<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the quarterly period
ended September 30, 1996
or
[_] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________________ to _____________________
Commission File Number 34-022552
RAILTEX, INC.
---------------------------------------------
(Exact name of Registrant as specified in its charter)
Texas 74-1948121
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization). Identification Number)
4040 Broadway, Suite 200
San Antonio, Texas 78209
- ---------------------------------------- ----------
(Address of principal executive offices). (Zip Code)
Registrant's telephone number,
including area code: (210) 841-7600
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x YES ____ NO
-----
Number of
Shares
Title of Class Outstanding
-------------- -----------
Common Stock, $0.10 Par Value. 9,110,606
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information:
Item 1. Financial Statements: Page
----
<S> <C>
Consolidated Statements of Income - For the Three and Nine Months
Ended September 30, 1995 and 1996 ................................................................ 3
Consolidated Balance Sheets - December 31, 1995 and
September 30, 1996................................................................................ 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended September 30, 1995 and 1996................................................................. 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................................12
Part II - Other Information........................................................................................23
Signatures..........................................................................................................28
</TABLE>
<PAGE>
Item 1. Financial Statements
- ----------------------------
RAILTEX, INC. AND SUSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30
------------------- ------------------
1995 1996 1995 1996
--------- ------- -------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES............................. $27,498 $29,857 $79,936 $88,614
OPERATING EXPENSES:
Transportation................................ 8,478 9,695 25,182 28,033
General and administrative.................... 5,831 4,503 15,710 15,352
Equipment..................................... 3,590 3,872 11,801 11,413
Maintenance of way............................ 2,749 3,678 8,140 10,392
Depreciation and amortization................. 2,209 2,638 6,017 7,365
Special Charge................................ -- -- 2,140 --
------- ------- -------- --------
Total operating expenses..................... 22,857 24,386 68,990 72,555
------- ------- -------- --------
OPERATING INCOME............................... 4,641 5,471 10,946 16,059
INTEREST EXPENSE............................... (1,374) (1,829) (4,204) (4,848)
OTHER INCOME................................... 94 248 731 688
------- ------- ------- -------
INCOME BEFORE INCOME TAXES..................... 3,361 3,890 7,473 11,899
INCOME TAXES................................... (1,307) (1,582) (3,046) (4,786)
------- ------- ------- -------
NET INCOME..................................... $ 2,054 $ 2,308 $ 4,427 $ 7,113
======= ======= ======= =======
NET INCOME PER SHARE........................... $ 0.22 $ 0.25 $ 0.50 $ 0.77
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING....................... 9,210 9,231 8,793 9,230
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1995 1996
------ ------------ ------------
(audited) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 2,130 $ 3,347
Accounts receivable, net............................................... 19,522 21,500
Prepaid expenses....................................................... 2,244 3,036
Deferred tax assets.................................................... 2,027 2,128
-------- --------
Total current assets................................................ 25,923 30,011
-------- --------
PROPERTY AND EQUIPMENT, NET.............................................. 174,593 202,593
-------- --------
OTHER ASSETS:
Investment, at cost (Note 4)........................................... -- 16,051
Other.................................................................. 4,466 5,665
-------- --------
Total other assets.................................................. 4,466 21,716
-------- --------
Total assets........................................................ $204,982 $254,320
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term notes payable............................................... $ 1,289 $ 624
Current portion of long-term debt...................................... 1,718 3,929
Accounts payable....................................................... 10,572 12,180
Accrued liabilities.................................................... 7,302 11,002
-------- --------
Total current liabilities........................................... 20,881 27,735
-------- --------
DEFERRED INCOME TAXES.................................................... 11,129 17,443
-------- --------
LONG-TERM DEBT........................................................... 1,208 29,400
-------- --------
SENIOR NOTES PAYABLE..................................................... 50,985 51,013
-------- --------
OTHER LIABILITIES........................................................ 3,177 3,974
-------- --------
