GENESEE & WYOMING INC, 424B4, 1996-06-25

GENESEE & WYOMING INC
424B4, 1996-06-25
RAILROADS, LINE-HAUL OPERATING

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RULE NO. 424(b)(4)
REGISTRATION NO. 333-3972

2,648,000 SHARES

[LOGO] GENESEE & WYOMING INC.

CLASS A COMMON STOCK
($.01 PAR VALUE)

Of the 2,648,000 shares of Class A Common Stock offered hereby, 2,500,000
shares are being sold by the Company and 148,000 shares are being sold by a
stockholder of the Company (the "Selling Stockholder"). See "Principal and
Selling Stockholders." The Company will not receive any proceeds from the sale
of Class A Common Stock by the Selling Stockholder. Prior to this offering,
there has been no public market for the Class A Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price.

The Company's authorized capital stock consists of Class A Common Stock and
Class B Common Stock. The Class A Common Stock is substantially identical to
the Class B Common Stock, except with respect to voting rights, convertibility
and dividends. The Class A Common Stock is entitled to one vote per share and
the Class B Common Stock is entitled to ten votes per share. Each share of
Class B Common Stock is freely convertible into one share of Class A Common
Stock. Shares of Class A Common Stock are entitled to a 10% dividend
preference over shares of Class B Common Stock when, as and if dividends are
declared by the Board of Directors. See "Description of Capital Stock."

The Class A Common Stock has been approved for quotation on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol
"GNWR."

FOR INFORMATION CONCERNING CERTAIN FACTORS RELATING TO THIS OFFERING, SEE
"RISK FACTORS" BEGINNING ON PAGE 7.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $17.00 $1.19 $15.81 $15.81
- --------------------------------------------------------------------------------
Total(3).................... $45,016,000 $3,151,120 $39,525,000 $2,339,880
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $1,025,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 397,200 shares of Class A Common Stock at the Price to
Public, less Underwriting Discounts and Commissions shown above, solely to
cover over-allotments, if any. If this option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $51,768,400, $3,623,788 and $45,804,732, respectively.
See "Underwriting."

The shares of Class A Common Stock offered hereby are being offered by the
several Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in
part. It is expected that the Class A Common Stock will be available for
delivery on or about June 28, 1996 at the offices of Schroder Wertheim & Co.
Incorporated, New York, New York.

SCHRODER WERTHEIM & CO. FURMAN SELZ

June 24, 1996
<PAGE>

[PHOTOGRAPHS AND MAPS]

----------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. All references to "GWI" or the "Company" in this
Prospectus mean Genesee & Wyoming Inc., a Delaware corporation, and its
subsidiaries. Unless otherwise indicated, all information in this Prospectus
(i) assumes that the Underwriters' over-allotment option is not exercised, and
(ii) gives effect to an 18.5:1 stock split and reclassification of the
Company's common stock into Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock") which became effective on June 10, 1996.

THE COMPANY

GWI is a leading operator of short line and regional freight railroads, based
on revenues and total track miles. In 1977, when Mortimer B. Fuller, III
purchased a controlling interest in the Company and became its Chief Executive
Officer, the Company operated a single 14-mile railroad that generated $3.9
million in operating revenues, substantially all of which were attributable to
shipments of salt by Akzo Nobel Salt, Inc. ("Akzo"). As a result of the
Company's acquisition and marketing strategies, the Company has grown to
operate over approximately 1,500 miles of track and, in 1995, the Company
generated $53.4 million in operating revenues. The Company now operates in four
regions of the United States: Western New York and Pennsylvania; Illinois;
Louisiana and Texas; and Oregon.

The Company's growth to date has been the result of its acquisition of rail
properties and its marketing efforts. This growth has largely been "stair-step"
in nature--large revenue increases resulting primarily from acquisitions,
followed by more gradual, incremental revenue growth as the Company implements
its marketing and operating strategies. The Company's growth has resulted in an
expanded customer base, a more diversified commodity mix and decreased
dependence on any one customer. The success of the Company's growth strategy is
evidenced by the fact that it has continued to maintain a stable revenue base
despite the collapse and subsequent closure of the salt mine operated by Akzo,
the Company's largest freight customer until 1994. See "Management's Discussion
and Analysis of Financial Condition and Results in Operations--Akzo Mine."

The Company's fundamental acquisition strategy is to acquire properties that
have large industrial customers which will provide the Company with a stable
revenue base and the potential to generate incremental revenues and additional
customers upon implementation of a focused marketing plan. In the first four
months of 1996, the Company completed two acquisitions, one which established a
new region and another which increased and diversified its customer base in the
New York and Pennsylvania region. In both cases, the Company acquired rail
properties that serve large industrial customers.

In February 1996, the Company formed Illinois & Midland Railroad, Inc.
("Illinois & Midland") which acquired certain railroad assets from Chicago &
Illinois Midland Railway Company ("CIMR") (the "Illinois & Midland
Acquisition"). In 1995, CIMR generated operating revenues of $13.7 million and
transported 48,104 carloads, 91% of which consisted of coal shipments to two
power plants operated by Commonwealth Edison Company ("ComEd"). In April 1996,
the Company formed Pittsburg & Shawmut Railroad, Inc. ("Pittsburg & Shawmut"),
which acquired certain railroad assets owned by three operating subsidiaries of
the Arthur T. Walker Estate Corporation (the "ATWEC Railroads") (the "Pittsburg
& Shawmut Acquisition"). Pittsburg & Shawmut

3
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interchanges with one of the Company's other railroads in three locations. In
1995, the ATWEC Railroads generated operating revenues of $5.9 million and
transported approximately 17,500 carloads, 93% of which were shipments of coal
from four mines located along its lines. See "Recent Developments."

The Illinois & Midland Acquisition established the Company in a new region
and broadened the Company's base of major industrial customers. This
acquisition provides the Company with an immediate presence in the midwest and
a strong base for additional growth in the region. The Pittsburg & Shawmut
Acquisition expanded the Company's presence in its New York and Pennsylvania
region and further broadened its customer base. The Company believes that the
proximity of Pittsburg & Shawmut to one of the Company's other railroads offers
an excellent opportunity for rationalization and consolidation of overhead
expenses as well as market extension and diversification.

The Company's operating strategy is to empower local managers with the
resources and authority to increase revenues, lower operating costs and
rationalize track where appropriate to make operations more efficient. GWI has
established incentive compensation programs that reward local managers for
improving results. The Company also seeks to increase the profitability of its
railroads by spreading regional and corporate overhead expenses over an
expanding revenue base.

The Company's principal executive offices are located at 71 Lewis Street,
Greenwich, Connecticut 06830. Its telephone number is (203) 629-3722.

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THE OFFERING(1)

<TABLE>
<S> <C>
Class A Common Stock offered:
By the Company.................................... 2,500,000 shares
By the Selling Stockholder........................ 148,000 shares
Common Stock to be outstanding after the Offering:
Class A Common Stock(2)........................... 4,001,937 shares(3)
Class B Common Stock(2)........................... 846,556 shares
---------
Total........................................... 4,848,493 shares(3)
=========
To repay debt. See "Use of
Use of proceeds..................................... Proceeds."
Nasdaq National Market symbol....................... GNWR
</TABLE>
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(1) The offering of shares of Class A Common Stock made hereby is referred to
herein as the "Offering."

(2) The Class A Common Stock is entitled to one vote per share. The Class B
Common Stock is entitled to ten votes per share. The Class B Common Stock
is convertible into Class A Common Stock on a one-to-one basis at the
option of the holder and, with certain exceptions, automatically converts
upon transfer by the original holder thereof. The Class A Common Stock is
entitled to a 10% dividend preference over the Class B Common Stock when,
as and if dividends are declared by the Board of Directors. The Class A
Common Stock and Class B Common Stock vote together as a single class
except as required by law, and are substantially identical except with
respect to voting rights, convertibility and dividends. See "Description of
Capital Stock."

(3) Excludes (i) an aggregate of 500,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Option Plan and Stock
Option Plan for Outside Directors, of which options to purchase 350,500
shares of Class A Common Stock are currently outstanding, (ii) 450,000
shares of Class A Common Stock reserved for issuance under the Company's
Employee Stock Purchase Plan, and (iii) 41,847 shares of Class A Common
Stock reserved for issuance upon exercise of the Bank Warrant. See
"Management--Stock Options," "Management--Employee Stock Purchase Plan" and
"Description of Capital Stock--Bank Warrant."

5
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The summary consolidated financial and operating data below has been taken or
derived from the audited consolidated financial statements and other records of
the Company. The summary consolidated financial and operating data should be
read in conjunction with the Consolidated Financial Statements and accompanying
Notes contained in this Prospectus. The results of operations for the interim
periods are not necessarily indicative of results of operations for the full
year. See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The pro forma financial and operating data is based
upon certain pro forma adjustments to reflect (i) the sale by the Company of
2,500,000 shares of Class A Common Stock in the Offering and the application of
the estimated net proceeds of the Offering as set forth under "Use of
Proceeds," (ii) the amendment and restatement of the Credit Facilities and
(iii) the closing of the Illinois & Midland and Pittsburg & Shawmut
Acquisitions. The pro forma unaudited condensed consolidated balance sheet data
assumes that the Pittsburg & Shawmut Acquisition occurred on March 31, 1996,
and the pro forma unaudited condensed consolidated income statement and
operating data assumes that the Illinois & Midland and Pittsburg & Shawmut
Acquisitions and the amendment and restatement of the Credit Facilities
occurred on January 1, 1995.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, PRO FORMA
------------------------------------------------ ---------------- -------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------- ------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues...... $ 20,536 $ 32,940 $ 49,645 $ 55,419 $ 53,387 $13,391 $16,608 $ 73,042 $19,448
Operating income........ 275 2,748 6,144 8,038 6,572 1,526 2,814 12,416 3,558
Interest expense........ (1,583) (2,319) (2,864) (3,212) (3,405) (766) (1,274) (3,650) (852)
Net income (loss)....... (884) 637 1,624 3,011 1,657 502 965 6,323 1,678
Earnings per common
share:
Income before extraor-
dinary item and cumu-
lative effect of ac-
counting change....... $ (0.39) $ 0.28 $ 0.88 $ 1.31 $ 0.92 $ 0.21 $ 0.41 $ 1.41 $ 0.35
Net income (loss)...... $ (0.39) $ 0.28 $ 0.70 $ 1.31 $ 0.71 $ 0.21 $ 0.41 $ 1.31 $ 0.35
Weighted average number
of common shares
outstanding............ 2,258 2,258 2,304 2,304 2,348 2,348 2,348 4,848 4,848
OPERATING DATA:
Total track mile-
age(1)(2).............. 298 555 841 808 839 808 964 1,160 1,236
Total carloads.......... 43,077 73,429 115,301 119,051 118,673 30,966 39,345 184,277 49,674
Total employees(2)...... 176 266 357 380 397 399 462 485 489
Operating revenues per
carload................ $ 477 $ 449 $ 431 $ 466 $ 450 $ 432 $ 422 $ 396 $ 392
Operating revenues per
employee............... $116,682 $123,835 $139,062 $145,839 $134,476 $33,561 $35,948 $150,602 $39,771
Carloads per employee... 245 276 323 313 299 78 85 380 102
Operating ratio(3)...... 98.7% 91.7% 87.6% 85.5% 87.7% 88.6% 83.1% 83.0% 81.7%
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(4) ADJUSTED(5)
-------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................ $115,859 $125,027 $125,027
Total debt.................................. 66,207 72,207 33,707
Stockholders' equity........................ 11,952 11,952 50,452
</TABLE>
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(1) Excludes track miles operated under trackage rights and operating
contracts. See "Property."
(2) Based on monthly averages over the respective periods, except for pro forma
data which is as of December 31, 1995 and March 31, 1996.
(3) Operating expenses divided by operating revenues.
(4) As adjusted to give effect to the Pittsburg & Shawmut Acquisition. See
"Recent Developments."
(5) As further adjusted to give effect to the sale by the Company of 2,500,000
shares of Class A Common Stock in the Offering and the application of the
estimated net proceeds of the Offering as described in "Use of Proceeds."

6
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RISK FACTORS

Potential purchasers of the Class A Common Stock should carefully consider
the following factors, as well as the other information contained in this
Prospectus, before deciding to purchase shares of the Class A Common Stock
offered hereby.

AVAILABILITY OF ACQUISITION OPPORTUNITIES

The Company's ability to continue to grow is dependent in part upon its
ability to acquire additional rail properties. In making acquisitions the
Company competes with other short line and regional rail operators, some of
which are larger and have greater financial resources than the Company. There
can be no assurance that acquisition opportunities will be available to the
Company in the future or that the Company will be able to compete successfully
for available properties. The Company's ability to acquire additional rail
properties and related railroad assets may also be dependent upon its ability
to obtain financing for such acquisitions. Financing may not be available or
may be available only on terms and conditions unfavorable to the Company. In
addition, the Company's Credit Facilities contain certain limitations on the
Company's ability to make acquisitions. See "Business--Strategy--Acquisition
of Rail Properties," "Business--Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

FLUCTUATIONS IN REVENUES AND EXPENSES

The Company has historically experienced fluctuations in revenues and
expenses due to unpredictable events such as one-time freight moves, customer
plant expansions and shut-downs, railcar sales, accidents and derailments. The
occurrence of such events in the future could cause further fluctuations in
revenues and expenses and negatively affect the Company's financial
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."

CUSTOMER CONCENTRATION

In 1995, the Company's ten largest customers accounted for approximately 50%
of the Company's operating revenues. The Company's two largest customers in
1995 were Akzo and Georgia-Pacific Corporation ("Georgia Pacific"), which
accounted for 9% and 8% of operating revenues, respectively. As a result of
the Illinois & Midland Acquisition, the Company anticipates that ComEd will
become its largest customer. On a pro forma basis after giving effect to both
the Illinois & Midland Acquisition and the Pittsburg & Shawmut Acquisition,
ComEd represented 16% of operating revenues in 1995. See "Pro Forma Financial
Information." The Company's business could be adversely affected if its
customers suffer significant reductions in their businesses or reduce
shipments of commodities transported by the Company. See "Business--Railroad
Operations--Customers."

RELIANCE ON KEY PERSONNEL

The Company's success to date has been largely dependent on the leadership
of Mortimer B. Fuller, III, its Chairman, President and Chief Executive
Officer. While the Company has a decentralized organizational structure and an
experienced management team, the loss of Mr. Fuller's services could adversely
affect the Company's operations. See "Business--Railroad Operations--
Management" and "Management."

RELATIONSHIPS WITH CLASS I RAILROADS

The railroad industry in the United States is dominated by a small number of
large Class I carriers that have substantial market control and negotiating
leverage. Almost all of the traffic on the Company's railroads is interchanged
with Class I carriers. A decision by any of these Class I carriers to
discontinue transporting certain commodities or to use alternate modes of
transportation, such as motor carriers, could adversely affect the Company's
business. See "Business--Industry Overview."

The Company's ability to provide rail service to its customers depends in
large part upon its ability to maintain cooperative relationships with Class I
connecting carriers with respect to, among other matters, freight rates, car
supply, reciprocal switching, interchange and trackage rights. A deterioration
in the operations of or

7
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service provided by those connecting carriers, or in the Company's
relationship with its connecting carriers, could adversely affect the
Company's business. In addition, much of the freight transported by the
Company's railroads moves on railcars supplied by Class I carriers. Were these
carriers to reduce the number of railcars available for use by its railroads,
the Company might not be able to obtain replacement railcars on favorable
terms. See "Business--Railroad Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."

Portions of the Company's rail properties are operated under leases,
operating agreements or trackage rights agreements with Class I carriers.
Failure of the Company's railroads to comply with such leases and agreements
in all material respects could result in the loss of operating rights with
respect to such rail properties, which would adversely affect the Company's
business. See "Property."

COMPETITION

Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, including motor carriers and, to a lesser
extent, ships and barges. Competition is based primarily upon the rate charged
and the transit time required, as well as the quality and reliability of the
service provided. Any improvement in the cost or quality of these alternate
modes of transportation could increase competition from these other modes of
transportation and adversely affect the Company's business. Approximately
12.8% of the Company's 1995 freight revenues was generated by overhead traffic
(i.e. traffic neither originating nor terminating on one of its railroads).
Overhead traffic is subject to diversion based on service and prices charged
by other railroads. See "Business--Competition" and "Business--Railroad
Operations--Rail Traffic."

REGULATION

The Company's railroads are subject to regulation by the Surface
Transportation Board ("STB"), the Federal Railroad Administration ("FRA"),
state departments of transportation and some state and local regulatory
agencies. See "Business--Regulation." Despite deregulation in recent years,
federal and state regulation continues to affect profitability and
competitiveness in the railroad industry. The federal and state regulatory
schemes negatively affect the Company through, among other things, the delays
and costs associated with protracted abandonment proceedings and the legal
costs associated with acquisition proceedings. Although the recently enacted
ICC Termination Act of 1995 (the "ICCTA") purports to aim at eliminating or
reducing such costs, the ICCTA has not been in effect long enough to determine
the extent to which it will be successful in this regard. In reducing
regulation, an effect of the ICCTA may be diminished regulatory protection for
small railroads, which negatively affects their competitive position with
their Class I connections. See "Business--Railroad Operations" and "Business--
Regulation."

LIABILITY FOR CASUALTY LOSSES

The Company has obtained for each of its railroads insurance coverage for
losses arising from personal injury and for property damage in the event of
derailments or other accidents or occurrences. The Company believes that its
insurance coverage is adequate based on its experience. However, under
catastrophic circumstances such as accidents involving passenger trains or
spillage of hazardous materials, the Company's liability could exceed its
insurance limits. Insurance is available from only a very limited number of
insurers and there can be no assurance that insurance protection at the
Company's current levels will continue to be available or, if available, will
be obtainable on terms acceptable to the Company. The occurrence of losses or
other liabilities which are not covered by insurance or which exceed the
Company's insurance limits could materially adversely affect the financial
condition of the Company. See "Business--Insurance."

ENVIRONMENTAL MATTERS

The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters,
and the handling, storage, transportation and disposal of waste and other
materials. The Company's railroads regularly transport hazardous materials for
shippers, and also periodically use hazardous materials in their own

8
<PAGE>

operations. As a result, the Company's business involves the risk of
substantial environmental liability as a result of current and past
operations. See "Business--Environmental Matters."

LABOR MATTERS

Five of the Company's railroads have employees who are subject to collective
bargaining agreements. Strikes and work stoppages, whether brought against the
Company's railroads or against the Class I carriers with which they connect,
could adversely affect the operations of the Company's railroads. See
"Business--Railroad Operations--Employees."

DILUTION

Purchasers of Class A Common Stock in the Offering will experience an
immediate and substantial dilution of $10.19 per share in the net tangible
book value of their shares. See "Dilution."

CONCENTRATION OF VOTING POWER

Upon completion of the Offering, the directors and executive officers of the
Company will beneficially own approximately 27.9% of the outstanding shares of
Class A Common Stock and approximately 99.0% of the outstanding shares of
Class B Common Stock, representing approximately 76.2% of the voting power of
the Company (including approximately 57.5% of the voting power of the Company
controlled by Mortimer B. Fuller, III, the Company's Chairman, President and
Chief Executive Officer). As a result, Mr. Fuller and the other directors and
executive officers of the Company will have the ability to affect the vote of
the Company's stockholders on significant corporate actions requiring
stockholder approval, including mergers, share exchanges or sales of all or
substantially all of the Company's assets. With such voting power, Mr. Fuller
and the other directors and executive officers of the Company may also have
the ability to delay or prevent a change in control of the Company. See
"Principal and Selling Stockholders," "Certain Transactions" and "Description
of Capital Stock."

NO PRIOR PUBLIC MARKET FOR CLASS A COMMON STOCK

Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for
quotation on the Nasdaq National Market, there can be no assurance that an
active trading market for the Class A Common Stock will develop or, if it does
develop, that such trading market will be sustained after the completion of
the Offering. The initial public offering price was determined through
negotiations between GWI and representatives of the Underwriters and may not
be indicative of the market price for the Class A Common Stock after the
Offering. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price of the Class A
Common Stock. The market price of the Class A Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors. In addition, general market price declines or
market volatility in the future could affect the market price of the Class A
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, 1,353,937 shares of Class A Common Stock
held by certain stockholders of the Company will be eligible for sale subject
to the volume and other limitations of Rule 144 under the Securities Act of
1933, as amended (the "Act"). In addition, all of the 846,556 shares of Class
B Common Stock outstanding immediately prior to the Offering are freely
convertible into shares of Class A Common Stock and, if so converted, will be
eligible for sale subject to the volume and other limitations of Rule 144.
Holders of the Bank Warrant are also entitled under certain circumstances to
demand and "piggy-back" registration rights with respect to the shares
issuable upon exercise thereof. No prediction can be made as to the effect, if
any, that future sales of shares of Class A Common Stock, or the availability
of shares of Class A Common Stock for future sales, will have on the market
price of the Class A Common Stock prevailing from time to time. Sales of
substantial amounts of Class A Common Stock (including shares issued upon the
exercise of options, warrants or the conversion of Class B Common Stock, or
under the Company's Employee Stock Purchase Plan), or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Class A Common Stock. See "Management--Stock Options," "Management--Employee
Stock Purchase Plan" and "Description of Capital Stock--Bank Warrant."

9
<PAGE>

The Company, its officers and directors and certain other stockholders have
agreed not to sell or otherwise dispose of any shares of Common Stock, subject
to certain exceptions, for a period of 180 days after the date of this
Prospectus without the prior written consent of Schroder Wertheim & Co.
Incorporated. Following the Offering, an aggregate of 2,012,253 shares will be
subject to these restrictions. See "Shares Eligible for Future Sale" and
"Underwriting."

LIMITATIONS ON TAKEOVERS

Certain provisions of the Company's Certificate of Incorporation and By-laws
may have the effect of discouraging a third party from making an acquisition
proposal for the Company and may thereby inhibit a change in control of the
Company under circumstances that could give the stockholders the opportunity
to realize a premium over the then-prevailing market prices. Specifically,
mergers and certain other corporate actions require the approval of two-thirds
of the total votes represented by all Class A Common Stock and Class B Common
Stock, the Board of Directors is divided into three classes, with the members
of each class serving for staggered three-year terms, and the Board is
expressly authorized to consider a variety of factors and constituencies in
determining the Company's best interests. In addition, under certain
circumstances Section 203 of the Delaware General Corporation Law makes it
more difficult for an "interested stockholder" (generally a 15% stockholder)
to effect certain business combinations with a corporation for a three-year
period. See "Description of Capital Stock--Limitations on Takeovers."

RECENT DEVELOPMENTS

ILLINOIS & MIDLAND ACQUISITION

On February 8, 1996, the Company established its Illinois region when
Illinois & Midland acquired certain railroad operating assets from CIMR. The
purchase price was $27.5 million (including the assumption of certain
liabilities and $159,000 of related costs) and was financed by the proceeds of
the term loan described below.

The Illinois & Midland Acquisition is an example of the Company's strategy
of acquiring rail properties that service major industrial customers. In 1995,
CIMR generated operating revenues of $13.7 million and operating income of
$4.0 million and transported 48,104 carloads, approximately 91% of which
consisted of coal shipments to two power plants operated by ComEd. Illinois &
Midland has the exclusive right to serve these power plants and the majority
of the shipments are under long-term contracts extending until 2002. A second
coal customer, Illinois Power Company, began to receive coal shipments at a
power plant located in Havana, Illinois in 1996. Illinois Power Company has
entered into a contract to receive an average of 7,000 carloads annually
through 1999. The Company believes that these contracts will provide a stable
revenue base from which to grow other freight revenues and non-freight
revenues. In addition to coal, Illinois & Midland also transports flour,
roofing granules, ethanol and lumber.

The assets acquired by Illinois & Midland consist primarily of a 126-mile
line extending from Peoria, Illinois, through Springfield to Taylorville,
Illinois, a small number of railcars which will be used for maintenance of
way, and certain rights under real property leases. The rail line consists of
111 miles of FRA Class III track and 15 miles of FRA Class II track. The
Company believes that the track is in excellent condition and that a
relatively low level of capital expenditures will be required in the near
future. Illinois & Midland interchanges with 11 railroads, including six Class
I railroads, and also connects with the Illinois River through an unloading
facility owned by ComEd and operated by Illinois & Midland. The Company
believes there will be opportunities for additional expansion through
acquisitions in the midwest.

In connection with the acquisition, Illinois & Midland hired 70 former CIMR
employees, including 55 operating and hourly employees who had been
represented by 12 different labor unions. Illinois & Midland, through
negotiation with the United Transportation Union ("UTU"), has entered into an
agreement whereby the UTU will represent all of these operating and hourly
employees. The agreement simplifies operating rules contained in the prior
agreements.

10
<PAGE>

PITTSBURG & SHAWMUT ACQUISITION

On April 29, 1996, Pittsburg & Shawmut acquired substantially all of the
operating assets of the ATWEC Railroads. These railroad assets were previously
operated by ATWEC subsidiaries Pittsburg & Shawmut Railroad Company, Mountain
Laurel Railroad Company and Red Bank Railroad Company. The purchase price was
approximately $15.2 million (including the assumption of a grant from the
Commonwealth of Pennsylvania and $250,000 of related costs). In addition, the
purchase and sale agreement provides for additional contingency payments of up
to $2.5 million in the event that coal revenues exceed certain agreed upon
levels. The purchase price was financed by the proceeds of the term loan
described below.

The 237-mile line acquired by Pittsburg & Shawmut consists of a main line
that extends from Driftwood, Pennsylvania through DuBois to Freeport,
Pennsylvania, and branch lines that extend to Reidsburg and Lawsonham,
Pennsylvania. In 1995, the ATWEC Railroads generated operating revenues of
$5.9 million and transported approximately 17,500 carloads, 93% of which were
shipments of coal from four mines located along its lines. Pittsburg & Shawmut
has entered into a seven-year agreement covering the shipments by its largest
customer, which represented 60% of coal hauled by the ATWEC Railroads in 1995.

The Pittsburg & Shawmut Acquisition is an example of the Company's strategy
of acquiring rail properties in its existing regions in order to capitalize on
operating efficiencies. Pittsburg & Shawmut consists of three separate rail
lines, which interchange with another of the Company's railroads in three
locations. The Company believes that the proximity of these two railroads
offers an excellent opportunity for rationalization as well as market
extension and diversification. The assets acquired by Pittsburg & Shawmut
consist of 237 miles of track, 859 railcars, 19 locomotives and various other
related assets necessary to operate the rail lines. As a result of operating
efficiencies obtained with the Company's existing railroads in the New York
and Pennsylvania region, Pittsburg & Shawmut plans to liquidate 42 miles of
track and sell a significant portion of the railcars and locomotives, thereby
reducing the effective purchase price of the acquisition.

AMENDMENT AND RESTATEMENT OF CREDIT FACILITIES

On February 8, 1996, the Company and each of its subsidiaries entered into
an Amended and Restated Revolving Credit and Term Loan Agreement (the "Credit
Agreement") whereby the Company restructured its credit facilities (the
"Credit Facilities") with The First National Bank of Boston, as agent for a
syndicate of banks (the "Bank of Boston"). The Credit Agreement provides for a
five-year $34 million revolving credit facility and a five-year $40 million
loan. The term loan was made available to the Company in two tranches. The
Company borrowed $26 million in February 1996 to consummate the Illinois &
Midland Acquisition, and an additional $11.7 million was used in April 1996 to
consummate the Pittsburg & Shawmut Acquisition. In connection with the Credit
Agreement, the Company issued to the Bank of Boston a warrant to purchase
41,847 shares of Class A Common Stock at a price of $.0005 per share (the
"Bank Warrant"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Capital Stock--Bank Warrant."

11
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be $38.5
million ($44.8 million ifthe Underwriters' over-allotment option is exercised
in full), after deducting underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company. The Company will not receive
any proceeds from the sale of Class A Common Stock by the Selling Stockholder.

The Company intends to use all of the net proceeds of the Offering to repay
borrowings under the Credit Facilities. Borrowings under the Credit Facilities
were used as follows: (i) $26.1 million in connection with the Illinois &
Midland Acquisition, (ii) $11.7 million in connection with the Pittsburg &
Shawmut Acquisition, (iii) $14.3 million to repay outstanding debt, including
$701,000 in debt held by or for the benefit of directors and officers of the
Company and members of their respective families (see "Certain Transactions")
and $2.7 million in prepayment and other financing costs, (iv) $8.3 million to
purchase rolling stock and locomotives, and (v) $700,000 to construct a
locomotive facility. As of May 31, 1996, the Company had $59.3 million
outstanding under the Credit Facilities at an interest rate of 8.53% per
annum. The interest rate fluctuates at increments over prime or London Inter-
Bank Offered Rates ("LIBOR"), based on the Company's ratio of debt to EBITDA.

Following application of the net proceeds to the Company from the Offering,
the Credit Facilities will be available to the Company to finance future
acquisitions. See "Recent Developments" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company has historically paid quarterly dividends in order to provide
limited liquidity to its stockholders. In 1994, 1995 and the first quarter of
1996, the Company paid total cash dividends of $63,000, $191,000 and $32,000,
respectively. Dividends in 1994 were reduced in anticipation of decreased net
income as a result of the loss of production at the Akzo mine. Because the
Company's net income increased in 1994 despite Akzo's decreased production, a
larger than usual dividend was paid in the first quarter of 1995 to offset the
lower dividends paid in 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Akzo Mine." Although the
Company has paid dividends in the past, it currently intends to retain all
earnings to support its operations and future growth and, therefore, does not
anticipate the payment of cash dividends on the Common Stock in the
foreseeable future. In addition, the Credit Facilities have certain covenant
limitations on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources."

