or Swing Line Bank will not make available to the Agent such Lender's or Swing Line Bank's ratable portion of such Revolving Credit Borrowing or Swing Line Borrowing, as the case may be, the Agent may assume that such Lender or Swing Line Bank has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) or (b) of this Section 2.02, as applicable, and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender or Swing Line Bank shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to the Advances comprising such Borrowing and (ii) in the case of such Lender or Swing Line Bank, the Federal Funds Rate. If such Lender or Swing Line Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's or Swing Line Bank's Advance as part of such Borrowing for purposes of this Agreement. 18 (f) The failure of any Lender or Swing Line Bank to make the Revolving Credit Advance or Swing Line Advance to be made by it as part of any Borrowing shall not relieve any other Lender or Swing Line Bank of its obligation, if any, hereunder to make its Revolving Credit Advance or Swing Line Advance on the date of such Revolving Credit Borrowing or Swing Line Borrowing as the case may be, but no Lender or Swing Line Bank shall be responsible for the failure of any other Lender or Swing Line Bank to make the Revolving Credit Advance or Swing Line Advance to be made by such other Lender or Swing Line Bank on the date of any Revolving Credit Borrowing or Swing Line Borrowing, as the case may be. SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit. (a) Request for Issuance. (i) Each Letter of Credit shall be issued upon notice, given not later than 1:00 P.M. (New York City time) on the fifth Business Day prior to the date of the proposed issuance of such Letter of Credit (or on such shorter notice as the applicable Issuing Bank may agree), by the Borrower to any Issuing Bank, and such Issuing Bank shall give the Agent, prompt notice thereof by telecopier. Each such notice of issuance of a Letter of Credit (a "Notice of Issuance") shall be by telephone, confirmed immediately in writing, or telecopier, specifying therein the requested (A) date of such issuance (which shall be a Business Day), (B) Available Amount of such Letter of Credit, (C) expiration date of such Letter of Credit (which shall not be later one year after the issuance thereof), (D) name and address of the beneficiary of such Letter of Credit and (E) form of such Letter of Credit, and shall be accompanied by such customary application and agreement for letter of credit as such Issuing Bank may specify to the Borrower for use in connection with such requested Letter of Credit (a "Letter of Credit Agreement"). If the requested form of such Letter of Credit is acceptable to such Issuing Bank in its sole discretion, such Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article III, make such Letter of Credit available to the Borrower requesting such issuance at its office referred to in Section 9.02 or as otherwise agreed with the Borrower in connection with such issuance. In the event and to the extent that the provisions of any Letter of Credit Agreement shall conflict with this Agreement, the provisions of this Agreement shall govern. (b) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the applicable Issuing Bank or the Lenders, such Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender's Ratable Share of the aggregate amount available to be drawn under such Letter of Credit. The Borrower hereby agrees to each such participation. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Agent, for the account of such Issuing Bank, such Lender's Ratable Share of each drawing made under a Letter of Credit funded by such Issuing Bank and not reimbursed by the Borrower on the date made, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Revolving Credit Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender further acknowledges and agrees that its participation in each Letter of Credit will be automatically adjusted to reflect such Lender's Ratable Share of the Available Amount of such Letter of Credit at each time such Lender's Revolving Credit Commitment is amended pursuant to the operation of Section 2.18, an assignment in accordance with Section 9.07 or otherwise pursuant to this Agreement. (c) Drawing and Reimbursement. The payment by an Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by any such Issuing Bank of a Revolving Credit Advance, which shall be a Base Rate Advance, in the amount of such draft. Each Issuing Bank shall give prompt notice (and such Issuing Bank will use its commercially reasonable efforts to deliver such notice within one Business Day) of each drawing under any Letter of Credit issued by it to the Borrower and the Agent. Upon written demand by such Issuing Bank, with a copy of such demand to the Agent, each Lender shall pay to the Agent such Lender's Ratable Share of such outstanding Revolving Credit Advance, by making available for the account of its Applicable Lending Office to the Agent for the account of such Issuing Bank, by deposit to the Agent's Account, in same day funds, an amount equal to the portion of the outstanding principal amount of such Revolving Credit Advance to be funded by such Lender. Promptly after receipt thereof, the Agent shall transfer such funds to such Issuing Bank. Each Lender agrees to fund its Ratable Share of an outstanding Revolving Credit Advance on (i) the Business Day on which demand therefor is made by such Issuing Bank, provided that notice of such demand is given not later than 11:00 A.M. (New York City time) on such Business Day, or (ii) the first 19 Business Day next succeeding such demand if notice of such demand is given after such time. If and to the extent that any Lender shall not have so made the amount of such Revolving Credit Advance available to the Agent, such Lender agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by any such Issuing Bank until the date such amount is paid to the Agent, at the Federal Funds Rate for its account or the account of such Issuing Bank, as applicable. If such Lender shall pay to the Agent such amount for the account of any such Issuing Bank on any Business Day, such amount so paid in respect of principal shall constitute a Revolving Credit Advance made by such Lender on such Business Day for purposes of this Agreement, and the outstanding principal amount of the Revolving Credit Advance made by such Issuing Bank shall be reduced by such amount on such Business Day. (d) Letter of Credit Reports. Each Issuing Bank shall furnish (i) to the Agent on the first Business Day of each month a written report summarizing issuance and expiration dates of Letters of Credit issued by it during the preceding month and drawings during such month under all Letters of Credit and (ii) to the Agent and each Lender on the first Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit issued by it. (e) Failure to Make Revolving Credit Advances. The failure of any Lender to make the Revolving Credit Advance to be made by it on the date specified in Section 2.03(c) shall not relieve any other Lender of its obligation hereunder to make its Revolving Credit Advance on such date, but no Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Advance to be made by such other Lender on such date. SECTION 2.04. Fees. (a) Facility Fee. The Borrower agrees to pay to the Agent for the account of each Lender a facility fee on the aggregate amount of such Lender's Revolving Credit Commitment from June 27, 2005 in the case of each Initial Lender and from the effective date specified in the Assumption Agreement or in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date at a rate per annum equal to the Applicable Percentage in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2005, and on the Termination Date. (b) Letter of Credit Fees. (i) The Borrower shall pay to the Agent for the account of each Lender a commission on such Lender's Ratable Share of the average daily aggregate Available Amount of all Letters of Credit outstanding from time to time at a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2005, and on the Termination Date, and after the Termination Date payable upon demand; provided that the Applicable Margin shall increase by 2% upon the occurrence and during the continuation of an Event of Default if the Borrower is required to pay default interest pursuant to Section 2.07(b). (ii) The Borrower shall pay to each Issuing Bank for its own account such reasonable and customary fronting, issuance, presentation, amendment and other processing fees as may from time to time be agreed in writing between the Borrower and such Issuing Bank. (c) Agent's Fees. The Borrower shall pay to the Agent for its own account such fees as have been agreed between the Borrower and the Agent. SECTION 2.05. Optional Termination or Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or permanently reduce ratably in part the Unused Revolving Credit Commitments, provided that each partial reduction (i) shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) shall be made ratably among the Lenders in accordance with their Revolving Credit Commitments. SECTION 2.06. Repayment. (a) Revolving Credit Advances. The Borrower shall repay to the Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Revolving Credit Advances then outstanding. 20 (b) Letter of Credit Reimbursements. The obligations of the Borrower under this Agreement, any Letter of Credit Agreement and any other agreement or instrument, in each case, relating to any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, such Letter of Credit Agreement and such other agreement or instrument under all circumstances, including, without limitation, the following circumstances (it being understood that any such payment by the Borrower is without prejudice to, and does not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by any Lender of any draft or the reimbursement by the Borrower thereof): (i) any lack of validity or enforceability of this Agreement, any Letter of Credit, any Letter of Credit Agreement or any other agreement or instrument, in each case, relating thereto (all of the foregoing being, collectively, the "L/C Related Documents"); (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (iii) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), any Issuing Bank, the Agent, any Lender or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by any Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; (vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the obligations of the Borrower in respect of the L/C Related Documents; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor. (c) Swing Line Advances. The Borrower shall repay to the Agent for the ratable account of the Swing Line Banks and each other Lender which has made a Swing Line Advance the outstanding principal amount of each Swing Line Advance made to it by each of them on the earlier of the maturity date specified in the applicable Notice of Swing Line Borrowing (which maturity shall be no later than five Business Days after the requested date of such Borrowing) and the Termination Date. SECTION 2.07. Interest on Advances. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such Revolving Credit Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Margin in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurodollar Rate Advances. During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of 21 (x) the Eurodollar Rate for such Interest Period for such Advance plus (y) the Applicable Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full. (iii) Swing Line Advances. A rate per annum equal at all times to the sum of (x) the Federal Funds Rate in effect from time to time plus (y) 0.50 % per annum plus (z) the Applicable Margin for Eurodollar Rate Advances in effect from time to time, payable in arrears the date such Swing Line Advance shall be paid in full (b) Default Interest. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Agent may, and upon the request of the Required Lenders shall, require the Borrower to pay interest ("Default Interest") on (i) the unpaid principal amount of each Advance owing to each Lender that is not paid when due, payable in arrears on the dates referred to in clause (a) above, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (a) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above, provided, however, that following acceleration of the Advances pursuant to Section 6.01, Default Interest shall accrue and be payable hereunder whether or not previously required by the Agent. SECTION 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a)(i) or (ii), and the rate, if any, furnished by each Reference Bank for the purpose of determining the interest rate under Section 2.07(a)(ii). (b) If, with respect to any Eurodollar Rate Advances under any Facility, the Lenders owed at least 51% of the aggregate principal amount thereof notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance under such Facility will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower that such Lenders have determined that the circumstances causing such suspension no longer exist. (c) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into a Eurodollar Rate Borrowing having an Interest Period of one month. (d) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $1,000,000, such Advances shall automatically Convert into Base Rate Advances. (e) Upon the occurrence and during the continuance of any Event of Default, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. 22 (f) If Moneyline Telerate Markets Page 3750 is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.09. Optional Conversion of Advances. The Borrower may on any Business Day, upon notice given to the Agent not later than 1:00 P.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.08 and 2.12, Convert all or any portion of Revolving Credit Advances of one Type comprising the same Borrowing into Revolving Credit Advances of the other Type; provided, however, that any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b), no Conversion of any Advances shall result in more separate Borrowings than permitted under Section 2.02(b) and each Conversion of Advances comprising part of the same Borrowing shall be made ratably among the Lenders in accordance with their Revolving Credit Commitments and provided, further that for any Conversion of Eurodollar Rate Advances into Base Rate Advances made other than on the last day of an Interest Period for such Eurodollar Rate Advances the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c). Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Advance. Each notice of Conversion shall be irrevocable and binding on the Borrower. SECTION 2.10. Prepayments of Advances. The Borrower may, upon notice at least two Business Days' prior to the date of such prepayment, in the case of Eurodollar Rate Advances, and not later than 1:00 P.M. (New York City time) on the date of such prepayment, in the case of Base Rate Advances, to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $1,000,000 or an integral multiple of $1,000,000 in excess thereof, (y) each partial prepayment of Swing Line Advances shall in an aggregate principal amount of not less than $1,000,000 and (z) in the event of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c). SECTION 2.11. Increased Costs. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or agreeing to issue or of issuing or maintaining or participating in Letters of Credit (excluding for purposes of this Section 2.11 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.14 shall govern), (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof and (iii) any such costs reflected in the Eurodollar Rate Reserve Percentage), then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 23 (b) Except to the extent reflected in the Eurodollar Rate Reserve Percentage, if any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend or to issue or participate in Letters of Credit hereunder and other commitments of this type or the issuance or maintenance of or participation in the Letters of Credit (or similar contingent obligations), then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrower shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend or to issue or participate in Letters of Credit hereunder or the issuance or maintenance of or participation in the Letters of Credit. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. (c) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender notifies the Borrower of the change or circumstance giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided further that, if the change or circumstance giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (a) each Eurodollar Rate Advance under the Facility under which such Lender has a Commitment will automatically, upon the last day of the applicable Interest Period or, if required by applicable law, immediately upon such demand, Convert into a Base Rate Advance and (b) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower that such Lender has determined that the circumstances causing such suspension no longer exist. SECTION 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder, irrespective of any right of counterclaim or set-off, not later than 1:00 P.M. (New York City time) on the day when due in U.S. dollars to the Agent at the Agent's Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest, fees or commissions ratably (other than amounts payable pursuant to Section 2.04(b)(ii), 2.11, 2.14 or 9.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon any Assuming Lender becoming a Lender hereunder as a result of a Commitment Increase pursuant to Section 2.18, and upon the Agent's receipt of such Lender's Assumption Agreement and recording of the information contained therein in the Register, from and after the applicable Increase Date the Agent shall make all payments hereunder and under any Notes issued in connection therewith in respect of the interest assumed thereby to the Assuming Lender. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(c), from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on clause (i) of the definition of "Base Rate" shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of fees and Letter of Credit commissions shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day 24 but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, fee or commission, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate. (e) If the Agent receives funds for application to the obligations hereunder under circumstances for which neither this Agreement nor the Borrower specify the Advances or the Facility to which, or the manner in which, such funds are to be applied, the Agent may, but shall not be obligated to, elect to distribute such funds to each Lender ratably in accordance with such Lender's proportionate share of the principal amount of all outstanding Advances and the Available Amount of all Letters of Credit then outstanding, in repayment or prepayment of such of the outstanding Advances or other obligations owed to such Lender, and for application to such principal installments, as the Agent shall direct. SECTION 2.14. Taxes. (a) Any and all payments by or an account of any obligation of any Loan Party hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Loan Party shall make such deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Agent, each Lender and each Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Agent, such Lender or the Issuing Bank, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or an Issuing Bank, or by the Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the applicable Loan Party shall deliver to the Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, 25 with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. Each Foreign Lender will, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender and on the date of the Assumption Agreement or the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as reasonably requested in writing by the Borrower (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrower with two original Internal Revenue Service Forms W-8BEN or W-8ECI, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes. SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances owing to it (other than (x) as payment of an Advance made by an Issuing Bank pursuant to the first sentence of Section 2.03(c), (y) as a payment of a Swing Line Advance made by a Swing Line Bank that has not been participated to the other Lenders pursuant to Section 2.02(b) or (z) pursuant to Section 2.11, 2.14 or 9.04(c)) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered provided further that, so long as the obligations under this Agreement and the Notes shall not have been accelerated, any excess payment received by any Lender shall be shared on a pro rata basis only with other Lenders. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.16. Evidence of Debt. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Advances. The Borrower agrees that upon notice by any Lender to the Borrower (with a copy of such notice to the Agent) to the effect that a Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Advances owing to, or to be made by, such Lender, the Borrower shall promptly execute and deliver to such Lender a Note in substantially the form of Exhibit A hereto, payable to the order of such Lender in a principal amount equal to the Revolving Credit Commitment of such Lender. (b) The Register maintained by the Agent pursuant to Section 9.07(d) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender's share thereof. (c) Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided, however, that the failure of the Agent or such Lender to make an entry, or any finding that 26 an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement. SECTION 2.17. Use of Proceeds. The proceeds of the Advances shall be available (and the Borrower agrees that it shall use such proceeds) for general corporate purposes of the Borrower and its Subsidiaries. SECTION 2.18. Increase in the Aggregate Revolving Credit Commitments. (a) The Borrower may, not more than once in any calendar year prior to the Termination Date, by notice to the Agent, request that the aggregate amount of the Revolving Credit Commitments be increased by an amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof (each a "Commitment Increase") to be effective as of a date that is at least 90 days prior to the scheduled Termination Date then in effect (the "Increase Date") as specified in the related notice to the Agent; provided, however that (i) in no event shall the aggregate amount of the Revolving Credit Commitments at any time exceed $600,000,000 and (ii) on the date of any request by the Borrower for a Commitment Increase and on the related Increase Date, the applicable conditions set forth in Article III shall be satisfied. (b) The Agent shall promptly notify the Lenders and such other Eligible Assignees as the Borrower may identify of a request by the Borrower for a Commitment Increase, which notice shall include (i) the proposed amount of such requested Commitment Increase, (ii) the proposed Increase Date and (iii) the date by which Lenders and such Eligible Assignees wishing to participate in the Commitment Increase must commit to an increase in the amount of their respective Commitments (the "Commitment Date"). Each Lender that is willing to participate in such requested Commitment Increase (each an "Increasing Lender") and each Eligible Assignee that is willing to participate in such requested Commitment Increase (each, an "Assuming Lender") shall, in its sole discretion, give written notice to the Agent on or prior to the Commitment Date of the amount by which it is willing to participate in such Commitment Increase; provided, however, that the Revolving Credit Commitment of each such Assuming Lender shall be in an amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof. If the Lenders and Assuming Lenders notify the Agent that they are willing to increase the amount of their respective Revolving Credit Commitments by an aggregate amount that exceeds the amount of the requested Commitment Increase, the requested Commitment Increase shall be allocated among the Lenders and Assuming Lenders willing to participate therein in such amounts as are agreed between the Borrower and the Agent. (c) Promptly following each Commitment Date, the Agent shall notify the Borrower as to the amount, if any, by which the Increasing Lenders and Assuming Lenders are willing to participate in the requested Commitment Increase. On each Increase Date, each Assuming Lender shall become a Lender party to this Agreement as of such Increase Date and the Revolving Credit Commitment of each Increasing Lender for such requested Commitment Increase shall be so increased by such amount (or by the amount allocated to such Lender pursuant to the last sentence of Section 2.18(b)) as of such Increase Date; provided, however, that the Agent shall have received on or before such Increase Date the following, each dated such date: (i) (A) certified copies of resolutions of the Board of Directors of the Borrower or the Executive Committee of such Board approving the Commitment Increase and the corresponding modifications to this Agreement, (B) an opinion of counsel