SENIOR SUBORDINATED NOTES PAYABLE........................................ 5,000 5,000
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred Stock; $1.00 par value; 10 million shares authorized;
no shares issued or outstanding at December 31 and September 30....... __ __
Common Stock; $.10 par value; 30 million shares authorized;
9,110,606 issued and outstanding at December 31 and September 30...... 911 911
Additional paid-in capital............................................. 83,439 83,439
Retained earnings...................................................... 28,316 35,429
Cumulative translation adjustment...................................... (64) (24)
------- -------
Total shareholders' equity.......................................... 112,602 119,755
------- --------
Total liabilities and shareholders' equity.......................... $204,982 $254,320
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 4,427 $ 7,113
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......................... 6,017 7,365
Special charge........................................ 2,140 --
Deferred income taxes................................. 2,263 2,085
Amortization of deferred financing costs.............. 242 264
Provision for losses on accounts receivable........... 300 479
Gain on sale of assets................................ (639) (520)
Changes in current assets and liabilities--
Accounts receivable.................................. (8,722) (1,325)
Prepaid expenses..................................... (651) (621)
Accounts payable and accrued liabilities............. 5,105 3,662
-------- --------
Net cash provided by operating activities............. 10,482 18,502
-------- --------
INVESTING ACTIVITIES:
Payment for purchase of Indiana & Ohio
Railcorp, net of cash acquired.......................... -- (8,989)
Purchase of property and equipment....................... (57,624) (17,563)
Investment in Ferrovia Centro-Atlantica S.A.............. -- (16,051)
Proceeds from sale of property and equipment............. 625 580
Organization and acquisition costs....................... (1,028) (847)
Increase in other long-term assets....................... -- (1,040)
-------- --------
Net cash used in investing activities.................. (58,027) (43,910)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term notes payable, net..... 330 (665)
Sale of common stock..................................... 25,607 --
Proceeds from long-term debt............................. 49,150 30,946
Deferred financing costs................................. (122) (268)
Principal payments on long-term debt..................... (28,442) (3,500)
Increase in other long-term liabilities.................. 97 95
-------- --------
Net cash provided by financing activities.............. 46,620 26,608
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................... 93 17
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................... (832) 1,217
CASH AND CASH EQUIVALENTS, beginning of period............ 2,167 2,130
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................. $ 1,335 $ 3,347
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The interim consolidated financial statements presented herein include
the accounts of RailTex, Inc. and its wholly owned subsidiaries. References to
"RailTex" or the "Company" mean RailTex, Inc. and, unless the context indicates
otherwise, its consolidated subsidiaries. All significant inter-company
transactions and accounts have been eliminated in consolidation. These interim
consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). All adjustments have been made to the accompanying
interim consolidated financial statements which are, in the opinion of the
Company's management, necessary for a fair presentation of the Company's
operating results. All adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is recommended
that these interim consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the entire year. Certain reclassifications have
been made in the prior period financial statements to conform with the current
period presentation.
2. SPECIAL CHARGE:
One of the Company's railroads, the Austin & Northwestern Railroad
Company, Inc. (the "Austin & Northwestern"), began operations on August 15, 1986
under a 10 year management agreement with Capital Metro, the Austin, Texas area
transit authority and the City of Austin. This agreement provided for renewal
options for three additional 10 year terms. The Austin & Northwestern decided
not to pursue further its rights unilaterally to renew the existing contract for
an additional 10 year period and to cease operations on or before the expiration
of the original contract term in August, 1996. As a result, the Company, Capital
Metro and the City of Austin entered into an agreement under which the Company,
Capital Metro and the City of Austin sought a substitute operator and under
which the Company was released from certain contingent liabilities. Therefore,
the Company recorded a Special Charge, in the second quarter of 1995, in the
amount of $2,140,000 before tax and $1,389,000 after tax, or $0.15 per share,
representing the write down of the unamortized value of leasehold improvements
of the Austin & Northwestern. Additionally, on May 6, 1996, the Company ceased
operations of the Austin & Northwestern as a new operator commenced operations.