12
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to (i) the Pittsburg & Shawmut
Acquisition and (ii) the sale by the Company of 2,500,000 shares of Class A
Common Stock in the Offering and the application of the estimated net proceeds
of the Offering as described in "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(1) ADJUSTED(2)
------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Current portion of long-term debt......... $ 2,894 $ 4,690 $ 2,415
Long-term debt, excluding current portion. 63,313 67,517 31,292
------- ------- -------
Total long-term debt.................... 66,207 72,207 33,707
------- ------- -------
Stockholders' equity:
Class A Common Stock, $.01 par value,
12,000,000 shares authorized; 1,501,937
outstanding and outstanding as adjusted;
4,001,937 outstanding as further
adjusted(3)(4)........................... 15 15 40
Class B Common Stock, $.01 par value,
1,500,000 shares authorized; 846,556
outstanding(4)........................... 8 8 8
Additional paid-in capital................ 1,340 1,340 39,815
Warrants outstanding(5)................... 471 471 471
Retained earnings......................... 10,118 10,118 10,118
------- ------- -------
Total stockholders' equity.............. 11,952 11,952 50,452
------- ------- -------
Total capitalization.................. $78,159 $84,159 $84,159
======= ======= =======
</TABLE>
- --------
(1) As adjusted to give effect to the Pittsburg & Shawmut Acquisition as if it
had occurred on March 31, 1996. See "Recent Developments."
(2) As further adjusted to give effect to the sale by the Company of 2,500,000
shares of Class A Common Stock in the Offering and the application of the
estimated net proceeds of the Offering as described in "Use of Proceeds."
(3) Excludes (i) an aggregate of 500,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Option Plan and Stock
Option Plan for Outside Directors, of which options to purchase 350,500
shares of Class A Common Stock are currently outstanding and (ii) 450,000
shares of Class A Common Stock reserved for issuance under the Company's
Employee Stock Purchase Plan. See "Management--Stock Options" and
"Management--Employee Stock Purchase Plan."
(4) For a description of the Class A Common Stock and the Class B Common
Stock, see "Description of Capital Stock."
(5) For a description of the Bank Warrant, see "Description of Capital Stock--
Bank Warrant."

13
<PAGE>

DILUTION

Pro forma net tangible book value per share before the Offering takes into
consideration the Pittsburg & Shawmut Acquisition as if it had occurred on
March 31, 1996. The Company's pro forma net tangible book value at March 31,
1996 was $(5.5) million, or $(2.33) per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the pro forma tangible
net worth of the Company (total tangible assets less total liabilities) by the
total number of shares of Class A Common Stock and Class B Common Stock
outstanding. After giving effect to the sale by the Company of 2,500,000
shares of Class A Common Stock in the Offering and the application of the net
proceeds as described in "Use of Proceeds," the Company's pro forma net
tangible book value at March 31, 1996 would have been $33.0 million, or $6.81
per share. This represents an immediate increase in net tangible book value of
$9.14 per share to existing stockholders and an immediate dilution in net
tangible book value of $10.19 per share to new investors purchasing shares of
Class A Common Stock in the Offering. The following table illustrates the pro
forma per share dilution at March 31, 1996:

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $17.00
Pro forma net tangible book value per share before the Offer-
ing(1)........................................................ $(2.33)
Increase per share attributable to new investors............... 9.14
------
Pro forma net tangible book value per share after giving effect
to the Offering(1).............................................. 6.81
------
Dilution per share to new investors.............................. $10.19
======
</TABLE>
- --------
(1) Tangible assets include leasehold interests. Intangible assets include
unamortized service assurance agreement (see note 1 to audited condensed
consolidated financial statements), organization costs and financing costs
in the amount of $17.4 million.

The following table shows, on a pro forma basis at March 31, 1996, the
difference between existing stockholders and new investors with respect to the
number of shares purchased from the Company and the total consideration and
average price per share paid to the Company:

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(2)(3)................. 2,348,493 48.4% $ 1,362,995 3.1% $ 0.58
New investors(3)........... 2,500,000 51.6 42,500,000 96.9 17.00
----------- ------- ----------- -----
Total.................... 4,848,493 100.0% $43,862,995 100.0%
=========== ======= =========== =====
</TABLE>
- --------
(1) The Class A Common Stock is entitled to one vote per share and the Class B
Common Stock is entitled to ten votes per share. The Class A Common Stock
and the Class B Common Stock vote together as a single class, except as
required by law.
(2) The information presented assumes no exercise of outstanding options or
warrants. See "Management--Stock Options" and "Description of Capital
Stock--Bank Warrant."
(3) After giving effect to the Offering (i) existing stockholders (other than
the Selling Stockholder) will beneficially own 1,353,937 shares of Class A
Common Stock and 846,556 shares of Class B Common Stock, and new investors
will own 2,648,000 shares of Class A Common Stock; and (ii) new investors
will control approximately 21.2% and existing stockholders (other than the
Selling Stockholder) will control approximately 78.8%, respectively, of
the total combined voting power of both classes of Common Stock. See "Risk
Factors--Concentration of Voting Power" and "Description of Capital
Stock."

14
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The following selected consolidated income statement data and selected
consolidated balance sheet data of the Company for the years ended December
31, 1991, 1992, 1993, 1994 and 1995, and the three months ended March 31, 1995
and 1996, have been derived from the Company's consolidated financial
statements. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year. The
following selected consolidated operating data for the years ended December
31, 1991, 1992, 1993, 1994 and 1995, and the three months ended March 31, 1995
and 1996, have been derived from the records of the Company. All of the
information should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Prospectus. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PRO FORMA(1)
----------------------
THREE
THREE MONTHS YEAR MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, ENDED ENDED
------------------------------------------------ ----------------- DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------- -------- ------------ ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues...... $ 20,536 $ 32,940 $ 49,645 $ 55,419 $ 53,387 $13,391 $ 16,608 $ 73,042 $ 19,448
Operating expenses...... 20,261 30,192 43,501 47,381 46,815 11,865 13,794 60,626 15,890
-------- -------- -------- -------- -------- ------- -------- -------- --------
Operating income........ 275 2,748 6,144 8,038 6,572 1,526 2,814 12,416 3,558
Interest expense........ (1,583) (2,319) (2,864) (3,212) (3,405) (766) (1,274) (3,650) (852)
Other income............ 105 643 165 192 456 105 81 2,711 113
-------- -------- -------- -------- -------- ------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of
accounting change...... (1,203) 1,072 3,445 5,018 3,623 865 1,621 11,477 2,819
Income taxes............ 319 (435) (1,428) (2,007) (1,472) (363) (656) (4,660) (1,141)
-------- -------- -------- -------- -------- ------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change...... (884) 637 2,017 3,011 2,151 502 965 6,817 1,678
Extraordinary item...... -- -- -- -- (494) -- -- (494) --
Cumulative effect of ac-
counting change(2)..... -- -- (393) -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------- -------- --------
Net income (loss)....... $ (884) $ 637 $ 1,624 $ 3,011 $ 1,657 $ 502 $ 965 $ 6,323 $ 1,678
======== ======== ======== ======== ======== ======= ======== ======== ========
Earnings per common
share:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change..... $ (0.39) $ 0.28 $ 0.88 $ 1.31 $ 0.92 $ 0.21 $ 0.41 $ 1.41 $ 0.35
Extraordinary item..... -- -- -- -- (0.21) -- -- (0.10) --
Cumulative effect of
accounting change(2).. -- -- (0.18) -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------- -------- --------
Net income (loss)...... $ (0.39) $ 0.28 $ 0.70 $ 1.31 $ 0.71 $ 0.21 $ 0.41 $ 1.31 $ 0.35
======== ======== ======== ======== ======== ======= ======== ======== ========
Dividends per common
share.................. $ 0.05 $ 0.05 $ 0.05 $ 0.03 $ 0.08 $ 0.04 $ 0.01
Weighted average number
of common shares
outstanding............ 2,258 2,258 2,304 2,304 2,348 2,348 2,348 4,848 4,848
OPERATING DATA:
Total track mile-
age(3)(4).............. 298 555 841 808 839 808 964 1,160 1,236
Total carloads.......... 43,077 73,429 115,301 119,051 118,673 30,966 39,345 184,277 49,674
Total employees(4)...... 176 266 357 380 397 399 462 485 489
Operating revenues per
carload................ $ 477 $ 449 $ 431 $ 466 $ 450 $ 432 $ 422 $ 396 $ 392
Operating revenues per
employee............... $116,682 $123,835 $139,062 $145,839 $134,476 $33,561 $ 35,948 $150,602 $ 39,771
Carloads per employee... 245 276 323 313 299 78 85 380 102
Operating ratio(5)...... 98.7% 91.7% 87.6% 85.5% 87.7% 88.6% 83.1% 83.0% 81.7%
BALANCE SHEET DATA AS OF
PERIOD END:
Total assets............ $ 44,404 $ 56,965 $ 63,653 $ 69,888 $ 78,429 $67,334 $115,859 $125,027
Total debt.............. 26,592 32,109 35,095 32,640 39,941 31,415 66,207 33,707
Stockholders' equity.... 4,030 4,575 6,074 9,082 10,548 9,488 11,952 50,452
</TABLE>
- --------
(1) The pro forma financial information presented is based upon certain pro
forma adjustments to reflect (i) the sale by the Company of 2,500,000
shares of Class A Common Stock in the Offering and the application of the
estimated net proceeds of the Offering as set forth under "Use of
Proceeds," (ii) the amendment and restatement of the Credit Facilities,
and (iii) the closing of the Illinois & Midland and Pittsburg & Shawmut
Acquisitions. The pro forma unaudited condensed consolidated balance sheet
data assumes that the Pittsburg & Shawmut Acquisition occurred on March
31, 1996, and the pro forma unaudited condensed consolidated income
statement and operating data assumes that the Illinois & Midland and
Pittsburg & Shawmut Acquisitions and the amendment and restatement of the
Credit Facilities occurred on January 1, 1995.
(2) Represents the adoption, as of January 1, 1993, of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions."
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Accounting Matters."
(3) Excludes track miles operated under trackage rights and operating
contracts. See "Property."
(4) Based on monthly averages over the respective periods, except for pro
forma data which is as of December 31, 1995 and March 31, 1996.
(5) Operating expenses divided by operating revenues.

15
<PAGE>

PRO FORMA FINANCIAL INFORMATION

The following Pro Forma Unaudited Condensed Consolidated Statements assume
(i) the sale by the Company of 2,500,000 shares of Class A Common Stock in the
Offering and the application of the estimated net proceeds of the Offering as
set forth under "Use of Proceeds," (ii) the amendment and restatement of the
Credit Facilities and (iii) the closing of the Illinois & Midland and
Pittsburg & Shawmut Acquisitions. The Pro Forma Unaudited Condensed
Consolidated Balance Sheet assumes that the Pittsburg & Shawmut Acquisition
occurred on March 31, 1996, and the Pro Forma Unaudited Condensed Consolidated
Statement of Income assumes that the Illinois & Midland and Pittsburg &
Shawmut Acquisitions and the amendment and restatement of the Credit
Facilities occurred on January 1, 1995.

The Pro Forma Unaudited Condensed Consolidated Income Statement for the year
ended December 31, 1995 reflects the audited income statement of the Company
for the year ended December 31, 1995 and the audited income statements of CIMR
and the ATWEC Railroads for the year ended December 31, 1995 on a historical
basis.

The Pro Forma Unaudited Condensed Consolidated Income Statement for the
period ended March 31, 1996 reflects the unaudited income statement of the
Company for the period ended March 31, 1996 and the unaudited income
statements of CIMR and the ATWEC Railroads for the period ended February 8,
1996 and March 31, 1996, respectively, on a historical basis.

The pro forma financial information is a presentation of historical results
with accounting and other adjustments. The pro forma financial information
does not reflect the effects of any of the anticipated changes to be made by
the Company in the Illinois & Midland and Pittsburg & Shawmut operations from
the historical operations of CIMR and the ATWEC Railroads.

THE PRO FORMA STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S FINANCIAL POSITION
OR RESULTS OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES
ASSUMED AND DO NOT PROJECT THE COMPANY'S RESULTS OF OPERATIONS FOR ANY FUTURE
PERIOD. SEE "RECENT DEVELOPMENTS."

The following Pro Forma Unaudited Condensed Consolidated Statements and
accompanying notes should be read in conjunction with the financial statements
and the financial information pertaining to the Company, CIMR and the ATWEC
Railroads included elsewhere in this Prospectus.

16
<PAGE>

PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
CHICAGO & THE
GENESEE & ILLINOIS MIDLAND ATWEC PRO
WYOMING INC. RAILWAY COMPANY RAILROADS COMBINED ADJUSTMENTS FORMA
------------ ---------------- --------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues...... $53,387 $13,733 $ 5,922 $ 73,042 $ -- $73,042
------- ------- ------- -------- ------- -------
Operating Expenses:
Transportation......... 14,262 2,593 1,027 17,882 -- 17,882
Maintenance of ways and
structures............ 6,127 1,814 806 8,747 -- 8,747
Maintenance of equip-
ment.................. 12,230 1,659 846 14,735 -- 14,735
General and administra-
tive.................. 10,309 2,203 1,918 14,430 (631)(1) 13,799
Depreciation and amor-
tization.............. 3,887 1,437 1,808 7,132 (1,669)(2,3) 5,463
------- ------- ------- -------- ------- -------
Total operating
expenses............. 46,815 9,706 6,405 62,926 (2,300) 60,626
Operating Income........ 6,572 4,027 (483) 10,116 2,300 12,416
Interest Expense........ (3,405) (1,461) (481) (5,347) 1,697 (4) (3,650)
Other Income............ 456 1,525 730 2,711 -- 2,711
Loss on Sale of Assets . -- (16,082) (10,288) (26,370) 26,370 (5) --
------- ------- ------- -------- ------- -------
Income Before Income
Taxes.................. 3,623 (11,991) (10,522) (18,890) 30,367 11,477
Income Taxes............ 1,472 (4,545) (4,214) (7,287) 11,947 (6) 4,660
------- ------- ------- -------- ------- -------
Income From Continuing
Operations............. $ 2,151 $(7,446) $(6,308) $(11,603) $18,420 $ 6,817
======= ======= ======= ======== ======= =======
Income From Continuing
Operations Per Common
Share.................. $ 0.92 $ 1.41
Weighted Average Number
of Common Shares
Outstanding............ 2,348 4,848
</TABLE>

See accompanying notes to pro forma unaudited condensed consolidated financial
statements.

17
<PAGE>

PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
CHICAGO &
ILLINOIS MIDLAND
RAILWAY COMPANY THE
GENESEE & (THROUGH ATWEC PRO
WYOMING INC. FEBRUARY 8, 1996) RAILROADS COMBINED ADJUSTMENTS FORMA
------------ ----------------- --------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues...... $16,608 $1,420 $1,420 $19,448 $ -- $19,448
Operating Expenses:
Transportation......... 4,480 532 261 5,273 -- 5,273
Maintenance of ways and
structures............ 2,186 411 210 2,807 -- 2,807
Maintenance of equip-
ment.................. 2,994 390 215 3,599 -- 3,599
General and administra-
tive.................. 2,809 757 400 3,966 (1,291)(1) 2,675
Depreciation and
amortization.......... 1,325 184 442 1,951 (415)(2,3) 1,536
------- ------ ------ ------- ------ -------
Total operating
expenses............. 13,794 2,274 1,528 17,596 (1,706) 15,890
Operating Income........ 2,814 (854) (108) 1,852 1,706 3,558
Interest Expense........ (1,274) (107) (78) (1,459) 607 (4) (852)
Other Income............ 81 17 15 113 -- 113
------- ------ ------ ------- ------ -------
Income Before Income
Taxes.................. 1,621 (944) (171) 506 2,313 2,819
Income Taxes............ 656 (360) (70) 226 915 (6) 1,141
------- ------ ------ ------- ------ -------
Income From Continuing
Operations............. $ 965 $ (584) $ (101) $ 280 $1,398 $ 1,678
======= ====== ====== ======= ====== =======
Income From Continuing
Operations Per Common
Share.................. $ 0.41 $ 0.35
Weighted Average Number
of Common Shares
Outstanding............ 2,348 4,848
</TABLE>

See accompanying notes to pro forma unaudited condensed consolidated financial
statements.

18
<PAGE>

PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
THE
GENESEE & ATWEC PRO
WYOMING INC. RAILROADS COMBINED ADJUSTMENTS FORMA
------------ --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equiva-
lents................. $ 6,588 $ 2,697 $ 9,285 $ (2,697)(7) $ 6,588
Accounts receivable,
net................... 14,764 710 15,474 (710)(7) 14,764
Materials and supplies. 2,295 183 2,478 (183)(7) 2,295
Prepaid expenses....... 1,747 298 2,045 (298)(7) 1,747
Deferred income tax as-
sets, net............. 1,364 -- 1,364 -- 1,364
-------- ------- -------- -------- --------
Total current assets.. 26,758 3,888 30,646 (3,888) 26,758
Note Receivable......... -- 1,249 1,249 (1,249)(7) --
Property and Equipment,
net.................... 70,609 14,480 85,089 (5,312)(8) 79,777
Service Assurance Agree-
ment, net.............. 14,851 -- 14,851 -- 14,851
Other Assets, net....... 3,641 84 3,725 (84)(7) 3,641
-------- ------- -------- -------- --------
Total assets.......... $115,859 $19,701 $135,560 $(10,533) $125,027
======== ======= ======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current Liabilities:
Current portion of
long-term debt........ $ 2,894 $ 125 $ 3,019 $ (604)(7,9) $ 2,415
Accounts payable....... 17,103 784 17,887 (784)(7) 17,103
Accrued expenses....... 4,431 433 4,864 (433)(7) 4,431
-------- ------- -------- -------- --------
Total current liabili-
ties................. 24,428 1,342 25,770 (1,821) 23,949
Long-Term Debt.......... 63,313 3,900 67,213 (35,921)(7,9) 31,292
Other Liabilities....... 2,055 333 2,388 (333)(7) 2,055
Deferred Income Taxes,
net.................... 4,489 1,921 6,410 (1,921)(7) 4,489
Deferred Items--grants.. 9,622 3,168 12,790 -- 12,790
Stockholders' Equity:
Class A common stock... 15 194 209 (169)(7,10) 40
Class B common stock... 8 150 158 (150)(7) 8
Treasury stock......... -- (33) (33) 33 (7) --
Additional paid-in cap-
ital.................. 1,340 7,653 8,993 30,822 (7,10) 39,815
Warrants outstanding... 471 -- 471 -- 471
Retained earnings...... 10,118 1,157 11,275 (1,157)(7) 10,118
Pension liability ad-
justment.............. -- (84) (84) 84 (7) --
-------- ------- -------- -------- --------
Total stockholders'
equity............... 11,952 9,037 20,989 29,463 50,452
-------- ------- -------- -------- --------
Total liabilities and
stockholders' equity. $115,859 $19,701 $135,560 $(10,533) $125,027
======== ======= ======== ======== ========
</TABLE>

See accompanying notes to pro forma unaudited condensed consolidated financial
statements.

19
<PAGE>

NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following notes identify the pro forma adjustments made to the
historical amounts in the pro forma unaudited condensed consolidated financial
statements.

1. For the fiscal year ended December 31, 1995, represents the elimination of
compensation of executive officers of acquired railroads not retained or
replaced by the Company ($406,000), occupancy and other costs of the
offices of the parent company of the ATWEC Railroads which were not
acquired ($168,000) and retiree benefits retained by the selling railroads
($57,000). For the three months ended March 31, 1996, represents the
elimination of transaction bonuses ($286,000), severance payments
($920,000), occupancy and other costs of the offices of the parent company
of the ATWEC Railroads which were not acquired ($77,000) and retiree
benefits retained by the selling railroads ($8,000).

2. Represents the decrease in depreciation expense resulting from a decrease
in the depreciable basis and a change in the depreciable lives of certain
assets. Depreciation expense of CIMR and the ATWEC Railroads for the year
ended December 31, 1995 and the three months ended March 31, 1996 was
approximately $2,740,000 and $573,000, respectively. Pro forma
depreciation expense of CIMR and the ATWEC Railroads, calculated on a
straight-line basis, was approximately $1,200,000 and $173,000,
respectively, or a difference of approximately $1,530,000 and $400,000,
respectively. Pro forma depreciation expense was calculated using the
composite depreciable lives utilized by the Company and the asset basis of
the Illinois & Midland and Pittsburg & Shawmut Acquisitions.

3. Represents the increase in amortization expense for the year ended
December 31, 1995 and the three months ended March 31, 1996 of
approximately $179,000 and $20,000, respectively, resulting from a
reduction in the amortization period for intangible assets, including the
service assurance agreement from the acquisition of CIMR.

4. Represents a decrease in interest expense associated with the reduction of
debt as a result of the Offering, plus the effect of the reduced interest
expense associated with the replacement of CIMR's and the ATWEC Railroads'
credit facilities with the Company's Credit Facilities. Included in the
pro forma interest expense is approximately $94,000 of amortization of the
debt discount associated with the Bank Warrant for the year ended December
31, 1995 and $10,000 for the three months ended March 31, 1996. The debt
bears interest at an assumed rate of approximately 8.5%. Also included is
the amortization of approximately $1,640,000 of debt financing fees over
five years. An increase in the assumed interest rate of 1/8% would
decrease net income by approximately $25,000 and $16,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively.

5. Represents the elimination of the write down of assets of CIMR and the
ATWEC Railroads to the purchase price paid by the Company.

6. Represents the income tax effects of the pro forma adjustments. The
Company's pro forma income tax rate is 40.6% for the year ended December
31, 1995 and 40.5% for the three months ended March 31, 1996.

7. Represents the elimination of assets (other than operating rail assets)
and liabilities the ATWEC Railroads which the Company did not acquire or
assume in connection with the Pittsburg & Shawmut Acquisition.

8. The total purchase price for the ATWEC Railroads of approximately
$15,194,000 includes approximately $250,000 of costs related to the
Pittsburg & Shawmut Acquisition. The purchase price was allocated to
property and equipment, less the anticipated proceeds from the sale of
assets of approximately $6,000,000.

9. Represents reduction of debt through the application of the estimated net
proceeds of the Offering, after giving effect to the additional debt
incurred by the Company in connection with the Pittsburg & Shawmut
Acquisition.

10. Represents estimated net proceeds to the Company from the Offering of
$38.5 million.

20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the Company's
consolidated financial statements, related notes and other financial
information included elsewhere in this Prospectus.

GENERAL

GWI is a holding company whose subsidiaries own and operate short line and
regional freight railroads and provide related rail services. The Company
generates revenues primarily from the movement of freight over track owned or
operated by its railroads. The Company also generates non-freight revenues
primarily by providing related rail services such as railcar leasing, railcar
repair, switching and storage to shippers along its lines and to the Class I
railroads that connect with its lines.

The Company's operating expenses include wages and benefits, equipment rents
(including car hire), purchased services, depreciation and amortization,
diesel fuel, casualties and insurance, materials and other expenses. Car hire
is a charge paid by a railroad to the owners of railcars used by that railroad
in moving freight. Other expenses generally include property and other non-
income taxes, professional services, communication and data processing costs
and general overhead expense.

When comparing the Company's results of operations from one reporting period
to another, the following factors should be taken into consideration. First,
in 1994 and 1995, the Company experienced a substantial decrease in revenues
and operating income as a result of the collapse of Akzo's salt mine and
subsequent loss of salt production. See "--Akzo Mine." Second, the Company has
historically experienced fluctuations in revenues and expenses due to
unpredictable events such as one-time freight moves, customer plant expansions
and shut-downs, railcar sales, accidents and derailments. In periods when
these events occur, results of operations are not easily comparable to other
periods. Finally, much of the Company's growth to date has resulted from
acquisitions and this growth has been "stair-step" in nature--periods with
large revenue increases primarily as a result of these acquisitions, followed
by periods of more gradual, incremental growth as the Company implements its
marketing and operating strategies. The Company acquired two rail properties
in 1993, one in 1994 and one in 1995. In addition, the Company completed the
Illinois & Midland and Pittsburg & Shawmut Acquisitions during the first four
months of 1996. See "Recent Developments." Because of variations in the
structure, timing and size of these acquisitions and differences in economics
among the Company's railroads resulting from differences in the rates and
other material terms established through negotiation, the Company's results of
operations in any reporting period may not be directly comparable to its
results of operations in other reporting periods.

AKZO MINE

The major customer of one of the Company's railroads is Akzo, which operated
a rock salt mine in Retsof, New York. In 1993, the last year the salt mine was
fully operational, Akzo accounted for $9.7 million or 19.5% of the Company's
operating revenues, $5.9 million or 15.2% of its freight revenues and $3.8
million or 35.0% of its non-freight revenues. In March 1994, a section of the
mine's roof collapsed, causing flooding from an underground aquifer. The mine
closed in September 1995. Akzo had previously announced its intention to
construct a new mine. In anticipation of the construction of a new mine, the
Company incurred approximately $600,000 of costs in connection with
construction of a rail spur. Akzo announced in April 1996 that a new mine will
not be constructed and that the Retsof location will be converted to a rock
salt distribution center. While the Company anticipates that it will be
reimbursed for these costs, there can be no assurance that such reimbursement
will occur.

The Akzo mine flooding negatively affected the Company's freight revenues in
1994 and 1995. Freight revenues attributable to Akzo totaled $2.9 million in
1994 and $1.9 million in 1995. The Company anticipates that freight revenues
attributable to Akzo will be minimal in 1996 and thereafter. The flooding has
not affected non-freight revenues from Akzo, which consist primarily of income
from railcar leases under long-term contracts. Non-freight revenues from Akzo
totaled $2.9 million in 1995 compared to $3.6 million in 1994.

21
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995

Operating Revenues

Operating revenues were $16.6 million in the first three months of 1996
compared to $13.4 million in the first three months of 1995, an increase of
$3.2 million or 24.0%. The increase was attributable to a $2.4 million
increase in freight revenues and an $834,000 increase in non-freight revenues.

Freight revenues were $13.0 million in the first three months of 1996
compared to $10.6 million in the first three months of 1995, an increase of
$2.4 million or 22.6%. The following table compares freight revenues, carloads
and average freight revenues per carload for the first three months of 1995
and 1996:

FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
THREE MONTHS ENDED MARCH 31, 1995 AND 1996

<TABLE>
<CAPTION>
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------------------- -------------------------- -----------
% OF % OF % OF % OF
COMMODITY GROUP 1995 TOTAL 1996 TOTAL 1995 TOTAL 1996 TOTAL 1995 1996
- --------------- ------- ----- ------- ----- ------ ----- ------ ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal, Coke & Ores....... $ 694 6.6% $ 3,007 23.2% 3,324 10.7% 11,941 30.3% $209 $252
Petroleum Products...... 2,125 20.1 2,270 17.5 4,383 14.2 4,542 11.6 485 500
Pulp & Paper............ 1,691 16.0 1,793 13.8 4,610 14.9 4,772 12.1 367 376
Lumber & Forest Prod-
ucts................... 1,051 9.9 1,269 9.8 3,102 10.0 4,123 10.5 339 308
Metals.................. 1,065 10.1 1,220 9.4 4,098 13.2 4,715 12.0 260 259
Chemicals & Plastics.... 1,008 9.5 967 7.5 2,078 6.7 1,841 4.7 485 525
Farm & Food Products.... 508 4.8 787 6.1 1,468 4.7 2,282 5.8 346 345
Autos & Auto Parts...... 582 5.5 764 5.9 1,085 3.5 1,463 3.7 536 522
Minerals & Stone........ 394 3.7 277 2.1 1,007 3.3 915 2.3 391 303
Salt.................... 1,125 10.7 72 0.6 4,057 13.1 388 1.0 277 186
Other................... 327 3.1 528 4.1 1,754 5.7 2,363 6.0 186 223
------- ----- ------- ----- ------ ----- ------ ----- ----- -----
Total.................. $10,570 100.0% $12,954 100.0% 30,966 100.0% 39,345 100.0% $341 $329
======= ===== ======= ===== ====== ===== ====== ===== ===== =====
</TABLE>

The increase in freight revenues was largely attributable to the
commencement of operations on Illinois & Midland, which generated freight
revenues of $2.5 million, $2.3 million of which were revenues from the
shipment of coal. A new line acquired in August 1995 in the Oregon region
generated an additional $591,000 in revenues in the first three months of
1996, primarily from shipments of grain and lumber. Excluding freight revenues
from the Akzo mine, freight revenues from all other operations increased
$389,000. These increases offset the continuing effect of the loss of
production at the Akzo mine. See "--Akzo Mine."

Total carloads were 39,345 in the first three months of 1996 compared to
30,966 in the first three months of 1995, an increase of 8,379 or 27.1%. The
increase was attributable to 9,720 carloads transported by Illinois & Midland,
which consisted primarily of coal and 2,682 carloads from a new Oregon line.
These increases were offset by a decrease of 4,023 carloads from other
operations, most of which were related to the closure of the Akzo mine.

Non-freight revenues were $3.7 million in the first three months of 1996
compared to $2.8 million in the first three months of 1995, an increase of
$834,000 or 29.6%. Revenues from car hire and car rentals were $1.3 million in
the first three months of 1996 compared to $818,000 in the first three months
of 1995, an increase of $491,000 or 60.1%. This increase includes a gain on
the sale of railcars of $593,000. Revenues from switching and storage
activities were $1.1 million in the first three months of 1996 compared to
$821,000 in the first three months of 1995, an increase of $307,000 or 37.4%.
The increase reflects the effect of increased capacity at the Company's
railcar storage facility in 1996 compared to 1995, and switching revenues
generated by Illinois & Midland.

Operating revenues per carload were $422 in the first three months of 1996
compared to $432 in the first three months of 1995, a decrease of $10 or 2.3%.
The decrease is primarily due to the decline in average freight revenues per
carload associated with increased coal shipments.

22
<PAGE>

Operating Expenses

Operating expenses were $13.8 million in the first three months of 1996
compared to $11.9 million in the first three months of 1995, an increase of
$1.9 million or 16.3%. Expenses associated with the Illinois & Midland
Acquisition represented $1.4 million of the increase. The Company's operating
ratio improved to 83.1% in the first three months of 1996 from 88.6% in the
first three months of 1995.

