10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [ ] SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission file number: 1-5666 UNION TANK CAR COMPANY (Exact name of registrant as specified in its charter) Delaware 36-3104688 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 225 W. Washington Street, Chicago, Illinois 60606 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 372-9500 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------- None - Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. There is no voting stock held by non-affiliates of the registrant. This Annual Report is being filed by the registrant as a result of undertakings made pursuant to Section 15(d) of the Securities Exchange Act of 1934. UNION TANK CAR COMPANY FORM 10-K Year Ended December 31, 2001 CONTENTS
Section Page ------- ---- Part I. Item 1 Business...................................................................................... 2 Item 2 Properties.................................................................................... 9 Item 3 Legal Proceedings............................................................................. 10 Item 4 Submission of Matters to a Vote of Security Holders........................................... 10 Part II. Item 5 Market for Registrant's Common Equity and Related Stockholder Matters............................................................. 11 Item 6 Selected Financial Data....................................................................... 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 11 Item 7A Disclosures about Market Risk................................................................. 16 Item 8 Financial Statements and Supplementary Data................................................... 17 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................... 44 Part III. Item 10 Directors and Executive Officers of the Registrant............................................ 44 Item 11 Executive Compensation........................................................................ 46 Item 12 Security Ownership of Certain Beneficial Owners and Management................................ 47 Item 13 Certain Relationships and Related Transactions................................................ 47 Part IV. Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 48 Signatures .............................................................................................. 49
-1- PART I ITEM 1. BUSINESS General UNION TANK CAR COMPANY (with its wholly-owned and majority-owned subsidiaries herein collectively referred to, unless the context otherwise requires, as the "Company") was organized under the laws of Delaware on September 23, 1980 and is the successor to a business which was originally incorporated in New Jersey in 1891. The Company is a wholly-owned subsidiary of Marmon Industrial LLC, a wholly-owned subsidiary of Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock of Holdings is owned, directly or indirectly, by trusts for the benefit of certain members of the Pritzker family. As used herein, "Pritzker family" refers to the lineal descendants of Nicholas J. Pritzker, deceased. Railcar Leasing, Services and Sales The principal activity of the Company is leasing of railway tank cars and other railcars to North American manufacturers and other shippers of chemical products, including liquid fertilizers, liquefied petroleum gas and other petroleum products, food products and bulk plastics. The Company owns and operates one of the largest fleets of privately-owned railway tank cars in the world. As of December 31, 2001, the Company's railcar fleet comprised 64,539 tank cars and 16,491 railway cars of other types. A total of 29,833 railcars were added to the lease fleet during the ten years ended December 31, 2001. These railcars accounted for approximately 40% of total railcar lease revenues during 2001. Most of the Company's railcars were built by the Company or to its specifications and the rest were purchased from other sources. Management estimates that railway tank cars carrying chemicals and acids account for the greatest portion of total leasing revenues, followed in order by compressed gases (particularly liquefied petroleum gas and anhydrous ammonia), refined petroleum products (such as gasoline, fuel oils and asphalt), food products and liquid fertilizers. A significant portion of revenues from the Company's non-tank railcar fleet derives from hopper cars for carrying bulk plastics. Remaining non-tank railcar revenues are attributable to railcars serving the lumber, dry bulk chemical and coal industries. The Company builds railway tank cars primarily for its leasing business, but also builds railway tank cars for sale to others. Generally, manufacturing follows receipt of a firm order for lease or sale of a railway tank car. -2- Substantially all of the Company's railcars are leased directly to several hundred manufacturers and other shippers under leases covering from one to several thousand railcars and ranging from one to twenty years. The average term of leases entered into during 2001 for newly-manufactured railcars was approximately eight years. The average term of leases entered into during 2001 for used railway tank cars and other railcars was approximately three years. Under the terms of most leases, the Company agrees to provide a full range of services, including railcar repair and maintenance. The Company supplies relatively few railcars directly to railroads. The Company markets its railcars through regional sales offices located throughout the United States and Canada and through a sales agent in Mexico. To ensure optimum use of the railcar lease fleet, the Company maintains data processing systems that contain information about each railcar, including mechanical specifications, maintenance and repair data, and lease terms. The Company employs a variety of methods to meet its financing needs. During 2001, the Company issued $110.0 million of senior secured notes. The Company expects that future financing needs will be met primarily with a combination of secured and unsecured borrowings and sale-leaseback transactions. Approximately 24% of Company-owned railcars are pledged to secure equipment obligations and secured notes. The remaining railcars are free of liens. The Company maintains repair facilities at strategic points throughout the United States and Canada. In addition to work performed by the Company, certain maintenance and repair work is performed for the Company's account by railroads when railroad inspection determines the need for such work under the interchange rules of the Association of American Railroads ("AAR"). The Company is not subject to regulation or supervision as a common carrier. The Company's railcars are subject to construction, safety and maintenance regulations of the Department of Transportation, various other government agencies and the AAR. These regulations have required and may in the future require the Company to make significant modifications to certain of its railcars from time to time. The Company's facilities for manufacturing and assembling railway tank cars are located in East Chicago, Indiana; Sheldon, Texas; and Oakville, Ontario, Canada. The Company also operates North America's largest network of shops for repairing and servicing railcars, as well as a fleet of specially equipped trucks to perform repairs at customer plant sites. Principal shops are located in Valdosta, Georgia; Muscatine, Iowa; El Dorado, Kansas; Ville Platte, Louisiana; Marion, Ohio; Altoona, Pennsylvania; Cleveland, Longview and Sheldon, Texas; Evanston, Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario; Montreal, Quebec; and Regina, Saskatchewan. -3- Other Activities The Company is engaged in several other activities, as described below. Metals Distribution Subsidiaries of the Company are leading distributors of carbon steel, stainless steel and aluminum tubular products; chrome and stainless bar; other carbon steel products, including beams and channels; and aircraft grade tubing, rolled form shapes and other raw materials. These subsidiaries serve the agriculture, capital goods, machine tool, construction, transportation, refining, petrochemical, and fluid power industries, as well as aerospace companies, construction trades, steel fabricators, and OEMs. Intermodal Tank Container Leasing Subsidiaries of the Company buy, manage, lease and maintain intermodal tank containers. The container fleet consists of a wide range of equipment for the global transportation, distribution and storage of bulk liquids, chemicals and gases, which allows the Company to service the full range of customer requirements. These customers include the international chemical industry and logistics operators specializing in bulk liquid transportation. Unlike railway tank cars or over-the-road tank semi-trailers, intermodal tank containers are capable of transporting cargo by way of multiple modes of transportation including road, rail or ship. Sulphur Processing Subsidiaries of the Company provide sulphur producers in Canada with various services, including processing of liquefied sulphur into crystalline slates and granules, and storage and shipping of the product. A subsidiary also designs, manufactures and sells sulphur processing plants worldwide. Other subsidiaries are engaged in manufacturing and distribution of sulphur bentonite products and micronutrients to the agricultural industry. Fasteners The Company's fastener business, conducted through several wholly-owned subsidiaries, consists of manufacturing and distributing a wide range of fasteners worldwide to the construction industry and manufacturers of furniture, household appliances, industrial and agricultural equipment. Other Railway Equipment and Services A subsidiary of the Company manufactures mobile railcar moving vehicles for in-plant and yard switching. Other subsidiaries provide contract switching services to companies with on-site rail yards. Containment Vessel Head Manufacturing A subsidiary of the Company manufactures and distributes metal containment vessel heads, primarily made of steel, to the metal containment vessel construction industry. -4- Segment Information The principal activity of the Company's primary industry segment is railcar leasing, services and sales. In addition, the Company has two secondary industry segments as shown in the table below. All other activities of the Company, as described previously, plus corporate headquarters items, are shown as All Other in the table:
Intermodal Tank Metals Container Consolidated Railcar Distribution Leasing All Other Totals -------- ------------ ---------- --------- ------------ (Dollars in Millions) 2001 ---- Revenues from external customers $ 619.5 $426.3 $ 74.7 $213.4 $1,333.9 Interest income 0.1 -- -- 20.0 20.1 Interest expense 71.4 0.2 13.9 0.1 85.6 Depreciation and amortization 122.2 13.8 21.5 12.4 169.9 Income before income taxes 135.7 10.5 8.4 19.2 173.8 Segment assets 1,897.6 185.6 319.8 594.1 2,997.1 Expenditures for long-lived assets 178.9 4.4 26.9 6.9 217.1 2000 ---- Revenues from external customers $ 698.0 $492.8 $ 29.7 $226.4 $1,446.9 Interest income 0.2 -- -- 22.8 23.0 Interest expense 70.5 0.2 5.3 0.6 76.6 Depreciation and amortization 122.6 15.4 7.4 14.2 159.6 Income before income taxes 168.7 20.1 1.7 28.8 219.3 Segment assets 1,876.8 224.6 312.3 502.5 2,916.2 Expenditures for long-lived assets 178.7 5.1 23.8 5.7 213.3 1999 ---- Revenues from external customers $ 761.5 $457.5 $ 6.2 $196.4 $1,421.6 Interest income 0.9 -- -- 12.8 13.7 Interest expense 72.4 0.2 -- 0.7 73.3 Depreciation and amortization 117.7 17.4 0.6 12.3 148.0 Income before income taxes 162.5 28.6 0.5 19.2 210.8 Segment assets 1,995.8 204.9 16.0 409.4 2,626.1 Expenditures for long-lived assets 202.5 6.2 2.5 8.2 219.4