for the Borrower (which may be in-house counsel), confirming the opinion delivered pursuant to Section 3.01(e)(iv), and (C) the written consent of the Guarantor approving the Commitment Increase; (ii) an assumption agreement from each Assuming Lender, if any, in form and substance satisfactory to the Borrower and the Agent (each an "Assumption Agreement"), duly executed by such Eligible Assignee, the Agent and the Borrower; and (iii) confirmation from each Increasing Lender of the increase in the amount of its Revolving Credit Commitment in a writing satisfactory to the Borrower and the Agent. On each Increase Date, upon fulfillment of the conditions set forth in the immediately preceding sentence of this Section 2.18(c), the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) and the Borrower, on or before 1:00 P.M. (New York City time), by telecopier, of the occurrence of the Commitment 27 Increase to be effected on such Increase Date and shall record in the Register the relevant information with respect to each Increasing Lender and each Assuming Lender on such date. Each Increasing Lender and each Assuming Lender shall, as of the Increase Date, fund their respective Ratable Shares of each Revolving Credit Borrowing then outstanding, which funds the Agent shall distribute to the other Lenders to effect a funding of each such Borrowing by each of the Lenders (including the Increasing Lenders and the Assuming Lenders) ratably in accordance with their Ratable Shares after giving effect to the applicable Commitment Increase and, if the applicable Increase Date is not the last day of an Interest Period, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 9.04(c). ARTICLE III CONDITIONS TO EFFECTIVENESS AND LENDING SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01. Section 2.01 of this Agreement shall become effective on and as of the first date (the "Effective Date") on which the following conditions precedent have been satisfied: (a) Nothing shall have come to the attention of the Lenders during the course of their due diligence investigation to lead them to believe that the Information Memorandum, together with any update supplied by the Borrower to the Lenders, was or has become misleading, incorrect or incomplete in any material respect; without limiting the generality of the foregoing, the Lenders shall have been given such access to the management, records, books of account, contracts and properties of the Borrower and its Subsidiaries as they shall have requested. (b) The Borrower shall have notified each Lender and the Agent in writing as to the proposed Effective Date. (c) The Borrower shall have paid all reasonable invoiced fees and expenses of the Agent and the Lenders (including the fees and expenses of counsel to the Agent). (d) On the Effective Date, the following statements shall be true and the Agent shall have received for the account of each Lender a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that: (i) The representations and warranties contained in Section 4.01 are correct on and as of the Effective Date, and (ii) No event has occurred and is continuing that constitutes a Default. (e) The Agent shall have received on or before the Effective Date the following, each dated such day, in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender: (i) The Notes to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.16. (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder. 28 (iv) A reasonably acceptable opinion of Ronald Ciancio, general counsel of the Borrower, substantially in the form of Exhibit D hereto. (v) A reasonably acceptable opinion of Shearman & Sterling LLP, counsel for the Agent, in form and substance satisfactory to the Agent. SECTION 3.02. Conditions Precedent to Each Borrowing, Commitment Increase and Issuance. The obligation of each Lender and each Swing Line Bank to make an Advance (other than (x) a Swing Line Advance made by a Lender pursuant to Section 2.02(b) or (y) an Advance made by any Issuing Bank or any Lender pursuant to Section 2.03(c)) on the occasion of each Borrowing, each Commitment Increase and the obligation of each Issuing Bank to issue a Letter of Credit shall be subject to the conditions precedent that the Effective Date shall have occurred and on the date of such Borrowing, the applicable Increase Date or such issuance the following statements shall be true (and each of the giving of the applicable Notice of Revolving Credit Borrowing, Notice of Swing Line Borrowing, request for Commitment Increase or Notice of Issuance and the acceptance by the Borrower of the proceeds of such Borrowing, shall constitute a representation and warranty by the Guarantor that on the date of such Borrowing, such Increase Date or such issuance such statements are true): (a) the representations and warranties contained in Section 4.01 (except the representations set forth in subsection (d)(ii) thereof and in subsection (f) thereof) are correct on and as of such date, before and after giving effect to such Borrowing, such Commitment Increase or such issuance and to the application of the proceeds therefrom, as though made on and as of such date, and (b) no event has occurred and is continuing, or would result from such Borrowing, such Commitment Increase or such issuance or from the application of the proceeds therefrom, that constitutes a Default. SECTION 3.03. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower, by notice to the Lenders, designates as the proposed Effective Date, specifying its objection thereto. The Agent shall promptly notify the Lenders of the occurrence of the Effective Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties. The Guarantor represents and warrants as follows: (a) Organization; Powers. Each of the Guarantor and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. (b) Authorization; Enforceability. The Transactions are within each Loan Party's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower. The Amendment has been duly executed and delivered by the Guarantor and the Borrower. This Agreement constitutes a legal, valid and binding obligation of the Borrower and the Guarantor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 29 (c) Governmental Approvals; No Conflicts. The Transactions (i) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (ii) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Guarantor or any of its Subsidiaries or any order of any Governmental Authority, (iii) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Guarantor or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Guarantor or any of its Subsidiaries, and (iv) will not result in the creation or imposition of any Lien on any asset of the Guarantor or any of its Subsidiaries. (d) Financial Condition; No Material Adverse Change. (i) The Guarantor has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (A) as of and for the fiscal year ended December 31, 2005, reported on by Ernst & Young LLP, independent public accountants, and (B) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 2006, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Guarantor and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, consistently applied, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (B) above. (ii) Except for disclosures, if any, made in filings by the Guarantor prior to December 11, 2006 pursuant to the Securities and Exchange Act of 1934, as amended, since December 31, 2005, there has been no material adverse change in the business, assets, operations or condition, financial or otherwise, of the Guarantor and its Subsidiaries, taken as a whole. (e) Properties. (i) The Guarantor and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (ii) Each of the Guarantor and its Subsidiaries owns, or is licensed to use, all trademarks, trade names, copyrights, patents and other intellectual property material to its business, and the use thereof by the Guarantor and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. (f) Litigation and Environmental Matters. (i) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Guarantor, threatened against or affecting the Guarantor or any of its Subsidiaries (A) which are likely, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Litigation) or (B) that involve this Agreement or the Transactions. (ii) Except for the Disclosed Litigation and except with respect to any other matters that, individually or in the aggregate, are not likely to result in a Material Adverse Effect, neither the Guarantor nor any of its Subsidiaries (A) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (B) has become subject to any Environmental Liability, (C) has received notice of any claim with respect to any Environmental Liability or (D) knows of any basis for any Environmental Liability. (iii) Since December 11, 2006, there has been no change in the status of the Disclosed Litigation that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. (g) Compliance with Laws and Agreements. Each of the Guarantor and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, 30 individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. (h) Investment Company Status. Neither the Guarantor nor any of its Subsidiaries is an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940. (i) Taxes. Each of the Guarantor and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (i) Taxes that are being contested in good faith by appropriate proceedings and for which the Guarantor or such Subsidiary, as applicable, has set aside on its books adequate reserves or (ii) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. (j) ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) as of the date of the most recent financial statements reflecting such amounts: (i) did not exceed the fair market value of the assets of such Plan by an aggregate amount in excess of $25,000,000 or (ii) if such shortfall is in excess of such amount, such shortfall could not reasonably be expected to result in a Material Adverse Effect. (k) Disclosure. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Guarantor to the Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information the Guarantor represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. ARTICLE V COVENANTS SECTION 5.01. Affirmative Covenants. Until the Commitments and Letters of Credit have expired or been terminated and the principal of and interest on each Advance and all fees payable hereunder shall have been paid in full, the Guarantor covenants and agrees with the Lenders that: (a) Financial Statements and Other Information. Each of the Borrower and the Guarantor as required below will furnish to the Agent: (i) within 105 days after the end of each fiscal year of each Loan Party, such Loan Party's audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young LLP or other independent public accountants of recognized national standing (without a going "concern" or like qualification or exception and without any qualification or material exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Loan Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied (the furnishing of such Loan Party's Form 10-K will satisfy the requirements of this Section 5.01(a)(i)); (ii) within 55 days after the end of each of the first three fiscal quarters of each fiscal year of each Loan Party, its consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, 31 setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of such Loan Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (the furnishing of such Loan Party's Form 10-Q will satisfy the requirements of this Section 5.01(a)(ii)); (iii) concurrently with any delivery of financial statements under clause (i) or (ii) above, a certificate of a Financial Officer of the Guarantor (A) certifying as to whether a Default has occurred since the delivery of the previous such certificate, or, with respect to the first such certificate, June 27, 2005 and, if such Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (B) setting forth reasonably detailed calculations demonstrating compliance with Sections 5.02(a) and 5.03 and (C) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.01(d) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (iv) concurrently with any delivery of financial statements under clause (i) above, a certificate of the accounting firm that reported on such financial statements of the Guarantor stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (v) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other material information filed by the Borrower, the Guarantor or any Subsidiary, with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, as the case may be; and (vi) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of such Loan Party or any Subsidiary, or compliance with the terms of this Agreement, as the Agent or any Lender may reasonably request. (b) Notices of Material Events. The Guarantor will furnish to the Agent prompt written notice of the following: (i) the occurrence of any Default; (ii) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that are likely to result in a Material Adverse Effect; and (iii) any other development that results in a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Guarantor setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. (c) Existence; Conduct of Business. The Guarantor will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 5.02.