The following table sets forth a comparison of the Company's operating
expenses for the first three months of 1995 and 1996:

OPERATING EXPENSE COMPARISON
THREE MONTHS ENDED MARCH 31, 1995 AND 1996

<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
% OF % OF
OPERATING OPERATING
$ REVENUES $ REVENUES
------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Labor and benefits.......................... $ 4,764 35.6% $ 5,452 32.8%
Equipment rents............................. 1,884 14.1 1,880 11.3
Purchased services.......................... 779 5.8 780 4.7
Depreciation and amortization............... 926 6.9 1,325 8.0
Diesel fuel................................. 892 6.7 1,065 6.4
Casualties and insurance.................... 635 4.7 1,157 7.0
Materials................................... 881 6.6 706 4.3
Other....................................... 1,104 8.2 1,429 8.6
------- ---- ------- ----
Total..................................... $11,865 88.6% $13,794 83.1%
======= ==== ======= ====
</TABLE>

Labor and benefits expense was $5.5 million in the first three months of
1996 compared to $4.8 million in the first three months of 1995, an increase
of $688,000 or 14.4%, primarily due to the commencement of operations on
Illinois & Midland. Labor costs decreased as a percentage of revenues,
however, to 32.8% in the first three months of 1996 from 35.6% in the first
three months of 1995. The decrease reflects the efficiency of the unit coal
train operations on Illinois & Midland.

Depreciation and amortization expense was $1.3 million in the first three
months of 1996 compared to $926,000 in the first three months of 1995, an
increase of $399,000 or 43.1%. The increase reflects depreciation and
amortization related to the Illinois & Midland Acquisition and the
depreciation of rolling stock purchased during the second and third quarters
of 1995. Casualties and insurance expense was $1.2 million in the first three
months of 1996 compared to $635,000 in the first three months of 1995, an
increase of $522,000 or 82.2%. The majority of this increase reflects
increased derailment expenses. Derailment expenses refers to all costs
associated with a railroad derailment, including labor and materials to rerail
rolling stock and repair track and equipment, and damage to commodities
shipped.

Interest Expense and Income Taxes

Interest expense in the first three months of 1996 was $1.3 million compared
to $766,000 in the first three months of 1995, an increase of $508,000 or
66.3%. The increase reflects the higher overall debt outstanding due to the
financing of the Illinois & Midland Acquisition and the financing of rolling
stock. The Company's effective income tax rate was 40.5% in the first three
months of 1996 compared to 42.0% in the first three months of 1995.

Net Income

The Company's net income in the first three months of 1996 was $965,000
compared to $502,000 in the first three months of 1995, an increase of
$463,000 or 92.2%.

23
<PAGE>

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Operating Revenues

Operating revenues were $53.4 million in 1995 compared to $55.4 million in
1994, a decrease of $2.0 million or 3.7%. This decrease was attributable to a
$1.4 million decrease in non-freight revenues coupled with a $633,000 decrease
in freight revenues.

Freight revenues were $42.4 million in 1995 compared to $43.0 million in
1994, a decrease of $633,000 or 1.5%. The following table compares freight
revenues, carloads and average freight revenues per carload for 1994 and 1995:

FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------------------- ---------------------------- -----------
% OF % OF % OF % OF
COMMODITY GROUP 1994 TOTAL 1995 TOTAL 1994 TOTAL 1995 TOTAL 1994 1995
- --------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal, Coke & Ores....... $ 2,828 6.6% $ 2,656 6.3% 12,867 10.8% 12,398 10.5% $ 220 $ 214
Petroleum Products...... 8,341 19.4 8,487 20.0 17,186 14.4 17,559 14.8 485 483
Pulp & Paper............ 6,354 14.8 6,797 16.1 17,070 14.3 18,667 15.7 372 364
Lumber & Forest Prod-
ucts................... 4,610 10.7 4,496 10.6 13,711 11.5 14,022 11.8 336 321
Metals.................. 4,862 11.3 4,459 10.5 16,606 14.0 17,014 14.3 293 262
Chemicals & Plastics.... 3,673 8.6 3,321 7.9 5,942 5.0 6,641 5.6 618 500
Farm & Food Products.... 2,112 4.9 2,756 6.5 6,525 5.5 5,778 4.9 324 477
Autos & Auto Parts...... 3,960 9.2 3,490 8.2 6,624 5.6 6,381 5.4 598 547
Minerals & Stone........ 1,860 4.3 1,407 3.3 5,037 4.2 4,189 3.5 369 336
Salt.................... 2,835 6.6 2,215 5.2 10,621 8.9 7,865 6.6 267 282
Other................... 1,550 3.6 2,268 5.4 6,862 5.8 8,159 6.9 226 278
------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Total.................. $42,985 100.0% $42,352 100.0% 119,051 100.0% 118,673 100.0% $ 361 $ 357
======= ===== ======= ===== ======= ===== ======= ===== ===== =====
</TABLE>

The decrease in freight revenues was largely attributable to the continuing
effect of the loss of production at the Akzo mine. See "--Akzo Mine." Freight
revenues from Akzo totaled $1.9 million in 1995 on 6,934 carloads compared to
$2.9 million on 10,423 carloads in 1994. Excluding Akzo, total carloads
increased by 3,111 or 2.9% in 1995 compared to 1994, while total freight
revenues increased $338,000 or 0.6% in 1995 compared to 1994. In 1995, the
Company realized $673,000 in additional freight revenues attributable to the
acquisition of a new rail line in the Oregon region. This increase was
partially offset by a $470,000 decrease in freight revenues from autos and
auto parts to $3.5 million in 1995 from $4.0 million in 1994. Freight revenues
from autos and auto parts in 1994 included a large one-time move of finished
vehicles diverted to the Company by another carrier, which was not repeated in
1995.

Non-freight revenues were $11.0 million in 1995 compared to $12.4 million in
1994, a decrease of $1.4 million or 11.2%. Revenues from car hire and car
rentals were $3.2 million in 1995 compared to $5.2 million in 1994, a decrease
of $2.0 million or 38.7%. Revenues from car hire and rentals were unusually
high in 1994 due to a gain on the sale of railcars. The Company also had a
reduced operating fleet in 1995 as a result of a sale of railcars in 1994,
which reduced rental revenue. Revenues from switching and storage activities
were $3.6 million in 1995 compared to $2.7 million in 1994, an increase of
$934,000 or 34.5%. The increase reflects the operation of the Company's
railcar storage facility for a full year. Car repair revenues were $1.6
million in 1995 compared to $1.9 million in 1994, a decrease of $349,000 or
18.3%. The decrease was attributable to a lower number of cars required to
haul salt and the improvement in the quality of cars received in interchange.

Operating revenues per carload were $450 in 1995 compared to $466 in 1994, a
decrease of $16 or 3.4%. The $1.4 million decrease in non-freight revenues
accounts for $12 of the per carload decline. The remainder is attributable to
a $4 decrease in average freight revenues per carload.

24
<PAGE>

Operating Expenses

Operating expenses were $46.8 million in 1995 compared to $47.4 million in
1994, a decrease of $565,000 or 1.2%. The Company's operating ratio increased
to 87.7% in 1995 from 85.5% in 1994.

The following table sets forth a comparison of the Company's operating
expenses in 1994 and 1995:

OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------------- -----------------
% OF % OF
OPERATING OPERATING
$ REVENUES $ REVENUES
------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Labor and benefits....................... $18,092 32.6% $18,683 35.0%
Equipment rents.......................... 8,634 15.6 7,434 13.9
Purchased services....................... 2,737 4.9 2,530 4.7
Depreciation and amortization............ 3,577 6.5 3,887 7.3
Diesel fuel.............................. 3,410 6.2 3,249 6.1
Casualties and insurance................. 2,742 5.0 3,673 6.9
Materials................................ 3,401 6.1 2,531 4.7
Other.................................... 4,788 8.6 4,828 9.1
------- ---- ------- ----
Total.................................. $47,381 85.5% $46,815 87.7%
======= ==== ======= ====
</TABLE>

Labor and benefits expense was $18.7 million in 1995 compared to $18.1
million in 1994, an increase of $591,000 or 3.3%. Labor costs increased as a
percentage of revenues to 35.0% in 1995 compared to 32.6% in 1994. The
increase was attributable to the start-up costs in connection with additional
lines in Oregon and expansion of operations in Texas.

Equipment rents were $7.4 million in 1995 compared to $8.6 million in 1994,
a decrease of $1.2 million or 13.9%. The decrease reflects a reduction in the
number of operating leases and lower car hire expense. In 1995, the Company
purchased railcars and locomotives subject to an operating lease, which
reduced equipment rent expense under this operating lease to $606,000 in 1995
compared to $1.7 million in 1994. Car hire expense decreased to $4.2 million
in 1995 compared to $5.4 million in 1994, reflecting a concerted management
effort to reduce this expense. Depreciation expense was $3.9 million in 1995
compared to $3.6 million in 1994, an increase of $310,000 or 8.7%. The
majority of this increase reflects depreciation expense associated with
railcars and locomotives purchased in 1995.

Casualties and insurance expense, including claims brought under the Federal
Employers' Liability Act, was $3.7 million in 1995 compared to $2.7 million in
1994, an increase of $931,000 or 34.0%. Additions to reserves for third party
liability were $1.4 million in 1995 compared to $669,000 in 1994, an increase
of $736,000. The majority of the increase in 1995 related to incidents
occurring prior to 1995. While the Company establishes reserves for incidents
as they occur, an unexpected legal action brought in 1995, together with
changes in circumstances relating to prior incidents, necessitated this
increase. In August 1994, the Company reduced its self-insured retention. If
this level of coverage had been in place when these incidents occurred,
necessary additions to reserves in 1995 would have been reduced by $400,000.
The remainder of the increase in casualties and insurance expense reflects an
increase in derailment expense.

Materials expense was $2.5 million in 1995 compared to $3.4 million in 1994,
a decrease of $870,000 or 25.6%. The decrease was largely attributable to a
reduction in car repairs.

Interest Expense and Income Taxes

Interest expense was $3.4 million in 1995 compared to $3.2 million in 1994,
an increase of $193,000 or 6.0%. The increase reflects higher overall debt
outstanding related to the financing of rolling stock. During 1995, the
Company refinanced the majority of its outstanding debt into the Credit
Facilities, resulting in an effective

25
<PAGE>

rate of interest that was lower than in 1994. See "--Liquidity and Capital
Resources." Penalties and fees paid to lenders related to the repayment of
debt resulted in an extraordinary charge of $494,000, net of related income
taxes of $357,000. The Company's effective income tax rate was 40.6% in 1995
compared to 40.0% in 1994.

Net Income

The Company's net income in 1995 was $1.7 million (or $2.2 million before an
extraordinary expense of $494,000 in connection with the early extinguishment
of debt) compared to net income in 1994 of $3.0 million. Excluding the effect
of this extraordinary expense, net income in 1995 decreased $860,000 or 28.6%
compared to 1994.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

Operating Revenues

Operating revenues were $55.4 million in 1994 compared to $49.6 million in
1993, an increase of $5.8 million or 11.6%. Of this increase, $4.0 million was
attributable to increases in freight revenues and $1.7 million was
attributable to increases in non-freight revenues.

Freight revenues were $43.0 million in 1994 compared to $39.0 million in
1993, an increase of $4.0 million or 10.3%. The following table compares
freight revenues, carloads and average freight revenues per carload for 1993
and 1994:

FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1993 AND 1994

<TABLE>
<CAPTION>
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------------------- ---------------------------- -----------
% OF % OF % OF % OF
COMMODITY GROUP 1993 TOTAL 1994 TOTAL 1993 TOTAL 1994 TOTAL 1993 1994
- --------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal, Coke & Ores....... $ 3,514 9.0% $ 2,828 6.6% 15,915 13.8% 12,867 10.8% $ 221 $ 220
Petroleum Products...... 8,202 21.1 8,341 19.4 16,946 14.7 17,186 14.4 484 485
Pulp & Paper............ 4,360 11.2 6,354 14.8 11,789 10.2 17,070 14.3 370 372
Lumber & Forest Prod-
ucts................... 3,208 8.2 4,610 10.7 10,020 8.7 13,711 11.5 320 336
Metals.................. 3,137 8.1 4,862 11.3 13,626 11.8 16,606 14.0 230 293
Chemicals & Plastics.... 2,766 7.1 3,673 8.6 4,446 3.9 5,942 5.0 622 618
Farm & Food Products.... 1,259 3.2 2,112 4.9 3,960 3.4 6,525 5.5 318 324
Autos & Auto Parts...... 1,152 3.0 3,960 9.2 2,206 1.9 6,624 5.6 522 598
Minerals & Stone........ 1,664 4.3 1,860 4.3 5,558 4.8 5,637 4.2 300 369
Salt.................... 5,980 15.3 2,835 6.6 24,525 21.3 10,621 8.9 244 267
Other................... 3,711 9.5 1,550 3.6 6,310 5.5 6,862 5.8 588 226
------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Total.................. $38,953 100.0% $42,985 100.0% 115,301 100.0% 119,051 100.0% $ 338 $ 361
======= ===== ======= ===== ======= ===== ======= ===== ===== =====
</TABLE>

The increase in freight revenues was attributable to a 3.3% increase in
carloads, to 119,051 in 1994 from 115,301 in 1993, combined with a 6.8%
increase in average freight revenues per carload, to $361 in 1994 from $338 in
1993. The increase in carloads occurred despite the collapse of Akzo's salt
mine which significantly decreased production from the mine. The loss of
production was primarily responsible for a 52.6% decrease in the Company's
freight revenues attributable to shipments of salt, to $2.8 million in 1994
from $6.0 million in 1993. See "--Akzo Mine."

Total carloads of commodities other than salt were 108,430 in 1994 compared
to 90,776 in 1993, an increase of 17,654 or 19.4%. Autos and auto parts
shipments increased by 4,418 carloads due to new contracts with Canadian auto
plants and a large short-term movement of finished vehicles diverted to the
Company by another carrier. Pulp and paper shipments increased by 5,281
carloads due to plant expansion and increased production from plants located
on the Company's lines. Shipments of lumber and forest products increased by
3,691

26
<PAGE>

carloads primarily due to a new contract with a paper mill. These increases
were offset by a 3,048 carload decrease in shipments of coal, coke and ores in
1994 compared to 1993 primarily due to lower shipments to a Canadian utility.

Non-freight revenues were $12.4 million in 1994 compared to $10.7 million in
1993, an increase of $1.7 million or 16.3%. Revenues from car hire and car
rentals were $5.2 million in 1994 compared to $4.4 million in 1993, an
increase of $792,000 or 17.8%. The increase was primarily attributable to a
gain on the sale of railcars. Railcar repair revenue was $1.9 million in 1994
compared to $1.5 million in 1993, an increase of $373,000 or 24.3%. This
increase was primarily attributable to the increased volume of freight traffic
in 1994. Other non-freight revenues were $5.3 million in 1994 compared to $4.7
million in 1993, an increase of $579,000 or 12.3%. The increase was primarily
due to higher demurrage and storage charges and easement sales.

Operating revenues per carload were $466 in 1994 compared to $431 in 1993,
an increase of $35 or 8.1%. The increase reflects a $23 increase in average
freight revenues per carload combined with the $1.7 million increase in non-
freight revenues.

Operating Expenses

Operating expenses were $47.4 million in 1994 compared to $43.5 million in
1993, an increase of $3.9 million or 8.9%. The Company's operating ratio
improved to 85.5% in 1994 from 87.6% in 1993.

The following table sets forth a comparison of the Company's operating
expenses in 1993 and 1994:

OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1993 AND 1994

<TABLE>
<CAPTION>
1993 1994
----------------- -----------------
% OF % OF
OPERATING OPERATING
$ REVENUES $ REVENUES
------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Labor and benefits....................... $16,499 33.2% $18,092 32.6%
Equipment rents.......................... 6,726 13.5 8,634 15.6
Purchased services....................... 3,407 6.9 2,737 4.9
Depreciation and amortization............ 3,115 6.3 3,577 6.5
Diesel fuel.............................. 2,788 5.6 3,410 6.2
Casualties and insurance................. 2,446 4.9 2,742 5.0
Materials................................ 3,680 7.4 3,401 6.1
Other.................................... 4,840 9.8 4,788 8.6
------- ---- ------- ----
Total.................................. $43,501 87.6% $47,381 85.5%
======= ==== ======= ====
</TABLE>

Labor and benefits expense was $18.1 million in 1994 compared to $16.5
million in 1993, an increase of $1.6 million or 9.7%. However, labor and
benefits expense decreased as a percentage of operating revenues to 32.6% in
1994 from 33.2% in 1993.

Equipment rents were $8.6 million in 1994 compared to $6.7 million in 1993,
an increase of $1.9 million or 28.3%. Equipment rents increased as a
percentage of operating revenues to 15.6% in 1994 from 13.5% in 1993. The
increase was primarily due to higher car hire costs resulting from the change
in mix of commodities hauled. The Company's railroads pay minimal car hire on
shipments of minerals, which declined from 1993 to 1994, but pay relatively
high car hire fees on shipments of autos and auto parts, which increased from
1993 to 1994.

Purchased services expense was $2.7 million in 1994 compared to $3.4 million
in 1993, a decrease of $670,000 or 19.7%. Purchased services expense decreased
as a percentage of operating revenues to 4.9% in 1994

27
<PAGE>

from 6.9% in 1993. The decrease was attributable to a reduction in contracted
maintenance of way expense and a reduction in repairs performed by third
parties on railcars owned or leased by GWI railroads.

Diesel fuel expense was $3.4 million in 1994 compared to $2.8 million in
1993, an increase of $622,000 or 22.3%. Diesel fuel expense increased as a
percentage of operating revenues to 6.2% in 1994 from 5.6% in 1993. The
increase was caused by an increase in fuel prices and severe winter weather
conditions in 1994.

Other expense was $4.8 million in both 1994 and 1993, but decreased as a
percentage of operating revenues to 8.6% in 1994 from 9.8% in 1993 as a result
of the relatively fixed nature of these expenses. Other expense included
write-offs of other assets of $675,000 and $180,000 in 1994 and 1993,
respectively, both as a result of rail line abandonments.

Interest Expense and Income Taxes

Interest expense was $3.2 million in 1994 compared to $2.9 million in 1993,
an increase of $348,000 or 12.2%. The increase reflects generally higher
interest rates on the Company's debt in 1994. The Company's effective income
tax rate decreased to 40.0% in 1994 from 41.5% in 1993 due to lower state and
other income taxes.

Net Income

The Company's net income in 1994 was $3.0 million compared to net income in
1993 of $1.6 million (or $2.0 million before a cumulative change of accounting
for postretirement benefits of $393,000). Excluding the effect of the
accounting change, net income in 1994 increased $994,000 or 49.3% compared to
1993.

LIQUIDITY AND CAPITAL RESOURCES

During the first three months of 1996, the Company generated cash from
operations of $6.0 million, which includes the effect of a $3.5 million
increase in net trade payables associated with the commencement of operations
of Illinois & Midland. In addition, the Company received $1.6 million in
proceeds from the sale of equipment and invested $970,000 in track and other
fixed assets (apart from its investment in the Illinois & Midland
Acquisition).

During 1995, the Company generated cash from operations of $2.6 million,
generated cash from asset sales of $318,000, received $3.5 million in state
grant funds for track rehabilitation, and had net new borrowings of $6.7
million. During the year the Company invested $8.6 million in equipment and
rolling stock and $8.0 million in track maintenance and buildings.

During 1994, the Company generated cash from operations of $7.3 million and
cash from asset sales of $824,000, and received $1.8 million in state grants
for rehabilitation of track. The cash generated was used to fund $6.2 million
in capital expenditures and to repay a net $2.5 million in long-term debt and
capital leases. Track and track structures accounted for $5.3 million of these
capital expenditures, while the balance was invested in equipment.

The Company has budgeted $7.3 million in capital expenditures in 1996,
primarily for track rehabilitation, of which $970,000 was expended during the
first three months of 1996. In connection with its lease of a rail line, one
of the Company's railroads has committed to install a minimum of five miles of
100 lb. rail or better in each of the next five years at an estimated total
cost of approximately $5.0 million. As of December 31, 1995, the Company had
completed approximately $1.0 million of this rehabilitation. The cost of this
obligation for 1996, $1.2 million, is included in the 1996 capital budget.

In June 1995, the Company borrowed under the Credit Facilities to
restructure a majority of its long-term debt and finance the purchase of rail
equipment. The Company repaid $14.3 million in debt maturing at various dates
between 1996 and 2001 and bearing interest rates ranging from 6.75% to 15.0%
per annum, including the repayment of $701,000 in debt held by or for the
benefit of directors and officers of the Company and members of their
respective families. See "Certain Transactions." The Company borrowed $6.0
million under the Credit Facilities to purchase rolling stock which had been
under an operating lease.

At March 31, 1996, the Company had long term debt (including current
portion) totaling $66.2 million, which comprised 84.7% of its total
capitalization. This compares to long term debt of $39.9 million, comprising

28
<PAGE>

79.1% of total capitalization at December 31, 1995, and long term debt of
$32.6 million, comprising 78.2% of total capitalization, at December 31, 1994.

In February 1996, the Company amended and restated its Credit Facilities to
provide funding for the Illinois & Midland and Pittsburg & Shawmut
Acquisitions. As amended, the Credit Facilities include a $40.0 million term
loan and a $34.0 million revolving credit facility. The term loan requires
varying quarterly principal payments beginning September 30, 1996, with the
remaining balance payable in February 2001. The revolving credit facility
provides for a mandatory commitment reduction of $2.0 million on December 31,
1997 with the remaining balance payable in February 2001. The interest rate on
the facilities is a varying increment over the Bank of Boston's prime rate or
LIBOR, based on the Company's ratio of debt to EBITDA. The Credit Facilities
are secured by a blanket first-priority lien on all of the Company's railroad
assets except real estate, and a pledge of all capital stock of the Company's
subsidiaries. In conjunction with the financing, the Company paid a fee to the
Bank of Boston of $1.5 million and issued the Bank Warrant. See "Description
of Capital Stock--Bank Warrant."

The Company's railroads have entered into a number of rehabilitation grants
with state and federal agencies. The grant funds are used as a supplement to
the Company's normal capital programs. In return for the grants, the railroads
pledge to maintain various levels of service and maintenance on the rail lines
that have been rehabilitated. The Company believes that the levels of service
and maintenance required under the grants are not materially different from
those that would be required without the grant obligation. While the Company
has benefited in recent years from these grant funds, there can be no
assurance that the funds will continue to be available.

The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditures relating to
ongoing operations, while relying on borrowed funds to finance acquisitions
and equipment needs (primarily rolling stock) related to acquisitions. The
Company believes that its cash flow from operations together with available
amounts under the Credit Facilities will enable the Company to meet its
liquidity and capital expenditure requirements relating to ongoing operations
for at least the next four years.

INFLATION

In recent years, inflation has not had a significant impact on the Company's
operations. The Company's contracts with connecting carriers typically include
clauses that adjust the rates based on specific inflation factors.

SEASONALITY

Historically, the Company's operating revenues from existing operations have
not been subject to significant seasonal changes.

ACCOUNTING MATTERS

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The cumulative effect of the accounting change
resulted in an after-tax charge to 1993 earnings of $393,000. The Company does
not provide postemployment benefits to its employees. Accordingly, the
adoption of Statement of Financial Accounting Standards No. 112 "Employers'
Accounting for Postemployment Benefits" will have no effect on the Company.

The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (effective for fiscal years beginning after December 15,
1995), in the first quarter of 1996. The adoption did not have a material
impact on the Company.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" (effective for fiscal years beginning after December 15,
1995) encourages, but does not require, employers to adopt a fair value method
of accounting for employee stock-based compensation, and requires increased
stock-based compensation disclosures if the fair value method is not adopted.
The Company does not intend to elect the fair value method for stock options.
Accordingly, implementation of this Statement will have no effect on the
Company's operating results or financial condition.

29
<PAGE>

BUSINESS

The Genesee and Wyoming Railroad Company, the Company's predecessor, was
founded in 1899 by E.L. Fuller and his partners. From its founding through
1977, the Company was dependent on a single commodity, salt, produced by a
single customer. In 1977, when Mortimer B. Fuller, III purchased a controlling
interest in the Company and became its Chief Executive Officer, the Company
generated $3.9 million in operating revenues over its 14 miles of track. In
1978, under the leadership of Mr. Fuller, the Company began a strategy of
diversifying its sources of revenues, initially in the railcar leasing
business and then through rail line acquisitions. As a result of the Company's
acquisition and marketing strategies, the Company has become a diversified
rail operation extending over approximately 1,500 miles of track and serving
over 280 customers in six states. In 1995, the Company generated $53.4 million
in operating revenues.

INDUSTRY OVERVIEW

The railroad industry in the United States has undergone significant change
since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"),
which deregulated the pricing and types of services provided by railroads.
Since 1980, Class I railroads in the United States and Canada have taken
aggressive steps to improve profitability and recapture market share. In
furtherance of that goal, these Class I railroads have focused their
management and capital resources on their long-haul core systems, and certain
of them have sold branch lines to smaller and more cost-efficient rail
operators that are willing to commit the resources necessary to meet the needs
of the shippers located on these lines. Divestment of branch lines enables
Class I carriers to minimize incremental capital expenditures, concentrate
traffic density, improve operating efficiency and avoid traffic losses
associated with rail line abandonment.

The commitment of Class I carriers to increase efficiency and profitability
has also led to an increase in merger activity among long haul railroads, such
as the mergers between Union Pacific Corporation and Chicago and North Western
Holdings Corp. and between Burlington Northern Inc. and Santa Fe Pacific
Corporation, and the pending merger between Union Pacific Corporation and
Southern Pacific Rail Corporation. Such merger activity is expected to lead to
additional short line divestments, as overlapping routes are sold and the
merged railroads seek to achieve operational synergies.

The Company believes that there will continue to be opportunities to acquire
lines from Class I railroads in the United States and that there may be
opportunities to make acquisitions among the over 500 existing short line and
regional railroads. The Company believes there may be acquisition
opportunities in Canada and Mexico as well, although governmental regulations
may limit acquisition opportunities in these countries. Both Canadian National
Railway Company and Canadian Pacific Limited have divestment programs, and
Mexico has announced a privatization program of the National Railroad of
Mexico which could include the disposition of rail lines.

Since 1980, more than 300 short line and regional railroads, operating
approximately 36,500 miles of track, have been created, largely through
divestments and other dispositions of track by Class I railroads. Reflecting
the downsizing and operations rationalization that has been occurring among
the Class I railroads, the proportion of total track miles operated by short
line and regional railroads in the United States has increased from
approximately 15% of total track miles in 1980 to approximately 27% in 1994
(the latest year for which information is available).

STRATEGY

The Company's strategy is to become the dominant provider of rail freight
transportation in the markets it serves by (i) growing its business through
acquisitions to establish new regions or increase its presence in existing
regions, (ii) expanding its revenue base within each region through marketing
efforts, and (iii) improving its operating efficiency through rationalization
and consolidation of overhead expenses. The Company's growth to date has been
the result of the acquisition of rail properties, which has expanded the
Company's customer base and diversified its commodity mix, and its marketing
efforts. The Company intends to continue to grow its business in each of its
four regions and to acquire rail properties in new regions to build on its
experience and further diversify its geographic and customer base.

30
<PAGE>

Acquisition of Rail Properties

The Company seeks to expand its business through the selective acquisition
of rail properties, both in new regions and in regions in which it currently
operates. The Company's fundamental acquisition strategy is to identify
properties that have large industrial customers which will provide the Company
with a stable revenue base and the potential to generate incremental revenues
and additional customers upon implementation of a focused marketing plan. In
new regions, the Company targets rail properties that have adequate size to
establish a presence in the region, provide a basis for growth in the region
and attract qualified management. When acquiring rail properties in its
existing regions, in addition to seeking properties with large industrial
customers, the Company targets rail properties where it believes the
successful implementation of its operating strategy is likely to generate
significant operating efficiencies.

In evaluating acquisition opportunities, the Company considers, among other
matters, the size of the rail operations, opportunities for expansion,
commodity and customer diversification, revenue stability, connecting
carriers, track condition and maintenance requirements, and expected financial
returns. The Company also considers acquisition opportunities that have the
potential to enable its railroads to provide better or more cost-effective
service to major shippers or to increase and diversify the overall customer
base of its railroads. The Company develops acquisition prospects through its
relationships with Class I carriers and its reputation in the industry. In
addition, the Company currently has four consultants on retainer to assist in
the identification and development of acquisition opportunities. The Company
has successfully integrated eleven acquisitions of varying sizes and operating
characteristics, of which four were existing short lines and seven were Class
I divestitures.

The Company acquires rail properties by purchase of assets, lease or
operating contract. Typically, the Company bids against other short line and
regional operators for available properties. The structure of each transaction
is determined by the seller based upon economic and strategic considerations.
In addition to the financial terms of the transaction, sellers consider more
subjective criteria such as a prospective acquiror's operating experience, its
reputation among shippers, and its ability to close a transaction and commence
operations smoothly. The Company believes it has established an excellent
record in each of these areas. In addition, by growing revenues on its
acquired lines and providing improved service to shippers, the Company is able
to provide increased revenue to the Class I carriers that connect with its
lines. The Company sees this ability to provide increased revenue to Class I
carriers as an advantage in bidding for properties.

Marketing

The Company's marketing strategy is to build each region on a base of major
industrial customers, to grow that base business through marketing efforts
directed at its major customers and to generate incremental revenues outside
the base of major customers by attracting smaller customers and providing
ancillary services which generate non-freight revenues. The Company believes
that over the long term, its strategy of building its regions around a core of
major industrial customers provides a stable revenue base and allows the
Company to focus its efforts on additional growth opportunities within a
region. Of the 13 customers that generated freight revenues in excess of $1
million in 1995, all but two depend exclusively on the Company for rail
service to support their facilities, and the Company believes that each of
these facilities is strategically important to the respective customers. While
the other two customers are not dependent on the Company, the Company's
railroads provide the best route for them to move their products by rail.
Through implementation of its marketing strategy, the Company intends to
increase further the number of major customers so that, over time, the
Company's reliance on any one customer will be reduced.

Consistent with its decentralized management structure, the Company's sales
and marketing activity is coordinated in each region by a marketing manager.
The marketing manager works closely with personnel of each of the Company's
railroads and with other department heads to develop marketing plans to
increase shipments from existing customers and develop new business. The
Company focuses on providing rail service to its customers that is easily
accessible, reliable and cost-effective. The Company considers all of its
employees to be customer service representatives and encourages them to
initiate and maintain regular contact with shippers.