-5- Geographic Information The following table presents geographic information for the Company. Revenues are attributed to countries based on location of customers. Long-lived Revenues Assets -------- ---------- (Dollars in Millions) 2001 ---- United States $1,064.2 $1,679.6 Canada 161.9 184.3 Other countries 107.8 321.3 -------- -------- Consolidated total $1,333.9 $2,185.2 ======== ======== 2000 ---- United States $1,184.9 $1,620.6 Canada 179.4 231.4 Other countries 82.6 316.5 -------- -------- Consolidated total $1,446.9 $2,168.5 ======== ======== 1999 ---- United States $1,216.4 $1,696.0 Canada 157.6 260.2 Other countries 47.6 35.6 -------- -------- Consolidated total $1,421.6 $1,991.8 ======== ======== Major Customers Revenues from any one customer did not exceed 10% of consolidated or industry segment revenues. Raw Materials The Company purchases raw materials from a variety of suppliers, with no one supplier being significant. In management's opinion, the Company will have adequate availability of raw materials in the future. -6- Foreign Operations The Company does not believe that there are other than normal business risks attendant to its foreign operations. Competition All activities of the Company compete with similar activities by other companies. Several competitors are in the business of leasing railcars in the United States and Canada. Principal competitors are GATX Corporation, General Electric Railcar Services Corporation, and ACF Industries, Incorporated. Principal competitive factors are price, service and product design. International cooperation within the Company's engineering, manufacturing, repair and leasing activities has enhanced its ability to provide competitive products and services to its customers throughout North America. In the metals distribution business, the Company has numerous competitors, both large and small. The Company is one of the largest competitors in the distribution of its class of products. Principal competitive factors include price, availability of product and service. The Company, the largest lessor of intermodal tank containers in the world, competes with numerous competitors in this industry. Competition is based on a number of factors, including technical expertise, availability of equipment, price, service and reputation. Supply and Demand Demand for railway tank cars and bulk plastic hopper cars is generally met with a combination of the industry's existing fleet and new railcar additions. The industry's generally high overall utilization of the railway tank car and bulk plastic covered hopper car fleets evidences an appropriate level and mix of equipment to meet existing railcar demands. New railcars are needed to satisfy growth, for specialized requirements, or the desire of certain customers for newer equipment. Since railcars are typically built to customer order, the supply of new railcars generally stays in reasonable balance with demand. Major underlying factors affecting demand for new railcars are: (a) the rate of growth of the overall economy, (b) growth of certain industry segments, manufacturers, or shippers, particularly involving significant new or expanded production operations, and (c) replacement of aged, obsolete, or worn out railcars. Demand for intermodal tank containers is dependent on growth of the global economy and demand for chemicals and other liquid products. Global economic factors impacting demand include overall demand for chemicals, location of production of the products carried and stored in relation to location of demand for these products, import/export tariffs and other trade restrictions. -7- Manufacturing Backlog The Company builds railway tank cars primarily for use in its leasing business and the number of railcars added in any one year is a small percentage of the Company's lease fleet. Additionally, for railway tank cars built for sale to customers, the Company delivers against orders within a relatively brief period. Therefore, backlog is not material to the Company's business. Employees As of December 31, 2001, the Company had approximately 5,560 employees. Environmental Matters The Company believes that all of its facilities are in substantial compliance with applicable laws and regulations relating to environmental protection. Over the past several years, the Company has attempted to identify and remediate potential problem areas. In 2001, the Company spent approximately $5.3 million on remediation and related matters, compared with $8.2 million and $6.6 million in 2000 and 1999, respectively. The Company expects to spend approximately $2.8 million in 2002 on similar activities. The Company has been designated as a Potentially Responsible Party ("PRP") by the EPA at one site: Auto Ion Chemical Company, Kalamazoo, Michigan. Costs incurred to date have not been material. Because of the nature of the Company's involvement at this site, management believes that future costs related to this site will not be material. The Company has not entered into any cost sharing arrangements with other PRP's that make it reasonably possible the Company will incur material costs beyond its pro rata share. Further, management does not believe that any problems or uncertainties as to the financial liabilities of other PRP's make it reasonably possible the Company will incur material costs beyond its pro rata share at this site. The Company's accruals for the site are based on the amount it reasonably expects to pay with respect to the site. Management believes that amounts accrued for remedial activities and environmental liabilities (which in the aggregate are not material) are adequate. -8- ITEM 2. PROPERTIES In management's opinion, the Company's properties are in good condition, substantially utilized and adequate to meet the Company's current and reasonably anticipated future needs. The Company estimates that its plant facilities were utilized during the year at an average of approximately 45% of productive capacity for railcar manufacturing, 75% for railcar servicing and repair, 75% for sulphur processing, 70% for fastener production, 75% for railcar moving vehicles manufacturing, and 75% for containment vessel head manufacturing. Railcars The Company owns approximately 84% of its total lease fleet of 81,030 railcars, of which 64,539 are tank cars and 16,491 are other railway freight cars. Of the approximately 68,180 owned railcars, 51,660 are free of liens. Railcars which are not owned are leased from others under long-term net leases. Railcar Manufacturing and Assembling Facilities Facilities for the manufacturing and assembling of railcars are located at East Chicago, Indiana; Sheldon, Texas; and Oakville, Ontario, Canada, together occupying about 170 acres. Railcar Servicing and Repair Shops The Company operates a network of shops for repairing and servicing railcars. Principal shops owned by the Company are located at Valdosta, Georgia; Muscatine, Iowa; El Dorado, Kansas; Ville Platte, Louisiana; Marion, Ohio; Altoona, Pennsylvania; Cleveland, Longview and Sheldon, Texas; Evanston, Wyoming; Edmonton, Alberta; Sarnia and Oakville, Ontario; Montreal, Quebec; and Regina, Saskatchewan. Several other repair shops and small repair points are strategically located throughout the United States and Canada. Metals Distribution Subsidiaries of the Company maintain numerous distribution warehouses and business offices, which are located throughout North America and Europe. There are more than 25 warehouse and distribution centers from which products are distributed to customers. Intermodal Tank Container Leasing Subsidiaries of the Company maintain a fleet of approximately 27,000 leased/managed intermodal tank containers which consists of a wide range of equipment types, specifications and capacities from 7,500 to 35,000 liters. These subsidiaries also own a fleet of 1,300 drop frame tank chassis. Customer service is provided through offices, agents and depots located throughout the world. The Company owns approximately 69% of its intermodal tank container and drop frame tank chassis fleet, of which approximately 23% are free of liens. Sulphur Processing A subsidiary of the Company owns facilities in Canada which process liquefied sulphur into crystalline slates and granules and handle the formed product. The Company also owns facilities in North America for the manufacture and distribution of sulphur bentonite products and micronutrients. -9- Fasteners The Company owns fastener manufacturing facilities in Ashland, Ohio; Montreal, Quebec; Gaffney, South Carolina; and Shenzhen, China. In addition, the Company leases several small plants in the United States, Canada, Sweden, China and Poland. Other Railway Equipment Facilities A subsidiary of the Company owns a mobile railcar moving vehicle manufacturing facility in LaGrange, Georgia. Containment Vessel Head Manufacturing Facilities A subsidiary of the Company owns a metal containment vessel head manufacturing facility in Sheldon, Texas. Other Properties The Company and its subsidiaries maintain numerous sales and business offices and warehouses, most of which are leased, throughout North America and Europe. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries have been named as defendants in a number of lawsuits and certain claims are pending. The Company has accrued what it reasonably expects to pay to resolve such claims, including legal fees, and, in the opinion of management, the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. See "Business - Environmental Matters". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -10- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. ITEM 6. SELECTED FINANCIAL DATA
For the year ended December 31, -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Revenues Services $ 707,404 $ 673,202 $ 631,606 $ 585,128 $ 563,950 Net sales 626,486 773,662 789,992 706,245 670,209 Net income 110,878 141,314 132,568 142,307 120,337 Ratio of earnings to fixed charges 2.56x 3.19x 3.24x 3.51x 3.10x At year end: Total assets $2,997,070 $2,916,195 $2,626,076 $2,427,430 $2,439,015 Long-term obligations 1,045,828 1,035,408 941,964 822,028 859,363