(b). 32 (d) Payment of Obligations. The Guarantor will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (i) the validity or amount thereof is being contested in good faith by appropriate proceedings, (ii) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (iii) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. (e) Maintenance of Properties; Insurance. The Guarantor will, and will cause each of its Subsidiaries to, (i) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (ii) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations, in each case, except to the extent that the failure to maintain any such insurance could not reasonably be expected to result in a Material Adverse Effect. (f) Books and Records; Inspection Rights. The Guarantor will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Guarantor will, and will cause each of its Subsidiaries to, permit any representatives designated by the Agent or any Lender, upon reasonable prior notice and (unless an Event of Default has occurred and is continuing, at the expense of the Agent or such Lender, as the case may be), to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. (g) Compliance with Laws. The Guarantor will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. (h) Use of Proceeds. The proceeds of the Advances will be used only for general corporate purposes of the Borrower and its Subsidiaries in the ordinary course of business. No part of the proceeds of any Advance will be used, whether directly or indirectly, for any purpose that entails a violation of any of the regulations of the Federal Reserve Board, including Regulations U and X. SECTION 5.02. Negative Covenants. Until the Commitments and Letters of Credit have expired or terminated and the principal of and interest on each Advance and all fees payable hereunder have been paid in full the Guarantor covenants and agrees with the Lenders that: (a) Negative Pledge. The Guarantor will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien in, of or on any property of the Guarantor or any of its Subsidiaries, whether now owned or hereafter acquired, except: (i) Liens created for the benefit of the Lenders; (ii) Liens existing on December 11, 2006; (iii) Permitted Encumbrances; (iv) Liens on property of a Subsidiary of the Guarantor to secure only obligations owing to the Guarantor or another such Subsidiary or Liens on property of any Person which becomes a Subsidiary of the Guarantor after December 11, 2006, provided that such Liens are in existence at the time such Person becomes a Subsidiary of the Guarantor and were not created in anticipation thereof; (v) Liens upon real and/or tangible personal property acquired after December 11, 2006 (by purchase, construction or otherwise) by the Guarantor or any of its Subsidiaries, each of which Liens either 33 (A) existed on such property before the time of its acquisition and was not created in anticipation thereof, or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such property; provided that no such Lien shall extend to or cover any property of the Guarantor or such Subsidiary other than the property so acquired and improvements thereon; provided, further, that the principal amount of Indebtedness secured by any such Lien shall at no time exceed the fair market value (as determined in good faith by a senior financial officer of the Guarantor) of such property at the time such Lien is created; and provided finally, that such Lien attaches to such asset concurrently with or within 18 months of acquisition thereof; (vi) Liens on assets related to railcar operating leases (including, but not limited to, car service contracts and cash collateral accounts funded with revenues under such leases) securing obligations of the Borrower, the Guarantor or any Subsidiary under such lease; (vii) attachment, judgment and other similar Liens arising in connection with court proceedings, provided that (A) the execution or other enforcement of such Liens in an aggregate amount exceeding $25,000,000 is effectively stayed and (B) the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (viii) Liens securing Secured Nonrecourse Obligations; (ix) in addition to the Liens permitted in the foregoing clauses (i) through (viii) of this Section 5.02(a), Liens incurred in the ordinary course of business of the Guarantor and any of its Subsidiaries, provided that the aggregate amount of Indebtedness secured by Liens pursuant to this clause (ix) shall not at any time exceed $250,000; (x) any extension, renewal or replacement, or the combination of, the foregoing, provided, however, that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or property (other than a substitution of like property), and (xi) additional Liens upon real and/or personal property of the Guarantor or any of its Subsidiaries created after December 11, 2006 so long as Unsecured Debt (as defined below) shall not, at any time, exceed Eligible Assets (as defined below). For the purposes of Section 5.02(a)(xi): "Eligible Assets" means the difference, as at any date of determination, of the following (each of the following items being the consolidated amounts as reflected in the Guarantor's balance sheet (and/or notes thereto) delivered in accordance with Section 5.01(a)(i) or (ii) hereof): (A) the sum of (i) cash plus (ii) available for sale securities plus (iii) direct financing leases plus (iv) loans plus (v) operating lease assets, facilities and other- net (including progress payments related thereto) plus (vi) 50% of investment in joint ventures plus (vii) assets held (or contracted to be acquired) for sale and lease plus (viii) investment in future residuals minus (B) encumbered assets. "Unsecured Debt" means the sum, as at any date of determination, of the following (each of the following items being the consolidated amounts as reflected in the Guarantor's balance sheet (and/or notes thereto) delivered in accordance with Section 5.01(a)(i) or (ii) hereof): (i) commercial paper and bankers acceptances plus (ii) notes payable (including without limitation, any indebtedness payable in respect of borrowings under existing unsecured credit facilities) plus (iii) Capital Lease Obligations plus (iv) senior term notes, so long as, in each case, such item is unsecured. (b) Fundamental Changes. (i) The Guarantor will not, and will not permit any Material Subsidiary (other than American Steamship Company) to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets, or all or substantially all of the stock of 34 any of its Material Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (A) the Borrower may merge into the Guarantor, in a transaction in which the Guarantor or the Borrower is the surviving corporation, (B) any Person may merge into the either Loan Party in a transaction in which such Loan Party is the surviving corporation, (C) any Person may merge into any Material Subsidiary in a transaction in which the surviving entity is a Material Subsidiary, (D) any Material Subsidiary may sell, transfer, lease or otherwise dispose of its assets to either Loan Party or to another Material Subsidiary or, in an arm's length transaction, to any other Person and (E) any Material Subsidiary may liquidate or dissolve if the relevant Loan Party, as owner of a majority of the outstanding equity interest of such Material Subsidiary, determines in good faith that such liquidation or dissolution is in the best interests of such Loan Party and is not materially disadvantageous to the Lenders. (ii) The Guarantor will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its subsidiaries on June 27, 2005, and businesses reasonably related thereto, including, without limitation, the business of leasing, investing in, financing and selling transportation, industrial and commercial equipment and commercial and other real estate investment property and companies and activities related thereto. (c) Transactions with Affiliates. The Guarantor will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) at prices and on terms and conditions not less favorable to the Guarantor or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (ii) transactions between or among the Guarantor and its Subsidiaries not involving any other Affiliate and (iii) any transaction permitted by Section 5.02(b); provided that the foregoing provisions of this Section 5.02(c) shall not prohibit any such Person from declaring or paying any lawful dividend so long as, after giving effect thereto, no Default shall have occurred and be continuing. (d) Restrictive Agreements. The Guarantor will not, and will not permit any of its Material Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon the ability of any Material Subsidiary (other than the Borrower, any member of the KVG Group, GATX Rail Canada Corporation and American Steamship Company) to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Guarantor or any of its Subsidiaries or to Guarantee Indebtedness of the Guarantor or any of its Subsidiaries; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (B) the foregoing shall not apply to restrictions and conditions existing on June 27, 2005 or any extension or renewal thereof (but shall apply to any amendment or modification expanding the scope of, any such restriction or condition) and (C) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder. For the purposes of this Section 5.02(d), the term "Subsidiary" does not include any GARC or Single Transaction Subsidiary and "KVG Group" means GATX Rail Austria GmbH, GATX Rail Germany GmbH, GATX Rail Poland Sp. zo.o. and their respective Subsidiaries. (e) Fiscal Year. Each of the Borrower and the Guarantor will not permit its fiscal year to end on other than December 31 and for each of is fiscal quarters to end on other than the last day of standard calendar quarters. SECTION 5.03. Financial Covenants. Until the Commitments and Letters of Credit have expired or terminated and the principal and interest on each Advance and all fees payable hereunder have been paid in full the Guarantor covenants and agrees with the Lenders that: (a) Net Worth. The Guarantor will not permit its Net Worth to be, as at the end of any fiscal quarter, less than $800,000,000 and 35 (b) Fixed Charge Coverage. The Guarantor will not permit its Fixed Charge Coverage Ratio, as at any fiscal quarter end, to be less than 1.20 to 1. For the purposes of this Section 5.03(b), "Cash Flow" means, for any period, the sum, for the Guarantor and its consolidated Subsidiaries, of the following: (i) net income, (ii) income taxes, (iii) non-cash provisions for, or actual write-offs of, assets (without duplication in respect of any prior period) and (iv) Fixed Charges. "Fixed Charge Coverage Ratio" means, for any day, the ratio of (i) Cash Flow for the period of four consecutive fiscal quarters of the Guarantor ending on or most recently ended prior to such day to (ii) Fixed Charges for such period. "Fixed Charges" means the sum, for any period for the Guarantor and its consolidated Subsidiaries, of the following: (i) Interest Expense plus (ii) estimate of that portion of minimum rents under operating leases representing the interest factor. "Interest Expense" means, for any period, the sum, for the Guarantor and its consolidated Subsidiaries, of the following: (i) all interest in respect of Indebtedness (including the interest component of any payments in respect of Capital Lease Obligations) accrued or capitalized during such period (whether or not actually paid during such period) plus (ii) the net amount payable (or minus the net amount receivable) under Hedging Agreements relating to interest during such period (whether or not actually paid or received during such period). ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) the Borrower shall fail to pay any principal of or interest on any Advance or any fee or any other amount payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of two Business Days; (b) any representation or warranty made or deemed made by or on behalf of a Loan Party or any Subsidiary (i) in this Agreement or any amendment or modification hereof or (ii) in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification thereof, shall prove to have been incorrect in any material respect when made or deemed made; (c) either of the Loan Parties shall fail to observe or perform any covenant, condition or agreement contained in Section 5.01(b), (c) (with respect to such Loan Party's existence) or (h) or in Sections 5.02 or 5.03; (d) either of the Loan Parties shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a) or (c) of this Section 6.01), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Agent (given at the request of any Lender) to either of the Loan Parties; (e) any Loan Party or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable and after any applicable grace and/or notice period; 36 (f) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (after giving effect to any applicable grace period and/or notice period) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (f) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower, the Guarantor or any Material Subsidiary (other than a Single Transaction Subsidiary) or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower, the Guarantor or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) the Borrower, the Guarantor or any Material Subsidiary (other than a Single Transaction Subsidiary) shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (g) of this Section 6.01, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower, or the Guarantor or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (i) the Borrower, the Guarantor or any Material Subsidiary (other than a Single Transaction Subsidiary) shall become unable, admit in writing or fail generally to pay its debts (other than Secured Nonrecourse Obligations) as they become due; (j) one or more judgments for the payment of money (other than in respect of Secured Nonrecourse Obligations) in an aggregate amount in excess of $25,000,000 shall be rendered against the Borrower, the Guarantor or any Material Subsidiary (other than a Single Transaction Subsidiary) or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower, the Guarantor or any such Material Subsidiary to enforce any such judgment; (k) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (l) a Change in Control shall occur; or (m) Article VII of this Agreement shall cease to be an enforceable obligation of the Guarantor or the Guarantor shall so assert in writing, except as a result of the operation of Section 9.06 hereof; then, and in every such event (other than an event with respect to the Borrower described in clause (g) or (h) of this Section), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments (other than the Commitments to make Advances by an Issuing Bank or a Lender pursuant to Section 2.03(c)), and thereupon the Commitments shall terminate immediately, and (ii) declare the Advances then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Advances so declared to be due and payable, together with accrued interest thereon and all fees and 37 other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (g) or (h) of this Article, the Commitments (other than the Commitments to make Advances by an Issuing Bank or a Lender pursuant to Section 2.03(c)) shall automatically terminate and the principal of the Advances then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Agent may with the consent, or shall at the request, of the Required Lenders, irrespective of whether it is taking any of the actions described in Section 6.01 or otherwise, make demand upon the Borrower to, and forthwith upon such demand the Borrower will, (a) pay to the Agent on behalf of the Lenders in same day funds at the Agent's office designated in such demand, for deposit in the L/C Cash Collateral Account, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding or (b) make such other arrangements in respect of the outstanding Letters of Credit as shall be acceptable to the Lenders having at least 51% of the Revolving Credit Commitments. If at any time the Agent determines that any funds held in the L/C Cash Collateral Account are subject to any right or claim of any Person other than the Agent and the Lenders or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Borrower will, forthwith upon demand by the Agent, pay to the Agent, as additional funds to be deposited and held in the L/C Cash Collateral Account, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, then held in the L/C Cash Collateral Account that the Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit, to the extent funds are on deposit in the L/C Cash Collateral Account, such funds shall be applied to reimburse the Issuing Banks to the extent permitted by applicable law. After (i) no Event of Default shall be continuing or (ii) all such Letters of Credit shall have expired or been fully drawn upon and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such LC Cash Collateral Account shall be returned to the Borrower. ARTICLE VII GUARANTY SECTION 7.01. Guaranty. The Guarantor hereby absolutely, unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise, of all obligations of the Borrower now or hereafter existing under or in respect of this Agreement, the Note and any Letter of Credit Agreement (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, premiums, fees, indemnities, contract causes of action, costs, expenses or otherwise (such obligations being the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, without limitation, fees and expenses of counsel) incurred by the Agent or any of the other Guaranteed Parties in enforcing any rights under this Agreement. Without limiting the generality of the foregoing, the Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Borrower to any of the Guaranteed Parties under or in respect of this Agreement but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower. SECTION 7.02. Guaranty Absolute. The Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any of the Guaranteed Parties with respect thereto. The liability of the Guarantor under this Agreement shall be irrevocable, absolute and unconditional irrespective of, and the Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to, any or all of the following: (a) any lack of validity or enforceability of this Agreement or any agreement or instrument relating thereto; 38 (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other obligations of the Borrower under or in respect to this Agreement, or any other amendment or waiver of or any consent to departure from this Agreement, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to the Borrower or any of its Subsidiaries or otherwise pursuant to the terms of this Agreement; (c) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of, or consent to departure from, any other guaranty, for all or any of the Guaranteed Obligations; (d) any manner of application of any collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other obligations of the Borrower under or in respect to this Agreement or any other assets of the Borrower or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of the Borrower or any of its Subsidiaries; (f) any failure of any Guaranteed Party to disclose to the Guarantor any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower now or hereafter known to such Guaranteed Party (the Guarantor waiving any duty on the part of the Guaranteed Parties to disclose such information); (g) the failure of any other Person to execute or deliver any other guaranty or agreement or the release or reduction of liability of any other guarantor or surety with respect to the Guaranteed Obligations; or (h) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Guaranteed Party that might otherwise constitute a defense available to, or a discharge of, the Guarantor, the Borrower or any other guarantor or surety. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any of the Guaranteed Parties or any other Person upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. SECTION 7.03. Waivers and Acknowledgments. (a) The Guarantor hereby unconditionally and irrevocably waives promptness, diligence, notice of acceptance, presentment, demand for performance, notice of nonperformance, default, acceleration, protest or dishonor and any other notice with respect to any of the Guaranteed Obligations and this Agreement and any requirement that any Guaranteed Party protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against the Borrower or any other Person or any collateral. (b) The Guarantor hereby unconditionally and irrevocably waives any right to revoke this Agreement and acknowledges that this Agreement is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. (c) The Guarantor hereby unconditionally and irrevocably waives (i) any defense arising by reason of any claim or defense based upon an election of remedies by any of the Guaranteed Parties that in any manner impairs, reduces, releases or otherwise adversely affects the subrogation, reimbursement, exoneration, contribution or indemnification rights of the Guarantor or other rights of the Guarantor to proceed against the Borrower, any other guarantor or any other Person or any collateral and (ii) any defense based on any right of set-off or counterclaim against or in respect of the obligations of the Guarantor hereunder. (d) The Guarantor hereby unconditionally and irrevocably waives any duty on the part of any of the Guaranteed Parties to disclose to the Guarantor any matter, fact or thing relating to the business, condition 39 (financial or otherwise), operations, performance, properties or prospects of the Borrower or any of its Subsidiaries now or hereafter known by such Guaranteed Party. (e) The Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by this Agreement and that the waivers set forth in Section 7.02 and this Section 7.03 are knowingly made in contemplation of such benefits. SECTION 7.04. Subrogation. The Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against the Borrower that arise from the existence, payment, performance or enforcement of the Guarantor's obligations under or in respect of this Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any of the Guaranteed Parties against the Borrower or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Agreement shall have been paid in full in cash, all Letters of Credit shall have expired or been terminated and the Commitments shall have expired or been terminated. If any amount shall be paid to the Guarantor in violation of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Agreement, (b) the Termination Date and (c) the latest date of expiration or termination of all Letters of Credit such amount shall be received and held in trust for the benefit of the of the Guaranteed Parties, shall be segregated from other property and funds of the Guarantor and shall promptly be paid or delivered to the Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Agreement, whether matured or unmatured, in accordance with the terms of this Agreement, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this Agreement thereafter arising. If (i) the Guarantor shall make payment to any of the Guaranteed Parties of all or any part of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all other amounts payable under this Agreement shall have been paid in full in cash, (iii) the Termination Date shall have occurred and (iv) all Letters of Credit shall have expired or been terminated, the Guaranteed Parties will, at the Guarantor's request and expense, execute and deliver to the Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to the Guarantor of an interest in the Guaranteed Obligations resulting from such payment made by the Guarantor pursuant to this Agreement. SECTION 7.05. Continuing Guaranty; Assignments. This guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, (ii) the Termination Date and (iii) the latest date of expiration or termination of all Letters of Credit, (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Guaranteed Parties and their successors, transferees and assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any of the Guaranteed Parties may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement (including, without limitation, all or any portion of its Commitments, the Advances owing to it and the Note or Notes held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Guaranteed Party herein or otherwise, in each case as and to the extent provided in Section 9.07 of this Agreement. The Guarantor shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Guaranteed Parties. ARTICLE VIII THE AGENT SECTION 8.01. Authorization and Action. Each Lender (in its capacity as a Lender and an Issuing Bank, as applicable) hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from 40 acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 8.