31
<PAGE>

Because most of the traffic transported by the Company's railroads is
interchanged with Class I carriers, the Company's marketing efforts are often
aimed at enhancing its railroads' relationships with Class I carriers as well
as shippers. The Company provides related rail services such as railcar
leasing, railcar repair, switching, storage, weighing and blocking and bulk
transfer, which enable Class I carriers and customers to move freight more
easily and cost-effectively. For example, the Company supplies cars to its
customers or its railroads when, among other things, a customer has a need
which cannot be filled by cars supplied by Class I railroads or the Company
has an opportunity to provide cars on a cost basis that both meets customer
needs and improves the economics of a freight move to the Company. The Company
actively manages its railcar portfolio, buying and selling equipment to take
advantage of changes in market value in conjunction with changes in its
customers needs.

Operations

The Company's operating strategy is to increase efficiency and profitability
in each region in which it operates. When acquiring new rail properties within
an existing region, the Company capitalizes on operating efficiencies created
by the presence of its other railroads within that region. For example, in
connection with the Pittsburg & Shawmut Acquisition, the Company will be able
to liquidate 42 miles of track and sell a number of locomotives and railcars.
In addition, consolidation of revenue and accounting functions often allows
the Company to operate new railroads with fewer employees, as was the case
with both the Illinois & Midland and Pittsburg & Shawmut Acquisitions. The
Company rationalizes its track, where appropriate, to make its operations more
efficient. Abandonments are planned on Buffalo & Pittsburgh, Louisiana & Delta
and Pittsburg & Shawmut in 1996 and 1997. The Company also seeks and grants
trackage rights to improve regional rail infrastructure efficiency.

The Company intends to continue to improve the operating efficiency of its
railroads by track rehabilitation, especially where maintenance has been
deferred by the prior owner. Because of the importance of certain of the
Company's shippers to the economic stability and or development of the regions
where they are located, and because of the importance of certain of the
Company's railroads to the economic infrastructure of those regions,
approximately $17.5 million in state and federal grants for track
rehabilitation and service improvements has been invested in the Company's
rail properties since 1987.

RAILROAD OPERATIONS

Management

The Company's decentralized management structure is an important element of
its railroad operations. The Company's Chief Executive Officer and Chief
Financial Officer have responsibility for overall strategic and financial
planning. Significant operational discretion is given to local management of
the Company's railroads, with each regional Senior Vice President responsible
for implementing a strategic plan for the region based on annual budgets,
quarterly reviews and incentive compensation tied to results. Regional Senior
Vice Presidents and local managers also have specific operational objectives
for continuous improvement such as reducing car hire expense or on-the-job
lost time injuries. The plan for each region is updated annually and
constitutes a basis for incentive compensation. Each railroad is given
significant freedom in pricing, staffing, purchasing, marketing and
operations, enabling the railroad's management to be more responsive to
customer needs and emerging business opportunities. Managers from all regions
meet periodically to discuss operational matters such as marketing, safety and
locomotive acquisition and maintenance. Senior management of the Company also
meets monthly to review each railroad's operations.

The Company believes that through its decentralized management structure it
has developed a culture that encourages employees to take initiative and
responsibility which is rewarded through performance-based profit sharing and
bonus programs.

Customers

The Company's railroads serve over 280 customers in its four operating
regions. Through 1995, the Company's largest customer was Akzo, which
accounted for approximately 20% of operating revenues in 1993,

32
<PAGE>

12% in 1994 and 9% in 1995. Since 1994, revenues from Akzo have been
negatively affected by the flooding of the Akzo mine. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Akzo
Mine." As a result of the Illinois & Midland Acquisition, the Company
anticipates that its largest customer in 1996 will be ComEd. The Company's ten
largest customers accounted for 50% of operating revenues in 1995. These same
ten customers accounted for 51.6% of operating revenues in 1994. Assuming
continuation of the Company's acquisition strategy, management expects the
Company's reliance on any one customer to diminish over time. The Company
typically ships freight pursuant to transportation contracts among the
Company, its connecting carriers and the shipper. These contracts are in
accordance with industry norms and vary in duration from one to seven years.

In recent years, the Company has benefited from the expansion of customers'
facilities on its railroads. For example, Willamette Industries recently
completed a $600 million expansion of its paper mill in Johnsonburg,
Pennsylvania, which contributed to a $1.6 million increase in freight revenues
from 1993 to 1995. A $98 million expansion at Armco Advanced Materials
Company's Butler, Pennsylvania plant contributed to an increase in freight
revenues from Armco of $478,000 from 1993 to 1995.

Certain other customers have recently made or announced capital expansions
at facilities served by the Company's railroads. Georgia Pacific's pulp and
paper mill in Toledo, Oregon is undergoing a $100 million expansion that will
increase capacity by 300 tons per day and also increase the input of raw
materials. In 1995, Cascade Rolling Mills in McMinnville, Oregon began a two-
phased investment of $42 million to construct and install a new wire rod and
bar mill designed to roll an additional 500,000 tons per year. The Company
believes it is well-positioned to realize an increase in freight revenues from
these plant expansions. There can be no assurance, however, that these plant
expansions, or the Company's marketing efforts, will lead to increased freight
revenues.

Commodities

The Company's railroads transport a wide variety of commodities for their
customers. Some of the Company's railroads have a well-diversified commodity
mix while others transport one or two principal commodities. In 1995, pulp and
paper and petroleum products were the two largest commodity groups transported
by the Company's railroads, constituting 15.7% and 14.8%, respectively, of
total carloads. On a pro forma basis after giving effect to both the Illinois
& Midland Acquisition and the Pittsburg & Shawmut Acquisition, coal accounted
for approximately 39.5% of total carloads in 1995. In 1996, the Company
expects that coal will be the largest commodity transported by the Company's
railroads as a result of the Illinois & Midland and Pittsburg & Shawmut
Acquisitions. The following table summarizes the aggregate traffic volume of
the Company's railroads by commodity group:

CARLOADS CARRIED BY COMMODITY GROUP

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
------------------- ------------------- -------------------
COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL
- --------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Coal, Coke & Ores....... 12,867 10.8% 12,398 10.5% 11,941 30.3%
Pulp & Paper............ 17,070 14.3 18,667 15.7 4,772 12.1
Metals.................. 16,606 14.0 17,014 14.3 4,715 12.0
Petroleum Products...... 17,186 14.4 17,559 14.8 4,542 11.6
Lumber & Forest Prod-
ucts................... 13,711 11.5 14,022 11.8 4,123 10.5
Farm & Food Products.... 6,525 5.5 5,778 4.9 2,282 5.8
Chemicals & Plastics.... 5,942 5.0 6,641 5.6 1,841 4.7
Autos & Auto Parts...... 6,624 5.6 6,381 5.4 1,463 3.7
Minerals & Stone........ 5,037 4.2 4,189 3.5 915 2.3
Salt.................... 10,621 8.9 7,865 6.6 388 1.0
Other................... 6,862 5.8 8,159 6.9 2,363 6.0
------- ----- ------- ----- ------ -----
Total................. 119,051 100.0% 118,673 100.0% 39,345 100.0%
======= ===== ======= ===== ====== =====
</TABLE>

33
<PAGE>

Coal, coke and ores consist primarily of shipments of coal to utilities and
industrial customers.

Pulp and paper consist primarily of inbound shipments of pulp and outbound
shipments of kraft and fine papers.

Metals consist primarily of scrap metal and finished steel products shipped
to and from two steel mills, and coated pipe.

Petroleum products consist primarily of fuel oil and crude oil.

Lumber and forest products consist primarily of finished lumber used in
construction, particleboard used in furniture manufacturing, and wood chips
and pulpwood used in paper manufacturing.

Farm and food products consist primarily of sugar, molasses, rice and other
grains and fertilizer.

Chemicals and plastics consist primarily of various chemicals used in
manufacturing.

Autos and auto parts consist primarily of finished automobiles.

Minerals and stone consist primarily of gravel and stone used in
construction.

Salt consists of mined rock salt used for roadway ice control.

Rail Traffic

Rail traffic is classified as on-line or overhead traffic. On-line traffic
is traffic that either originates or terminates with shippers located on a
railroad and is interchanged with another rail carrier. On-line traffic that
both originates and terminates on a railroad is referred to as local traffic.
Overhead traffic neither originates nor terminates on a railroad, but rather
passes over a railroad from one connecting carrier to another.

The Company believes that on-line shipments provide it with a stability of
revenues because such traffic represents shipments to or from shippers located
along its lines which cannot easily be diverted to other rail carriers. While
overhead traffic is more easily diverted, it is less costly to handle. To
offset the potential for diversion of overhead traffic, the Company has sought
long-term contracts, based on a percentage of the shipper's annual rail
volume, on its significant overhead traffic. In 1995, approximately two-thirds
of GWI's overhead traffic was transported under such multi-year contracts. In
1995, 12.8% of freight revenues was generated by overhead traffic. On a pro
forma basis after giving effect to both the Illinois & Midland Acquisition and
the Pittsburg & Shawmut Acquisition, approximately 9.0% of freight revenues
was generated by overhead traffic in 1995.

The following table summarizes freight revenues by type of traffic carried
by the Company's railroads.

FREIGHT REVENUES BY TRAFFIC TYPE

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS
DECEMBER 31, 1994 DECEMBER 31, 1995 ENDED MARCH 31, 1996
------------------ ------------------ ---------------------
% OF % OF % OF
TRAFFIC TYPE AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------ --------- -------- --------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
On-line
Originated............ $ 18,784 43.7% $ 16,770 39.6% $ 3,862 29.8%
Terminated............ 16,504 38.4 17,104 40.4 6,836 52.8
Local................. 1,964 4.6 3,068 7.2 1,035 8.0
--------- ------- --------- ------- ----------- ---------
Total On-line....... 37,252 86.7 36,942 87.2 11,733 90.6
Overhead................ 5,733 13.3 5,410 12.8 1,221 9.4
--------- ------- --------- ------- ----------- ---------
Total Traffic....... $ 42,985 100.0% $ 42,352 100.0% $ 12,954 100.0%
========= ======= ========= ======= =========== =========
</TABLE>

34
<PAGE>

Safety

GWI's safety program involves all employees and focuses on the prevention of
accidents and injuries. The Senior Vice President of each region is
accountable for the results of the program, and each has an officer
responsible for day-to-day program administration. Line supervisors have
direct responsibility for the safety and training of their personnel.

The Company maintains a corporate-wide safety policy facilitated by a full-
time Safety Director. The Company's safety program also gives each railroad
the flexibility to develop its own safety rules based on local requirements or
practices. Each railroad complies fully with all federal, state and local
government regulations. Operating personnel are trained and certified in train
operations, hazardous materials handling, proper radio procedures and all
other areas subject to governmental rules and regulations.

The Company also participates in governmental and industry sponsored safety
programs. Members of the Company's management serve on the Board of Directors
of Operation Lifesaver (the national grade crossing awareness program), the
New Program Committee of Operation Lifesaver and the American Short Line
Railroad Association Safety Committee. In addition, the Company has a "working
team" consisting of the safety officers from each railroad. This team is
charged with ongoing development and refinement of the Company's safety
program and coordination with each railroad to insure compliance with and
implementation of all safety rules and regulations.

Employees

As of May 31, 1996, the Company had 484 full-time employees, 88 of whom were
hired in 1996 in connection with the Illinois & Midland and Pittsburg &
Shawmut Acquisitions. Of this total, 146 are members of national labor
organizations, including 52 employees hired in connection with the Illinois &
Midland Acquisition. The Company has seven contracts with these national labor
organizations which have expiration dates ranging from August 1997 to June
1999. The Company has also entered into collective bargaining agreements with
an additional 61 employees who represent themselves, all of which expire in
1999.

In March 1994, approximately 40 employees of one of the Company's railroads
began an illegal work stoppage to protest the use of management on train
crews. A temporary restraining order was issued and the underlying dispute was
subsequently resolved in arbitration. The work stoppage did not have a
material effect on the Company's operations and the Company believes the work
stoppage has not had an adverse effect on its overall employee relations. The
Company has not experienced any other strikes or work stoppages for over 20
years. The Company believes that its railroads' relations with their employees
are good.

INSURANCE

The Company has obtained for each of its railroads insurance coverage for
losses arising from personal injury and for property damage in the event of
derailments or other accidents or occurrences. The liability policies have
self-insured retentions ranging from $25,000 to $250,000 per occurrence. In
addition, the Company maintains an excess liability policy which provides
supplemental coverage for losses in excess of primary policy limits. With
respect to the transportation of hazardous commodities, the Company's
liability policy covers sudden releases of hazardous materials, including
expenses related to evacuation. Personal injuries associated with grade
crossing accidents are also covered under the Company's liability policy. The
Company also maintains all-risk property damage coverage, subject to a
standard pollution exception and self-insured retentions ranging from $10,000
to $250,000.

Employees of the Company's railroads are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths
of railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims
are covered under the Company's liability insurance policies.

35
<PAGE>

The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, there can be no
assurance as to the adequacy, availability or cost of insurance in the future.
See "Risk Factors--Liability for Casualty Losses."

COMPETITION

In acquiring rail properties, the Company competes with other short line and
regional railroad operators, some of which are larger and have greater
financial resources than the Company. Competition for rail properties is based
primarily upon price, operating history and financing capability. The Company
believes its established reputation as a successful acquiror and operator of
short line rail properties, in combination with its managerial and financial
resources, effectively positions it to take advantage of future acquisition
opportunities. See "--Strategy--Acquisition of Rail Properties."

Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a lesser
extent, ship and barge operators. The extent of this competition varies
significantly among the Company's railroads. Competition is based primarily
upon the rate charged and the transit time required, as well as the quality
and reliability of the service provided, for an origin-to-destination
transportation package. To the extent other carriers are involved in
transporting a shipment, the Company cannot control the cost and quality of
such service. Cost reductions achieved by major rail carriers over the past
several years have generally improved their ability to compete with alternate
modes of transportation.

REGULATION

The Company's railroads are subject to regulation by the STB, the FRA, state
departments of transportation and some state and local regulatory agencies.
The STB is the successor to certain regulatory functions previously
administered by the Interstate Commerce Commission. Established by the ICCTA
in 1995, the STB has jurisdiction over, among other things, service levels and
compensation of carriers for use of their railcars by other carriers. It also
must authorize extension or abandonment of rail lines, the acquisition of rail
lines, and consolidation, merger or acquisition of control of rail common
carriers; in limited circumstances, it may condition such authorization upon
the payment of severance benefits to affected employees. The STB may review
rail carrier pricing only in response to a complaint concerning rates charged
for transportation where there is an absence of effective competition. The FRA
has jurisdiction over safety and railroad equipment standards and also assists
in coordinating projects for railroad route simplification.

In 1980, the Staggers Rail Act fundamentally changed federal regulatory
policy by emphasizing the promotion of revenue adequacy (the opportunity to
earn revenues sufficient to cover costs and attract capital) for the railroads
and allowing competition to determine to a greater extent rail prices and
route and service options. The ICCTA continues the trend towards limiting
regulation of rail prices. As a result of these changes in legislative policy,
the railroad industry's rate structure has evolved from a system of
interrelated prices that applied over different routes between the same points
to a combination of market based prices that are now subject to limited
regulatory constraints. While federal regulation of rail prices has been
significantly curtailed, federal regulation of services continues to affect
profitability and competitiveness in the railroad industry.

To date, the most significant impact on the Company of the federal and state
regulatory schemes has been the delays and costs associated with protracted
abandonment proceedings and the legal costs associated with acquisition
proceedings. Although the ICCTA purports to aim at eliminating or reducing
such costs, the ICCTA has not been in effect long enough to determine if it
will be successful in this regard. In reducing regulation an effect of the
ICCTA may be diminished regulatory recourse for small railroads which
negatively affects their competitive position with their Class I connections.

36
<PAGE>

ENVIRONMENTAL MATTERS

The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. These environmental laws and regulations, which
are implemented principally by the Environmental Protection Agency and
comparable state agencies, govern the management of hazardous wastes, the
discharge of pollutants into the air and into surface and underground waters,
and the manufacture and disposal of certain substances. There are no material
environmental claims currently pending or, to the Company's knowledge,
threatened against the Company or any of its railroads. In addition, the
Company believes that the operations of its railroads are in material
compliance with current laws and regulations. The Company estimates that any
expenses incurred in maintaining compliance with current laws and regulations
will not have a material effect on the Company's earnings or capital
expenditures. However, there can be no assurance that the current regulatory
requirements will not change, or that currently unforeseen environmental
incidents will not occur, or that past non-compliance with environmental laws
will not be discovered on the Company's properties.

LEGAL PROCEEDINGS

The Company currently has no claims or legal actions pending other than
claims arising in the ordinary course of its business. The Company believes
these claims, taking into account reserves and applicable insurance, will not
have a material adverse effect on the Company.

37
<PAGE>

PROPERTY

The Company currently operates twelve railroads in six states, of which nine
are owned, two are leased and one is operated under an operating agreement.
The Company's railroads own or lease 1,236 miles of track and operate over an
additional 270 miles pursuant to trackage rights and haulage contracts. These
rail properties typically consist of the track and the underlying land. Real
estate adjacent to the railroad rights-of-way is generally retained by the
seller, and the Company's holdings of such property are not material.
Similarly, the seller typically retains mineral rights and rights to grant
fiber optic and other easements in the properties acquired by the Company's
railroads.

The following table sets forth certain information with respect to the
Company's railroads:

<TABLE>
<CAPTION>
TRACK CONNECTING
RAILROAD AND LOCATION MILES STRUCTURE CARRIERS(1)
- --------------------- ----- --------- -----------
<S> <C> <C> <C>
Allegheny & Eastern Railroad,
Inc. ("ALY")................ 153 (2) Owned BPRR, CR
Pennsylvania
Bradford Industrial Railroad,
Inc. ("BR")................. 4 (3) Owned BPRR, CR
New York, Pennsylvania
Buffalo & Pittsburgh Rail-
road, Inc. ("BPRR")......... 279 (4) Owned/Leased ALY, BLE, BR, CN,
New York, Pennsylvania CPRS, CR, CSX, NS,
The Dansville & Mount Morris PS, RSR, SB
Railroad Company ("DMM").... 8 Owned GNWR
New York
Genesee and Wyoming Railroad
Company ("GNWR")............ 26 (5) Owned (5) CPRS, CR, DMM, RSR
New York
Pittsburg & Shawmut Railroad,
Inc. ("PS")................. 224 (6) Owned BPRR, CR
Pennsylvania
Rochester & Southern Rail-
road, Inc. ("RSR").......... 66 (7) Owned BPRR, CPRS, CR,
New York GNWR, NS
Illinois & Midland Railroad,
Inc. ("IMR")................ 97 (8) Owned BNSF, CR, GWWR,
Illinois IAIS, IC, KJRY, NS,
Portland & Western Railroad, PPU, SP, TPW, UP
Inc. ("PNWR")............... 107 (9) Leased BNSF, SP, WPRR,
Oregon POTB
Willamette & Pacific Rail-
road, Inc. ("WPRR")......... 185 (10) Leased SP, PNWR
Oregon
Louisiana & Delta Railroad,
Inc. ("LDRR")............... 87 (11) Owned/Leased SP
Louisiana
GWI Switching Services, L.P.
("GWSW").................... 0 (12) Operating Agreement SP
Texas
</TABLE>
- --------
(1) See Legend of Connecting Carriers following this table.
(2) In addition, ALY operates by trackage rights over 3 miles of CR.
(3) In addition, BR operates by trackage rights over 14 miles of BPRR.
(4) Includes 92 miles under perpetual leases and 9 miles under a lease
expiring in 2090. In addition, BPRR operates by trackage rights over 27
miles of CSX under an agreement expiring in 2018.
(5) Track has been conveyed to a county industrial development agency and
leased back to GNWR. In addition, GNWR operates by trackage rights over
an aggregate of 49 miles of RSR.
(6) In addition, PS operates over 13 miles pursuant to an operating contract.
(7) In addition, RSR has a haulage contract over 52 miles of CP.
(8) In addition, IMR operates by trackage rights over 15 miles of IC, 9 miles
of PPU and 5 miles of UP.
(9) In addition, PNWR operates by trackage rights over 2 miles of SP and 4
miles of POTB.
(10) All under lease expiring in 2013, with renewal options subject to both
parties' consent. In addition, WPRR operates over 41 miles of SP under a
concurrent trackage rights agreement.
(11) Includes 14 miles under a lease expiring in 2011. In addition, LDRR
operates by trackage rights over 91 miles of SP under an agreement
terminable by either party after 1997 and has a haulage contract with
M.A. Patout & Sons over 4 miles of track.
(12) GWSW operates via trackage rights over 5 miles of SP.

38
<PAGE>

LEGEND OF CONNECTING CARRIERS

<TABLE>
<S> <C>
BLE Bessemer and Lake Erie Railroad Company
BNSF Burlington Northern Santa Fe Corp.
CN Canadian National
CPRS CP Rail Systems
CR Consolidated Rail Corporation
CSX CSX Transportation, Inc.
GWWR Gateway Western Railway
IAIS Iowa Interstate Railroad, Ltd.
IC Illinois Central Railroad Company
</TABLE>
<TABLE>
<S> <C>
KJRY Keokuk Junction Railway
NS Norfolk Southern Corp.
POTB Port of Tillamook Bay Railroad
PPU Peoria & Pekin Union Railway
SB South Buffalo Railway Company
SP Southern Pacific Transportation Company
TPW Toledo, Peoria & Western Railway Corp.
UP Union Pacific Railroad Company
</TABLE>

The following is a description of each of the twelve railroads operated by
the Company:

Allegheny & Eastern Railroad, Inc.

In 1992, ALY acquired from International Paper 153 miles of track between
Erie and Emporium, Pennsylvania. Connections are made with CR at Erie and
Emporium, Pennsylvania and with BPRR at Johnsonburg, Pennsylvania. Traffic in
1995 totaled 5,769 carloads, which included petroleum products, pulpwood, wood
pulp, chemicals and paper. In addition, a CR unit train operates over ALY
between International Paper plants in Lock Haven and Erie, Pennsylvania.

Bradford Industrial Railroad, Inc.

In 1992 BR acquired 4 miles of track running from East Bradford to Bradford,
Pennsylvania and 14 miles of trackage rights from Bradford to Salamanca, New
York, where BR connects with CR and BPRR. Traffic in 1995 totaled 722 carloads
which included paper products, petroleum products and plastics.

Buffalo & Pittsburgh Railroad, Inc.

BPRR purchased and leased 365 miles of track and obtained 27 miles of
trackage rights from CSX in 1991. BPRR conveyed its interest in the 26-mile
Clearfield Branch to CR in 1992. In 1993, BPRR discontinued service over the
60-mile Indiana Branch leased from CSX. BPRR connects with every Class I
railroad in the eastern United States and Canada. In 1995, BPRR handled 49,057
carloads. Principal commodities included aggregates, automobiles, chemicals,
coal, petroleum products, lumber, paper products and steel.

The Dansville & Mount Morris Railroad Company

DMM operates 8 miles of track from a connection with GNWR at Groveland, New
York to Dansville, New York, where it serves the Foster Wheeler Energy
Corporation. In 1995, DMM handled 21 carloads of steel and machinery. DMM was
acquired in 1985. In 1988, its 60-90 lb. rail was replaced with 131 lb.
continuous welded rail.

Genesee and Wyoming Railroad Company

GNWR commenced operations in 1899. The 26-mile GNWR mainline runs from
Groveland, New York to P&L Junction in Caledonia, New York. In addition, GNWR
operates via trackage rights over 49 miles of RSR to interchange with CR in
Rochester, New York. GNWR also interchanges with CPRS at Silver Springs, New
York. The principal commodity handled by GNWR is rock salt for snow and ice
control. Traffic in 1995 totaled 7,741 carloads and was negatively affected by
the collapse and closure of the Akzo mine. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Akzo Mine."

Pittsburg & Shawmut Railroad, Inc.

The assets of PS were acquired on April 29, 1996. See "Recent Developments."
PS operates over 237 miles of track in western Pennsylvania, connecting with
BPRR in three locations and CR. Coal is the primary commodity hauled by PS.

39
<PAGE>

Rochester & Southern Railroad, Inc.

The 93-mile RSR mainline and 6 miles of branch lines between Ashford and
Rochester, New York were acquired from CSX in 1986. RSR abandoned 33 miles
between Silver Springs and Machias, New York in 1991, leaving 60 miles of
mainline. RSR interchanges with CR at Rochester and Silver Springs, with CPRS
at Silver Springs, with GNWR at P&L Junction and with BPRR in Buffalo, New
York via a haulage contract with CPRS. Traffic in 1995 totaled 4,290 carloads
which included fuel oil, chemicals, coal, lumber and auto parts.

Illinois & Midland Railroad, Inc.

The assets of IMR were acquired on February 8, 1996. See "Recent
Developments." IMR is headquartered in Springfield, Illinois and operates
between Taylorville and Peoria, Illinois over 97 miles of owned track, 15
miles of trackage rights over IC, 9 miles of trackage rights over PPU and 5
miles of trackage rights over UP. IMR handles principally coal to two ComEd
power plants. IMR connects with BNSF, CR, GWWR, IAIS, IC, KJRY, NS, PPU, SP,
TPW and UP and with the Illinois River through an unloading facility owned by
ComEd and operated by IMR at Havana, Illinois. Coal is the primary commodity
hauled by IMR.

Portland & Western Railroad, Inc.

PNWR acquired by lease 53 miles of SP's remaining Oregon branch lines on
August 18, 1995. The lease runs for 20 years with a 10-year renewal unless
terminated by either party. PNWR has trackage rights from Willsburg Junction,
Oregon to interchange with SP at Brooklyn Yard in Portland. On October 1, 1995
PNWR leased 54 miles of BNSF's former Oregon Electric subdivision for three
years with three-year renewals subject to termination by either party. PNWR
also interchanges with BNSF at Brooklyn Yard. In the last five months of 1995,
PNWR handled 3,753 carloads comprised principally of lumber and grain.

Willamette & Pacific Railroad, Inc.

In 1993 WPRR acquired, under a 20-year lease with renewal options subject to
both parties' consent, 185 miles of SP's Westside Branches between Portland
and Eugene, Oregon. WPRR operates under a trackage rights agreement over 41
miles of SP from Albany, Oregon to interchange with SP at Eugene Yard. Traffic
in 1995 totaled 35,281 carloads. Major commodities shipped on WPRR include
paper, newsprint, wood chips, lumber, steel, grain, scrap steel, fertilizer
and grass seed.

Louisiana & Delta Railroad, Inc.

In 1987 LDRR purchased and leased certain SP branch lines between Raceland
and New Iberia, Louisiana. Seven separate branches total 92 miles and are
connected by 93 miles of trackage rights over the SP mainline. Service to an
eighth branch, acquired by a shipper, began in 1989. LDRR handled 12,039
carloads in 1995. Principal commodities carried by LDRR are carbon black,
sugar and molasses, pipe, plastics, rice, salt and paper products.

GWI Switching Services, L.P.

GWSW began operation of a Dayton, Texas plastic pellet car storage yard in
1994 under a long-term contract. The yard was completed in December 1995 and
has capacity to hold 3,000 cars. The yard is located on over 100 acres along
SP's Baytown branch and contains over 50 miles of track. GWSW operates over 5
miles of SP under trackage rights to move the cars to and from the storage
yard and SP's Dayton rail yard. The yard has capacity to be expanded, at SP's
option, to hold approximately 4,500 cars.

TRACK CONDITION

The Company's railroads conduct freight operations on 1,506 miles of track.
Of this total, 829 miles of track are owned by the Company's railroads, 407
miles of track are leased and the Company operates over 202 miles of track
pursuant to trackage rights agreements. In addition, the Company has a haulage
contract whereby it pays a connecting carrier to carry its customers' freight
over 56 miles of the connecting carrier's line. The remaining 12 miles are
operated by Pittsburg & Shawmut pursuant to an operating contract.

40
<PAGE>

Of the 1,506 miles of track operated on or by the Company's railroads, 13%
was in FRA Class IV condition, permitting speeds of up to 60 miles per hour
for freight trains. An additional 45% was in FRA Class III condition,
permitting speeds of up to 40 miles per hour, while 21% was in FRA Class II
condition, permitting speeds of up to 25 miles per hour. The remaining 21% was
in FRA Class I or FRA Excepted Class I condition, which permits maximum speeds
of 10 miles per hour. The following table summarizes the track condition of
the Company's railroads:

TRACK CONDITION

<TABLE>
<CAPTION>
FRA CLASS
----------------------------
IV III II I EXCEPTED TOTAL %
--- --- --- --- -------- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Owned.................................. - 528 170 95 36 829 55%
Leased................................. - 119 120 46 122 407 27
Trackage rights........................ 146 31 18 7 - 202 13
Contract............................... 50 2 3 13 - 68 5
--- --- --- --- --- ----- ---
Total miles............................ 196 680 311 161 158 1,506 100%
=== === === === === ===== ===
FRA Class as percentage of miles....... 13% 45% 21% 11% 10% 100%
=== === === === === =====
</TABLE>

The Company's track maintenance policy is to maintain its railroads' track,
ties and roadbed consistent with safe operations and with the volume of
traffic transported over their lines. Safety-related maintenance receives the
highest maintenance priority, followed by high-density track segments on which
the highest volume of traffic is transported. Low-density segments, sidings
and lines for which higher transit speeds are not essential to providing
timely and effective service are maintained at lower FRA Class conditions.