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements -------------------------- This annual report on Form 10-K for the year ended December 31, 2001 contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This information may involve risks and uncertainties that could cause actual results to differ materially from those set forth herein. These risks and uncertainties include, but are not limited to, unanticipated changes in the markets served by the Company such as the railcar leasing, service and sales, intermodal tank container leasing and metal products distribution industries. 2001 versus 2000 Results of Operations --------------------- Performance of the railcar and tank container leasing businesses was adversely affected in all major markets by the general economic slowdown. Demand for existing equipment decreased resulting in downward pressure on both lease rental rates and fleet utilization. While service revenues increased $34.2 million, this was primarily due to the inclusion of the incremental revenues associated with the intermodal tank container operations ($45.0 million increase) acquired in September 2000. Railcar service revenues decreased $4.7 million. Gross margin on service revenues increased $8.0 million. This -11- was also primarily due to the inclusion of the intermodal tank container operations ($21.6 million increase) acquired in September 2000, which was offset by weaker railcar service results ($13.2 million decrease). Although the Company's railcar lease fleet utilization decreased during 2001, utilization has remained in a range of 95% to 98% during the last five years. Utilization rates of the Company's existing railcars are driven by long-term requirements of manufacturers and shippers of chemical products, petroleum products, food products, and bulk plastics, and suitability of the Company's fleet to meet such demand. The potential impact of short-term fluctuations in demand is tempered by the longer-term nature of the leases, which have averaged four years over the last five years for existing equipment and longer for new equipment. Demand for new railcars declined, resulting in lower production and lower capacity utilization. Demand for the products of the metals distribution business was adversely impacted by the general economic slowdown in the U.S. As a result, overall sales revenues decreased $147.2 million primarily due to reduced sales of railcars ($73.3 million decrease) and metal products ($66.6 million decrease). Gross margin on sales revenues decreasd $33.3 million primarily due to the same factors which impacted sales revenues. A reserve of $4.7 million was established in 2001 to cover anticipated costs associated with the suspension of new railway tank car manufacturing at the Oakville, Ontario, Canada facility in the second quarter of 2002. General and administrative expenses increased $7.2 million primarily due to the incremental expenses associated with the intermodal tank container operations ($5.7 million increase) acquired in September 2000. Interest expense increased $9.0 million mainly due to the full year impact of the $180 million senior secured notes issued to acquire the intermodal tank container leasing business in September 2000. Provision for income taxes decreased $15.1 million primarily due to lower income before taxes and the benefit of enacted tax rate reduction on deferred taxes for the Company's Canadian subsidiaries ($9.2 million). Financial Condition and Liquidity --------------------------------- Operating activities provided $347.6 million of cash in 2001. These funds, along with proceeds from issuance of debt, were used to provide for railcar additions, service borrowed debt obligations, advance funds to parent, and pay dividends to the Company's stockholder. It is the Company's policy to pay to its stockholder a quarterly dividend equal to 70% of net income. To the extent that the Company generates cash in excess of its operating needs, such funds, in excess of the amounts paid as dividends, are advanced to its parent and bear interest at commercial rates. Conversely, when the Company requires additional funds to support its operations, prior advances are repaid by its parent. No restrictions exist regarding the amount of dividends which may be paid or advances which may be made by the Company to its parent. In 2001, the Company spent $217.1 million for construction and purchase of railcars and other fixed assets. Of the capital expenditures for construction and purchase of railcars and other fixed assets over the past five years, approximately 83% have been for railcars. Since capital expenditures for railcars are generally incurred subsequent to receipt of firm customer lease orders, such expenditures are -12- discretionary to the Company based on its desire to enter into those lease orders. Capital expenditures for intermodal tank containers are likewise discretionary in the intermodal tank container business. In 2001, the Company issued $110.0 million in senior secured notes. Other financing activities of the Company included $91.6 million for principal repayments on borrowed debt and $77.0 million for cash dividends. Net cash used in financing activities was $54.3 million. Management expects that the future cash to be provided by operating activities, long-term financings, and repayment of funds previously advanced to parent will be adequate to provide for the continued expansion of the Company's business and enable it to meet its debt service obligations. The following table presents the scheduled cash inflows and outflows for the railcar leasing business over the next five years based on leases and railcar-related indebtedness outstanding as of December 31, 2001:
2002 2003 2004 2005 2006 ------ ------ ------ ------ ------- (Dollars in Millions) Railcar Leasing Cash Inflows ---------------------------- Minimum future lease rentals $419.4 $329.3 $252.9 $188.3 $ 122.4 Railcar Leasing Cash Outflows ----------------------------- Minimum future lease payments 68.2 70.0 73.1 96.3 93.5 Principal and interest amount of obligations 153.5 107.0 139.5 87.6 132.1 ------ ------ ------ ------ ------- Excess (Deficit) of inflows over outflows $197.7 $152.3 $ 40.3 $ 4.4 $(103.2) ====== ====== ====== ====== =======
The minimum future lease rentals above relate to railcar leases in effect at December 31, 2001. Based upon its historical experience, the Company expects that the railcars (other than those which are retired in the ordinary course of business) will be re-leased at the expiration of such leases. The rentals under such future leases cannot be ascertained and are not reflected above. In addition, maturities of debt obligations and interest payments for the intermodal tank container leasing business over the next five years are as follows: $10,013 in 2002, $11,012 in 2003, $12,012 in 2004, $12,011 in 2005 and $14,010 in 2006. The Company has not experienced any significant impact of inflation and changing prices on its financial position or results of operations over the last several years. The Company's foreign subsidiaries periodically enter into foreign currency forward contracts to hedge against U. S. dollar exposures. The notional amounts of the foreign currency forward contracts, all with initial maturities of less than one year, amounted to $22.0 million and $12.0 million at December 31, 2001 and 2000, respectively. Critical Accounting Policies ---------------------------- Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgements that affect the reported amounts of assets, -13- liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates and judgements based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. The Company believes that, of its significant accounting policies (see "Summary of Accounting Principles and Practices" more fully described on note 2 in Item 8), the following policies involve a higher degree of judgement and/or complexity. Property and Equipment Property and equipment are depreciated or amortized over their useful lives based on management's estimates of the period over which the assets will generate revenue. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. Asset Impairment In assessing the recoverability of the Company's long-lived assets, the Company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges. Income Taxes The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter. New Accounting Pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their estimated useful lives. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which provides additional guidance on the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted each of the new rules as of January 1, 2002. The adoption of the new rules is not anticipated to have a material adverse effect on the Company's results of operations or financial position. -14- 2000 versus 1999 Results of Operations --------------------- Service revenues increased $41.6 million primarily due to the inclusion of the incremental revenues associated with the intermodal tank container operations ($22.3 million increase) acquired in September 2000 and the effects of railcars added to the lease fleet ($7.7 million increase). Gross margin on service revenues increased $12.3 million primarily due to the inclusion of the intermodal tank container operations acquired in September 2000, and the effects of railcars added to the lease fleet. Although the Company's railcar lease fleet utilization decreased during 2000, utilization has remained in a range of 96% to 98% during the last five years. Utilization rates of the Company's existing railcars are driven by long-term requirements of manufacturers and shippers of chemical products, petroleum products, food products, and bulk plastics, and suitability of the Company's fleet to meet such demand. The potential impact of short-term fluctuations in demand is tempered by the longer-term nature of the leases, which average four years for existing equipment and longer for new equipment. Demand for new railcars declined, resulting in lower production and lower capacity utilization. As a result, overall sales revenues decreased $16.3 million primarily due to reduced sales of railcars ($71.7 million decrease), which were offset by increased sulphur service processing plant sales ($16.0 million increase) and increased sales of metal products ($34.0 million increase). Gross margin on sales revenues remained flat. General and administrative expenses increased $10.7 million primarily due to the incremental expenses associated with the intermodal tank container operations acquired in September 2000. Interest income increased $9.4 million due to both higher average advances to parent and higher average interest rates. Financial Condition and Liquidity --------------------------------- Operating activities provided $287.2 million of cash in 2000. These funds, along with proceeds from issuance of debt and a sale-leaseback transaction discussed below, were used to fund acquisition of businesses, provide for railcar additions, pay dividends to the Company's stockholder, and service borrowed debt obligations. It is the Company's policy to pay to its stockholder a quarterly dividend equal to 70% of net income. To the extent that the Company generates cash in excess of its operating needs, such funds, in excess of the amounts paid as dividends, are advanced to its parent and bear interest at commercial rates. Conversely, when the Company requires additional funds to support its operations, prior advances are repaid by its parent. No restrictions exist regarding the amount of dividends which may be paid or advances which may be made by the Company to its parent. In 2000, the Company spent $213.3 million for construction and purchase of railcars and other fixed assets and $285.0 million for acquisition of an intermodal tank container leasing business and other assets. Of the capital expenditures for construction and purchase of railcars and other fixed assets over the past five years, approximately 86% have been for railcars. Since capital expenditures for railcars are generally incurred subsequent to receipt of firm customer lease orders, such expenditures are -15- discretionary to the Company based on its desire to enter into those lease orders. Capital expenditures for intermodal tank containers are likewise discretionary in the intermodal tank container business. In 2000, the Company entered into a railcar sale-leaseback transaction for $150.0 million. In addition, a subsidiary of the Company issued $180.0 million in senior secured notes to finance the acquisition of an intermodal tank container leasing business. Other financing activities of the Company included $44.8 million for principal repayments on borrowed debt and $98.0 million for cash dividends. Net cash provided by financing activities was $191.4 million. ITEM 7A. DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments is the potential loss in fair value arising from adverse changes in interest rates. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The following table provides information about the Company's debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates and estimated fair value of the Company's debt obligations.