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the Lender that made any Advance as the holder of the Indebtedness resulting therefrom until the Agent receives and accepts an Assumption Agreement entered into by an Assuming Lender as provided in Section 2.18 or an Assignment and Acceptance entered into by such Lender, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance, observance or satisfaction of any of the terms, covenants or conditions of this Agreement on the part of any Loan Party or the existence at any time of any Default or to inspect the property (including the books and records) of any Loan Party; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 8.03. CUSA and Affiliates. With respect to its Commitments, the Advances made by it and the Note issued to it, CUSA shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include CUSA in its individual capacity. CUSA and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person who may do business with or own securities of any Loan Party or any such Subsidiary, all as if CUSA were not the Agent and without any duty to account therefor to the Lenders. The Agent shall have no duty to disclose any information obtained or received by it or any of its Affiliates relating to any Loan Party or any of its Subsidiaries to the extent such information was obtained or received in any capacity other than as Agent. SECTION 8.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 8.05. Indemnification. (a) The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower or the Guarantor) from and against such Lender's pro rata share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement (collectively, the "Indemnified Costs"), provided that no Lender shall be liable for any portion of the Indemnified Costs resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its pro rata share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings 41 or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 8.05(a) applies whether any such investigation, litigation or proceeding is brought by the Agent, any Lender or a third party. For purposes of this Section 8.05(a), the Lenders' respective pro rata shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Revolving Credit Advances outstanding at such time and owing to the respective Lenders, (ii) their respective pro rata Shares of the aggregate Available Amount of all Letters of Credit outstanding at such time and (iii) their respective Unused Revolving Credit Commitments at such time. (b) Each Lender severally agrees to indemnify the Issuing Banks (to the extent not promptly reimbursed by the Borrower or the Guarantor) from and against such Lender's Ratable Share of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against any such Issuing Bank in any way relating to or arising out of this Agreement or any action taken or omitted by such Issuing Bank hereunder or in connection herewith; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Issuing Bank's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse any such Issuing Bank promptly upon demand for its Ratable Share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Borrower under Section 9.04, to the extent that such Issuing Bank is not promptly reimbursed for such costs and expenses by the Borrower or the Guarantor. (c) The failure of any Lender to reimburse the Agent or the Issuing Bank promptly upon demand for its ratable share of any amount required to be paid by the Lenders to the Agent or the Issuing Bank as provided herein shall not relieve any other Lender of its obligation hereunder to reimburse the Agent or the Issuing Bank for its ratable share of such amount, but no Lender shall be responsible for the failure of any other Lender to reimburse the Agent or an Issuing Bank for such other Lender's Ratable Share of such amount. Without prejudice to the survival of any other agreement of any Lender hereunder, the agreement and obligations of each Lender contained in this Section 8.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. SECTION 8.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent with the consent, so long as no Event of Default has occurred and is continuing, of any Loan Party, which consent shall not be unreasonably withheld or delayed. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 8.07. Other Agents. Each Lender hereby acknowledges that neither the co-documentation agents nor any other Lender designated as any "Agent" on the signature pages hereof has any liability hereunder other than in its capacity as a Lender. ARTICLE IX MISCELLANEOUS 42 SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower or the Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders and (with respect to amendments) the Borrower and the Guarantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that (a) no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (i) waive any of the conditions specified in Section 3.01, (ii) change the percentage of the Revolving Credit Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder or (iii) amend this Section 9.01 and (b) no amendment, waiver or consent shall, unless in writing and signed by the Required Lenders and each Lender that is directly affected by such amendment, waiver or consent, (i) other than as provided in Section 2.18, increase the Commitments of such Lenders (ii) reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder to such Lender or (ii) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees or other amounts payable hereunder to such Lender; and provided further that (x) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note, (y) no amendment, waiver or consent shall, unless in writing and signed by each Swing Line Bank, in addition to the Lenders required above to take such action, affect the rights or obligations of the Swing Line Banks in their capacities as such under this Agreement, and (z) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Banks in addition to the Lenders required above to take such action, adversely affect the rights or obligations of the Issuing Banks in their capacities as such under this Agreement. SECTION 9.02. Notices, Etc. (a) All notices and other communications provided for hereunder shall be either (x) in writing (including telecopier communication) and mailed, telecopied or delivered or (y) as and to the extent set forth in Section 9.02(b) and in the proviso to this Section 9.02(a), if to the Borrower or the Guarantor, at its address at 500 West Monroe Street, Chicago, Illinois 60661, Attention: Treasurer; if to any Initial Lender, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address at Two Penns Way, New Castle, Delaware 19720, Attention: Bank Loan Syndications Department; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent, provided that materials required to be delivered pursuant to Section 5.01(a) shall be delivered to the Agent as specified in Section 9.02(b) or as otherwise specified to the Borrower by the Agent. All such notices and communications shall, when mailed, telecopied, telegraphed or e-mailed, be effective when received. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof. (b) So long as CUSA or any of its Affiliates is the Agent, materials required to be delivered pursuant to Section 5.01(a) may be delivered to the Agent in an electronic medium in a format reasonably acceptable to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com and shall deliver in written form such materials to any Lender that so requests in writing. Each Loan Party agrees that the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Agreement, the Notes or any of the transactions contemplated hereby (collectively, the "Communications") available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the "Platform"). Each Loan Party acknowledges that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided "as is" and "as available" and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform. 43 (c) Each Lender agrees that notice to it (as provided in the next sentence) (a "Notice") specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by email or telecopier. Each Lender agrees (i) to notify the Agent in writing of such Lender's e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address. SECTION 9.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Costs and Expenses. (a) The Borrower agrees to pay on demand all reasonable costs and expenses of the Agent (supported by invoices) in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, (A) all reasonable due diligence, syndication (including printing, distribution and bank meetings), transportation and duplication expenses and (B) the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses (supported by invoices) of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of rights under this Section 9.04(a). (b) The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances or (ii) the actual or alleged presence of Hazardous Materials on any property of the Borrower or any of its Subsidiaries or any Environmental Liability relating in any way to the Borrower or any of its Subsidiaries, in each case except to the extent such claim, damage, loss, liability or expense resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, equity holders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Borrower also agrees not to assert any claim for special, indirect, consequential or punitive damages against the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, and the Lenders and the Agent agree not to assert any such claim against the Borrower, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances. (c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.08(d) or (e), 2.10 or 2.12, acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 9.07 as a result of a demand by the Borrower pursuant to Section 9.07(a), the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or 44 expenses that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits (including the Applicable Margin)), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (d) Without prejudice to the survival of any other agreement of any Loan Party hereunder, the agreements and obligations of the Borrower contained in Sections 2.11, 2.14 and 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. SECTION 9.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or such Affiliate to or for the credit or the account of the Borrower or the Guarantor against any and all of the obligations of the Borrower or the Guarantor now or hereafter existing under this Agreement and the Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify such Loan Party after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender and its Affiliates may have. SECTION 9.06. Binding Effect. This Agreement shall become effective (other than Section 2.01, which shall only become effective upon satisfaction of the conditions precedent set forth in Section 3.01) when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. In the event that either Loan Party merges into the other Loan Party, by operation of law or otherwise, such surviving Loan Party will continue to remain subject to all terms and conditions of this Agreement and the Notes, and such references set forth in this Agreement and the Notes to the "Loan Party", "Borrower" and/or "Guarantor" will refer solely to the surviving Loan Party to such merger and Article VII of this Agreement shall cease to be in effect. SECTION 9.07. Assignments and Participations. (a) Each Lender may and, if demanded by the Borrower (following a demand by such Lender pursuant to Section 2.11 or 2.14 or a suspension of Eurodollar Rate Advances pursuant to Section 2.12 and only if no Event of Default has occurred and is continuing) upon at least five Business Days' notice to such Lender and the Agent, will assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitment, its undrawn Letter of Credit Commitment, the Advances owing to it, its participations in Letters of Credit and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under and in respect of one or more of the Facilities, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the amount of (x) the Revolving Credit Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) the undrawn Letter of Credit Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the applicable Assignment and Acceptance) shall in no event be less than $1,000,000, unless, in each case, the Borrower and the Agent otherwise agree, (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 9.07(a) shall be arranged by the Borrower after consultation with the Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of 45 a demand by the Borrower pursuant to this Section 9.07(a) unless and until such Lender shall have received one or more payments from either the Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, and (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $3,500 payable by the parties to each such assignment, provided, however, that no such recordation fee shall be payable in the case of an assignment made at the request of the Borrower. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.11, 2.14 and 9.04 to the extent any claim thereunder relates to an event arising prior to such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by any Loan Party of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (d) The Agent shall maintain at its address referred to in Section 9.02 a copy of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement 46 (including, without limitation, all or a portion of its Commitment, the Advances owing to it and any Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Borrower Information relating to the Borrower received by it from such Lender. (g) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and any Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. SECTION 9.08. Confidentiality. Neither the Agent nor any Lender may disclose to any Person any confidential, proprietary or non-public information of the Borrower furnished to the Agent or the Lenders by or on behalf of the Borrower or the Guarantor (such information being referred to collectively herein as the "Borrower Information"), except that each of the Agent and each of the Lenders may disclose Borrower Information (i) to its and its Affiliates' employees, officers, directors, agents and advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Borrower Information and instructed to keep such Borrower Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any regulatory or self-regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section 9.08, to any assignee or participant or prospective assignee or participant, (vii) to the extent such Borrower Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 9.08 by the Agent or such Lender, or (B) is or becomes available to the Agent or such Lender on a nonconfidential basis from a source other than the Borrower and (viii) with the consent of the Borrower. SECTION 9.09. Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.11. Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the 47 extent permitted by law, in such federal court. Each Loan Party hereby agrees that service of process in any such action or proceeding brought in the any such New York State court or in such federal court may be made upon CT Corporation System at its offices at 111 Eighth Avenue, New York, New York 10011 (the "Process Agent") and each Loan Party hereby irrevocably appoints the Process Agent its authorized agent to accept such service of process, and agrees that the failure of the Process Agent to give any notice of any such service shall not impair or affect the validity of such service or of any judgment rendered in any action or proceeding based thereon. Each Loan Party hereby further irrevocably consents to the service of process in any action or proceeding in such courts by the mailing thereof by any parties hereto by registered or certified mail, postage prepaid, to such Loan Party at its address specified pursuant to Section 9.02. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.12. No Liability of the Issuing Banks. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither an Issuing Bank nor any of its officers or directors shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by such Issuing Bank against presentation of documents that do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that the Borrower shall have a claim against such Issuing Bank, and such Issuing Bank shall be liable to the Borrower, to the extent of any direct, but not consequential damages suffered by the Borrower that the Borrower proves were caused by (i) such Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit or (ii) such Issuing Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, such Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation. SECTION 9.13. Patriot Act. Each Lender hereby notifies the Borrower and the Guarantor that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies each borrower, guarantor or grantor (the "Loan Parties"), which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the Act. 48 SECTION 9.14. Waiver of Jury Trial. Each of the Borrower, the Guarantor, the Agent and the Lenders hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the Notes or the actions of the Agent or any Lender in the negotiation, administration, performance or enforcement thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. GATX FINANCIAL CORPORATION By ------------------------------------- Title: Vice President and Treasurer CITICORP USA, INC., as Administrative Agent and Lender By ------------------------------------- Title: Vice President Co-Syndication Agents JPMORGAN CHASE BANK, N.A. By ------------------------------------- Title: Managing Director BANK OF AMERICA, N.A. By ------------------------------------- Title: Senior Underwriter Co-Documentation Agents CALYON NEW YORK BRANCH By ------------------------------------- Title: Managing Director By ------------------------------------- Title: Vice President LASALLE BANK NATIONAL ASSOCIATION By ------------------------------------- Title: First Vice President 49 Co-Agents BAYERISCHE LANDESBANK By ------------------------------------- Title: First Vice President By ------------------------------------- Title: Senior Vice President HARRIS NESBITT FINANCING INC. By ------------------------------------- Title: Vice President KEYBANK NATIONAL ASSOCIATION By ------------------------------------- Title: Senior Vice President U.S. BANK NATIONAL ASSOCIATION By ------------------------------------- Title: Vice President Lenders PNC BANK, N.A. By ------------------------------------- Title: Vice President MIZUHO CORPORATE BANK, LTD. By ------------------------------------- Title: Senior Vice Presient NORDDEUTSCHE LANDESBANK GIROZENTRALE By ------------------------------------- Title: Vice President By ------------------------------------- Title: Assistant Vice President THE BANK OF NEW YORK By ------------------------------------- Title: Vice President 50 Initial Issuing Banks THE BANK OF NEW YORK By ------------------------------------- Title: Vice President LASALLE BANK NATIONAL ASSOCIATION By ------------------------------------- Title: First Vice President 51 SCHEDULE I GATX FINANCIAL CORPORATION AMENDED AND RESTATED CREDIT AGREEMENT APPLICABLE LENDING OFFICES
Revolving Letter of Credit Swing Line Credit Name of Initial Lender Commitment Commitment Commitment Domestic Lending Office Eurodollar Lending Office - ---------------------- ------------ ----------- ----------- --------------------------- ---------------------------- Bank of America, N.A. $ 75,000,000 $ 0 $ 0 The Bank of New York $ 15,00,000 $ 0 $35,000,000 One Wall Street One Wall Street New York, NY 10286 New York, NY 10286 Attn: K Kanhai-Ali Attn: K Kanhai-Ali T: 212 635-8208 T: 212 635-8208 F: 212 635-7926 F: 212 635-7926 Bayerische Landesbank $ 37,500,000 $ 0 $ 0 560 Lexington Avenue 560 Lexington Avenue New York, NY 10022 New York, NY 10022 Attn: Richard Jackson Attn: Richard Jackson T: 212 230-9088 T: 212 230-9088 F: 212 230-9117 F: 212 230-9117 Calyon New York Branch $ 45,000,000 $ 0 $ 0 1301 Avenue of the Americas 1301 Avenue of the Americas New York, NY 10019 New York, NY 10019 Attn: Agnes Castillo Attn: Agnes Castillo T: 212 261-7669 T: 212 261-7669 F: 212 569-3180 F: 212 569-3180 Citicorp USA, Inc. $100,000,000 $30,000,000 $ 0 Two Penns Way Two Penns Way New Castle, DE 19720 New Castle, DE 19720 Attn: David Graber Attn: David Graber T: 302 894-6034 T: 302 894-6034 F: 212 994-0961 F: 212 994-0961 Harris Nesbitt Financing Inc. $ 27,500,000 $ 0 $ 0 115 S. LaSalle Street, #12W 115 S. LaSalle Street, #12W Chicago, IL 60603 Chicago, IL 60603 Attn: Elizabeth Moran Attn: Elizabeth Moran JPMorgan Chase Bank, N.A. $ 75,000,000 $ 0 $ 0 111 Fannin Avenue 111 Fannin Avenue 10th Floor 10th Floor Houston, TX 77002 Houston, TX 77002 Attn: Candace Grayson Attn: Candace Grayson T: 713 750-7904 T: 713 750-7904 F: 713 750-2938 F: 713 750-2938
KeyBank National Association $ 27,500,000 $ 0 $ 0 601 108th Avenue, 5th Floor 601 108th Avenue, 5th Floor Bellevue, WA 98004 Bellevue, WA 98004 Attn: James Teichman Attn: James Teichman T: 425 709-4574 T: 425 709-4574 F: 425 709-4587 F: 425 709-4587 LaSalle Bank National Association $ 45,000,000 $ 0 $15,000,000 135 South LaSalle Street 135 South LaSalle Street Chicago, IL 60603 Chicago, IL 60603 Attn: Marie Wartinbee Attn: Marie Wartinbee T: 312 904-6434 T: 312 904-6434 F: 312 904-2982 F: 312 904-2982 Mizuho Corporate Bank, Ltd. $ 15,00,000 $ 0 $ 0 1251 Avenue of the Americas 1251 Avenue of the Americas New York, NY 10020 New York, NY 10020 Norddeutsche Landesbank $ 15,00,000 $ 0 $ 0 1114 Avenue of the Americas 1114 Avenue of the Americas Girozentrale 37th Floor 37th Floor New York, NY 10036 New York, NY 10036 Attn: Stephen Hunter Attn: Stephen Hunter T: 212 812-6803 T: 212 812-6803 F: 212 812-6860 F: 212 812-6860 PNC Bank, N.A. $ 20,000,000 $ 0 $ 0 249 Fifth Avenue 249 Fifth Avenue 3rd Floor 3rd Floor Pittsburgh, PA 15222 Pittsburgh, PA 15222 U.S. Bank National Association $ 27,500,000 $ 0 $ 0 400 City Center 400 City Center OS-WI-CCCL OS-WI-CCCL Oshkosh, WI 54901 Oshkosh, WI 54901 Attn: Connie Sweeney Attn: Connie Sweeney T: 920 237-7604 T: 920 237-7604 F: 920 237-7993 F: 920 237-7993 ------------ ----------- ----------- Total: $525,000,000 $30,000,000 $50,000,000 ============ =========== ===========
2 EXHIBIT A - FORM OF NOTE U.S.$_______________ Dated: _______________, 200_ FOR VALUE RECEIVED, the undersigned, GATX FINANCIAL CORPORATION, a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________________________ (the "Lender") for the account of its Applicable Lending Office on the Termination Date (each as defined in the Credit Agreement referred to below) the principal sum of U.S.$[amount of the Lender's Revolving Credit Commitment in figures] or, if less, the aggregate principal amount of the Revolving Credit Advances (as defined below) made by the Lender to the Borrower pursuant to the Amended and Restated Credit Agreement dated as of June 27, 2005 among the Borrower, GATX Corporation, a New York corporation, the Lender and certain other lenders parties thereto, and Citicorp USA, Inc., as Agent for the Lender and such other lenders (as amended or modified from time to time, the "Credit Agreement"; the terms defined therein being used herein as therein defined) outstanding on the Termination Date. The Borrower promises to pay interest on the unpaid principal amount of each Revolving Credit Advance from the date of such Revolving Credit Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to CUSA, as Agent, at 388 Greenwich Street, New York, New York 10013, in same day funds. Each Revolving Credit Advance owing to the Lender by the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of advances (the "Revolving Credit Advances") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Revolving Credit Advance being evidenced by this Promissory Note and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. GATX FINANCIAL CORPORATION By ------------------------------------- Title: ------------------------------ ADVANCES AND PAYMENTS OF PRINCIPAL
AMOUNT OF AMOUNT OF PRINCIPAL PAID UNPAID PRINCIPAL NOTATION DATE ADVANCE OR PREPAID BALANCE MADE BY - ---- --------- -------------- ---------------- --------