In connection with its lease of the SP rail line, WPRR installed 30,600
railroad ties and has committed to upgrade approximately 25 miles of rail. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

EQUIPMENT

As of March 31, 1996, rolling stock of the Company's railroads consisted of
113 locomotives and 1,133 freight cars, some of which were owned and some of
which were leased from others. The average age of the Company's locomotive
fleet is approximately 28 years. The following tables summarize the aggregate
fleet of the Company's railroads at March 31, 1996(1):

LOCOMOTIVES

<TABLE>
<CAPTION>
HORSEPOWER PER UNIT OWNED LEASED TOTAL
------------------- ----- ------ -----
<S> <C> <C> <C>
3000 to 3200.............................................. 18 7 25
2000 to 3000.............................................. 28 6 34
1800 and under............................................ 24 30 54
--- --- ---
Total................................................... 70 43 113
=== === ===
</TABLE>

FREIGHT CARS

<TABLE>
<CAPTION>
CAR TYPE OWNED LEASED MANAGED TOTAL
-------- ----- ------ ------- -----
<S> <C> <C> <C> <C>
Covered hopper.................................... 651 19 162 832
Plain box car..................................... 25 - 101 126
Equipped box car.................................. - 50 - 50
Gondola........................................... - 115 - 115
Wood chip gondola................................. - 10 - 10
--- --- --- -----
Total........................................... 676 194 263 1,133
=== === === =====
</TABLE>
- --------
(1) In addition, in connection with the Pittsburg & Shawmut Acquisition, the
Company acquired an additional 859 railcars and 19 locomotives, a
significant portion of which will be sold.

41
<PAGE>

MANAGEMENT

The following table sets forth information regarding the executive officers
and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mortimer B. Fuller, III. 54 Chairman of the Board of Directors, President and
Chief Executive Officer
Senior Vice President, Chief Financial Officer and
Mark W. Hastings........ 46 Treasurer
Forrest L. Becht........ 52 Senior Vice President-Louisiana and Texas
Charles W. Chabot....... 49 Senior Vice President-New York and Pennsylvania
Robert I. Melbo......... 53 Senior Vice President-Oregon
Spencer D. White........ 36 Senior Vice President-Illinois
Alan R. Harris.......... 48 Senior Vice President and Chief Accounting Officer
James M. Fuller(1)...... 55 Director
Louis S. Fuller(2)...... 55 Director
John M. Randolph(1)(2).. 70 Director
Philip J. Ringo(1)(2)... 54 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

The Company's Board of Directors is divided into three classes and directors
serve for staggered three-year terms. The current terms of office of James M.
Fuller and John M. Randolph expire in 1997, the current terms of office of
Louis S. Fuller and Philip J. Ringo expire in 1998, and the current term of
office of Mortimer B. Fuller, III expires in 1999.

Mortimer B. Fuller, III has been President and Chief Executive Officer of
the Company since 1977. He has been a director of the Company since 1973 and
also serves as Chairman of the Board and of the Board's Executive Committee.
He is a graduate of Princeton University, Boston University School of Law and
Harvard Business School. Mr. Fuller is a director of the American Short Line
Railroad Association. He is a founding member of the Regional Railroads of
America, and serves on that Association's executive committee. He also serves
on the Board of Directors of Detection Systems, Inc. Mr. Fuller is a first
cousin of James M. Fuller and Louis S. Fuller.

Mark W. Hastings, Senior Vice President, Chief Financial Officer and
Treasurer, has been the Company's chief financial officer since he joined the
Company in 1978. Prior to joining GWI, Mr. Hastings was a credit analyst for
Marine Midland Bank. He currently represents the short line industry on the
Board of the Railroad Clearing House, which has been established to create the
administrative systems and banking functions for the electronic settlement of
all rail industry interline freight payments.

Forrest L. Becht, Senior Vice President-Louisiana and Texas, joined the
Company in 1987 as General Manager of Louisiana & Delta Railroad, Inc., and
now serves as its President and General Manager. His 25-year career in the
railroad industry has included service with The Atchison, Topeka and Santa Fe
Railway from 1968 to 1981 in a succession of staff and line positions in its
mechanical and operating departments. Mr. Becht is a director of the American
Short Line Railroad Association and is active in several other railroad
operating associations.

Charles W. Chabot, Senior Vice President-New York and Pennsylvania, joined
the Company as Senior Vice President--Marketing and Sales in 1991. He became
President of Buffalo & Pittsburgh Railroad, Inc. in 1992. Prior to joining the
Company, Mr. Chabot was employed for over ten years by the Chessie System
Railroad (predecessor of CSX Transportation, Inc.), where he served in various
capacities in marketing and freight equipment planning, including Director,
Minerals Marketing, Assistant Vice President, Chemical Marketing, and
Assistant Vice President, Planning and Equipment. He also served as a
management consultant with Booz, Allen and Hamilton. Mr. Chabot represents the
short line railroad industry on the Board of Directors of Operation Lifesaver,
Inc.

42
<PAGE>

Robert I. Melbo, Senior Vice President-Oregon, has served as General Manager
of Willamette & Pacific Railroad, Inc. since 1993. He joined the Company in
1993 after over 25 years of service in operations with Southern Pacific
Transportation Company in various capacities, including Manager-Field
Operations, Northern Willamette Valley, and Superintendent of the Oregon
Division.

Spencer D. White, Senior Vice President-Illinois, joined the Company in 1988
as Chief Engineer of Buffalo & Pittsburgh Railroad, Inc. after serving in
progressive engineering positions with CSX Transportation since 1982. He has
served the Company as Vice President-Operations of Buffalo & Pittsburgh
Railroad, Inc. and Chief Engineer of the New York and Pennsylvania railroads.
He assumed his current position in February 1996, following the Illinois &
Midland Acquisition.

Alan R. Harris, Senior Vice President and Chief Accounting Officer, joined
the Company in 1990 as its Chief Accounting Officer. Mr. Harris is a certified
public accountant and from 1985 to 1990, he was Director of Accounting, and
subsequently Secretary and Treasurer, of Preston Trucking Company, Inc., an
interstate carrier.

James M. Fuller has been a director of the Company since 1974. In 1995 he
became Regional Sales Manager of the Harvey Salt Co., a distributor of salt
and water purification chemicals. From 1983 until 1993, Mr. Fuller was
National Account Manager-Export for Akzo, where he served for over 25 years.
Mr. Fuller is a first cousin of Mortimer B. Fuller, III and Louis S. Fuller.

Louis S. Fuller, has been a director of the Company since 1974. Since 1991,
he has been a member of Courtright and Associates, an executive search firm.
Mr. Fuller serves on the Advisory Board of Pioneer American Bank. He is a
first cousin of Mortimer B. Fuller, III and James M. Fuller.

John M. Randolph, a financial consultant and private investor for more than
the past five years, has been a director of the Company since 1986. In 1965
Mr. Randolph founded and was Chief Executive Officer of Randolph Computer
Corporation, one of the first computer leasing companies. He subsequently
served as Chairman and Chief Executive Officer of J.M. Randolph and
Associates, a company created to manage certain computer leasing assets
acquired by the Bank of Boston. Mr. Randolph currently serves as a director of
Leasing Technologies International Inc. and as Vice Chairman and a director of
Financing for Science International, Inc.

Philip J. Ringo has been a director of the Company since 1978. Since 1995,
he has been President of Chemical Leaman Tank Lines Inc., a trucking firm.
From 1992 to 1995, Mr. Ringo served as President and Chief Operating Officer
of The Morgan Group, Inc. and Chairman and Chief Executive Officer of Morgan
Drive Away, Inc., a common and contract carrier for the manufactured housing
and recreational vehicle industries. From 1988 to 1992, he was Chief Executive
Officer and President of Energy Innovations, Inc., a monitoring and
communications equipment firm. Prior to that, he served as President of ATE
Management and Service Co., Inc., now known as Ryder/ATE, Inc. (municipal
transportation services). Mr. Ringo is a Trustee of the Bartlett Capital Trust
and the Bartlett Management Trust, and a director of Chemical Leaman, Inc.

43
<PAGE>

EXECUTIVE COMPENSATION

Shown on the table below is information on the annual and long-term
compensation for services rendered to the Company in all capacities during
1995, paid by the Company to those persons who were, at the end of 1995, the
Chief Executive Officer and each other executive officer of the Company whose
salary and bonus in 1995 exceeded $100,000 (collectively, the "Named
Executives").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- --------------------------
AWARDS PAYOUTS
------------------ -------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) SATION AWARDS OPTIONS PAYOUTS SATION(2)
- --------------------------- ---- -------- -------- ------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortimer B. Fuller, III.................... 1995 $286,456 $70,400 - - - - $8,933
Chairman of the Board, President
and Chief Executive Officer
Mark W. Hastings .......................... 1995 $115,375 $22,700 - - - - $7,086
Senior Vice President, Chief Financial
Officer and Treasurer
Charles W. Chabot ......................... 1995 $138,116 $15,400 - - - - $9,557
Senior Vice President-New York and
Pennsylvania
</TABLE>
- --------
(1) The bonuses shown were awarded and paid in 1996 for services rendered
during 1995.
(2) The amounts shown include (i) Company contributions to the Company's
401(k) Savings Plan (see "--401(k) Savings Plan") on behalf of the Named
Executives as follows: Mr. Fuller-$1,613, Mr. Hastings-$1,459 and Mr.
Chabot-$1,613; (ii) the value of insurance premiums paid by the Company,
and the economic benefit (projected on an actuarial basis) to the Named
Executives, under split dollar life insurance arrangements as follows: Mr.
Fuller-$6,845, Mr. Hastings-$5,152 and Mr. Chabot-$7,469; and (iii) $475
in life insurance premiums paid by the Company for the benefit of each
Named Executive under a group life insurance program.

STOCK OPTIONS

No options were granted or exercised during 1995 and no options to purchase
Common Stock were outstanding at the end of 1995.

1996 Stock Option Plan

The Company's 1996 Stock Option Plan (the "Stock Option Plan") provides for
the grant of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-statutory
options to executives and other employees of the Company to purchase up to an
aggregate of 450,000 shares of Class A Common Stock. The Stock Option Plan is
administered by a Stock Option Committee comprised of at least two
disinterested directors within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended. The Stock Option Committee is
authorized to determine the recipients of options, the type of options
granted, the number of shares subject to each option, the term of each option,
exercise prices and other option features. The term of an option may not
exceed ten years, except that if an incentive stock option is granted to an
optionee who would thereafter own stock possessing more than 10% of the
combined voting power of the Common Stock (a "10% Stockholder"), the term of
the option may not exceed five years. The exercise price must at least equal
the market value of the Class A Common Stock on the grant date of the option,
except that if an incentive stock option is granted to a 10% Stockholder, the
exercise price must at least equal 110% of such value. Options are not
transferable except by will or intestacy, and lapse within stated periods
following the death of the optionee or the termination of the optionee's
employment with the Company. The Stock Option Plan contains customary anti-
dilution provisions and provides for the acceleration of the vesting of
options upon a change in control of the Company. The Stock Option Plan
terminates in 2006. Options to purchase an aggregate of 350,500 shares of
Class A Common Stock at the initial public offering price are currently
outstanding.

44
<PAGE>

Stock Option Plan for Outside Directors

The Company's Stock Option Plan for Outside Directors (the "Outside
Directors' Plan") provides for the grant to non-employee directors of the
Company of non-statutory options to purchase up to an aggregate of 50,000
shares of Class A Common Stock. The Outside Directors' Plan provides for three
categories of option grants: (i) options to purchase 8,000 shares of Class A
Common Stock at the initial public offering price, granted to each of the
Company's four current outside directors on the closing date of the Offering;
(ii) options to purchase 2,000 shares of Class A Common Stock at its market
value on the option grant date, granted to each new outside director of the
Company upon his or her election to the Board; and (iii) options to purchase
1,000 shares of Class A Common Stock at its market value on the option grant
date, granted to each such new outside director on fixed dates in 1997 and
1998 provided that the Company's net income after taxes for the most recently
completed year exceeds by at least 10% its net income after taxes for the
immediately preceding year. Options vest over a three-year period in
increments of one-third on each anniversary of the grant date, and expire on
the tenth anniversary. Options are not transferable except by will or
intestacy, and lapse within stated periods following the death of the optionee
or cessation of his service as a director. The Outside Directors' Plan
contains customary anti-dilution provisions and provides for the acceleration
of the vesting of options upon a change in control of the Company.

EMPLOYMENT AGREEMENTS

The Company is a party to employment agreements with each of its seven
executive officers which provide that upon termination of the officer's
employment with the Company within three years after a defined change in
control of the Company, the officer will receive a cash amount equal to three
times the average annual compensation payable to him by the Company during the
immediately preceding five years. The agreements provide for reduction of the
amounts paid pursuant thereto to the extent that such amounts would otherwise
be non-deductible to the Company under Section 280G of the Code.

CASH BONUS PLAN

The Company awards annual bonuses to ten employees (including its seven
executive officers) based on pre-tax earnings targets and individual
performance objectives. Earnings targets, individual performance objectives
and bonus percentages are established at the beginning of each year by the
Compensation Committee of the Board. Maximum bonus percentages currently range
from 15% to 50% of annual salary.

401(K) SAVINGS PLAN

The Company's 401(k) Savings Plan (the "401(k) Plan") provides retirement,
death and disability benefits to certain employees with a cash or deferred
arrangement intended to qualify under the Code. It became effective in 1994
and covers employees other than union employees covered by a collective
bargaining agreement with a union local (which employees are covered by a
separate 401(k) plan of the Company). Each participant may defer and have
contributed to his account under the 401(k) Plan up to 15% of compensation
each year, including any bonuses. The Company and its subsidiaries make
matching contributions annually equal to 25% of each participant's
contribution. The maximum matching contribution is 1 1/2% of the participant's
annual compensation. Each employer may make an additional discretionary
contribution for its employees which is allocated to participants' accounts in
proportion to their total compensation for the plan year for which the
contribution is made.

DIRECTORS' COMPENSATION

The Company currently pays its outside directors $2,100 per Board meeting
attended, $500 per Board Committee meeting attended not in conjunction with a
Board meeting, $250 per Committee meeting attended in conjunction with a Board
meeting and $250 per meeting attended by telephone. All of the Company's
directors other than Mortimer B. Fuller, III qualify for such payments. In
addition, during 1995 the Company provided medical insurance on behalf of
Louis S. Fuller and John M. Randolph at a cost of $5,448 and $5,818,
respectively.

45
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1995 the Compensation Committee of the Board of Directors was
composed of Louis S. Fuller, John M. Randolph and Philip J. Ringo. Mortimer B.
Fuller, III participates in the deliberations of the Compensation Committee
for the purpose of providing evaluations and recommendations with respect to
the compensation paid to officers other than himself. However, Mr. Fuller
neither participates nor is otherwise involved in the deliberations of the
Compensation Committee with respect to his own compensation, and those
deliberations are conducted by the Compensation Committee in executive session
without Mr. Fuller present.

EMPLOYEE STOCK PURCHASE PLAN

Under the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"), all full-time employees who have been employed by the Company for at
least two years are eligible to purchase from the Company shares of Class A
Common Stock by payroll deduction at market price. The Stock Purchase Plan is
administered by a committee composed of at least two disinterested directors.
An aggregate of 450,000 shares of Class A Common Stock (subject to customary
anti-dilution provisions) may be purchased under the Stock Purchase Plan.
During any year, a participating employee may purchase under the Stock
Purchase Plan shares having an aggregate market value of up to $25,000,
provided that after any such purchase, he or she would own no more than 5% of
the total combined voting power of the Company. The Stock Purchase Plan will
become effective upon the effectiveness of the Company's registration
statement on Form S-8 under the Act covering the shares subject to the Stock
Purchase Plan.

CERTAIN TRANSACTIONS

In 1983, the Company issued $598,365 in aggregate principal amount of
subordinated debentures maturing in 1998, including (i) a debenture in
$260,865 principal amount issued to Louis S. Fuller, a director of the
Company, and his wife, and (ii) debentures in $337,500 aggregate principal
amount issued to trusts for the benefit of James M. Fuller, a director of the
Company, and others. The debentures bore interest at the rate of 10% per annum
and contained customary loan covenants. Such transactions were at arm's
length, on terms and conditions identical to those offered to non-affiliated
third parties. In June 1995, the Company repaid all such debt with borrowings
under the Credit Facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

In May 1994, a subsidiary of the Company issued $990,000 in aggregate
principal amount of subordinated notes maturing in 2001, including (i) a note
in $100,000 principal amount issued to Louis S. Fuller, (ii) a note in
$100,000 principal amount issued to Frances A. Fuller, the mother of Mortimer
B. Fuller, III, and (iii) notes in $50,000 aggregate principal amount issued
to trusts for the benefit of John M. Randolph, a director of the Company, and
his wife. The notes bore interest at the rate of 12% per annum and contained
customary loan covenants. Such transactions were at arm's length, on terms and
conditions identical to those offered to non-affiliated third parties. In June
1995, the Company repaid all of such debt with borrowings under the Credit
Facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

The Company, Mortimer B. Fuller, III, the other executive officers of the
Company (the "Other Executives") and all of the holders of the Class B Common
Stock are parties to a Class B Stockholders' Agreement dated as of May 20,
1996. Under that agreement, if a party proposes to transfer shares of Class B
Common Stock in a transaction that will not result in the automatic conversion
of those shares into shares of Class A Common Stock (see "Description of
Capital Stock"), the Other Executives have the right to purchase up to an
aggregate of 50% of those shares, and Mr. Fuller has the right to purchase the
balance, all at the then-current market price of the Class A Common Stock. If
Mr. Fuller does not purchase the entire balance of the shares, the Other
Executives have the right to purchase whatever shares remain. Such purchase
rights also apply if the employment of any of the Other Executives is
terminated for any reason. The effect of this agreement will be to concentrate
ownership of the Class B Common Stock, which enjoys ten times the voting power
of the Class A Common Stock, in the hands of management of the Company,
particularly Mr. Fuller. See "Principal and Selling Stockholders."

46
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of May 31, 1996 certain information
concerning shares of both classes of the Company's Common Stock held by (i)
each stockholder known by the Company to own beneficially more than 5% of
either class, (ii) each director of the Company, (iii) each Named Executive
(see "Management--Executive Compensation"), (iv) the Selling Stockholder, and
(v) all directors and executive officers of the Company as a group. The
address for each of the directors and Named Executives is the address of the
Company.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------------- CLASS A ----------------------------
CLASS A CLASS B COMMON CLASS A CLASS B
COMMON COMMON STOCK COMMON COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER(1) STOCK STOCK PERCENT(2) OFFERED STOCK STOCK PERCENT(2)
- --------------------------------------- --------- ------- ---------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortimer B. Fuller, III(3)............. 651,347 651,347 55.5% 651,347 651,347 26.9%(4)
James M. Fuller(5)..................... 283,901 11,100 12.6 283,901 11,100 6.1
Louis S. Fuller(6)..................... 160,894 160,894 13.7 160,894 160,894 6.6
John M. Randolph(7).................... 7,400 7,400 0.6 7,400 7,400 0.3
Philip J. Ringo(8)..................... 3,700 -- 0.2 3,700 -- 0.1
Mark W. Hastings(9).................... 7,400 7,400 0.6 7,400 7,400 0.3
Charles W. Chabot...................... -- -- -- -- -- --
Nancy E. Putney, Trustee 159,470 -- 6.8 159,470 -- 3.3
Putney Family Trust
4833 Leland Street
Chevy Chase, MD 20815
Ryder/ATE, Inc. ....................... 148,000 -- 6.3 148,000 -- -- --
1 Centennial Plaza,
Suite 500
705 Central Avenue
Cincinnati, OH 45202
All Directors and Executive
Officers as a Group
(11 persons).......................... 1,114,642 838,141 83.2% 1,114,642 838,141 40.3%(4)
</TABLE>
- --------
(1) Unless otherwise indicated, each stockholder shown on the table has sole
voting and investment power with respect to the shares beneficially owned
by him or it.
(2) Percentages are based on ownership of both Class A Common Stock and Class
B Common Stock.
(3) The amounts shown include: (i) 351,592 shares of Class A Common Stock and
351,592 shares of Class B Common Stock owned by Mr. Fuller individually;
(ii) 188,607 shares of Class A Common Stock and 188,607 shares of Class B
Common Stock held by a family trust for the benefit of Mr. Fuller and
others, of which Mr. Fuller is a co-trustee; (iii) 83,583 shares of Class
A Common Stock and 83,583 shares of Class B Common Stock held by another
family trust for the benefit of Mr. Fuller and others, of which Mr. Fuller
is a co-trustee; (iv) 925 shares of Class A Common Stock and 925 shares of
Class B Common Stock owned by Mr. Fuller's wife, as to which shares Mr.
Fuller disclaims beneficial ownership; (v) 10,915 shares of Class A Common
Stock and 10,915 shares of Class B Common Stock owned by Mr. Fuller's
mother which, together with the shares held by the above-mentioned family
trusts, are subject to a Voting Agreement pursuant to which Mr. Fuller has
been granted irrevocable proxies to vote all such shares through March 20,
2008; and (vi) 15,725 shares of Class A Common Stock and 15,725 shares of
Class B Common Stock held by a family trust for the benefit of Mr. Fuller
and others, of which Mr. Fuller is the Trustee.
(4) Because the Class A Common Stock is entitled to one vote per share and the
Class B Common Stock is entitled to ten votes per share, immediately after
the Offering the stock ownership of Mortimer B. Fuller, III will represent
57.5% of the voting power of the Company and the stock ownership of all
directors and executive officers as a group will represent 76.2% of the
voting power of the Company.
(5) The amounts shown include 11,100 shares of Class A Common Stock and 11,100
shares of Class B Common Stock held by Mr. Fuller individually, and an
aggregate of 272,801 shares of Class A Common Stock held by family trusts
for the benefit of Mr. Fuller and/or others, of which Mr. Fuller is a
trustee or co-trustee.
(6) The amounts shown include 133,144 shares of Class A Common Stock and
133,144 shares of Class B Common Stock held by Mr. Fuller individually,
and an aggregate of 27,750 shares of Class A Common Stock and 27,750
shares of Class B Common Stock owned by Mr. Fuller's children (as to which
shares he disclaims beneficial ownership).
(7) Such shares are held by a trust for the benefit of Mr. Randolph, of which
he is a co-trustee.
(8) Such shares are owned by Mr. Ringo's wife, and he disclaims beneficial
ownership thereof.
(9) Such shares are owned by Mr. Hastings jointly with his wife.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Restated Certificate of
Incorporation and By-laws of the Company.

IN GENERAL

The Company's authorized capital stock consists of 12,000,000 shares of
Class A Common Stock, par value $.01 per share, and 1,500,000 shares of Class
B Common Stock, par value $.01 per share. At the date of this Prospectus,
1,501,937 shares of Class A Common Stock and 846,556 shares of Class B Common
Stock were issued and outstanding, and there were 31 holders of record of
Class A Common Stock and 18 holders of record of Class B Common Stock.

CLASS A COMMON STOCK AND CLASS B COMMON STOCK

Voting. Holders of Class A Common Stock are entitled to one vote per share.
Holders of Class B Common Stock are entitled to ten votes per share. All
actions submitted to a vote of stockholders are voted on by the holders of
Class A Common Stock and Class B Common Stock voting together as a single
class, except as otherwise required by law. Under current Delaware law, the
holders of the outstanding shares of a class are entitled to vote as a class
upon a proposed charter amendment that would change the aggregate number of
authorized shares of such class, change the par value of the shares of such
class or change the powers, preferences or special rights of the shares of
such class so as to affect them adversely. Holders of the Company's Common
Stock are not entitled to cumulate voting in the election of directors.

Conversion. Class A Common Stock has no conversion rights. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock (i)
at any time at the option of the holder of the Class B Common Stock and (ii)
automatically upon any transfer by the holder thereof other than (a) a
transfer to a spouse, child or grandchild of the transferor by gift or upon
the transferor's death, or (b) a transfer to an individual or entity that is,
at the time of transfer, a holder of record of Class B Common Stock or an
executive officer of the Company.

Dividends. Dividends are payable on the outstanding shares of (i) only Class
A Common Stock or (ii) both Class A Common Stock and Class B Common Stock, in
each case, when, as and if declared by the Board of Directors. If the Board
determines to pay a dividend on the Class B Common Stock, each share of Class
A Common Stock will receive a dividend in an amount 10% greater than the
amount of the dividend per share paid on the Class B Common Stock. Subject to
the foregoing, dividends in the form of stock can only be paid in shares of
Class A Common Stock. Although the Company has paid dividends in the past, it
currently intends to retain all earnings to support its operations and future
growth and, therefore, does not anticipate the payment of cash dividends on
the Common Stock in the foreseeable future. See "Dividend Policy."

Liquidation. In the event of liquidation, holders of Class A Common Stock
and Class B Common Stock will share with each other on a ratable basis as a
single class in the net assets of the Company available for distribution after
payment or provision for the liabilities of the Company.

Other Terms. Neither the Class A Common Stock nor the Class B Common Stock
may be subdivided, consolidated, reclassified or otherwise changed unless
contemporaneously therewith the other class of shares is subdivided,
consolidated, reclassified or otherwise changed in the same proportion and in
the same manner. In any merger, consolidation, reorganization or other
business combination, the consideration to be received per share by holders of
either Class A Common Stock or Class B Common Stock must be identical to that
received by holders of the other class. Neither the holders of Class A Common
Stock nor the holders of Class B Common Stock are entitled to preemptive
rights, and neither the Class A Common Stock nor the Class B Common Stock is
subject to redemption.

Listing. The Class A Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "GNWR."

48
<PAGE>

BANK WARRANT

As part of the consideration for the availability of the Credit Facilities
(see "Recent Developments"), in February 1996 the Company paid a fee of $1.5
million and issued to the Bank of Boston, for no additional consideration, a
warrant to purchase 41,847 shares of Class A Common Stock at a price of
approximately $.0005 per share (the "Bank Warrant"), subject to customary
anti-dilution adjustments. The Bank Warrant is immediately exercisable, is
transferable to members of the banking syndicate and their affiliates, and
expires in 2006. Holders of the Bank Warrant are entitled under certain
circumstances to demand and "piggy-back" registration rights, at the Company's
expense (subject to certain limitations), with respect to the shares issuable
upon exercise thereof.

LIMITATIONS ON TAKEOVERS

Super-Majority Voting Provision. The Company's Restated Certificate of
Incorporation requires the affirmative vote of the holders of at least two-
thirds of the combined voting power of the Class A Common Stock and Class B
Common Stock, voting together as one class, for approval of the following
actions: (i) any merger or consolidation unless the Company is the surviving
corporation in such transaction and no change of control (defined as any
person or group becoming the beneficial owner of shares of Class A Common
Stock and Class B Common Stock representing 50% or more of the votes
represented by all outstanding shares of Class A Common Stock and Class B
Common Stock) has occurred, (ii) any sale, lease or other disposition of all
or substantially all of the assets of the Company and (iii) any amendment of
the super-majority voting provision. These voting requirements could have the
effect of delaying, deferring or preventing such transactions.

Classified Board of Directors. The Company's Board of Directors is divided
into three classes, with the members of each class serving for staggered
three-year terms. The classification of the directors will have the effect of
making it more difficult for stockholders to force an immediate change in the
composition of the Board of Directors. The Board of Directors believes that
the longer time required to elect a majority of a classified Board of
Directors helps to ensure the continuity and stability of the Company's
management and policies since a majority of the directors at any given time
will have had prior experience as directors of the Company.

Consideration of Non-Price Issues. The Company's Restated Certificate of
Incorporation permits the Board of Directors, in considering the best
interests of the Company, to consider the effects of any action upon
employees, general agents, customers, creditors, communities, the state and
national economies and the long-term as well as short-term interests of the
Company and its stockholders, including the possibility that these interests
may be best served by the continued independence of the Company, and all other
pertinent factors.

Delaware General Corporation Law Section 203. Section 203 of the Delaware
General Corporation Law provides that, subject to certain exceptions specified
therein, a corporation may not engage in any business combination (which
includes a merger or a sale of more than 10% of the corporation's assets) with
an "interested stockholder" for a three-year period following the time that
such stockholder becomes an interested stockholder unless (i) prior to such
time, the Board of Directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares),
or (iii) at or subsequent to such time, the business combination is approved
by the Board of Directors of the corporation and by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder. Except as specified in Section 203, an interested
stockholder is defined to include (a) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within three years
immediately prior to the date of determination and (b) the affiliates and
associates of any such person. Under certain circumstances, Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period.

49
<PAGE>

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Class A Common Stock is The First
National Bank of Boston.

SHARES ELIGIBLE FOR FUTURE SALE

In general, under Rule 144 as currently in effect, a holder (or holders
whose shares are aggregated) of "restricted securities," including persons who
may be deemed affiliated with the Company, whose shares meet a two-year
holding period requirement are entitled to sell, within any three-month
period, a number of those shares that does not exceed the greater of 1% of the
then outstanding shares of Class A Common Stock (40,019 shares of Class A
Common Stock immediately after the Offering) or the average weekly reported
trading volume in the Class A Common Stock during the four calendar weeks
preceding the date on which notice of the sale is given, provided certain
manner of sale and notice requirements and requirements as to the availability
of current public information about the Company are satisfied. Under Rule
144(k), a holder of "restricted securities" who is deemed not to have been an
affiliate of the Company during the three months preceding a sale by him, and
whose shares meet a three-year holding period requirement, is entitled to sell
those shares without regard to these restrictions and requirements. However,
affiliates of the Company must comply with the restrictions and requirements
of Rule 144, other than the two-year holding period requirement, in order to
sell shares of Class A Common Stock which are not "restricted securities"
(such as shares acquired by affiliates in the Offering).

An aggregate of 450,000 shares of Class A Common Stock is available for
issuance under the Company's 1996 Stock Option Plan (including 350,500 shares
subject to outstanding options, none of which are currently exercisable), and
an aggregate of 450,000 shares of Class A Common Stock is available for
issuance under the Company's Employee Stock Purchase Plan. The Company expects
to file a registration statement on Form S-8 under the Act immediately after
the closing of the Offering to register all of the shares issuable under both
such Plans. In addition, an aggregate of 50,000 shares of Class A Common Stock
is available for issuance under the Company's Stock Option Plan for Outside
Directors, which shares, if issued, will be eligible for sale subject to the
volume and other limitations of Rule 144 under the Act. See "Management--Stock
Options" and "Management--Employee Stock Purchase Plan." The holders of the
Bank Warrant are entitled under certain circumstances to demand and "piggy-
back" registration rights with respect to the shares issuable upon exercise
thereof. See "Description of Capital Stock--Bank Warrant."