Fair Value 2002 2003 2004 2005 2006 Thereafter Total 12-31-2001 ----- ----- ----- ----- ----- ---------- -------- ---------- (Dollars in Millions) Fixed rate debt $98.1 $57.3 $94.3 $48.0 $98.2 $746.6 $1,142.5 $1,202.2 Average interest rate 6.74% 7.86% 7.09% 8.51% 7.29% 7.08% 7.17%
-16- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Page ---- Report of Independent Auditors.............................................................................. 18 Financial Statements Consolidated statement of income for each of the three years in the period ended December 31, 2001...................................................................... 19 Consolidated balance sheet - December 31, 2001 and 2000................................................... 20 Consolidated statement of stockholder's equity for each of the three years in the period ended December 31, 2001............................................................. 21 Consolidated statement of cash flows for each of the three years in the period ended December 31, 2001............................................................. 22 Notes to consolidated financial statements................................................................ 23
-17- REPORT OF INDEPENDENT AUDITORS TO UNION TANK CAR COMPANY We have audited the accompanying consolidated balance sheet of Union Tank Car Company and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Union Tank Car Company and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Chicago, Illinois March 13, 2002 -18- UNION TANK CAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Dollars in Thousands) For the Year Ended December 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Revenues Services (leasing and other) $ 707,404 $ 673,202 $ 631,606 Net sales 626,486 773,662 789,992 ---------- ---------- ---------- 1,333,890 1,446,864 1,421,598 Interest income 20,097 23,037 13,669 Other income 12,685 13,756 13,750 ---------- ---------- ---------- 1,366,672 1,483,657 1,449,017 Costs and expenses Cost of services 426,164 399,954 370,681 Cost of sales 532,893 646,803 663,946 General and administrative 148,166 140,923 130,257 Interest expense 85,633 76,641 73,298 ---------- ---------- ---------- 1,192,856 1,264,321 1,238,182 ---------- ---------- ---------- Income before income taxes 173,816 219,336 210,835 Provision for income taxes 62,938 78,022 78,267 ---------- ---------- ---------- Net income $ 110,878 $ 141,314 $ 132,568 ========== ========== ========== Ratio of earnings to fixed charges 2.56 x 3.19 x 3.24 x ========== ========== ========== See Notes to Consolidated Financial Statements. -19- UNION TANK CAR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
December 31, ----------------------- 2001 2000 ---------- ---------- Assets ------ Cash and cash equivalents $ 12,047 $ 34,567 Short-term investments 110,107 59,233 Accounts receivable, primarily due within one year, less allowance for doubtful accounts of $9,532 in 2001 and $9,176 in 2000 135,145 150,271 Accounts and notes receivable, affiliates 57,065 57,294 Inventories, net of LIFO reserves of $28,868 in 2001 and $33,673 in 2000 142,812 174,071 Prepaid expenses and deferred charges 14,284 11,772 Advances to parent company, principally at LIBOR plus 1% 340,365 260,517 Railcar lease fleet, net 1,606,364 1,561,644 Intermodal tank container lease fleet, net 296,739 292,375 Fixed assets, net 198,742 211,084 Investment in direct financing lease 26,611 30,641 Other assets 56,789 72,726 ---------- ---------- Total assets $2,997,070 $2,916,195 ========== ========== Liabilities and Stockholder's Equity ------------------------------------ Accounts payable $ 62,705 $ 71,429 Accrued rent 91,473 83,394 Accrued liabilities 185,780 173,365 Borrowed debt 1,145,063 1,124,191 ---------- ---------- 1,485,021 1,452,379 Deferred income taxes and investment tax credits 476,751 466,712 Minority interest 82,383 78,067 Stockholder's equity Common stock, no par value; 1,000 shares authorized and issued 106,689 106,689 Additional capital 133,459 133,459 Retained earnings 712,767 678,889 ---------- ---------- Total stockholder's equity 952,915 919,037 ---------- ---------- Total liabilities and stockholder's equity $2,997,070 $2,916,195 ========== ==========
See Notes to Consolidated Financial Statements. -20- UNION TANK CAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY Years Ended December 31, 2001, 2000 and 1999 (Dollars in Thousands) Common Additional Retained Stock Capital Earnings Total --------- ---------- --------- --------- Balance at December 31, 1998 $ 106,689 $ 96,865 $ 585,057 $ 788,661 Net income -- -- 132,568 132,568 Cash dividends -- -- (82,000) (82,000) Non-cash dividends -- -- (50) (50) --------- --------- --------- --------- Balance at December 31, 1999 106,689 96,865 635,575 839,129 Capital contribution -- 36,594 -- 36,594 Net income -- -- 141,314 141,314 Cash dividends -- -- (98,000) (98,000) --------- --------- --------- --------- Balance at December 31, 2000 106,689 133,459 678,889 919,037 Net income -- -- 110,878 110,878 Cash dividends -- -- (77,000) (77,000) --------- --------- --------- --------- Balance at December 31, 2001 $ 106,689 $ 133,459 $ 712,767 $ 952,915 ========= ========= ========= ========= See Notes to Consolidated Financial Statements. -21- UNION TANK CAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Thousands)
For the Year Ended December 31, ----------------------------------- 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income $ 110,878 $ 141,314 $ 132,568 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 169,865 159,586 148,028 Deferred taxes 13,783 11,591 22,937 Gain on disposition of railcars and other fixed assets (6,319) (4,178) (4,357) Other non-cash income and expenses 9,687 4,575 2,163 Changes in operating assets and liabilities 49,725 (25,711) 19,845 --------- --------- --------- Net cash provided by operating activities 347,619 287,177 321,184 Cash flows from investing activities: Construction and purchase of railcars and other fixed assets (217,082) (213,261) (219,391) (Increase) decrease in short-term investments (54,014) (23,947) 5,951 (Increase) decrease in advance to parent (65,739) 51,514 (159,828) (Increase) decrease in other assets and investments (870) (896) 521 Proceeds from disposals of railcars and other fixed assets 23,293 12,107 12,493 Purchases of businesses, net of cash acquired -- (284,985) (11,764) --------- --------- --------- Net cash used in investing activities (314,412) (459,468) (372,018) Cash flows from financing activities: Proceeds from issuance of borrowed debt 114,247 184,157 176,900 Proceeds from sale-leaseback transactions -- 150,026 13,200 Principal payments of borrowed debt (91,558) (44,779) (62,948) Cash dividends (77,000) (98,000) (82,000) --------- --------- --------- Net cash (used in) provided by financing activities (54,311) 191,404 45,152 Effect of exchange rates on cash and cash equivalents (1,416) (493) 830 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (22,520) 18,620 (4,852) Cash and cash equivalents at beginning of year 34,567 15,947 20,799 --------- --------- --------- Cash and cash equivalents at end of year $ 12,047 $ 34,567 $ 15,947 ========= ========= =========
See Notes to Consolidated Financial Statements -22- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) 1. Ownership UNION TANK CAR COMPANY (with its wholly-owned and majority-owned subsidiaries herein collectively referred to, unless the context otherwise requires, as the "Company") is a wholly-owned subsidiary of Marmon Industrial LLC ("MIC") which is a subsidiary of Marmon Holdings, Inc. ("Holdings"). Substantially all of the stock of Holdings is owned, directly or indirectly, by trusts for the benefit of certain members of the Pritzker family. As used herein, "Pritzker family" refers to the lineal descendants of Nicholas J. Pritzker, deceased. 2. Summary of Accounting Principles and Practices Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions have been eliminated. On September 1, 2000, the Company acquired a company engaged in the metals distribution business and its wholly-owned subsidiaries, through a capital contribution from Holdings. The acquisition has been accounted for on an "as if pooled" basis and, accordingly, the accompanying financial statements include the financial positions, results of operations, and cash flows of the combined companies for all periods presented. Cash and Cash Equivalents Cash and cash equivalents includes all highly liquid debt instruments purchased with an original maturity of three months or less. Short-Term Investments Short-term investments consist of commercial paper with original maturities between four and six months. Lessor Accounting Operating Leases - Most of the Company's railcar and intermodal tank container leases are classified as operating leases. Aggregate rentals from operating leases are reported as revenue ratably over the life of the lease. Expenses, including depreciation and maintenance, are charged as incurred. Direct Financing Leases - Some of the Company's railcar and other rental equipment leases are classified as direct financing leases. Gross investment in leases (minimum lease payments plus estimated residual values) less the cost of the equipment is designated as unearned income. This unearned income is recognized over the life of the lease based upon the "constant yield method" or similar methods which generally result in an approximate level rate of return on the investment. -23- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue Recognition Revenue from sales of products is generally recognized upon shipment to customers which is when title and the risks and rewards of ownership are passed on to the customers. Shipping and Handling Costs All freight costs incurred by the Company to ship its products to its customers are included in cost of sales. Depreciation and Fixed Assets Accounting Railcars, intermodal tank containers and fixed assets are recorded at cost less accumulated depreciation. These assets are depreciated to salvage value over their estimated useful lives on the straight-line method. The estimated useful lives are principally: railcars, 25-30 years; intermodal tank containers, 15-20 years; buildings and improvements, 20-30 years; and machinery and equipment, 3-20 years. The cost of major conversions and betterments are capitalized and depreciated over their estimated useful lives or, if shorter, the remaining useful lives of the related assets. Maintenance and repairs are charged to expense when incurred. Gains or losses on disposals are included in other income, except for those related to railcar disposals which are included in cost of services. Impairment of Long-lived and Identifiable Intangible Assets Carrying values of long-lived assets and identifiable intangible assets are reviewed if facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value of an asset will not be recoverable, as determined based on the undiscounted net cash flows of the asset acquired over the remaining depreciation or amortization period, the carrying value of the asset is reduced to its estimated fair value (based on an estimate of discounted net future cash flows). Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. -24- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation The Company's foreign operations use the local currency as their functional currency. Accordingly, assets and liabilities are translated at exchange rates in effect at the date of translation. Average exchange rates are used for revenues, costs and expenses, and income taxes. Translation adjustments and transaction gains and losses are borne by the Company's parent. For the years ended December 31, 2001, 2000 and 1999, MIC absorbed a gain of $954, a gain of $938, and a loss of $585, respectively. Inventories Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) or last-in, first-out (LIFO) methods. Finished goods represented approximately 80% of net inventories at December 31, 2001. Fair Value of Financial Instruments All book value amounts for financial instruments approximate the instruments' fair value except for borrowed debt discussed in Note 7. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Acquisitions In September 2000, the Company acquired the intermodal tank container leasing business of Transamerica Leasing, Inc. for $264 million. In addition, the Company acquired other entities for a total of $21 million in 2000. These acquisitions were accounted for using the purchase method. Accordingly, results of operations of the acquired businesses were included in the Company's consolidated financial statements from the date of purchase. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. -25- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Railcar Lease Data Railcars are leased directly to several hundred shippers, located throughout North America. The Company leases to a wide variety of customers, and no customer accounted for more than 10% of consolidated lease revenues. Each lease involves one to several thousand railcars, normally for periods ranging from one to twenty years. The average term of leases entered into during 2001 for newly-manufactured railcars was approximately eight years. The average term of leases entered into during 2001 for used railway tank cars and other railcars was approximately three years. Under the terms of most of the leases, the Company agrees to provide a full range of services including railcar repair and maintenance. Minimum future lease rentals to be received on the railcar lease fleet (including railcars leased from others) were as follows as of December 31, 2001: Operating Leases ---------- 2002 $ 419,350 2003 329,348 2004 252,915 2005 188,292 2006 122,413 2007 and thereafter 252,404 ---------- Totals $1,564,722 ========== 4. Lease Fleet and Fixed Assets December 31, ------------------------- 2001 2000 ----------- ----------- Railcar lease fleet Gross cost $ 2,987,559 $ 2,906,251 Less accumulated depreciation (1,381,195) (1,344,607) ----------- ----------- $ 1,606,364 $ 1,561,644 =========== =========== Intermodal tank container lease fleet Gross cost $ 325,903 $ 300,330 Less accumulated depreciation (29,164) (7,955) ----------- ----------- $ 296,739 $ 292,375 =========== =========== Fixed assets, at cost Land $ 15,979 $ 16,025 Buildings and improvements 177,157 171,570 Machinery and equipment 311,553 325,950 ----------- ----------- 504,689 513,545 Less accumulated depreciation (305,947) (302,461) ----------- ----------- $ 198,742 $ 211,084 =========== =========== -26- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Investment in Direct Financing Lease In 1987, one of the Company's Canadian subsidiaries entered into a Canadian dollar denominated lease of a passenger airplane to a scheduled commercial air carrier for an 18-year period. Minimum future rentals to be received on the lease are as follows at December 31, 2001: 2002 $ 5,265 2003 5,265 2004 5,265 2005 5,265 ------- Total $21,060 ======= The investment is recoverable from future lease payments and estimated residual value, as follows: December 31, ------------------- 2001 2000 -------- ------- Minimum future lease rentals $ 21,060 $ 27,960 Estimated residual value 14,916 15,842 -------- -------- Gross investment 35,976 43,802 Less unearned income (9,365) (13,161) -------- -------- Net investment $ 26,611 $ 30,641 ======== ======== 6. Lease Commitments The Company, as lessee, has entered into long-term leases for certain railcars and various manufacturing, office and warehouse facilities. In 2000, the Company entered into a sale-leaseback transaction with a financial institution pursuant to which it sold and leased back an aggregate of $150,026 in railcars. The Company has an option to purchase all of the railcars at a fixed purchase price on July 15, 2012. The exercise price of the fixed price purchase option is equal to the projected future fair market value of the subject railcars, as determined by an independent appraiser. -27- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2001, future minimum rental commitments for all noncancelable leases are as follows: Operating Leases ------------------------------ Sale- Leaseback Others Total --------- ------- -------- 2002 $ 66,647 $ 6,746 $ 73,393 2003 68,427 5,593 74,020 2004 71,465 4,849 76,314 2005 94,663 3,892 98,555 2006 91,824 2,774 94,598 2007 and thereafter 505,702 21,383 527,085 -------- ------- -------- $898,728 $45,237 $943,965 ======== ======= ======== Minimum future sublease revenue to be received under existing railcar sale-leaseback leases as of December 31, 2001 is presented below. Future sublease revenue under other existing operating leases is not material and is primarily included in other income. The Company expects that the subleased railcars will be re-leased at the expiration of such leases. The rentals under such future subleases cannot be ascertained and therefore are not reflected in this table. Sale- Leaseback Leases --------- 2002 $ 80,018 2003 67,697 2004 56,366 2005 41,484 2006 27,674 2007 and thereafter 62,233 -------- $335,472 ======== Sublease rentals recorded as revenue for the years ended December 31, 2001, 2000 and 1999 were approximately $94,000, $93,000 and $80,000, respectively. Rentals charged to costs and expenses were $79,392, $73,350 and $65,053 in 2001, 2000 and 1999, respectively. -28- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Borrowed Debt
December 31, ----------------------- 2001 2000 ---------- ---------- Unsecured notes, due from 2002 - 2009 at 5.91% -7.45% (average rate 6.92% as of December 31, 2001 and 6.86% as of December 31, 2000) $ 515,000 $ 550,000 Senior secured notes, due from 2010 - 2016 at 6.79% - 7.68% (average rate 7.20% as of December 31, 2001 and 7.36% as of December 31, 2000) 381,000 280,000 Equipment obligations, payable periodically through 2009 at 6.50% - 11.60% (average rate 8.16% as of December 31, 2001 and 7.98% as of December 31, 2000) 226,808 267,310 Other long-term borrowings, payable periodically through 2014 (average rate of 10.10% as of December 31, 2001 and 9.97% as of December 31, 2000) 22,255 26,881 ---------- ---------- $1,145,063 $1,124,191 ========== ==========
In June 2001, the Company issued $110,000 principal amount of Senior Secured Notes. Interest on the notes is payable semiannually on June 1 and December 1, commencing December 1, 2001 at the rate of 6.82% per annum. Principal is payable annually commencing on June 1, 2002 and continuing until maturity on June 1, 2016. The notes are secured by approximately 1,900 railcars with a cost of approximately $123,000 and 1,100 intermodal tank containers and wheeled chassis with a cost of approximately $23,800. In September 2000, EXSIF Worldwide, Inc., an indirect majority-owned subsidiary of the Company, issued $180,000 principal amount of senior secured notes. Interest on the notes is payable semiannually on April 1 and October 1, commencing April 1, 2001 at the rate of 7.68% per annum. Principal is payable annually commencing on October 1, 2001 and continuing until maturity on October 1, 2015. The notes are secured by intermodal tank container assets with a total purchase price of approximately $240,000 and the future stream of leasing income on such intermodal tank containers. Payment of the notes has been guaranteed by the Company. Other senior secured notes of $100,000 are secured by railcars with an original cost of $132,582 and $132,754 at December 31, 2001 and 2000, respectively. Equipment obligations are secured by railcars with an original cost of $735,056 and $735,735 at December 31, 2001 and 2000, respectively. -29- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's Canadian subsidiaries have approximately $8,480 of credit lines available on a no-fee basis. No amounts were outstanding as of December 31, 2001 and 2000. Maturities of debt obligations for the years 2002 - 2006 are as follows: $99,235 in 2002, $57,989 in 2003, $94,709 in 2004, $48,352 in 2005 and $98,178 in 2006. The estimated fair value of borrowed debt is as follows: December 31, ----------------------- 2001 2000 ---------- ---------- Unsecured notes $ 539,403 $ 559,711 Senior secured notes 397,127 291,328 Equipment obligations 242,359 279,230 Other long-term borrowings 25,937 29,593 ---------- ---------- $1,204,826 $1,159,862 ========== ========== The current fair value of the Company's borrowed debt is estimated by discounting the future interest and principal cash flows at the Company's estimated incremental borrowing rate at the respective year-end for debt with similar maturities. 8. Income Taxes The Company and its more than 80% owned U.S. subsidiaries are included in the consolidated U.S. federal income tax return of Holdings. Under an arrangement with MIC, federal income taxes, before consideration of investment tax credits, are computed as if the Company files a separate consolidated return. For this computation, the Company generally uses tax accounting methods which minimize the current tax liability (these methods may differ from those used in the consolidated tax return). Tax liabilities are remitted to, and refunds are obtained from, MIC on this basis. If deductions and credits available to Holdings' entire consolidated group exceed those which can be used on its tax return, allocation of the related benefits between the Company and others will be at the sole discretion of Holdings. As a member of a consolidated federal income tax group, the Company is contingently liable for the federal income taxes of the other members of the consolidated group. Undistributed earnings of the Company's non-U.S. subsidiaries reflect full provision for non-U.S. income taxes. However, since the earnings are indefinitely reinvested in non-U.S. operations, no provision has been made for taxes that might be payable upon remittance of such earnings nor is it practicable to determine the amount of any such liability. -30- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following summarizes the provision for income taxes: 2001 2000 1999 -------- -------- -------- State Current $ 2,970 $ 4,049 $ 4,015 Deferred 1,778 (221) 910 Federal Current 17,937 37,596 33,658 Deferred and investment tax credit 32,557 17,042 26,320 Foreign Current 28,248 24,786 17,657 Deferred and investment tax credit (20,552) (5,230) (4,293) -------- -------- -------- Total $ 62,938 $ 78,022 $ 78,267 ======== ======== ======== In 2001, 2000, and 1999, the Company paid foreign withholding taxes of $2,557, $1,210 and $2,112, respectively. Income tax expense is based upon domestic and foreign income before taxes as follows: 2001 2000 1999 -------- -------- -------- Domestic $139,253 $173,337 $181,370 Foreign 34,563 45,999 29,465 -------- -------- -------- Total $173,816 $219,336 $210,835 ======== ======== ======== Income tax effects of significant items which resulted in effective tax rates of 36.2% in 2001, 35.6% in 2000, and 37.1% in 1999 follow:
2001 2000 1999 -------- -------- -------- Federal income taxes at 35% statutory rate $ 60,836 $ 76,768 $ 73,792 Increase (decrease) resulting from: Amortization of investment tax credits (1,989) (1,876) (2,013) State income taxes, net of federal income tax benefit 3,709 2,411 3,520 Excess tax provided on foreign income 6,133 1,198 2,388 Amortization of goodwill 2,146 2,133 2,133 Effect of Canadian tax rate decrease on foreign deferred taxes (9,207) -- -- Other, net 1,310 (2,612) (1,553) -------- -------- -------- Total income taxes $ 62,938 $ 78,022 $ 78,267 ======== ======== ========
The excess tax on foreign income represents differences due to higher foreign tax rates and foreign tax credits not benefited. -31- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of net deferred tax balances are as follows: 2001 2000 --------- --------- Excess of tax over book depreciation $(490,679) $(479,544) Other (31,551) (31,096) --------- --------- Gross liabilities (522,230) (510,640) Expenses per books not yet deductible for tax 33,664 34,555 Other 21,200 20,935 --------- --------- Gross assets 54,864 55,490 Deferred investment tax credits (9,385) (11,562) --------- --------- Net deferred income tax liability $(476,751) $(466,712) ========= ========= The above assets exclude certain state deferred income tax assets related to loss carryforwards (which expire over the next seven years) in the gross amount of $2,200 at December 31, 2001 and $2,600 at December 31, 2000. 9. Contingencies The Company and its subsidiaries have been named as defendants in a number of lawsuits and certain claims are pending. The Company has accrued what it reasonably expects to pay to resolve such claims, and, in the opinion of management, their ultimate resolution will not have a material effect on the Company's consolidated financial position or results of operations. As part of its risk management plan, the Company self-insures certain levels of its property damage, general liability and products liability exposures, as well as certain workers' compensation liabilities in states where it is authorized to do so. The Company maintains no property damage insurance on its railcars or intermodal tank containers. The Company has accrued for the estimated costs of reported, as well as incurred but not reported, self-insured claims. The Company reserves the full estimated value of claims. It does not discount its claims liability. The Company has certain environmental matters currently pending, none of which are significant to the Company's results of operations or financial condition, either individually or in the aggregate. See further discussion of such matters under the "Environmental Matters" caption of Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. -32- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Pension Benefits Substantially all of the Company's employees are covered by discretionary contribution or defined benefit retirement plans. Costs of the discretionary contribution pension plans are accrued in amounts determined on the basis of percentages, generally established annually by the Company, of employee compensation of the various units covered by such plans. The contributions are funded as accrued. Discretionary and defined contribution plan expense for 2001, 2000 and 1999 was $12,000, $11,046 and $12,142, respectively. As of December 31, 2001, the Company's defined benefit plans either had their benefits frozen or were terminated. The benefits are based on payment of a specific amount, which varies by plan, for each year of service. The Company's funding policy is to contribute the minimum amount required either by law or union agreement. Contributions are intended to provide not only for benefits attributed to service through the plans' termination dates, but also for those expected to be earned in the future. Benefits are based on both years of service and compensation. Defined benefit pension plan income was $335, $590 and $441 for 2001, 2000 and 1999, respectively. Prepaid pension costs recognized in the consolidated balance sheet were $28 at December 31, 2001. Accrued defined benefit pension liability recognized in the consolidated balance sheet was $307 at December 31, 2000. 11. Retirement Health Care and Life Insurance Benefits The Company provides limited health care and life insurance benefits for certain retired employees. These benefits are subject to deductible and copayment provisions, Medicare supplements and other limitations. At December 31, 2001 and 2000, the liability for postretirement health care and life insurance benefits was $4,444 for both years, and was included in accrued liabilities in the consolidated balance sheet. Expense related to these benefits was $688, $685 and $511 in 2001, 2000 and 1999, respectively. 12. Ratio of Earnings to Fixed Charges The ratio of earnings to fixed charges represents the number of times that interest expense, amortization of debt discount, and the interest component of rent expense were covered by income before income taxes and such interest, amortization, and the interest component of rentals. -33- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information Condensed consolidated statements of income for the years ended December 31, 2001, 2000 and 1999 are as follows:
Year Ended December 31, 2001 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- ------- ------------ ------------ ------------ Revenues Services (leasing and other) $469,121 $ 69,123 $213,717 $(44,557) $ 707,404 Net sales 39,442 23,472 583,312 (19,740) 626,486 -------- -------- -------- -------- ---------- 508,563 92,595 797,029 (64,297) 1,333,890 Other income (715) 10,457 12,030 11,010 32,782 -------- -------- -------- -------- ---------- 507,848 103,052 809,059 (53,287) 1,366,672 Costs and expenses Cost of services 290,324 40,442 139,955 (44,557) 426,164 Cost of sales 38,766 26,962 486,905 (19,740) 532,893 General and administrative 40,085 3,927 104,154 -- 148,166 Interest 54,247 5,888 14,488 11,010 85,633 -------- -------- -------- -------- ---------- 423,422 77,219 745,502 (53,287) 1,192,856 -------- -------- -------- -------- ---------- Income before income taxes 84,426 25,833 63,557 -- 173,816 Provision for income taxes 37,684 748 24,506 -- 62,938 -------- -------- -------- -------- ---------- Net income $ 46,742 $ 25,085 $ 39,051 $ -- $ 110,878 ======== ======== ======== ======== ==========
-34- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued)
Year Ended December 31, 2000 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Revenues Services (leasing and other) $ 469,117 $ 76,329 $148,780 $(21,024) $ 673,202 Net sales 121,832 27,830 649,127 (25,127) 773,662 --------- -------- -------- -------- ---------- 590,949 104,159 797,907 (46,151) 1,446,864 Other income (776) 9,484 12,509 15,576 36,793 --------- -------- -------- -------- ---------- 590,173 113,643 810,416 (30,575) 1,483,657 Costs and expenses Cost of services 267,083 41,053 112,842 (21,024) 399,954 Cost of sales 112,416 27,284 532,230 (25,127) 646,803 General and administrative 34,378 3,983 102,562 -- 140,923 Interest 50,237 5,403 5,425 15,576 76,641 --------- -------- -------- -------- ---------- 464,144 77,723 753,059 (30,575) 1,264,321 --------- -------- -------- -------- ---------- Income before income taxes 126,059 35,920 57,357 -- 219,336 Provision for income taxes 38,826 13,759 25,437 -- 78,022 --------- -------- -------- -------- ---------- Net income $ 87,233 $ 22,161 $ 31,920 $ -- $ 141,314 ========= ======== ======== ======== ==========
Year Ended December 31, 1999 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Revenues Services (leasing and other) $464,144 $ 75,396 $ 97,883 $ (5,817) $ 631,606 Net sales 199,483 37,495 591,491 (38,477) 789,992 -------- -------- -------- -------- ---------- 663,627 112,891 689,374 (44,294) 1,421,598 Other income 1,601 7,749 10,617 7,452 27,419 -------- -------- -------- -------- ---------- 665,228 120,640 699,991 (36,842) 1,449,017 Costs and expenses Cost of services 253,594 43,399 79,505 (5,817) 370,681 Cost of sales 187,975 34,672 479,776 (38,477) 663,946 General and administrative 35,621 3,742 90,894 -- 130,257 Interest 55,949 9,642 255 7,452 73,298 -------- -------- -------- -------- ---------- 533,139 91,455 650,430 (36,842) 1,238,182 -------- -------- -------- -------- ---------- Income before income taxes 132,089 29,185 49,561 -- 210,835 Provision for income taxes 48,902 10,815 18,550 -- 78,267 -------- -------- -------- -------- ---------- Net income $ 83,187 $ 18,370 $ 31,011 $ -- $ 132,568 ======== ======== ======== ======== ==========
-35- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued) Condensed consolidated balance sheets as of December 31, 2001 and 2000 are as follows:
December 31, 2001 ----------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Assets ------ Cash and cash equivalents $ 60 $ 8,590 $ 3,397 $ -- $ 12,047 Short-term investments -- 110,107 -- -- 110,107 Accounts receivable 26,721 15,805 93,174 (555) 135,145 Accounts and notes receivable, affiliates -- 1 57,064 -- 57,065 Inventories, net 21,993 4,914 115,905 -- 142,812 Prepaid expenses and deferred charges 5,563 881 6,880 960 14,284 Advances to parent 150,331 (50,474) 243,087 (2,579) 340,365 Railcar lease fleet, net 1,315,178 123,159 168,027 -- 1,606,364 Intermodal tank container lease fleet, net -- -- 296,739 -- 296,739 Fixed assets, net 96,345 14,600 87,797 -- 198,742 Investment in direct financing lease -- 26,611 -- -- 26,611 Investment in subsidiaries 853,848 -- 148,389 (1,002,237) -- Other assets 507 640 56,282 (640) 56,789 ---------- -------- ---------- ----------- ---------- Total assets $2,470,546 $254,834 $1,276,741 $(1,005,051) $2,997,070 ========== ======== ========== =========== ========== Liabilities and Stockholder's Equity ------------------------------------ Accounts payable $ 27,168 $ 2,413 $ 33,353 $ (229) $ 62,705 Accrued liabilities 206,231 12,173 55,985 2,864 277,253 Borrowed debt 922,533 48,646 173,884 -- 1,145,063 ---------- -------- ---------- ----------- ---------- 1,155,932 63,232 263,222 2,635 1,485,021 Deferred income taxes and investment tax credits 358,142 45,381 73,228 -- 476,751 Minority interest -- -- 4,956 77,427 82,383 Stockholder's equity Common stock and additional capital 331,752 13,012 481,641 (586,257) 240,148 Retained earnings 573,998 147,702 489,952 (498,885) 712,767 Equity adjustment from foreign currency translation 50,722 (14,493) (36,258) 29 -- ---------- -------- ---------- ----------- ---------- Total stockholder's equity 956,472 146,221 935,335 (1,085,113) 952,915 ---------- -------- ---------- ----------- ---------- Total liabilities and stockholder's equity $2,470,546 $254,834 $1,276,741 $(1,005,051) $2,997,070 ========== ======== ========== =========== ==========
-36- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued)