2 EXHIBIT B - FORM OF NOTICE OF BORROWING Citicorp USA, Inc., as Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way New Castle, Delaware 19720 [Date] Attention: Bank Loan Syndications Department Ladies and Gentlemen: The undersigned, GATX Financial Corporation, refers to the Amended and Restated Credit Agreement, dated as of June 27, 2005 (as amended or modified from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, GATX Corporation, a New York corporation, certain Lenders parties thereto and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is _______________, 200_. (ii) The Facility under which the Proposed Borrowing is requested is the _______________ Facility. (iii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iv) The aggregate amount of the Proposed Borrowing is $_______________. (v) The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Borrowing is _____ [week[s]] [month[s]].] The Guarantor hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 4.01 of the Credit Agreement (except the representations set forth in subsection (d)(ii) thereof and in subsection (f) thereof) are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; (B) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes a Default; and Very truly yours, GATX FINANCIAL CORPORATION By ------------------------------------- Title: --------------------------------- Guarantor: GATX CORPORATION By ------------------------------------- Title: ---------------------------------- 2 EXHIBIT C - FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated Credit Agreement dated as of June 27, 2005 (as amended or modified from time to time, the "Credit Agreement") among GATX FINANCIAL CORPORATION, a Delaware corporation (the "Borrower"), GATX Corporation, a New York corporation (the "Guarantor"), the Lenders (as defined in the Credit Agreement) and Citicorp USA, Inc., as agent for the Lenders (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule I hereto agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement as of the date hereof equal to the percentage interest specified on Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement Facility or Facilities on Schedule I hereto together with, in the case of an assignment of a Revolving Credit Commitment, participations in Letters of Credit held by the Assignor on the date hereof. After giving effect to such sale and assignment, the Assignee's Commitments and the amount of the Advances owing to the Assignee will be as set forth on Schedule 1 hereto. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Loan Parties or the performance or observance by the Loan Parties of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note[, if any] held by the Assignor [and requests that the Agent exchange such Note for a new Note payable to the order of [the Assignee in an amount equal to the Commitments assumed by the Assignee pursuant hereto or new Notes payable to the order of the Assignee in an amount equal to the Commitments assumed by the Assignee pursuant hereto and] the Assignor in an amount equal to the Commitments retained by the Assignor under the Credit Agreement, [respectively,] as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service forms required under Section 2.14 of the Credit Agreement. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Agent, unless otherwise specified on Schedule 1 hereto. 5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and facility fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. 2 Schedule 1 to Assignment and Acceptance Revolving Credit Facility Percentage interest assigned: ______% Assignee's Revolving Credit Commitment: $______ Aggregate outstanding principal amount of Advances assigned: $______ Principal amount of Note payable to Assignee: $______ Principal amount of Note payable to Assignor: $______ Letter of Credit Facility Percentage interest assigned: ______% Assignee's Letter of Credit Commitment: $______ Effective Date*: _______________, 200_
[NAME OF ASSIGNOR], as Assignor By ------------------------------------- Title: --------------------------------- Dated: , 200 --------------- - [NAME OF ASSIGNEE], as Assignee By ------------------------------------- Title: --------------------------------- Dated: , 200 --------------- - Domestic Lending Office: [Address] Eurodollar Lending Office: [Address] - ---------- * This date should be no earlier than five Business Days after the delivery of this Assignment and Acceptance to the Agent. 3 Accepted [and Approved]** this day of , 200 - ---------- ------------- - CITICORP USA, INC., as Agent By ---------------------------------- Title: ------------------------------ [Approved this __________ day of _______________, 200_ GATX FINANCIAL CORPORATION By ]* ---------------------------------- Title: ------------------------------ - ---------- ** Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee". * Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee". 4 EXHIBIT D - FORM OF OPINION OF COUNSEL FOR THE BORROWER [Effective Date] To the Lenders parties to the Credit Agreement referred to below and Citicorp USA, Inc., as Agent 388 Greenwich Street New York, NY 10013 Ladies and Gentlemen: I have acted as counsel to GATX Financial Corporation, a Delaware corporation (the "Company") in connection with the Amended and Restated Credit Agreement dated as of June 27, 2005 (the "Credit Agreement") among the Company, the Lenders as defined in the Credit Agreement, and Citicorp USA, Inc., as Administrative Agent. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement. In my capacity as such counsel, I or other attorneys of the Company have examined the Credit Agreement, as well as originals, or copies certified or otherwise identified to my satisfaction, of such other records and documents as I have deemed necessary as a basis for the opinions expressed below. In such examination, I have assumed the genuineness of all documents submitted to me as originals, and the conformity to the originals of all documents submitted to me as copies. Based upon the foregoing , it is my opinion that: (a) The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) The Credit Agreement and all certificates, documents, instruments, and agreements delivered under or in connection with the Credit Agreement, (i) have been properly authorized by all necessary corporate action, (ii) do not require the approval of any holder of shares, stocks, bonds, debentures or other securities outstanding under any agreement, indenture or other instrument to which the Company is a party or by which the Company or its property may be charged or affected and (iii) have been duly executed and delivered on behalf of the Company; (c) The execution and delivery of the Credit Agreement and all certificates, documents, instruments, and agreements delivered under or in connection with the Credit Agreement, or the fulfillment of their respective terms, conditions, and provisions, or the consummation of the transactions contemplated by the Agreements are within the Company's corporate powers and do not and will not (i) constitute a breach of any existing and outstanding contractual or other obligation of the Company, (ii) violate any provision of the charter or by-laws of the Company, (iii) require the approval or the giving of prior notice to any government, government agency, ministry, bureau or commission, whether domestic or foreign, (iv) constitute a default under or contravene any provisions of any agreement, indenture or other instrument to which the Company is a party or by which the Company or its property is bound, (v) violate any judgment, order, injunction, decree or award of any court, administrative agency or governmental body against, or binding upon, the Company or (vi) constitute a violation by the Company of any law, order or regulation applicable to the Company; and (d) If the Credit Agreement were to be governed by the law of the State of Illinois, the Credit Agreement and all certificates, documents, instruments, and agreements delivered under or in connection with the Credit Agreement, would constitute legal, valid and binding obligations of the Company, and are enforceable in accordance with their respective provisions, subject to (i) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (x) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (y) concepts of materiality, reasonableness, good faith and fair dealing, and (ii) all applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws, decrees or regulations affecting the enforcement of creditor's rights generally. (e) To the best of my knowledge, there are no pending or overtly threatened actions or proceedings against the Company or any of its Subsidiaries before any court, governmental agency or arbitrator that purport to affect the legality, validity, binding effect or enforceability of the Credit Agreement or the consummation of the transactions contemplated thereby or, except the Disclosed Litigation, that are likely to have a materially adverse effect upon the financial condition or operations of the Company or any of its Subsidiaries. (f) I express no opinion as to whether a Federal or state court outside the State of New York would give effect to the choice of New York law provided for in the Credit Agreement. I am licensed to practice in the State of Illinois. I express no opinion on the law of any other jurisdiction other than law of the State of Illinois, the General Corporation law of the state of Delaware and the federal laws of the United States. 2 EX-12 8 c12743exv12.txt STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES . . . EXHIBIT 12 GATX FINANCIAL CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31 ------------------------------------------ 2006 2005 2004 2003 2002 ------ ------ ------ ------ ------ IN MILLIONS, EXCEPT RATIOS Earnings available for fixed charges: Income from continuing operations before cumulative effect of accounting change................................ $210.6 $166.5 $200.9 $104.8 $ 60.6 Add (deduct): Income taxes............................... 107.4 100.0 114.0 47.7 30.6 Share of affiliates' earnings, net of distributions received.................. (39.9) (33.5) (23.2) (32.5) (0.1) Interest on indebtedness and amortization of debt discount and expense............ 108.9 85.1 105.6 117.3 135.6 Interest portion of operating lease expense................................. 99.4 112.9 110.0 117.2 123.0 ------ ------ ------ ------ ------ Total earnings available for fixed charges... $486.4 $431.0 $507.3 $354.5 $349.7 ------ ------ ------ ------ ------ Fixed charges: Interest on indebtedness and amortization of debt discount and expense............ $108.9 $ 85.1 $105.6 $117.3 $135.6 Capitalized interest....................... -- -- -- -- -- Interest portion of operating lease expense................................. 99.4 112.9 110.0 117.2 123.0 ------ ------ ------ ------ ------ Fixed charges................................ $208.3 $198.0 $215.6 $234.5 $258.6 ------ ------ ------ ------ ------ Ratio of earnings to fixed charges(a)........ 2.34x 2.18x 2.35x 1.51x 1.35x
- -------- (a) The ratio of earnings to fixed charges represents the number of times "fixed charges" are covered by "earnings." "Fixed charges" consist of interest on outstanding debt and amortization of debt discount and expense, adjusted for capitalized interest and the interest portion of operating lease expense. "Earnings" consist of income from continuing operations before income taxes and interest portion of fix charges, less share of affiliates' earnings, net of distributions received. 75 EX-23 9 c12743exv23.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-105196) of GATX Financial Corporation and in the related Prospectus of our reports dated March 1, 2007, with respect to the consolidated financial statements of GATX Financial Corporation, GATX Financial Corporation management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of GATX Financial Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2006. /s/ Ernst & Young LLP Chicago, Illinois March 1, 2007 76 EX-31.1 10 c12743exv31w1.txt CEO CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Brian A. Kenney, certify that: 1. I have reviewed this Annual Report on Form 10-K of GATX Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Brian A. Kenney ---------------------------------------- Brian A. Kenney Chairman, President and Chief Executive Officer March 2, 2007 77 EX-31.2 11 c12743exv31w2.txt CFO CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Robert C. Lyons, certify that: 1. I have reviewed this Annual Report on Form 10-K of GATX Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert C. Lyons ---------------------------------------- Robert C. Lyons Vice President and Chief Financial Officer March 2, 2007 78 EX-32 12 c12743exv32.txt CEO AND CFO CERTIFICATION EXHIBIT 32 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of GATX Financial Corporation (the "Company") on Form 10-K for the period ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Brian A. Kenney /s/ Robert C. Lyons - ---------------------------------------- ---------------------------------------- Brian A. Kenney Robert C. Lyons Chairman, President and Chief Executive Vice President and Chief Financial Officer Officer
March 2, 2007 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by GATX Financial Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to GATX Financial Corporation and will be retained by GATX Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request. 79 -----END PRIVACY-ENHANCED MESSAGE-----