Prior to the Offering, there has been no public market for the Class A
Common Stock and no determination can be made as to the effect, if any, that
sales of shares of Class A Common Stock or the availability of shares for sale
will have on the market price of the Class A Common Stock prevailing from time
to time. Nevertheless, sales of substantial amounts of the Class A Common
Stock in the public market (including shares issued upon exercise of options
or warrants, the conversion of Class B Common Stock, or under the Company's
Employee Stock Purchase Plan) could adversely affect the market price of the
Class A Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities.

50
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters") have severally agreed to
purchase and the Company and the Selling Stockholder have agreed to sell to
them, severally, the aggregate number of shares of Class A Common Stock set
forth opposite their respective names.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Schroder Wertheim & Co. Incorporated............................ 634,000
Furman Selz LLC................................................. 634,000
CS First Boston Corporation..................................... 70,000
Dean Witter Reynolds Inc. ...................................... 70,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc. .................... 70,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 70,000
A.G. Edwards & Sons, Inc. ...................................... 70,000
Goldman, Sachs & Co. ........................................... 70,000
Lazard Freres & Co. LLC......................................... 70,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 70,000
Morgan Stanley & Co. Incorporated............................... 70,000
NatWest Securities Corporation.................................. 70,000
PaineWebber Incorporated........................................ 70,000
Prudential Securities Incorporated.............................. 70,000
Salomon Brothers Inc............................................ 70,000
Smith Barney Inc. .............................................. 70,000
Advest, Inc. ................................................... 40,000
William Blair & Company, L.L.C. ................................ 40,000
Brean Murray, Foster Securities Inc. ........................... 40,000
Burnham Securities Inc. ........................................ 40,000
Janney Montgomery Scott Inc. ................................... 40,000
Ladenburg, Thalmann & Co. Inc. ................................. 40,000
The Robinson-Humphrey Company, Inc. ............................ 40,000
Scott & Stringfellow, Inc. ..................................... 40,000
Sutro & Co. Incorporated........................................ 40,000
Wheat First Butcher Singer...................................... 40,000
---------
Total..................................................... 2,648,000
=========
</TABLE>

The Underwriting Agreement provides that the several Underwriters are
obligated, subject to the approval of certain legal matters by their counsel
and certain other conditions, to purchase all the shares of Class A Common
Stock offered hereby (other than those covered by the Underwriters' over-
allotment option described below), if any are purchased. Schroder Wertheim &
Co. Incorporated and Furman Selz LLC, as representatives of the several
Underwriters (the "Representatives"), have advised the Company that the
Underwriters propose to offer the shares to the public at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters
propose initially to allow a concession not in excess of $0.71 per share to
certain dealers, including the Underwriters; that the Underwriters and such
dealers may initially allow a discount of not in excess of $0.10 per share to
other dealers; and that the initial public offering price and the concession
and discount to dealers may be changed by the Representatives after the
initial public offering.

The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of the Underwriting Agreement, to
purchase up to an additional 397,200 shares of Class A Common Stock, at the
initial public offering price set forth on the cover page of this Prospectus,
less

51
<PAGE>

underwriting discounts and commissions. The Underwriters may exercise the
option only to cover over-allotments, if any, in the sale of shares of Class A
Common Stock in the Offering. To the extent that the Underwriters exercise
this option, each Underwriter will be committed, subject to certain
conditions, to purchase a number of additional shares proportionate to such
Underwriter's initial commitment.

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Act.

The Company, certain management stockholders, directors and certain other
stockholders have agreed not to offer to sell, sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock, subject to
certain exceptions, for a period of 180 days after the date of this Prospectus
without the prior written consent of Schroder Wertheim & Co. Incorporated.

Prior to the Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price of the Class A
Common Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in such negotiations were the
Company's results of operations and financial condition, the prospects for the
Company and for the industry in which the Company operates, the Company's
capital structure and prevailing conditions in the securities market.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority in excess of 5% of the total number of shares offered hereby.

NOTICE TO ONTARIO RESIDENTS

The distribution of the shares of Class A Common Stock in the Province of
Ontario, Canada is being made only on a private placement basis and is exempt
from the requirement that the Company prepare and file a prospectus with the
relevant Canadian securities regulatory authorities. Accordingly, any resale
of the shares of Class A Common Stock must be made in accordance with
applicable securities laws, which may require resales to be made in accordance
with exemptions from registration and prospectus requirements. Purchasers are
advised to seek legal advice prior to any resale of the shares of Class A
Common Stock.

Each Ontario purchaser who receives a purchase confirmation regarding the
purchase of shares of Class A Common Stock will be deemed to represent to the
Company and to the dealer from whom such confirmation is received that such
purchaser is entitled under applicable Ontario securities laws to purchase
such shares of Class A Common Stock without the benefit of a prospectus
qualified under such securities laws.

Ontario purchasers of shares of Class A Common Stock should consult their
own legal and tax advisors with respect to the tax consequences of an
investment in the shares of Class A Common Stock in their particular
circumstances and with respect to the eligibility of the shares of Class A
Common Stock for investment by purchaser under relevant Canadian legislation.

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.

All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the Company or such persons. All or a substantial portion of the assets
of the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against the Company or persons outside of Canada.

52
<PAGE>

LEGAL MATTERS

The validity of the Class A Common Stock offered by this Prospectus is being
passed on for the Company by Harter, Secrest & Emery, Rochester, New York.
Certain legal matters will be passed upon for the Underwriters by Shearman &
Sterling, New York, New York.

EXPERTS

The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.

ADDITIONAL INFORMATION

The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited interim financial information for the
first three quarters of each year.

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-l under the Act for registration of the
shares of Class A Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to do not purport to be complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved and each statement shall be deemed qualified in its
entirety by this reference. The Registration Statement and the exhibits and
schedules thereto may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the public reference
facilities of the Commission's Regional Offices: New York Regional Office,
Seven World Trade Center, Suite 1300, New York, New York 10048; and Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.

53
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Genesee & Wyoming Inc. and Subsidiaries:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March
31, 1996 (Unaudited)................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1993,
1994 and 1995, and the Three Months Ended March 31, 1995 (Unaudited),
and March 31, 1996 (Unaudited)......................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995, and the Three Months Ended March 31,
1996 (Unaudited)....................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995, and the Three Months Ended March 31, 1995
(Unaudited), and March 31, 1996 (Unaudited)............................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Chicago & Illinois Midland Railway Company:
Report of Independent Public Accountants................................ F-20
Balance Sheets as of December 31, 1994 and 1995, and February 8, 1996
(Unaudited)............................................................ F-21
Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995, and the One Month and Eight Day Period Ended February 8, 1996
(Unaudited)............................................................ F-22
Statements of Shareholder's Equity for the Years Ended December 31,
1993, 1994 and 1995, and the One Month and Eight Day Period Ended
February 8, 1996 (Unaudited)........................................... F-23
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995, and the One Month and Eight Day Period Ended February 8, 1996
(Unaudited)............................................................ F-24
Notes to Financial Statements........................................... F-25
Pittsburg & Shawmut Railroad Company, Mountain Laurel Railroad Company and
Red Bank Railroad Company:
Report of Independent Public Accountants................................ F-30
Combined Balance Sheets as of December 31, 1994 and 1995, and March 31,
1996 (Unaudited)....................................................... F-31
Combined Statements of Operations for the Years Ended December 31, 1993,
1994 and 1995, and the Three Months Ended March 31, 1995 (Unaudited),
and March 31, 1996 (Unaudited)......................................... F-32
Combined Statements of Shareholder's Equity for the Years Ended December
31, 1993, 1994 and 1995, and the Three Months Ended March 31, 1996
(Unaudited)............................................................ F-33
Combined Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995, and the Three Months Ended March 31, 1995 (Unaudited),
and March 31, 1996 (Unaudited)......................................... F-34
Notes to Combined Financial Statements.................................. F-35
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and
the Stockholders of
Genesee & Wyoming Inc.:

We have audited the accompanying consolidated balance sheets of GENESEE &
WYOMING INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1994
and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genesee & Wyoming Inc. and
Subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

As discussed in Note 8 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions.

Arthur Andersen LLP

Chicago, Illinois
February 16, 1996
(except with respect to matters discussed in
Note 14 as to which the dates are April 22, 1996,
April 29, 1996, June 10, 1996 and June 21, 1996)

F-2
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 5,884 $ 2,115 $ 6,588
Accounts receivable, net......................... 10,698 9,441 14,764
Materials and supplies........................... 1,550 1,512 2,295
Prepaid expenses and other....................... 1,005 1,455 1,747
Deferred income tax assets, net.................. 1,075 1,278 1,364
------- ------- --------
Total current assets........................... 20,212 15,801 26,758
------- ------- --------
PROPERTY AND EQUIPMENT, net........................ 49,263 61,574 70,609
------- ------- --------
SERVICE ASSURANCE AGREEMENT, net................... -- -- 14,851
------- ------- --------
OTHER ASSETS, net.................................. 413 1,054 3,641
------- ------- --------
Total assets................................. $69,888 $78,429 $115,859
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................ $ 4,230 $ 1,239 $ 2,894
Accounts payable................................. 13,501 8,408 17,103
Accrued expenses................................. 3,062 3,404 4,431
------- ------- --------
Total current liabilities...................... 20,793 13,051 24,428
------- ------- --------
LONG-TERM DEBT..................................... 28,410 38,702 63,313
------- ------- --------
OTHER LIABILITIES.................................. 1,629 2,043 2,055
------- ------- --------
DEFERRED INCOME TAX LIABILITIES, net............... 3,125 4,139 4,489
------- ------- --------
DEFERRED ITEMS--grants from governmental agencies.. 6,849 9,946 9,622
------- ------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value, one vote
per share; 12,000,000 shares authorized;
1,501,937 shares issued and outstanding......... 15 15 15
Class B common stock, $0.01 par value, 10 votes
per share; 1,500,000 shares authorized; 846,556
shares issued and outstanding................... 8 8 8
Additional paid-in capital....................... 1,340 1,340 1,340
Warrants outstanding............................. -- -- 471
Retained earnings................................ 7,719 9,185 10,118
------- ------- --------
Total stockholders' equity..................... 9,082 10,548 11,952
------- ------- --------
Total liabilities and stockholders' equity... $69,888 $78,429 $115,859
======= ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............ $ 49,645 $ 55,419 $ 53,387 $13,391 $16,608
OPERATING EXPENSES:
Transportation............... 11,444 13,357 14,262 3,663 4,480
Maintenance of ways and
structures.................. 7,293 6,632 6,127 1,644 2,186
Maintenance of equipment..... 12,365 14,533 12,230 3,198 2,994
General and administrative... 9,284 9,282 10,309 2,434 2,809
Depreciation and
amortization................ 3,115 3,577 3,887 926 1,325
-------- -------- -------- ------- -------
Total operating expenses.... 43,501 47,381 46,815 11,865 13,794
-------- -------- -------- ------- -------
Income from operations...... 6,144 8,038 6,572 1,526 2,814
INTEREST EXPENSE.............. (2,864) (3,212) (3,405) (766) (1,274)
OTHER INCOME.................. 165 192 456 105 81
-------- -------- -------- ------- -------
Income before provision for
income taxes, extraordinary
item and cumulative effect
of accounting change....... 3,445 5,018 3,623 865 1,621
PROVISION FOR INCOME TAXES.... (1,428) (2,007) (1,472) (363) (656)
-------- -------- -------- ------- -------
Income before extraordinary
item and cumulative effect
of accounting change....... 2,017 3,011 2,151 502 965
EXTRAORDINARY ITEM FROM EARLY
EXTINGUISHMENT OF DEBT, net
of related income tax benefit
of $357,000.................. -- -- (494) -- --
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE FOR
POSTRETIREMENT BENEFITS, net
of related income tax benefit
of $263,000.................. (393) -- -- -- --
-------- -------- -------- ------- -------
NET INCOME.................... $ 1,624 $ 3,011 $ 1,657 $ 502 $ 965
======== ======== ======== ======= =======
EARNINGS PER COMMON SHARE:
Income before extraordinary
item and cumulative effect
of accounting change....... $ 0.88 $ 1.31 $ 0.92 $ 0.21 $ 0.41
Extraordinary item.......... -- -- (0.21) -- --
Cumulative effect of
accounting change.......... (0.18) -- -- -- --
-------- -------- -------- ------- -------
Net Income.................. $ 0.70 $ 1.31 $ 0.71 $ 0.21 $ 0.41
======== ======== ======== ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.... 2,304 2,304 2,348 2,348 2,348
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- -----------------
SHARES $0.01 SHARES $0.01 ADDITIONAL STOCKHOLDERS'
ISSUED AND PAR ISSUED AND PAR PAID-IN WARRANTS RETAINED EQUITY
OUTSTANDING VALUE OUTSTANDING VALUE CAPITAL OUTSTANDING EARNINGS TOTAL
----------- ----- ----------- ----- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 1,480 $ 15 824 $ 8 $1,280 $ -- $ 3,272 $ 4,575
Net income............ -- -- -- -- -- -- 1,624 1,624
Cash dividends--$0.05
per share............ -- -- -- -- -- -- (125) (125)
----- ---- --- ---- ------ ----- ------- -------
BALANCE, December 31,
1993................... 1,480 15 824 8 1,280 -- 4,771 6,074
Stock options
exercised ........... 22 -- 22 -- 60 -- -- 60
Net income............ -- -- -- -- -- -- 3,011 3,011
Cash dividends--$0.03
per share............ -- -- -- -- -- -- (63) (63)
----- ---- --- ---- ------ ----- ------- -------
BALANCE, December 31,
1994................... 1,502 15 847 8 1,340 -- 7,719 9,082
Net income............ -- -- -- -- -- -- 1,657 1,657
Cash dividends--$0.08
per share............ -- -- -- -- -- -- (191) (191)
----- ---- --- ---- ------ ----- ------- -------
BALANCE, December 31,
1995................... 1,502 15 847 8 1,340 -- 9,185 10,548
Proceeds from issuance
of stock warrants
(Unaudited).......... -- -- -- -- -- 471 -- 471
Net income
(Unaudited).......... -- -- -- -- -- -- 965 965
Cash dividends--$0.01
per share
(Unaudited).......... -- -- -- -- -- -- (32) (32)
----- ---- --- ---- ------ ----- ------- -------
BALANCE, March 31, 1996
(Unaudited)............ 1,502 $ 15 847 $ 8 $1,340 $ 471 $10,118 $11,952
===== ==== === ==== ====== ===== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- -----------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................... $ 1,624 $ 3,011 $ 1,657 $ 502 $ 965
Adjustments to reconcile net
income to net cash provided
by operating activities--
Cumulative effect of
accounting change........... 393 -- -- -- --
Depreciation and
amortization................ 3,115 3,577 3,887 926 1,325
Deferred income taxes........ 952 738 811 279 264
Gain on disposition of
property and equipment...... (55) (169) (195) (8) (627)
Write-off of other assets.... 180 675 -- -- --
Changes in assets and
liabilities--
Receivables................. 633 (3,226) 1,257 1,511 (5,042)
Materials and supplies...... (99) (214) 38 (5) (33)
Prepaid expenses and other.. (29) (236) (450) (439) (292)
Accounts payable and accrued
expenses................... 497 2,855 (4,751) (2,158) 9,227
Other assets and
liabilities, net........... 38 279 310 19 235
------- ------- -------- ------- --------
Net cash provided by
operating activities..... 7,249 7,290 2,564 627 6,022
------- ------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of assets of Chicago
& Illinois Midland Railway
Company...................... -- -- -- -- (26,335)
Purchase of property and
equipment.................... (7,600) (6,153) (16,632) (1,135) (970)
Proceeds from disposition of
property..................... 166 824 318 8 1,555
------- ------- -------- ------- --------
Net cash used in investing
activities............... (7,434) (5,329) (16,314) (1,127) (25,750)
------- ------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-
term borrowings, including
capital leases............... (4,951) (4,962) (16,999) (1,225) (326)
Proceeds from issuance of
long-term debt............... 7,557 2,476 24,300 -- 25,925
Debt issuance costs........... -- -- (641) -- (1,642)
Net proceeds (payments) on
grants....................... 243 1,755 3,512 405 (195)
Dividends paid................ (125) (63) (191) (95) (32)
Proceeds from issuance of
stock warrants............... -- -- -- -- 471
Proceeds from exercise of
stock options................ -- 60 -- -- --
------- ------- -------- ------- --------
Net cash provided by (used
in) financing activities. 2,724 (734) 9,981 (915) 24,201
------- ------- -------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............... 2,539 1,227 (3,769) (1,415) 4,473
CASH AND CASH EQUIVALENTS,
beginning of period............ 2,118 4,657 5,884 5,884 2,115
------- ------- -------- ------- --------
CASH AND CASH EQUIVALENTS, end
of period...................... $ 4,657 $ 5,884 $ 2,115 $ 4,469 $ 6,588
======= ======= ======== ======= ========
CASH PAID DURING THE PERIOD FOR:
Interest...................... $ 2,850 $ 3,075 $ 3,204 $ 538 $ 1,240
Income taxes.................. 184 1,023 1,022 445 65
======= ======= ======== ======= ========
SUPPLEMENTAL NON-CASH INVESTING
ACTIVITY:
Assumption of liabilities in
connection with purchase of
assets of Chicago &
Illinois Midland Railway
Company.................... $ -- $ -- $ -- $ -- $ 1,162
======= ======= ======== ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Data with respect to the three months ended March 31, 1995 and 1996, are
unaudited.)

1. THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Genesee & Wyoming Inc. and Subsidiaries (the "Company") operates 11 short-
line and regional railroads in New York, Pennsylvania, Louisiana, Oregon,
Texas and, beginning in 1996, Illinois (see Note 14), through its various
subsidiaries. The Company, through its leasing subsidiary, also buys, sells,
leases and manages railroad transportation equipment primarily for customers
served by the Company's subsidiaries.

In the opinion of management, the unaudited financial statements for the
three-month periods ended March 31, 1995 and 1996, are presented on a basis
consistent with the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for interim periods are not
necessarily indicative of results of operations for the full year.

On May 18, 1995, the Company changed its name from Genesee & Wyoming
Industries, Inc. to Genesee & Wyoming Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.

Revenue Recognition

Revenues are estimated and recognized as shipments initially move onto the
Company's tracks, which, due to the relatively short length of haul, is not
materially different from the recognition of revenues as shipments progress.

Cash Equivalents

The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the consolidated balance sheets and consolidated statements
of cash flows. Cash equivalents are stated at cost, which approximates fair
market value.

Materials and Supplies

Materials and supplies consist of items for improvement and maintenance of
road property and equipment, and are stated at the lower of average cost or
market.

Property and Equipment

Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized while routine maintenance and repairs, which do not improve or
extend asset lives, are charged to expense when incurred. Gains or losses on
sales or other dispositions are credited or charged to other income. Gains of
approximately $790,000 and $593,000 realized by the leasing subsidiary on the
sale or disposition of transportation equipment during fiscal year 1994 and
the first quarter of 1996, respectively are classified in operating revenues.
Depreciation is provided on the straight-line method over the useful lives of
the property and are as follows:

<TABLE>
<S> <C>
Road properties................................................ 20-50 years
Equipment...................................................... 3-20 years
</TABLE>

F-7
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Service Assurance Agreement

The service assurance agreement represents a commitment from a significant
customer of the Company, through its subsidiary Illinois & Midland Railroad,
Inc. (see Notes 2 and 14), which grants the Company the exclusive right to
service three of the customer's facilities indefinitely. The service assurance
agreement is amortized on a straight-line basis over the same period as the
related track structure, which is 20 years. The Company continually evaluates
whether later events and circumstances have occurred that indicate the
remaining estimated useful life of the asset may not be recoverable. When
factors indicate that the asset should be evaluated for possible impairment,
the Company uses an estimate of the related undiscounted future cash flows
over the remaining life of the asset in measuring whether the asset is
recoverable.

Net Income per Share

Net income per share is determined by dividing net income by the weighted
average number of common shares outstanding during the periods, as adjusted
for the stock split discussed in Note 14. The dilutive effect of unexercised
stock options and stock warrants have not been included in the calculation as
the effect would not be material.

Significant Customer Relationship

A large portion of the Company's operating revenues is attributable to
customers operating in the salt, forest products and petroleum industries. The
largest ten customers accounted for approximately 51%, 53% and 50% of the
Company's revenues in 1993, 1994 and 1995, respectively. One customer in the
salt industry accounted for approximately 20%, 12% and 9% of the Company's
revenue in 1993, 1994 and 1995, respectively (see Note 14 for a discussion of
recent developments of this significant customer). The Company regularly
grants trade credit to all of its customers. In addition, the Company grants
trade credit to other railroads through the routine interchange of traffic.
Although the Company's accounts receivable include a diverse number of
customers and railroads, the collection of these receivables is substantially
dependent upon the economies of the regions in which the Company operates, the
salt, forest products and petroleum industries, and the railroad sector of the
economy in general.

Disclosures About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:

Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.

Long-term debt: The fair value of the Company's long-term debt is based
on secondary market indicators. Since the Company's debt is not quoted,
estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates
fair value.

Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-8
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. EXPANSION OF RAILROAD OPERATIONS:

Portland & Western Railroad, Inc.--In 1995 the Company formed a new
subsidiary, the Portland & Western Railroad, Inc. ("P&W"). This subsidiary
operates 107 miles of track in Oregon under two lease agreements. See Note 5
for further discussion.

Finger Lakes Railway Corporation--In July of 1995, the Company invested
$175,000 to acquire 44% of the outstanding common stock of this entity. The
Company also provided a $150,000 irrevocable letter of credit in order to
provide assurance that the entity will comply with a certain agreement. This
investment will be recorded on the equity method. The results of operations
and financial position of this entity are not material.

Illinois & Midland Railroad, Inc.--Subsequent to year-end, the Company
formed the Illinois & Midland Railroad, Inc. to purchase certain assets of the
Chicago & Illinois Midland Railway Company for approximately $27.5 million.
See Note 14 for further discussion of this acquisition.

Pittsburg & Shawmut Railroad, Inc.--Subsequent to year-end, the Company
formed the Pittsburg & Shawmut Railroad, Inc. to purchase certain assets of
the Pittsburg & Shawmut Railroad Company, Mountain Laurel Railroad Company and
Red Bank Railroad Company for approximately $15.2 million. See Note 14 for
further discussion of this acquisition.

3. PROPERTY AND EQUIPMENT:

Major classifications of property and equipment are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Road properties..................................... $41,420 $48,691 $57,203
Equipment and other................................. 21,596 30,540 32,323
------- ------- -------
63,016 79,231 89,526
Less--Accumulated depreciation and amortization..... 13,753 17,657 18,917
------- ------- -------
$49,263 $61,574 $70,609
======= ======= =======
</TABLE>

4. OTHER ASSETS:

Other assets includes approximately $605,000 of deferred financing costs at
December 31, 1995, net of accumulated amortization, which were capitalized in
conjunction with the refinancing transaction during 1995 (see Note 6). These
costs are amortized over the period covered by the related revolving credit
agreement using the straight-line method, which is not materially different
from the amortization computed using the effective-interest method.

In 1993 and 1994, the Company wrote off all road property which was being
held for sale or future use to state the property at net realizable value.
These write-offs (approximately $180,000 and $675,000 in 1993 and 1994,
respectively) were recorded as a charge to maintenance of ways and structures
expense.

5. LEASES:

Lessor

A subsidiary leases rolling stock to third parties under agreements that are
accounted for as operating leases. The property held for lease on December 31,
1995, totaled $15,334,000 less accumulated depreciation of

F-9
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$2,904,000. The following is a schedule of minimum future rentals receivable
on noncancelable operating leases (amounts in thousands):

<TABLE>
<S> <C>
1996.............................................................. $ 3,335
1997.............................................................. 3,198
1998.............................................................. 2,910
1999.............................................................. 1,160
2000.............................................................. 1,160
Thereafter........................................................ 3,402
-------
$15,165
=======
</TABLE>

Lessee

The Company has entered into several leases for rolling stock, locomotives
and other equipment. Operating lease expense for the years ended December 31,
1993, 1994 and 1995, was approximately $2,264,000, $2,275,000 and $2,173,000,
respectively. The following is a summary of future minimum payments under
noncancelable leases (amounts in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996....................................................... $1,537 $479
1997....................................................... 1,220 --
1998....................................................... 957 --
1999....................................................... 581 --
2000....................................................... 263 --
Thereafter................................................. 181 --
------ ----
Total minimum payments..................................... $4,739 479
======
Less: Amount representing interest......................... (26)
----
Present value of minimum lease payments.................... $453
====
</TABLE>

Also, the Company entered into a lease agreement with a Class I carrier for
one of its subsidiaries to operate 185 miles of track in Oregon in 1992, and
the subsidiary began operations in 1993. The Company has assumed all operating
and financial responsibilities including maintenance and regulatory
compliance. Under the lease, no payments to the lessor are required as long as
the subsidiary only interchanges its freight traffic with the lessor. Through
December 31, 1995, no payments were required under this lease arrangement. The
lease is subject to an initial 20 year term and shall be renewed for
successive ten year renewal terms, unless either party elects not to renew the
lease. If the lessor terminates the lease for any reason, the lessor must
reimburse the Company for its depreciated basis in the property.

In August, 1995, the P&W signed an agreement with a Class I carrier to lease
and operate 53 miles of track in Oregon. The lease is subject to an initial 20
year term and shall be renewed for an additional ten years, unless either
party elects not to renew the lease. Under the lease, no payments to the
lessor are required as long as the subsidiary maintains minimum levels of
traffic and provided the subsidiary interchanges its freight traffic with only
the lessor and certain permitted carriers. The maximum annual lease payment
required if the P&W did not move any traffic would be $1.3 million. In
October, 1995, the P&W signed an agreement with another Class I carrier to
lease and operate an additional 54 miles of connecting track in Oregon. The
lease is subject to an initial three year term and shall be renewed for
successive three year intervals, unless either party elects not to renew the
lease. Under the lease, no payments to the lessor are required as long as the
subsidiary interchanges its freight traffic with only the lessor and certain
permitted carriers. Under both of these arrangements, the Company has assumed
all operating and financial responsibilities including maintenance and
regulatory compliance. Through December 31, 1995, no payments were required
under either lease arrangement.

No payments have been required under any of the Company's railroad property
leases, and the Company anticipates that its traffic interchange for the
foreseeable future will not result in any payments being incurred under these
railroad property leases. Therefore, the above table does not include any
payments pertaining to the Company's railroad property leases.

F-10
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A subsidiary of the Company has entered into a trackage rights agreement to
operate over 91 miles of a Class I carrier. This agreement is terminable by
either party after 1997.

6. LONG-TERM DEBT:

Long-term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Credit facilities with variable interest depending
upon certain financial ratios of the Company, as
defined (8.44% at December 31, 1995), due
partially in quarterly installments, with balance
due in 2001...................................... $ -- $24,300 $50,201
Promissory note payable with interest at 8% and
principal payments due annually of $1,188,000 if
certain conditions, as specified in the
agreement, are met, with balance due in 1999..... 9,306 9,122 9,122
Term loan payable in quarterly installments,
variable maturities through 2005 with interest
adjusted quarterly at 90-day treasury bill rate
plus 3.25%....................................... 6,691 6,066 5,895
Capital lease obligations with interest at 12.47%,
payable in monthly installments of $47,885
through 1996 (see Note 5)........................ 937 453 322
Secured promissory note with the State of
Illinois, interest at 3%, payable in annual
installments over 10 years beginning on the first
anniversary of the project completion date....... -- -- 667
Other long-term debt with interest rates varying
from 6.75% to 15%, refinanced in 1995 (see
below)........................................... 15,706 -- --
------- ------- -------
32,640 39,941 66,207
Less--Current portion............................. 4,230 1,239 2,894
------- ------- -------
Long-term debt, less current portion.............. $28,410 $38,702 $63,313
======= ======= =======
</TABLE>

On June 2, 1995, the Company refinanced approximately $14.3 million ($15.7
million as of December 31, 1994) of previously existing notes and purchased
approximately $6 million of rolling stock previously under an operating lease
by entering into a credit facilities agreement. In conjunction with this
refinancing transaction, an extraordinary charge for prepayment penalties and
other financing costs on the early extinguishment of debt for approximately
$851,000 ($494,000 net of income taxes) was incurred. These amounts have been
recorded in the accompanying consolidated income statement as an extraordinary
item, net of income taxes.

Subsequent to year-end, on February 8, 1996, the Company amended and
restated the credit facilities agreement. In conjunction with this
transaction, the Company incurred additional indebtedness of approximately
$28.0 million, primarily for the purchase of certain assets of the Chicago &
Illinois Midland Railway Company (see Note 14 for further discussion). The
amended and restated credit facilities provide for a $40 million term loan and
a $34 million revolving credit facility. The term loan requires varying
quarterly principal payments beginning September 30, 1996, with the remaining
balance payable in February, 2001. The revolving credit facility provides for
a mandatory commitment reduction of $2.0 million on December 31, 1997, with
the remaining balance payable in February, 2001. The Company may voluntarily
reduce the commitment on the revolving credit facility at any time without
penalty, provided that no reinstatement of the commitment amounts may occur.
In conjunction with the amendment and restatement, the Company paid debt
financing fees of $1.6

F-11
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

million, primarily to a financial institution. These costs have been
capitalized in the accompanying balance sheets as of March 31, 1996 as an
other asset and are being amortized over the period covered by the related
credit facilities agreement using the straight-line method, which is not
materially different from the amortization computed using the effective-
interest method.