December 31, 2000 ----------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Assets ------ Cash and cash equivalents $ 4,494 $ 23,111 $ 6,962 $ -- $ 34,567 Short-term investments -- 59,233 -- -- 59,233 Accounts receivable 29,133 12,696 113,185 (4,743) 150,271 Accounts and notes receivable, affiliates -- 83 57,211 -- 57,294 Inventories, net 28,191 8,122 137,758 -- 174,071 Prepaid expenses and deferred charges 6,210 763 5,167 (368) 11,772 Advances to parent 142,673 (12,869) 132,042 (1,329) 260,517 Railcar lease fleet, net 1,220,966 156,513 184,165 -- 1,561,644 Intermodal tank container lease fleet, net -- -- 292,375 -- 292,375 Fixed assets, net 100,631 18,335 92,118 -- 211,084 Investment in direct financing lease -- 30,641 -- -- 30,641 Investment in subsidiaries 823,329 -- 147,171 (970,500) -- Other assets 596 503 72,130 (503) 72,726 ---------- -------- ---------- ----------- ---------- Total assets $2,356,223 $297,131 $1,240,284 $ (977,443) $2,916,195 ========== ======== ========== =========== ========== Liabilities and Stockholder's Equity ------------------------------------ Accounts payable $ 27,412 $ 2,702 $ 45,639 $ (4,324) $ 71,429 Accrued liabilities 191,528 11,670 50,856 2,705 256,759 Borrowed debt 875,767 63,800 184,624 -- 1,124,191 ---------- -------- ---------- ----------- ---------- 1,094,707 78,172 281,119 (1,619) 1,452,379 Deferred income taxes and investment tax credits 342,719 68,590 55,403 -- 466,712 Minority interest -- -- 2,050 76,017 78,067 Stockholder's equity Common stock and additional capital 323,104 13,012 508,356 (604,324) 240,148 Retained earnings 560,034 142,352 424,041 (447,538) 678,889 Equity adjustment from foreign currency translation 35,659 (4,995) (30,685) 21 -- ---------- -------- ---------- ----------- ---------- Total stockholder's equity 918,797 150,369 901,712 (1,051,841) 919,037 ---------- -------- ---------- ----------- ---------- Total liabilities and stockholder's equity $2,356,223 $297,131 $1,240,284 $ (977,443) $2,916,195 ========== ======== ========== =========== ==========
-37- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued) Condensed consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999 are as follows:
Year Ended December 31, 2001 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Net cash provided by operating activities: $ 168,282 $ 28,516 $ 150,821 $ -- $ 347,619 Cash flows from investing activities: Construction and purchase of railcars and other fixed assets (176,798) (2,079) (38,205) -- (217,082) Increase in short-term investments -- (54,014) -- -- (54,014) Decrease (increase) in advance to parent 28,802 37,605 (90,060) (42,086) (65,739) Increase in other assets (20) -- (850) -- (870) Proceeds from disposals of railcars and other fixed assets 5,534 9,944 7,815 -- 23,293 --------- -------- --------- -------- --------- Net cash used in investing activities (142,482) (8,544) (121,300) (42,086) (314,412) Cash flows from financing activities: Proceeds from issuance of borrowed debt 110,000 -- 4,247 -- 114,247 Principal payments of borrowed debt (63,234) (13,407) (14,917) -- (91,558) Cash dividends (77,000) (19,735) (22,351) 42,086 (77,000) --------- -------- --------- -------- --------- Net cash (used in) provided by financing activities (30,234) (33,142) (33,021) 42,086 (54,311) Effect of exchange rates on cash and cash equivalents -- (1,351) (65) -- (1,416) --------- -------- --------- -------- --------- Net decrease in cash and cash equivalents (4,434) (14,521) (3,565) -- (22,520) Cash and cash equivalents at beginning of year 4,494 23,111 6,962 -- 34,567 --------- -------- --------- -------- --------- Cash and cash equivalents at end of year $ 60 $ 8,590 $ 3,397 $ -- $ 12,047 ========= ======== ========= ======== =========
-38- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued)
Year Ended December 31, 2000 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Net cash provided by operating activities: $ 190,042 $ 43,112 $ 54,023 $ -- $ 287,177 Cash flows from investing activities: Construction and purchase of railcars and other fixed assets (172,116) (6,661) (34,484) -- (213,261) Increase in short-term investments -- (23,947) -- -- (23,947) (Increase) decrease in advance to parent (38,255) 19,929 87,021 (17,181) 51,514 Increase in other assets (330) -- (566) -- (896) Proceeds from disposals of railcars and other fixed assets 7,618 2,604 1,885 -- 12,107 Purchases of businesses, net of cash acquired -- -- (284,985) -- (284,985) --------- -------- --------- -------- --------- Net cash used in investing activities (203,083) (8,075) (231,129) (17,181) (459,468) Cash flows from financing activities: Proceeds from issuance of borrowed debt -- -- 184,157 -- 184,157 Proceeds from sale-leaseback transactions 150,026 -- -- -- 150,026 Principal payments of borrowed debt (34,541) (7,531) (2,707) -- (44,779) Cash dividends (98,000) (17,181) -- 17,181 (98,000) --------- -------- --------- -------- --------- Net cash provided by (used in) financing activities 17,485 (24,712) 181,450 17,181 191,404 Effect of exchange rates on cash and cash equivalents -- (479) (14) -- (493) --------- -------- --------- -------- --------- Net increase in cash and cash equivalents 4,444 9,846 4,330 -- 18,620 Cash and cash equivalents at beginning of year 50 13,265 2,632 -- 15,947 --------- -------- --------- -------- --------- Cash and cash equivalents at end of year $ 4,494 $ 23,111 $ 6,962 $ -- $ 34,567 ========= ======== ========= ======== =========
-39- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Consolidating Financial Information (Continued)
Year Ended December 31, 1999 ---------------------------- Union Tank Car Procor Other Company Limited Subsidiaries Eliminations Consolidated -------------- -------- ------------ ------------ ------------ Net cash provided by operating activities: $ 205,779 $ 35,548 $ 79,857 $ -- $ 321,184 Cash flows from investing activities: Construction and purchase of railcars and other fixed assets (199,865) (2,273) (17,253) -- (219,391) Decrease in short-term investments -- 5,951 -- -- 5,951 Increase in advance to parent (82,106) (20,227) (57,495) -- (159,828) Decrease in other assets -- -- 521 -- 521 Proceeds from disposals of railcars and other fixed assets 6,912 4,212 1,369 -- 12,493 Purchases of businesses, net of cash acquired -- -- (11,764) -- (11,764) --------- -------- -------- -------- --------- Net cash used in investing activities (275,059) (12,337) (84,622) -- (372,018) Cash flows from financing activities: Proceeds from issuance of borrowed debt 175,000 -- 1,900 -- 176,900 Proceeds from sale-leaseback transactions 13,200 -- -- -- 13,200 Principal payments of borrowed debt (38,107) (24,332) (509) -- (62,948) Cash dividends (82,000) -- -- -- (82,000) --------- -------- -------- -------- --------- Net cash provided by (used in) financing activities 68,093 (24,332) 1,391 -- 45,152 Effect of exchange rates on cash and cash equivalents -- 790 40 -- 830 --------- -------- -------- -------- --------- Net decrease in cash and cash equivalents (1,187) (331) (3,334) -- (4,852) Cash and cash equivalents at beginning of year 1,237 13,596 5,966 -- 20,799 --------- -------- -------- -------- --------- Cash and cash equivalents at end of year $ 50 $ 13,265 $ 2,632 $ -- $ 15,947 ========= ======== ======== ======== =========
-40- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. Related Party Transactions The following table sets forth the major related party transaction amounts included in the consolidated financial statements, other than those disclosed elsewhere. Interest Management Insurance Income Expense Billed -------- ---------- --------- 2001 $13,265 $3,361 $3,507 2000 17,794 3,107 3,088 1999 9,682 5,063 3,396 The Company from time to time advances funds in excess of its current cash requirements for domestic operations to MIC or MIC's subsidiaries on an unsecured demand basis. Such advances, which bear interest principally at LIBOR plus 1%, amounted to $327,909 and $219,169 at December 31, 2001 and 2000, respectively. Certain of the Company's Canadian operations and its affiliates enter into intercompany loans utilizing their respective excess cash balances. These advances between the Company and subsidiaries of MIC resulted in receivables of $12,456 and $41,348 at December 31, 2001 and 2000, respectively, that are included in advances to parent company. An administrative services fee is paid to The Marmon Group, Inc. ("Marmon"), a subsidiary of Holdings and an affiliate of MIC, for certain services provided by Marmon's officers and employees including services with respect to accounting, tax, finance, legal and related matters which Marmon provides to certain of Holdings' divisions, subsidiaries and affiliates. Marmon provides these services to the Company because it is considered more cost efficient to provide such services in this manner. The administrative fee which Marmon charges to the Company and other entities to which it provides services is calculated using activity-based management concepts. The various Marmon departments allocate both time and expenses to the entities for which it provided services for the previous year. Marmon takes the amount derived from this exercise and applies discretion to determine the final administrative services fee to be charged. The factors which are considered include matters such as the following: any known operating problems and risks that require or may require additional time to be devoted to the Company by Marmon; significant expansion programs; significant contracts; unusual tax or accounting matters; and the experience and length of service of the Company's management. -41- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In September 2000, Worldwide Containers, Inc. ("WCI"), a majority-owned subsidiary of the Company, received a capital contribution from an affiliate consisting of a $43,400 demand note of another affiliate of the Company and 20% of the capital stock of Webb Wheel Products, Inc., another affiliate of the Company, in exchange for approximately 15.1% of the capital stock of WCI. WCI also received a capital contribution from another affiliate consisting of a 20% limited partnership interest in Rail Car Associates Limited Partnership in exchange for approximately 4.2% of the capital stock of WCI. These non-cash transactions have been excluded from the consolidated statement of cash flows. The interest of minority shareholders in WCI at December 31, 2001 and 2000 was $82,383 and $78,067, respectively. The minority interest in income for the years ended December 31, 2001 and 2000 was $4,316 and $1,539, respectively. Prior to its acquisition of the 20% minority interest in September 2000, the Company owned an 80% interest in Rail Car Associates Limited Partnership. The minority interest in income was $582 and $894 for the years ended December 31, 2000 and 1999, respectively. All minority interest in income was included as a charge against other income. 15. Derivative Financial Instruments The Company's foreign subsidiaries periodically enter into foreign currency forward contracts to hedge against U. S. dollar exposures. The notional amounts of the foreign currency forward contracts, all with initial maturities of less than one year, amounted to $22.0 million and $12.0 million at December 31, 2001 and 2000, respectively. The fair value of such contracts is not material. The Company adopted the provision of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2001. The impact of adoption was not significant. 16. Quarterly Data (Unaudited) Three Months Ended ----------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- 2001 ---- Net sales and services revenues $342,157 $352,609 $315,152 $323,972 Cost of sales and services 245,001 255,355 220,784 237,917 -------- -------- -------- -------- Gross profit 97,156 97,254 94,368 86,055 Net income $ 28,191 $ 30,529 $ 34,201 $ 17,957 ======== ======== ======== ======== 2000 ---- Net sales and services revenues $352,962 $371,511 $356,089 $366,302 Cost of sales and services 254,540 269,164 257,092 265,961 -------- -------- -------- -------- Gross profit 98,422 102,347 98,977 100,341 Net income $ 33,893 $ 36,959 $ 37,371 $ 33,091 ======== ======== ======== ======== -42- UNION TANK CAR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Costs and expenses in the fourth quarter of 2001 included a $4,700 provision for costs associated with the suspension of new railway tank car manufacturing at the Oakville, Ontario plant in the second quarter in 2002, a $2,400 reduction in carrying value of certain inventory in the other railway equipment business, and a $1,300 write-off of goodwill in certain fastener businesses. 17. Supplementary Disclosures of Cash Flow Information