Both the term loan and the revolving credit facility accrue interest at
prime or the Eurodollar rate, at the option of the Company, plus the
applicable margin, which varies from 0% to 3% depending upon the Company's
funded debt to EBITDA ratio, as defined in the agreement. Interest is payable
in arrears based on certain elections of the Company, never to exceed three
months outstanding. The Company pays a 1/2% per annum commitment fee on all
unused portions of the credit facilities. Both the term loan and the revolving
credit facility require mandatory prepayments when certain events occur. These
events include, among other things, the generation of excess cash flow, the
disposition of certain levels of assets not subject to prior liens and the
sale of Company stock, all as defined in the agreement. These credit
facilities are secured by substantially all the assets of the Company and the
stock of certain subsidiaries. These facilities require the maintenance of
certain covenants, including, but not limited to, funded debt to EBITDA,
funded debt to net worth, cash flow coverage, EBIT to interest and minimum net
worth, all as defined in the agreement. The Company is also limited in its
ability to incur additional indebtedness, create liens on its assets, make
certain capital expenditures and pay dividends greater than $32,000 in any one
quarter.

The following is a summary of the maturities of long-term debt as of
December 31, 1995, as adjusted to reflect the payment terms of the amended and
restated credit facilities (amounts in thousands):

<TABLE>
<S> <C>
1996............................................................ $ 1,239
1997............................................................ 2,035
1998............................................................ 2,002
1999............................................................ 7,434
2000............................................................ 825
2001............................................................ 24,775
Thereafter...................................................... 1,631
-------
$39,941
=======
</TABLE>

The promissory note payable with an outstanding balance of $9,122,000 at
December 31, 1995, provides for annual principal payments of $1,188,000
provided that certain levels of revenue and cash flow are met. In accordance
with these provisions, the Company was not required to make any principal
payments in 1994 or 1995. The Company did, however, make principal payments of
$177,000 and $184,000 in 1994 and 1995, respectively, due to additional
requirements regarding the sale of assets, as defined in the agreement.
Management believes that the Company will be required to make the full
principal payments beginning in 1997 through the due date of the note. The
annual debt maturity schedule has been adjusted accordingly.

The Company's debt has been secured by substantially all the assets of the
Company and the stock of certain subsidiaries. Certain obligations require the
maintenance of covenants including, but not limited to, funded debt to
EBITDAR, funded debt to net worth, EBIT to interest, cash flow and the
incurrence of additional indebtedness, as defined in the agreement. The
Company and its subsidiaries were in compliance with the provisions of these
covenants as of December 31, 1995.

7. INTEREST RATE RISK MANAGEMENT:

The Company uses derivative financial instruments, specifically interest
rate caps and interest rate swaps, to manage its variable interest rate risk
on long-term debt.

F-12
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Interest Rate Cap--In August, 1995, the Company entered into a three-year
interest rate cap agreement whereby the Company paid $90,000 to a financial
institution in order to cap the rate on three-month dollar deposits, as
defined, to a fixed rate of 8.0%. The notional amount under this agreement
reduces on a quarterly basis in varying amounts from $15,250,000 at September
30, 1995, to $11,438,000 at September 30, 1998 ($15,000,000 at December 31,
1995). The fees paid by the Company for the interest rate cap were capitalized
and are amortized over the period covered by the agreement.

Interest Rate Swap--On February 14, 1996, the Company entered into a three-
year interest rate swap agreement with a financial institution whereby the
Company fixed its LIBOR interest rate at 5.14% by exchanging its variable
interest rate on long-term debt for a fixed interest rate. The notional amount
under this agreement is $10.0 million. Any fees paid or received under this
arrangement are accrued as earned, the effect of which results in fixed
interest expense over the period covered by the agreement.

Interest Rate Risk Management Commitment--In conjunction with amending and
restating the Company's existing credit facilities as discussed in Note 6, the
Company entered a commitment to provide interest rate protection for at least
50% of the commitment amount ($37.0 million as of February 8, 1996) under the
credit facilities by June 30, 1996. This commitment will be waived if the
Company's ratio of funded debt to net worth, as defined, is less than 1.50 to
1.00 as of June 30, 1996.

8. EMPLOYEE BENEFIT PLANS:

Pension

The Company administers a noncontributory defined benefit plan for the
employees of a subsidiary who are members of a union and who meet minimum
service requirements. Benefits are determined based on a fixed amount per year
of credited service. The Company's funding policy is to make contributions for
pension benefits based on actuarial computations which reflect the long-term
nature of the plan. Contributions are subject to Board of Directors approval.
The Company has met the minimum funding requirements according to the Employee
Retirement Income Security Act.

Pension costs for 1993, 1994 and 1995 were approximately $13,000, $13,000,
and $14,000, respectively. The pension liability recognized in the
accompanying consolidated balance sheet at December 31, 1994 and 1995, was
approximately $85,000 and $80,000, respectively. The projected benefit
obligation was determined using a discount rate of 7.8%. The long-term rate of
return on plan assets was 7.5%. The plan assets, which consist of fixed income
securities, were approximately $109,000 and $117,000, respectively, at
December 31, 1994 and 1995. The unrecognized net transition obligation is
being amortized over the remaining service lives of plan participants.

Postretirement Benefits

The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106), on January 1, 1993. This statement requires that employers recognize the
cost of providing benefits other than pensions to retirees during the years an
employee provides services.

Historically, the Company has provided certain health care and life
insurance benefits for certain retired employees. Eligible employees include
union employees for one of its subsidiaries, and certain nonunion employees
who have reached the age of 55 with 30 or more years of service. The Company
funds the plan on a pay-as-you-go basis.

F-13
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Total postretirement benefit costs for the years ended December 31, 1993,
1994 and 1995, were $711,000, $55,000 and $49,000, respectively, $656,000 of
which in 1993 represented the immediate recognition of the transition
obligation on the cumulative effect of accounting change for postretirement
benefits. The funded status of the plan at December 31, 1994 and 1995, was as
follows (amounts in thousands):

<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation--
Fully eligible active participants.............................. $ 3 $ 4
Other active participants....................................... 114 145
Retirees........................................................ 460 486
---- ----
577 635
Plan assets at fair value......................................... -- --
---- ----
Accumulated postretirement benefit obligation in excess of plan
assets........................................................... 577 635
Unrecognized net gain resulting from change in actuarial assump-
tions............................................................ 99 51
---- ----
Accrued postretirement benefit cost............................... $676 $686
==== ====
</TABLE>

For measurement purposes, a 10.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996 and 1997. The rate
was then assumed to gradually decrease to 5% by the year 2002, at which time
the rate was assumed to remain level. To illustrate the effect of these
assumptions, increasing the assumed health care cost trend by 1% each year
would increase the accumulated postretirement benefit obligation as of
December 31, 1995, by approximately $65,000 and the net periodic
postretirement benefit cost for 1995 by approximately $6,000.

Relevant assumptions used in accounting for the postretirement benefit plan
as of December 31 were as follows:

<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Weighted average discount rate................................... 7.5% 7.5%
Long-term rate of return on plan assets.......................... N/A N/A
=== ===
</TABLE>

Employee Bonus Programs

The Company has performance-based bonus programs which include a majority of
nonunion employees. Key employees are granted bonuses on a discretionary
basis. Total compensation of approximately $92,000, $314,000 and $308,000 was
awarded under the various bonus plans in 1993, 1994 and 1995, respectively.

Profit Sharing

The Company maintains a defined contribution profit-sharing plan for two
subsidiaries. There were no contributions in 1993, 1994 or 1995.

Effective January 1, 1994, the Company established two 401(k) plans covering
union and nonunion employees who have met specified length of service
requirements. The 401(k) plans qualify under Section 401(k) of the Internal
Revenue Code as salary reduction plans. Employees may elect to contribute a
certain percentage of their salary on a before-tax basis. For nonunion
employees, the Company matches the participants contributions up to 1 1/2% of
the participants salary. The Company's contributions to the plans in 1994 and
1995 were approximately $70,000 and $83,000, respectively.

F-14
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Postemployment Benefits

The Company does not provide postemployment benefits to its employees.

9. INCOME TAXES:

The Company files consolidated U.S. federal income tax returns which include
all of its subsidiaries. The components of the provision for income taxes on
income before extraordinary item and cumulative effect of accounting change
are as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current--
Federal.................................. $ 473 $1,123 $ 550 $ 54 $ 332
State.................................... 3 146 111 30 60
Deferred................................... 952 738 811 279 264
------ ------ ------ ------- -------
$1,428 $2,007 $1,472 $ 363 $ 656
====== ====== ====== ======= =======
</TABLE>

The provision for income taxes on income before extraordinary item and
cumulative effect of accounting change in each period differs from that which
would be computed by applying the statutory U.S. federal income tax rate to
the income before taxes. The following is a summary of the effective tax rate
reconciliation:

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax provision at statutory rate.............. 34.0% 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit..................................... 6.9 4.6 4.0 6.3 4.5
Other, net................................... .6 1.4 2.6 1.7 2.0
---- ---- ---- ------ ------
41.5% 40.0% 40.6% 42.0% 40.5%
==== ==== ==== ====== ======
</TABLE>

The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax
liability, which is classified between current and long-term in the
accompanying consolidated balance sheets (amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets--
Accruals and reserves not deducted for tax pur-
poses until paid.............................. $ 1,349 $ 1,438 $ 1,554
Alternative minimum tax credits................ 2,487 2,903 3,258
Net operating losses........................... 219 489 111
Investment tax credits......................... 156 52 --
Postretirement benefits........................ 271 272 272
Other.......................................... 140 74 63
------- ------- -------
4,622 5,228 5,258
Deferred tax liability--differences in deprecia-
tion and amortization........................... (6,672) (8,089) (8,383)
------- ------- -------
Net deferred tax liability................... $(2,050) $(2,861) $(3,125)
======= ======= =======
</TABLE>

F-15
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company's alternative minimum tax credits can be carried forward
indefinitely; however, the Company must achieve future regular taxable income
in order to realize this credit. The Company's net operating loss
carryforwards expire between 2008 and 2010. The investment tax credits expire
in 2000. Management does not believe that a valuation allowance is required
for the deferred tax assets based on anticipated future profit levels and the
reversal of current temporary differences.

10. GRANTS FROM GOVERNMENTAL AGENCIES:

During 1995, a subsidiary of the Company received a grant from the State of
Pennsylvania of $3,500,000 for rehabilitation of a portion of the subsidiary's
track. The agreement requires the State of Pennsylvania to reimburse the
subsidiary for 75% of the total costs of the project. This project was
approximately 85% completed as of December 31, 1995. Another subsidiary of the
Company received a grant from the State of Louisiana of $300,000 for
rehabilitation of a portion of the subsidiary's track. This project was
substantially completed as of December 31, 1995.

During 1994, three subsidiaries of the Company received grants totaling
approximately $1,755,000 from the State of Pennsylvania for the rehabilitation
of a portion of each subsidiary's track. The agreements require the State to
reimburse each subsidiary for 70%-75% of the total costs for each
rehabilitation project. Each of these rehabilitation projects was completed by
December 31, 1994.

During a prior year, a subsidiary of the Company received a grant from the
State of New York of $4,000,000 for the rehabilitation of a portion of the
subsidiary's track. This subsidiary also received a grant of $900,000 from the
Federal Railroad Administration for the same rehabilitation project. The State
of New York is entitled to 63.8% of the net liquidation value of the
rehabilitated track upon abandonment. The State of New York agreement also
requires the subsidiary to maintain the track structure by making capital
improvements with a value equal to or less than $4,000,000, payable over a 10
year period beginning on April 1, 1994. The capital improvements are computed
based on the number of loaded cars moved over the subsidiary's track. Failure
by the Company to propose the capital improvements by March 1 of the following
year will result in the State of New York assessing a penalty in the form of a
usage fee, thereby requiring the Company to repay a portion of the grant equal
to the required capital improvements. The Company believes that it has
proposed and/or performed capital improvements which eliminate any repayments
associated with the grant.

All of the aforementioned grants do not represent a future liability of the
Company unless the Company abandons the rehabilitated track structure within a
specified period of time, as defined in the respective agreements. As the
Company does not intend to abandon the track, the Company has recorded
additions to road property and has deferred the amount of the grants as the
rehabilitation expenditures have been incurred. The amortization of the
deferred grant is a noncash offset to depreciation expense over the useful
life of the related assets and is not included as taxable income. During the
years ended December 31, 1993, 1994 and 1995, the Company recorded offsets to
depreciation expense from grant amortization of $279,000, $313,000 and
$415,000, respectively.

11. COMMITMENTS AND CONTINGENCIES:

The Company has built its portfolio of railroad properties through the
purchase or lease of road and track structure and through operating
agreements. These transactions have related only to the physical assets of the
railroad property. Historically, the Company does not assume the operations or
liabilities of the divesting railroads.

In connection with the Company's lease of its 185-mile line in Oregon (see
Note 5), the Company has committed to the lessor to rehabilitate 25 miles of
track over five years, beginning February, 1993, at an estimated total cost of
approximately $5.0 million. As of December 31, 1995, the Company has completed
approximately $1.0 million of this rehabilitation.

F-16
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company is a defendant in certain lawsuits resulting from the railroad
operations. Management believes that adequate provision has been made in the
financial statements for any expected liabilities which may result from
disposition of such lawsuits. While it is possible that some of the foregoing
matters may be settled at a cost greater than that provided for, it is the
opinion of management that the ultimate liability, if any, will not be
material to the Company.

12. STOCKHOLDERS' EQUITY:

The Company entered into an agreement in 1978 (extended in 1987) with its
president whereby options to purchase 90,650 shares were granted. In 1994, the
remaining outstanding options to purchase 44,400 shares were exercised.

In conjunction with the amendment and restatement of the Company's credit
facilities as discussed in Note 6, detachable warrants were issued to a
financial institution to purchase 41,847 shares of Class A Common Stock at an
exercise price of $0.0005 per share. These warrants are exercisable at any
time through March 1, 2006. Issuance of additional warrants for the purchase
of 11,950 shares of Class A Common Stock are required if the Company does not
successfully complete an initial public offering of at least $30 million in
net proceeds by December 31, 1996. These warrants provide a put option whereby
the warrant holder can require the Company to repurchase the shares based on
market value, as defined in the agreement. This put option is exercisable
under certain conditions after March 1, 2001. The warrants also provide a call
option whereby the Company can elect to repurchase the shares based on market
value, as defined in the agreement. This call option is exercisable under
certain conditions after March 1, 2003. Management has valued the warrants at
approximately $471,000, the amount of which was recorded as a debt discount in
the three-month period ending March 31, 1996. The discount is being amortized
over the period covered by the related credit facilities agreement using the
straight-line method, which is not materially different from the amortization
computed using the effective-interest method.

13. ACCOUNTING PRONOUNCEMENTS:

In March, 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("FAS 121") was issued. Under FAS 121, an impairment loss
must be recognized for long-lived assets and certain identifiable intangibles
to be held and used by an entity whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. FAS 121
is effective for financial statements issued for fiscal years beginning after
December 15, 1995, and must be adopted on a prospective basis. Restatement of
previously issued financial statements is not permitted. The Company adopted
FAS 121 prospectively in the first quarter of 1996, the adoption of which did
not have a material impact on the financial condition or results of operations
of the Company.

14. POST DECEMBER 31, 1995 EVENTS:

Illinois & Midland Railroad, Inc.--On February 8, 1996, a newly-formed
subsidiary, the Illinois & Midland Railroad, Inc., purchased certain assets,
primarily road and track structure, of the Chicago & Illinois Midland Railway
Company for approximately $27.5 million, including related costs and the
assumption of certain

F-17
<PAGE>

liabilities. The purchase price was allocated to purchased inventory
($750,000), assumed note receivable ($1,220,000), property ($10,546,000), and
the service assurance agreement ($14,981,000). This subsidiary will operate
approximately 126 miles of track in the State of Illinois. A significant
portion of this subsidiary's operating revenues (83% in 1995) is attributable
to coal shipments for one customer which is an electric utility. The
acquisition was accounted for as a purchase. The allocation of the purchase
price is based on preliminary estimates and may be revised at a later date.

Pittsburg & Shawmut Railroad, Inc.--On April 29, 1996, a newly formed
subsidiary, the Pittsburg & Shawmut Railroad, Inc. purchased certain assets,
primarily road and track structure, of the Pittsburg & Shawmut Railroad
Company, Mountain Laurel Railroad Company, and Red Bank Railroad Company for
approximately $15.2 million, including related costs and the assumption of a
grant from the Commonwealth of Pennsylvania. In addition, the purchase and
sale agreement provides for additional contingency payments of up to $2.5
million. A portion of these payments are required (up to a maximum of
$500,000) if certain coal shipments during any calendar year from 1997-1999,
as defined, exceed 290,000 tons. The remaining contingency payments (up to a
maximum of $2.0 million) are calculated as 25% of the gross revenues
attributable to certain coal shipments that exceed 564,793 tons during any
calendar year from 2000-2009, as defined. Upon resolution of the amount of the
contingency payments, there will be an additional element of cost related to
the transaction, which will be recorded as excess cost over the fair market
value of tangible net assets acquired and amortized over the same period as
the related track structure, which is 20 years. A significant portion of this
subsidiary's revenue is attributable to coal shipments. The acquisition was
accounted for as a purchase. The allocation of the purchase price is based on
preliminary estimates and may be revised at a later date.

Pro Forma for Acquisitions--Results for the operations of the Illinois &
Midland Railroad, Inc. and the Pittsburg & Shawmut Railroad, Inc. are included
within the consolidated financial statements subsequent to February 8, 1996,
and April 29, 1996, respectively. Unaudited pro forma results assuming both
acquisitions had been made as of January 1, 1995, are as follows (in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, 1995 MARCH 31, 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.......................................... $18,204 $19,448
Net income........................................ 1,393 280
Net income per share.............................. $0.59 $0.12
======= =======
</TABLE>

The above information reflects adjustments for only depreciation,
amortization and interest expense based on the new cost basis and debt
structure of the Company. Income per share information has been adjusted for
the stock split, but not for the underwritten initial public offering.

Recent Developments of Significant Customer--As discussed in Note 1, a
significant portion of the Company's revenue is attributable to a customer
operating in the salt industry. This customer accounted for approximately 9%
of the Company's revenue for 1995, of which 40% was for freight hauling and
60% represented car rental revenue. Similar amounts for 1993 were 20%, 61% and
39%, respectively. Similar amounts for 1994 were 12%, 43% and 57%,
respectively. On March 12, 1994, this customer experienced a subsidence and
subsequent flooding at its Retsof, New York, salt mine. Salt shipments by rail
ceased until August, 1994. Rail shipments then resumed and continued, at a
lower level than experienced before the subsidence, until September, 1995,
when the mine closed. Car rental revenue from long-term operating leases with
this customer is unaffected.

This customer had previously announced its intentions to construct a new
mine. On April 22, 1996, this customer announced that a new mine will not be
constructed and that the closed mine will be converted to a distribution
center. In anticipation of the construction of a new mine, the Company
incurred approximately $600,000 of costs in connection with construction of a
rail spur. While management anticipates that it will be reimbursed for these
costs, there can be no assurance that such reimbursement will occur.

F-18
<PAGE>

GENESEE & WYOMING INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Initial Public Offering and Related Stock Transactions--On June 12, 1996 the
Company filed an amended registration statement with the Securities and
Exchange Commission for an underwritten initial public offering of 2,648,000
shares of Class A Common Stock (the Common Stock Offering), of which 2,500,000
shares will be offered by the Company and 148,000 shares will be offered by a
selling stockholder. The proceeds of the Common Stock Offering will be used to
pay down borrowings on the credit facilities.

In connection with the Common Stock Offering, the Company, effective June
10, 1996, changed the par value of its Class A and Class B Common Stock from
$10 per share to $.01 per share and increased the shares authorized to 12
million and 1.5 million shares, respectively. The rights and privileges of
Class B Common Stock changed to substantially the same as Class A Common
Stock, except it will carry 10 votes per share, be convertible into Class A
Common Stock and have transfer restrictions. The Class A Common Stock also has
a 10% dividend preference over Class B Common Stock, as and if dividends are
declared by the Board of Directors. Also, the Company executed an 18.5 to 1
stock split and reclassified the Company's outstanding Class A Common Stock
into Class A and Class B Common Stock, depending on the election of the
shareholder. For purposes of this statement the reclassification has been
assumed to be equal between Class A and Class B Common Stock.

Also, the Company established an incentive and nonqualified stock option
plan for key employees and a nonqualified stock option plan for nonemployee
directors that will allow employees and directors to purchase up to an
aggregate of 500,000 shares of Class A Common Stock. In addition, the Company
established an employee stock purchase plan and reserved 450,000 shares under
the plan. The plan allows employees to purchase stock at market value.

All references in the consolidated financial statements of the Company to
the number of shares authorized and outstanding of Class A and Class B Common
Stock have been retroactively adjusted to reflect the reclassification of the
capital stock and the stock split.

F-19
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Genesee & Wyoming Inc.:

We have audited the accompanying balance sheets of CHICAGO & ILLINOIS MIDLAND
RAILWAY COMPANY (an Illinois corporation) as of December 31, 1994 and 1995,
and the related statements of operations, shareholder's equity and cash flows
for each of the three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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 provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chicago & Illinois Midland
Railway Company as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Chicago, Illinois
April 4, 1996

F-20
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- FEBRUARY 8,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 46 $ 419 $ 124
Accounts receivable............................. 3,972 4,360 3,127
Materials and supplies.......................... 993 733 750
Other current assets............................ 541 302 859
------- ------- -------
Total current assets.......................... 5,552 5,814 4,860
------- ------- -------
PROPERTY AND EQUIPMENT, NET....................... 27,321 10,630 10,546
------- ------- -------
LONG-TERM RECEIVABLE FROM AFFILIATE............... 360 439 439
------- ------- -------
OTHER ASSETS, NET................................. 15,888 15,790 15,711
------- ------- -------
Total assets................................. $49,121 $32,673 $31,556
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 7,029 $ 8,367 $ 8,129
Accrued expenses................................ 1,509 1,286 1,740
------- ------- -------
Total current liabilities..................... 8,538 9,653 9,869
------- ------- -------
LONG-TERM DEBT:
Affiliates...................................... 8,500 8,500 8,500
Other........................................... 9,323 5,281 4,712
------- ------- -------
Total long-term debt.......................... 17,823 13,781 13,212
------- ------- -------
OTHER LIABILITIES................................. 1,395 1,252 1,095
------- ------- -------
DEFERRED INCOME TAX LIABILITIES, NET.............. 12,394 6,462 6,439
------- ------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDER'S EQUITY:
Common stock, no par value; 10,000,000 shares
authorized; 3,130,016 shares issued and out-
standing....................................... 3,524 3,524 3,524
Retained earnings (deficit)..................... 5,447 (1,999) (2,583)
------- ------- -------
Total shareholder's equity.................... 8,971 1,525 941
------- ------- -------
Total liabilities and shareholder's equity... $49,121 $32,673 $31,556
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-21
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ONE MONTH AND
EIGHT DAY
YEARS ENDED DECEMBER 31, PERIOD ENDED
---------------------------- FEBRUARY 8,
1993 1994 1995 1996
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES................. $ 13,983 $ 9,365 $ 13,733 $1,420
OPERATING EXPENSES:
Transportation.................... 3,017 2,547 2,593 532
Maintenance of ways and struc-
tures............................ 1,702 1,752 1,814 411
Maintenance of equipment.......... 1,401 2,579 1,659 390
General and administrative........ 2,693 2,134 2,203 757
Depreciation and amortization..... 1,569 1,579 1,437 184
-------- -------- -------- ------
Total operating expenses....... 10,382 10,591 9,706 2,274
-------- -------- -------- ------
Income (loss) from operations.. 3,601 (1,226) 4,027 (854)
INTEREST EXPENSE................... (1,345) (1,613) (1,461) (107)
OTHER INCOME....................... 2,162 533 1,525 17
LOSS ON SALE OF ASSETS (Note 11)... -- -- (16,082) --
-------- -------- -------- ------
Income (loss) before income
taxes......................... 4,418 (2,306) (11,991) (944)
PROVISION (BENEFIT) FOR INCOME TAX-
ES................................ 1,747 (850) (4,545) (360)
-------- -------- -------- ------
NET INCOME (LOSS).................. $ 2,671 $ (1,456) $ (7,446) $ (584)
======== ======== ======== ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-22
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
-------------
RETAINED
EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ --------- -------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993....................... 3,130 $3,524 $ 4,232 $ 7,756
Net income................................... -- -- 2,671 2,671
----- ------ ------- -------
BALANCE, December 31, 1993..................... 3,130 3,524 6,903 10,427
Net loss..................................... -- -- (1,456) (1,456)
----- ------ ------- -------
BALANCE, December 31, 1994..................... 3,130 3,524 5,447 8,971
Net loss..................................... -- -- (7,446) (7,446)
----- ------ ------- -------
BALANCE, December 31, 1995..................... 3,130 3,524 (1,999) 1,525
Net loss (Unaudited)......................... -- -- (584) (584)
----- ------ ------- -------
BALANCE, February 8, 1996 (Unaudited).......... 3,130 $3,524 $(2,583) $ 941
===== ====== ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-23
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ONE MONTH AND
EIGHT DAY
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------- FEBRUARY 8,
1993 1994 1995 1996
------- -------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ 2,671 $ (1,456) $(7,446) $(584)
Adjustments to reconcile net income
(loss) to net cash (used in) pro-
vided by operating activities--
Depreciation and amortization...... 1,569 1,579 1,439 184
Deferred income taxes.............. 387 (850) (5,932) (23)
Gain on disposition of equipment... -- -- (1,074) --
Loss on sale of assets (Note 11)... -- -- 16,082 --
Changes in assets and liabilities--
Accounts receivable.............. (250) 697 (388) 1,233
Materials and supplies........... 190 294 (167) (17)
Other current assets............. (63) (76) 239 (557)
Accounts payable and accrued ex-
penses.......................... (2,357) (1,624) 1,115 216
Other assets and liabilities,
net............................. (2,582) 146 (176) (131)
------- -------- ------- -----
Net cash (used in) provided by
operating
activities...................... (435) (1,290) 3,692 321
------- -------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.. (874) (1,362) (2,829) (47)
Proceeds from disposition of prop-
erty and equipment................. 83 66 4,007 --
Deposit on equipment................ -- -- (376) --
Advances to affiliate, net.......... -- (360) (79) --
------- -------- ------- -----
Net cash (used in) provided by
investing activities............ (791) (1,656) 723 (47)
------- -------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................... 1,075 2,498 271 11
Principal payments on long-term
debt............................... -- -- (4,313) (580)
------- -------- ------- -----
Net cash provided by (used in)
financing
activities...................... 1,075 2,498 (4,042) (569)
------- -------- ------- -----
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................... (151) (448) 373 (295)
CASH AND CASH EQUIVALENTS, beginning
of period........................... 645 494 46 419
------- -------- ------- -----
CASH AND CASH EQUIVALENTS, end of pe-
riod................................ $ 494 $ 46 $ 419 $ 124
======= ======== ======= =====
CASH PAID DURING THE PERIOD FOR:
Interest........................... $ 1,350 $ 1,498 $ 1,548 $ 269
Income taxes (refunds)............. 1,830 (275) 1,574 --
======= ======== ======= =====
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-24
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

NOTES TO FINANCIAL STATEMENTS

(DATA WITH RESPECT TO THE ONE MONTH AND EIGHT DAY PERIOD ENDED FEBRUARY 8,
1996 ARE UNAUDITED)

1. THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Chicago & Illinois Midland Railway Company (the "Company") is a short-line
railroad located in Illinois that operates over 126 miles of track, including
29 miles of trackage rights over two Class I carriers and a terminal switching
carrier. The Company is a wholly-owned subsidiary of Pawnee Railroad Company
("Pawnee").

In the opinion of management, the unaudited financial statements for the one
month and eight day period ended February 8, 1996, are presented on a basis
consistent with the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for the interim period are not
necessarily indicative of results of operations for the full year.

Revenue Recognition

Cash Equivalents

The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.

Materials and Supplies

Materials and supplies, consisting primarily of fuel and replacement parts,
are valued at the lower of average cost or market.

Property and Equipment

Property and equipment are carried at historical cost. Major renewals or
betterments are capitalized while routine maintenance and repairs, which do
not improve or extend asset lives, are charged to expense when incurred. Gains
or losses on sales or other dispositions are credited or charged to other
income. Depreciation is provided using the straight-line method over the
estimated useful lives of the property and are as follows:

<TABLE>
<S> <C>
Road properties............................................... 24-79 years
Equipment..................................................... 8-33 years
</TABLE>

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of the property and
equipment may not be recoverable. When factors indicate that the asset should
be evaluated for possible impairment, the Company uses an estimate of the
related undiscounted future cash flows over the remaining useful life of the
asset in measuring whether the asset is recoverable.

Income Taxes

The Company is a member of a group that files a consolidated tax return. The
consolidated amount of current and deferred tax expense is allocated among the
members of the group based on each entity's tax attributes using a separate
return approach.

F-25
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Significant Customer Relationship

A large portion of the Company's operating revenues is attributable to the
shipment of coal for an electric utility. This customer accounted for
approximately 77%, 78% and 83% of the Company's operating revenues in 1993,
1994 and 1995, respectively. This traffic is covered under a service assurance
agreement. See Note 4 for further discussion.

Disclosures About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:

Current assets and current liabilities: The carrying amount approximates
fair value due to the short maturity of these items.

Long-term debt: The fair value of the Company's long-term debt is based on
secondary market indicators. Since the Company's debt is not quoted,
estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair
value.

Management Estimates

2. OTHER INCOME:

In 1993, the Company settled a significant lawsuit for a third-party
crossing accident. Total cash paid for the settlement was $600,000, resulting
in a gain, from reversal of the related reserve, of $1,900,000 which is
included in other income.

In 1995, the Company sold various railcars and locomotives to third-parties
for proceeds of approximately $4,007,000. The Company realized a gain on these
transactions of approximately $1,074,000 which is included in other income.