For the Year Ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Changes in operating assets and liabilities: Accounts receivable $ 4,824 $ (7,792) $ 8,148 Inventories 22,744 (6,278) 14,686 Prepaid expenses and deferred charges (3,063) 15 2,476 Accounts payable, accrued rent and accrued liabilities 25,220 (11,656) (5,465) -------- -------- -------- $ 49,725 $(25,711) $ 19,845 ======== ======== ======== Cash paid during the year for: Interest (net of amount capitalized) $ 87,350 $ 75,782 $ 73,739 Income taxes 47,392 70,715 66,450
Unrealized foreign currency translation gains and losses, which are non-cash items, are excluded from the change in short-term investments and advances to parent. 18. Industry Segment Information The Company's industry and geographic data are found under the "Segment Information" caption of Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The aforementioned data are an integral part of the Notes to Consolidated Financial Statements. -43- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT First Elected Name Age Current Positions or Offices to Position -------------------- --- ---------------------------------- ------------- Kenneth P. Fischl 52 Director 1994 President of the Company 2002 Mark J. Garrette 48 Vice President of the Company and 1994 Senior Vice President and Controller - Tank Car Division Robert C. Gluth 77 Director, Executive Vice President 1981 and served as Treasurer between February, 1986 and January, 1987 and since October, 1989 Frank D. Lester 61 Vice President of the Company and 1999 President - Tank Car Division John D. Nichols 71 Director 2002 Robert W. Webb 63 General Counsel and Secretary 1986 of the Company -44- Kenneth P. Fischl Mr. Fischl was elected President of the Company in January 2002. He was elected as a Director in March 1994, and served as President of the Tank Car Division from February 1993 to August 1999. He was appointed Vice President of the Company and Executive Vice President and General Manager of the Tank Car Division in July 1992. He joined the Company in 1977 as a Market Analyst. Mr. Fischl was promoted to Manager of Tank Car Marketing and Administration in 1979 and became Vice President of Fleet Management in 1981. Mr. Fischl was elected a Vice President of The Marmon Group, Inc. ("Marmon") in May 1998. Mark J. Garrette Mr. Garrette was appointed Senior Vice President and Controller of the Tank Car Division and elected Vice President of the Company in August 1994. He joined the Tank Car Division as Vice President and Assistant Controller in May 1994. Robert C. Gluth Mr. Gluth is Executive Vice President and a Director of Marmon Industrial LLC ("MIC"), Vice President, Treasurer and a Director of Holdings, Executive Vice President and Director of Marmon LLC ("TMC"), and Executive Vice President and a Director of Marmon. Mr. Gluth is also Treasurer of each of TMC, MIC and Marmon. Frank D. Lester In August 1999, Mr. Lester was named President of the Tank Car Division and elected a Vice President of the Company. Mr. Lester joined the Tank Car Division in 1979 as a district sales manager. In 1981, he was promoted to Vice President - Sales, and in 1988, he was named Vice President - Quality. In 1994, Mr. Lester was elected to President of Procor Limited. John D. Nichols Mr. Nichols was elected as a Director of the Company in January 2002. He is President and Chief Executive Officer of each of MIC, Holdings, TMC and Marmon. Prior to joining Marmon in January 2002, Mr. Nichols was Chief Executive Officer and chairman of the board of Illinois Tool Works Inc. (ITW) before his retirement in 1996. Mr. Nichols joined ITW in 1980 as executive vice president. Robert W. Webb Mr. Webb is a Senior Vice President, Secretary and General Counsel of each of MIC, Holdings, TMC and Marmon. There are no family relationships among the directors and executive officers of the Company. Directors and executive officers are elected for a term of one year, or until a successor is appointed. -45- Other Directorships Mr. John D. Nichols is a Director of Household International, Inc., Philip Morris Companies Inc. and Rockwell International Corporation. Otherwise, none of the members of the Company's Board of Directors are members of the board of directors of companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act or of a company registered as an investment company under the Investment Company Act of 1940. ITEM 11. EXECUTIVE COMPENSATION Frank D. Lester, Vice President, and Mark J. Garrette, Vice President, were the only executive officers of the Company who in the year ended December 31, 2001, received salary and bonus in excess of $100,000 from the Company and its subsidiaries for services in all capacities to the Company. All other officers of the Company received their 2001 compensation from Marmon and are primarily involved in the management of MIC, TMC and Marmon. The Company, together with the other subsidiaries of MIC, has been required to pay Marmon a portion of such compensation which is encompassed in the charge for certain common services provided by Marmon to the Company and such other subsidiaries. The amount of such charge has been determined pursuant to a formula based upon the dollar value of revenues, earnings and assets. See Note 14 to the consolidated financial statements included in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Directors of the Company do not receive any compensation in such capacity. Shown below is the aggregate of all forms of compensation paid by the Company to Mr. Lester and Mr. Garrette: Summary Compensation Table Annual Compensation ------------------------- All Other Name and Principal Position Year Salary Bonus Compensation * ---------------------------------- ---- -------- ------- -------------- Frank D. Lester, Vice President of the Company 2001 $270,450 $80,000 $41,085 and President of the Tank Car 2000 263,200 50,000 29,800 Division 1999 220,200 33,600 15,000 Mark J. Garrette, Vice President of the Company 2001 197,529 42,000 22,755 and Senior Vice President of the 2000 189,700 40,000 21,800 Tank Car Division 1999 180,300 38,000 21,000 * Primarily represents the aggregate amounts of Company contributions to defined contribution plans on behalf of each of the named individuals. -46- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MIC, a Delaware single member limited liability company having its principal executive offices at 225 West Washington Street, Chicago, Illinois, owns 1,000 shares, or 100% of the Company's issued and outstanding common stock. MIC is a subsidiary of Holdings. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Note 14 to the consolidated financial statements included in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001 which contains a description of certain related party transactions is incorporated herein by reference. -47- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page ---- a) 1. Financial Statements - Consolidated statement of income for each of the three years in the period ended December 31, 2001................................................... 19 Consolidated balance sheet - December 31, 2001 and 2000................................. 20 Consolidated statement of stockholder's equity for each of the three years in the period ended December 31, 2001................................... 21 Consolidated statement of cash flows for each of the three years in the period ended December 31, 2001............................................. 22 Notes to consolidated financial statements................................................ 23 2. Schedules Financial statement schedules are not submitted because they are not applicable or because the required information is included in the financial statements or notes thereto. 3. Index to Exhibits............................................................................ 50
b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended December 31, 2001. -48- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: UNION TANK CAR COMPANY (Registrant) By: /s/ Robert C. Gluth ------------------- Robert C. Gluth Executive Vice President, Director and Treasurer Dated: March 13, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date ------------------------------ ------------------------------ -------------- /s/ Kenneth P. Fischl President and Director March 13, 2002 ------------------------------ (principal executive officer) Kenneth P. Fischl /s/ Robert C. Gluth Executive Vice President, March 13, 2002 ------------------------------ Director and Treasurer Robert C. Gluth (principal financial officer and principal accounting officer) /s/ John D. Nichols Director March 13, 2002 ------------------------------ John D. Nichols -49- UNION TANK CAR COMPANY AND SUBSIDIARIES INDEX TO EXHIBITS 2 (a) Asset Purchase Agreement between Transamerica Leasing Inc., Trans Ocean Tank Services Corporation and EXSIF Worldwide, Inc. (as assignee of Worldwide Containers, Inc.) dated as of July 11, 2000 (submitted with the electronic filing to the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by reference) 3 (a) Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of Delaware on September 2, 1982 (which was filed as Exhibit 3(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1982, and is incorporated herein by reference) 3 (b) By-Laws of the Company, as adopted November 25, 1987 (which was filed as Exhibit 3(b) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and is incorporated herein by reference) 4 (a) Trust Indenture and Security Agreement (UTC Trust No. 2000-A) (L-16) dated June 29, 2000 between Norwest Bank Minnesota, National Association, as Owner Trustee, and LaSalle Bank National Association, as Indenture Trustee (submitted with the electronic filing to the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by reference) 4 (b) Indenture and Security Agreement dated September 28, 2000 among Bank One, N.A., EXSIF Worldwide, Inc. and the Company (submitted with the electronic filing to the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by reference) 12 Statements re computation of ratios The computation of the Ratio of Earnings to Fixed Charges (summarized in Note 12 to the consolidated financial statements) 21 Subsidiaries of the registrant 23 Consent of Ernst & Young LLP, Independent Auditors
Instruments defining the rights of holders of long-term debt are not being filed herewith pursuant to the provisions of paragraph 4(iii) of Item 601(b) of Regulation S-K. The Company agrees to furnish a copy of any such instrument to the Commission upon request. -50-