3. PROPERTY AND EQUIPMENT:

Major classifications of property and equipment are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- FEBRUARY 8,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Road properties..................................... $26,922 $27,696 $27,550
Equipment and other................................. 6,046 2,741 2,922
------- ------- -------
32,968 30,437 30,472
Less--Accumulated depreciation...................... 5,647 19,807 19,926
------- ------- -------
$27,321 $10,630 $10,546
======= ======= =======
</TABLE>

F-26
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

4. OTHER ASSETS:

Other assets at December 31, 1994 and 1995, consist of the following
(amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- FEBRUARY 8,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Service assurance agreement with significant cus-
tomer............................................. $17,238 $17,238 $17,238
Organization costs................................. 446 446 446
Other.............................................. 210 617 591
------- ------- -------
17,894 18,301 18,275
Less--Accumulated amortization..................... 2,006 2,511 2,564
------- ------- -------
$15,888 $15,790 $15,711
======= ======= =======
</TABLE>

The service assurance agreement represents a commitment from the Company's
significant customer which grants the Company the exclusive right to service
three of the customer's facilities indefinitely. The service assurance
agreement is being amortized on a straight-line basis over a 40-year period
through the year 2029. Organization costs are being amortized over seven years
through 1998. Amortization included in the statements of operations for each
of the three years in the period ended December 31, 1995, was $505,000.

5. OPERATING LEASE AGREEMENTS:

The Company has entered into several leases for rolling stock. As of
December 31, 1995, the Company is a lessee for 110 rotary gondolas. This
agreement requires payments of $230 per car per month ($303,600 annually)
through December 31, 1999, for total future minimum lease payments as of
December 31, 1995 of $1,214,000. The Company subleases the same 110 rotary
gondolas to another party. Actual future rental receipts from this sublease
are dependent, in part, upon usage by the lessee. Minimum future rentals to be
received under noncancelable leases in effect at December 31, 1995, are
$442,000, all of which are due in 1996. The net effect of all lease
arrangements are classified as a reduction in maintenance of equipment expense
in the accompanying statements of income. Net reductions in maintenance of
equipment expense for the years ended December 31, 1993, 1994 and 1995 were
approximately $939,000, $1,249,000 and $358,000, respectively. Subsequent to
year-end, the Company assigned both of the above lease arrangements to
Illinois & Midland Railroad, Inc. in conjunction with the transaction
discussed in Note 11.

6. LONG-TERM DEBT:

Long-term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- FEBRUARY 8,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured senior notes due to affiliate with
interest at 10.5%, due December 31, 1998.......... $ 8,500 $ 8,500 $ 8,500
Revolving line of credit with interest at prime or
the Eurodollar rate, as appropriate, plus an
applicable margin, as defined (9.00% and 7.94%,
respectively, at December 31, 1995), due according
to annual commitment reduction amounts with the
balance due on April 10, 1998, secured by
substantially all the assets of the Company....... 8,938 4,625 4,045
Secured promissory note with the State of Illinois,
interest at 3%, payable in annual installments
over 10 years beginning on the first anniversary
of the project completion date.................... 385 656 667
------- ------- -------
Total long-term debt............................. $17,823 $13,781 $13,212
======= ======= =======
</TABLE>

F-27
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Subsequent to year-end, on February 8, 1996, all of the Company's long-term
debt was either paid in full or assumed by Illinois & Midland Railroad, Inc.
See Note 11 for further discussion.

Both the unsecured senior notes and the revolving line of credit require the
maintenance of certain covenants, including, but not limited to, minimum net
worth, minimum fixed obligation coverage and maximum debt to net worth. The
Company was in compliance with the provisions of these covenants as of
December 31, 1995.

7. RELATED PARTIES:

The unsecured senior notes for $8,500,000 (see Note 6) are payable to
stockholders of Pawnee. As of December 31, 1994 and 1995, the Company owed
interest totaling $223,000 on these notes. Interest expense on these notes for
each of the three years ended December 31, 1995, was $893,000. Included in
other current assets at December 31, 1994 and 1995, are $367,000 and $155,000,
respectively, due from Pawnee and related entities.

During 1994, the Company advanced $1,360,600 at 8% interest to Pawnee
Transportation Company ("PTC"), a wholly owned subsidiary of Pawnee, in
connection with the construction of a coal unloading facility located at the
Company's rail yard in Kincaid, Illinois. At December 31, 1994 and 1995, PTC
owed $360,000 and $439,000, respectively, to the Company under this
arrangement. Included in other income for the years ended December 31, 1994
and 1995, is $54,000 and $93,000, respectively, of interest earned from PTC.

8. EMPLOYEE BENEFIT PLANS:

Retirement benefits for all employees of the Company are provided for in
accordance with the Railroad Retirement Act.

The Company has 401(k) plans in effect for all management and certain union
employees. The 401(k) plans qualify under Section 401(k) of the Internal
Revenue Code as salary reduction plans. Employees may elect to contribute a
certain percentage of their salary on a before-tax basis. The Company matches
50% of eligible employee contributions up to a maximum percentage of the
employee's salary, as approved by the Board of Directors. Such percentage was
6% in 1993 and ranged from 1% to 6% for 1994 and 3% to 4% in 1995. For the
years ended December 31, 1993, 1994 and 1995, the Company contributed $44,000,
$60,000 and $41,000, respectively, to those plans on behalf of its employees.

9. INCOME TAXES:

The components of the provision (benefit) for income taxes are as follows
(amounts in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
--------------------- FEBRUARY 8,
1993 1994 1995 1996
------ ----- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current--
Federal................................ $ 955 $ -- $ 1,113 $(274)
State.................................. 221 -- 274 (63)
Deferred--
Federal ............................... 471 (701) (4,913) (19)
State.................................. 100 (149) (1,019) (4)
------ ----- ------- -----
$1,747 $(850) $(4,545) $(360)
====== ===== ======= =====
</TABLE>

F-28
<PAGE>

CHICAGO & ILLINOIS MIDLAND RAILWAY COMPANY

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The provision (benefit) for income taxes differs from that which would be
computed by applying the statutory U.S. federal income tax rate to income
(loss) before taxes. The following is a summary of the effective tax rate
reconciliation:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD ENDED
------------------- FEBRUARY 8,
1993 1994 1995 1996
---- ----- ----- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax provision (benefit) at statutory
rate.................................... 34.0% (34.0)% (34.0)% (34.0) %
State income taxes, net of federal income
tax benefit............................. 4.8 (4.3) (4.9) (4.7)
Other, net............................... .7 1.4 1.0 .6
---- ----- ----- -----
39.5% (36.9)% (37.9)% (38.1)%
==== ===== ===== =====
</TABLE>

The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax
liability in the accompanying balance sheets (amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- FEBRUARY 8,
1994 1995 1996
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liability--differences in depre-
ciation and amortization..................... $13,512 $6,993 $6,970
Accruals for casualty claims.................. (595) (518) (518)
Other......................................... (33) (13) (13)
NOL........................................... (490) -- --
------- ------ ------
Net deferred tax liability................ $12,394 $6,462 $6,439
======= ====== ======
</TABLE>

Management does not believe that a valuation allowance is required for the
deferred tax assets based on anticipated future profit levels and the reversal
of current temporary differences.

10. COMMITMENTS AND CONTINGENCIES:

The Company is a defendant in certain lawsuits resulting from its railroad
operations. Management believes that adequate provision has been made in the
financial statements for any expected liabilities which may result from
disposition of such lawsuits. While it is possible that some of the foregoing
matters may be settled at a cost greater than that provided for, it is the
opinion of management that the ultimate liability, if any, will not be
material to the Company's results of operations or financial position.

11. SUBSEQUENT EVENT:

Subsequent to year-end, on February 8, 1996, the common stock of Pawnee was
sold to Stanford PRC Acquisition Corporation ("Stanford"), and Stanford and
Pawnee were merged into the Company. Also on this date, substantially all of
the assets of the Company, primarily road and track structure, were sold to
Illinois & Midland Railroad, Inc. (an unrelated entity) for approximately
$27.5 million, including related costs and the assumption of certain
liabilities. The sale of assets represented a loss of approximately $16.1
million, as the book value of the assets sold exceeded the purchase price. The
Company recognized a loss on the sale of assets in the 1995 financial
statements to write down the property and equipment ($15,655,000) and the
materials and supplies ($427,000) to net realizable value. The proceeds from
this transaction were used to pay off the remaining debt instruments. The
Company is in the process of liquidating its remaining assets and liabilities.
Operations of the railroad by the Company have ceased.

F-29
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Genesee & Wyoming Inc.:

We have audited the accompanying combined balance sheets of THE PITTSBURG &
SHAWMUT RAILROAD COMPANY, MOUNTAIN LAUREL RAILROAD COMPANY AND RED BANK
RAILROAD COMPANY (Pennsylvania corporations) as of December 31, 1994 and 1995,
and the related combined statements of operations, shareholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Pittsburg & Shawmut
Railroad Company, Mountain Laurel Railroad Company and Red Bank Railroad
Company as of December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.

As explained in Note 4 to the financial statements, effective January 1, 1994,
the Companies adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."

Arthur Andersen LLP

Chicago, Illinois
March 8, 1996 (except with respect to
matters discussed in Note 11 as to
which the date is April 29, 1996)

F-30
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

COMBINED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 1,421 $ 2,205 $ 2,697
Accounts receivable, net...................... 2,535 901 710
Materials and supplies........................ 322 192 183
Prepaid expenses and other.................... 240 254 298
Notes receivable from related parties......... 2,659 1,584 1,249
------- ------- -------
Total current assets........................ 7,177 5,136 5,137
PROPERTY AND EQUIPMENT, net..................... 26,789 14,944 14,480
OTHER ASSETS.................................... 1,218 105 84
------- ------- -------
Total assets........................... $35,184 $20,185 $19,701
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............. $ 1,675 $ -- $ 125
Accounts payable.............................. 1,549 971 784
Accrued expenses.............................. 583 530 433
------- ------- -------
Total current liabilities................... 3,807 1,501 1,342
------- ------- -------
LONG-TERM DEBT.................................. 5,584 4,025 3,900
------- ------- -------
OTHER LIABILITIES............................... 474 336 333
------- ------- -------
DEFERRED INCOME TAX LIABILITIES, net............ 6,491 1,991 1,921
------- ------- -------
DEFERRED ITEMS--grants from governmental agen-
cies........................................... 3,296 3,194 3,168
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDER'S EQUITY:
Preferred stock, $1 par value; 215,000 shares
authorized; 194,263 shares issued and 161,500
shares outstanding........................... 194 194 194
Common stock, $1 par value; 150,000 shares au-
thorized; 150,000 shares issued and outstand-
ing.......................................... 150 150 150
Additional paid-in capital.................... 7,653 7,653 7,653
Preferred stock held in treasury, 32,763
shares....................................... (33) (33) (33)
Pension liability adjustment.................. (141) (84) (84)
Unrealized gain on marketable securities...... 143 -- --
Retained earnings............................. 7,566 1,258 1,157
------- ------- -------
Total shareholder's equity.................. 15,532 9,138 9,037
------- ------- -------
Total liabilities and shareholder's eq-
uity.................................. $35,184 $20,185 $19,701
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-31
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
----------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES.................. $9,558 $8,795 $ 5,922 $1,675 $1,420
OPERATING EXPENSES:
Transportation.................... 1,747 1,561 1,027 377 261
Maintenance of ways and struc-
tures............................ 928 950 806 296 210
Maintenance of equipment.......... 1,138 1,275 846 233 215
General and administrative........ 2,477 3,021 1,918 499 400
Depreciation and amortization..... 1,732 1,801 1,808 462 442
------ ------ ------- ------- -------
Total operating expenses........ 8,022 8,608 6,405 1,867 1,528
------ ------ ------- ------- -------
Income (loss) from operations... 1,536 187 (483) (192) (108)
INTEREST EXPENSE.................... (725) (595) (481) (146) (78)
OTHER INCOME, net................... 331 334 730 132 15
LOSS ON SALE OF PROPERTY AND
EQUIPMENT (Note 11)................ -- -- (10,288) -- --
------ ------ ------- ------- -------
Income (loss) before income tax-
es............................. 1,142 (74) (10,522) (206) (171)
PROVISION (BENEFIT) FOR INCOME TAX-
ES................................. 457 -- (4,214) (84) (70)
------ ------ ------- ------- -------
NET INCOME (LOSS)................... $ 685 $ (74) $(6,308) $ (122) $ (101)
====== ====== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-32
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON PREFERRED
PREFERRED STOCK STOCK ADDITIONAL TREASURY STOCK
------------------ ------------- PAID-IN ----------------- RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS
------- -------- ------ ------ ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1993................... 194 $ 194 150 $150 $7,653 (33) $ (33) $ 7,157
Net income............ -- -- -- -- -- -- -- 685
Dividends............. -- -- -- -- -- -- -- (152)
------- -------- --- ---- ------ ------ ------- -------
BALANCE AT DECEMBER 31,
1993................... 194 194 150 150 7,653 (33) (33) 7,690
Net loss.............. -- -- -- -- -- -- -- (74)
Dividends............. -- -- -- -- -- -- -- (50)
------- -------- --- ---- ------ ------ ------- -------
BALANCE AT DECEMBER 31,
1994................... 194 194 150 150 7,653 (33) (33) 7,566
Net loss.............. -- -- -- -- -- -- -- (6,308)
------- -------- --- ---- ------ ------ ------- -------
BALANCE AT DECEMBER 31,
1995................... 194 194 150 150 7,653 (33) (33) 1,258
Net loss (Unaudited).. -- -- -- -- -- -- -- (101)
------- -------- --- ---- ------ ------ ------- -------
BALANCE AT MARCH 31,
1996 (Unaudited)....... 194 $194 150 $150 $7,653 (33) $(33) $ 1,157
======= ======== === ==== ====== ====== ======= =======
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-33
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEARS ENDED DECEMBER31, 31,
-------------------------- --------------
1993 1994 1995 1995 1996
------- -------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 685 $ (74) $(6,308) $ (122) $ (101)
Adjustments to reconcile net
income (loss) to net cash (used
in) provided by operating
activities--
Depreciation and amortization.... 1,732 1,801 1,808 462 442
Deferred income taxes............ (274) (169) (4,500) (84) (70)
Gain on disposition of property
and marketable securities....... (123) (131) (497) -- --
Write-off of note receivable..... 164 -- -- -- --
Loss on sale of property and
equipment (Note 11)............. -- -- 10,288 -- --
Changes in assets and
liabilities--
Account receivable, net........ (3,419) 2,014 1,634 823 191
Materials and supplies......... 94 53 130 9 9
Prepaid expenses and other..... (59) (50) (14) 3 (44)
Accounts payable and accrued
expenses...................... (1,453) 1,439 (632) (535) (284)
Other assets and liabilities,
net........................... (16) (15) (40) (2) 14
------- -------- ------- ------ ------
Net cash (used in) provided by
operating activities......... (2,669) 4,868 1,869 554 157
------- -------- ------- ------ ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment........................ (1,524) (793) (407) (53) --
Proceeds from disposition of
property and equipment........... 134 246 287 -- --
Issuance of notes receivable, from
related parties.................. (188) (910) -- -- (575)
Receipts on notes receivable, from
related parties.................. 637 20 1,075 -- 910
Purchase of marketable securities. -- -- (548) -- --
Proceeds from sale of marketable
securities....................... 332 -- 1,742 -- --
------- -------- ------- ------ ------
Net cash (used in) provided by
investing activities......... (609) (1,437) 2,149 (53) 335
------- -------- ------- ------ ------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-term
debt............................. (1,774) (3,168) (3,234) (108) --
Proceeds from grants.............. 3,500 -- -- -- --
Dividends paid.................... (152) (50) -- -- --
------- -------- ------- ------ ------
Net cash provided by (used in)
financing activities......... 1,574 (3,218) (3,234) (108) --
------- -------- ------- ------ ------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................ (1,704) 213 784 393 492
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 2,912 1,208 1,421 1,421 2,205
------- -------- ------- ------ ------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,208 $ 1,421 $ 2,205 $1,814 $2,697
======= ======== ======= ====== ======
CASH PAID DURING THE PERIOD FOR:
Interest.......................... $ 732 $ 602 $ 488 $ 107 $ 112
======= ======== ======= ====== ======
Income taxes...................... $ 1,012 $ -- $ -- $ -- $ --
======= ======== ======= ====== ======
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-34
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS

(DATA WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)

1. THE COMPANIES' BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

The accompanying financial statements include the financial statements of
The Pittsburg & Shawmut Railroad Company (P&S), Mountain Laurel Railroad
Company (MNL) and Red Bank Railroad Company (RBK) (the Companies). The
Companies are wholly owned subsidiaries of Arthur T. Walker Estate Corporation
(ATWEC) which is wholly owned by Dumaines, a private trust. The Companies are
short-line railroads that operate over approximately 237 miles of track in the
Commonwealth of Pennsylvania.

Principles of Combination

The combined financial statements include the accounts of the Companies. All
significant intercompany transactions and accounts have been eliminated in
combination.

Revenue Recognition

Revenues are recognized based on the waybill, which, due to the relatively
short length of haul, is not materially different from the recognition of
revenues as shipments progress.

Cash Equivalents

The Companies consider all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents for purposes of
classification in the combined balance sheets and combined statements of cash
flows. Cash equivalents are stated at cost, which approximates fair market
value.

Materials and Supplies

Materials and supplies consist of items for improvement and maintenance of
road property and equipment, and are stated at the lower of average cost or
market.

Property and Equipment

Property and equipment are carried at historical cost. Major renewals or
betterments are capitalized while routine maintenance and repairs, which do
not improve or extend asset lives, are charged to expense when incurred. Gains
or losses on sales or other dispositions are credited or charged to other
income. Depreciation is provided on the straight-line method over the useful
lives of the property as follows:

<TABLE>
<S> <C>
Road properties............................................... 10-35 years
Equipment..................................................... 5-20 years
</TABLE>

Income Taxes

The Companies are members of a group that file a consolidated tax return.
The consolidated amounts of current and deferred tax expense is allocated
among the members of the group based on each entity's tax attributes using a
separate return approach.

Significant Customer Relationship

A large portion of the Companies' operating revenue is generated from
shipments of bituminous coal. The five largest coal shippers in 1993, 1994 and
1995 accounted for 65% or more of the Companies' revenue.

F-35
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue has decreased over the past two years primarily due to reductions in
coal shipments. The Companies regularly grant trade credit to all their
customers. In addition, the Companies grant trade credits to other railroads
through the routine interchange of traffic. The collection of the Companies'
accounts receivable is substantially dependent upon the economy of the region
in which the Companies operate, the coal industry, and the railroad sector of
the economy in general.

Disclosures About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Companies:

Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.

Long-term debt: Since the Companies' debt is not quoted, estimates are
based on each obligation's characteristics, including remaining maturities,
interest rate, credit rating, collateral, amortization schedule and
liquidity. The carrying amount approximates fair value.

Management Estimates

2. NOTES RECEIVABLE FROM RELATED PARTIES:

The Companies have notes receivable from the following related entities
(amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ATWEC................................................ $1,581 $ 674 $1,249
Brookport Resources Company, an affiliate company.... 168 0 0
Shawmut Development Corporation, an affiliate compa-
ny.................................................. 910 910 0
------ ------ ------
$2,659 $1,584 $1,249
====== ====== ======
</TABLE>

3. PROPERTY AND EQUIPMENT:

Major classifications of property and equipment are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Road properties..................................... $30,026 $30,212 $30,212
Equipment and other................................. 19,230 18,973 18,973
------- ------- -------
49,256 49,185 49,185
Less--Accumulated depreciation...................... 22,467 34,241 34,705
------- ------- -------
$26,789 $14,944 $14,480
======= ======= =======
</TABLE>

F-36
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The notes are non-interest-bearing and are payable upon demand. Subsequent
to December 31, 1995, the note from Shawmut Development Corporation was paid
in full. The Companies issued an additional $575,000 demand note to ATWEC in
two separate distributions, in January and March of 1996.

4. OTHER ASSETS:

Included in other assets are marketable securities of $1,074,000 in 1994.
Effective January 1, 1994, the Companies adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The adoption of SFAS No.
115 requires that equity securities that have readily determinable fair values
shall be classified as "available-for-sale" if not held for the objective of
generating profits on short-term differences in price. Based on the Companies'
intentions, the debt and equity securities are classified and treated as
available-for-sale. At December 31, 1994, debt and equity securities were
stated at lower of aggregate cost or market.

SFAS No. 115 further requires that unrealized holding gains and losses
related to available-for-sale securities shall be excluded from earnings and
reported as a net amount in a separate component of shareholder's equity until
realized.

The following summarizes the effect of applying SFAS No. 115 (in thousands):

<TABLE>
<S> <C>
Cost basis........................................................ $ 931
------
Gross unrealized holding--
Gains........................................................... 171
Losses.......................................................... (28)
------
Net unrealized gain........................................... 143
------
Market value at December 31, 1994................................. $1,074
======
</TABLE>

All of the marketable securities were sold in 1995 for a realized gain of
approximately $264,000 that is included in other income.

5. EMPLOYEE BENEFIT PLANS:

Pension

ATWEC administers a noncontributory defined benefit plan and a deferred
compensation arrangement for the employees of its subsidiaries. The specific
attributes of the defined benefit plan and the deferred compensation
arrangement are allocated to each subsidiary (including the Companies) based
on the Projected Benefit Obligation per individual per entity. Benefits are
determined based on years of service, compensation during the last five years
of employment and participation in the profit sharing plan or the defined
benefit plan. For the deferred compensation arrangement, benefits are based on
a fixed amount per year. The Companies' funding policy is to make
contributions for pension and deferred compensation benefits based on
actuarial computations which reflect the long-term nature of the plans. The
Companies have met the minimum funding requirements according to the Employee
Retirement Income Security Act.

F-37
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Pension cost for both plans combined for 1993, 1994 and 1995 was
approximately $53,000, $50,000 and $31,000, respectively. The funded status at
December 31, 1994 and 1995, was as follows (amounts in thousands):

<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Actuarial present value of benefit obligations................
Vested benefits............................................. $ 779 $ 656
Nonvested benefits.......................................... -- --
----- -----
Accumulated benefit obligation and projected benefit obliga-
tion......................................................... 779 656
Plan assets................................................... 266 294
----- -----
Projected benefit obligation in excess of plan assets......... (513) (362)
Unrecognized net transition obligation........................ 99 84
Unrecognized prior service costs.............................. 21 14
Unrecognized net loss......................................... 145 69
Adjustment to recognize minimum liability..................... (265) (167)
----- -----
Pension liability recognized in the combined balance sheet.... $(513) $(362)
===== =====
</TABLE>

The projected benefit obligation was determined using a discount rate of 7%.
The long-term rate of return on plan assets was 8%.

Profit Sharing

ATWEC has a profit sharing program for all non-collective bargaining
employees. Benefits for profit sharing are determined based on earnings of
ATWEC. Allocations to employees are based on eligible wages. Profit sharing
contributions were approximately $14,000, $14,000 and $56,000 in 1993, 1994
and 1995, respectively. Contributions are subject to Board of Directors
approval.

6. LONG-TERM DEBT:

Long-term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note A payable to ATWEC bearing interest at 6%,
payable in annual principal payments of $120,000
beginning in January of 1998 and interest payable
semiannually, secured by all the property with the
balance due January 1, 2017......................... $2,400 $2,400 $2,400
Note B payable to ATWEC bearing interest at 6%,
payable in annual principal payments of $125,000 and
interest payable semiannually, secured by all
property, due in January of 1997.................... 250 125 125
Note payable to Dumaines bearing interest at prime
plus 2% on the effective date of the note, interest
payable quarterly, with principal and interest
balance due December of 1997........................ 1,500 1,500 1,500
Loan payable bearing interest at prime and repaid in
1995................................................ 1,849 -- --
Term note bearing interest at prime and repaid in
1995................................................ 1,260 -- --
------ ------ ------
7,259 4,025 4,025
Less--Current portion................................ 1,675 -- 125
------ ------ ------
Long-term debt................................... $5,584 $4,025 $3,900
====== ====== ======
</TABLE>

F-38
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The following is a summary of the maturities of long-term debt as of
December 31, 1995 (amounts in thousands):

<TABLE>
<S> <C> <C>
1996.............................................................. $ 0
1997.............................................................. 1,625
1998.............................................................. 120
1999.............................................................. 120
2000.............................................................. 120
Thereafter........................................................ 2,040
------
$4,025
====== ===
</TABLE>

At December 31, 1995, the prime interest rate was 8.5%.

7. TRANSACTIONS WITH RELATED PARTIES:

Revenue

Included within revenues are $891,000, $461,000 and $167,000 for 1993, 1994
and 1995, respectively, for shipments for ATWEC subsidiaries.

Interest Expense

Included within interest expense is approximately $296,000, $288,000 and
$319,000 for 1993, 1994 and 1995, respectively, for notes payable to related
parties.

Management Fees

Walker Management Company, a wholly owned subsidiary of ATWEC, allocates to
the Companies compensation and benefits for executives to perform certain
accounting, legal, communications, data processing, administrative and other
services ("corporate services") that are not specifically attributable to the
Companies. In addition, occupancy and other corporate office costs are
allocated to the Companies. These fees are approximately $324,000, $350,000,
$308,000 and $77,000 in the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996, and are included in general and
administrative expenses in the combined statements of operations. Management
believes that the Walker Management Company corporate services allocated to
the Companies represent the cost of the services provided and that the costs
are reasonable.

8. INCOME TAXES:

The components of the provision for income taxes are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------- ----------------
1993 1994 1995 1995 1996
---- ----- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current--
Federal................................ $339 $ 145 $ 67 $ -- $ --
State.................................. 66 26 (7) -- --
Deferred................................. 52 (171) (4,274) (84) (70)
---- ----- ------- ------- -------
$457 $ -- $(4,214) $ (84) $ (70)
==== ===== ======= ======= =======
</TABLE>

F-39
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The provision for taxes on income in each period differs from that which
would be computed by applying the statutory U.S. federal income tax rate to
the income before taxes. The following is a summary of the major items
affecting the provision (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------- ----------------
1993 1994 1995 1995 1996
---- ----- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax expense at statutory rate (34%). $388 $ (25) $(3,577) $(70) $(58)
State income taxes, net of federal
income tax benefit................. 101 7 (940) (18) (15)
Effect of change in state tax rates
on deferred taxes.................. -- 19 226 -- --
Other, net.......................... (32) (1) 77 4 3
---- ----- ------- ------- -------
$457 $ -- $(4,214) $(84) $(70)
==== ===== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets--
Accruals and reserves not deducted for tax
purposes until paid.......................... $ (289) $ (173) $ (173)
Alternative minimum tax credits............... (387) (463) (463)
Net operating losses.......................... (302) (188) (143)
Other......................................... (408) (548) (548)
Deferred tax liability--differences in deprecia-
tion........................................... 7,877 3,363 3,248
------ ------ ------
Net deferred tax liability.................... $6,491 $1,991 $1,921
====== ====== ======
</TABLE>

The Companies' alternative minimum tax credits can be carried forward
indefinitely; however, the Companies must achieve future regular taxable
income in order to realize this credit. The Companies' net operating loss
carryforwards (NOL) consist entirely of federal NOLs as state NOLs were used,
and excesses lost, in 1995. The Companies' federal net operating loss
carryforwards begin to expire in 2009.

Management does not believe that a valuation allowance is required for the
deferred tax assets based on anticipated tax gain from the sale of the assets
(see Note 11) and the reversal of current temporary differences.

9. GRANTS FROM GOVERNMENTAL AGENCIES:

During 1993, the MNL received a grant from the Commonwealth of Pennsylvania
of $3.5 million for acquisition and initial start up costs as well as rail
rehabilitation. The agreement required the Commonwealth of Pennsylvania to
reimburse the MNL for 50% of the total costs of the project ($7 million). This
project was completed as of December 31, 1993.

The aforementioned grant does not represent a future liability of MNL unless
MNL abandons the rehabilitated track structure within a specified period of
time, as defined in the agreement. As MNL does not intend to abandon the
track, MNL has recorded additions to road property and has deferred the amount
of the grant as the rehabilitation expenditures have been incurred. The
amortization of the deferred grant is a noncash offset to depreciation expense
over the useful life of the related assets and is not included as taxable
income.

F-40
<PAGE>

THE PITTSBURG & SHAWMUT RAILROAD COMPANY,
MOUNTAIN LAUREL RAILROAD COMPANY AND
RED BANK RAILROAD COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

10. COMMITMENTS AND CONTINGENCIES:

The Companies are defendants in certain lawsuits resulting from the railroad
operations. Management believes that adequate provision has been made in the
financial statements for any expected liabilities which may result from
disposition of such lawsuits. While it is possible that the foregoing matters
may be settled at a cost greater than that provided for, it is the opinion of
management that the ultimate liability, if any, will not be material to the
Companies' results of operations and financial position.

The RBK operates under a lease and operating agreement which is renewable on
a year-to-year basis beginning in 1996. The lease agreement requires payments
to be made by MNL based on per ton of traffic moved on the RBK. Lease expense
related to this agreement in 1993, 1994 and 1995 was $338,000, $244,000 and
$121,000, respectively.

11. SUBSEQUENT EVENT:

Subsequent to year-end, on April 29, 1996, substantially all of the assets
of the Companies, primarily property and equipment, were sold to Pittsburg &
Shawmut Railroad, Inc. (an unrelated entity) for approximately $11.7 million
in cash, excluding related costs and the assumption of the grant from the
Commonwealth of Pennsylvania. In addition, the purchase and sale agreement
provides that ATWEC or the Companies may receive additional contingency
payments of up to $2.5 million in the event coal revenues exceed certain
agreed upon levels. The sale of road property represented a loss of
approximately $10.3 million, as the book value of the assets sold exceeded the
purchase price. The Companies recognized a loss on the sale of property and
equipment in the 1995 financial statements to write down property and
equipment to net realizable value.

F-41
<PAGE>

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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PER-
SON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH THE
INFORMATION IS FURNISHED.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 10
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Consolidated Financial and Operating Data........................ 15
Pro Forma Financial Information........................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 30
Property.................................................................. 38
Management................................................................ 42
Certain Transactions...................................................... 46
Principal and Selling Stockholders........................................ 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 51
Notice to Ontario Residents............................................... 52
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Index to Financial Statements............................................. F-1
</TABLE>

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UNTIL JULY 19, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COM-
MON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLI-
GATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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2,648,000 SHARES

LOGO

GENESEE & WYOMING INC.

CLASS A COMMON STOCK
($.01 PAR VALUE)

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SCHRODER WERTHEIM & CO.

FURMAN SELZ

June 24, 1996

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