3. ACQUISITIONS:
On February 4, 1995, a newly formed subsidiary of the Company, New
England Central Railroad, Inc. (the "NECR") acquired certain assets of the
Central Vermont Railway, Inc. (the "Central Vermont"). The purchase price,
including related costs, was $40.2 million and was funded by borrowings under
the Company's U.S. Acquisition Facility. (See Note 5). Unlike all of its
previous acquisitions, the Company acquired substantially all of the assets of
the Central Vermont, hired a substantial number of the Central Vermont employees
to operate the NECR and assumed certain contracts of the Central Vermont.
Consequently, this acquisition has been accounted for using the purchase method
of accounting.
On June 4, 1996, the Company acquired 100% of the outstanding stock of
the Indiana & Ohio Railcorp, (the "INOHo), an existing short line railroad
headquartered in Cincinnati, Ohio. Through its subsidiaries, the INOH operates
10 line segments totaling 230 miles of track in southwestern Ohio and
southeastern Indiana. The purchase price was $12.4 million including an $8.9
million cash payment and the assumption of $3.5 million of long term debt, of
which $2.1 million was paid down subsequent to closing the acquisition. This
acquisition was funded by borrowings under the Company's U.S. Acquisition
Facility (See Note 5). This acquisition has been accounted for using the
purchase method of accounting. The purchase price was allocated based on
estimated fair values at the date of the acquisition. (See Note 7).
6
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma results of operations for the nine
months ended September 30, 1995 and 1996, assumes the acquisition of the NECR
and the INOH occurred as of January 1, 1995 (dollars are in thousands except per
share amounts).
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Operating Revenues.................. $ 87,320 $ 91,356
======== ========
Net Income.......................... $ 5,098 $ 6,980
======== ========
Net Income Per Share................ $ 0.55 $ 0.76
======== ========
</TABLE>
These proforma results have been prepared for comparative purposes
only and include certain adjustments such as depreciation expense as a result of
a step-up in the basis of fixed assets and an adjustment of depreciable lives,
additional amortization expense as a result of organization costs and increased
interest expense on acquisition debt. These results do not purport to be
indicative of the results of operations which actually would have resulted had
the combinations been in effect on January 1, 1995 or of future results of
operations of the consolidated entities.
On September 21, 1996, a newly formed subsidiary of the Company,
Connecticut Southern Railroad, Inc. (the "CSO"), purchased from Consolidated
Rail Corp. ("Conrail") certain assets including 23 miles of rail segments
located in the Hartford Connecticut area and six locomotives. The CSO was also
granted rights to operate over an additional 49 miles of track, from North
Haven, Connecticut to Springfield, Massachusetts, under a freight operating
agreement with Amtrak. The purchase price, $3.5 million, was funded by
borrowings under the Company's U.S. Acquisition Facility (see Note 5). This
transaction has been accounted for as a purchase of assets.
4. INVESTMENTS:
In June 1996, a newly formed wholly owned subsidiary of the Company,
RailTex International Holdings, Inc., completed its initial investment in
Ferrovia Centro-Atlantica S.A. ("FCA") which was awarded a 30 year concession to
operate the 4,400 mile Center Eastern Network of the Brazilian federal railroad.
FCA was awarded the concession at the government's minimum bid price of
approximately U.S. $318.0 million. The Brazilian government structured the
transaction as a 30 year concession with a 20.0% down payment and future lease
payments due in quarterly installments after an initial two year grace period.
RailTex International Holdings owns 12.5% of the voting stock and 13.4% of the
non-voting stock of FCA and will account for the transaction using the cost
method of accounting. The Company's initial investment, which funded its share
of the down payment, was approximately U.S. $8.2 million and was funded by
borrowings under the U.S. Acquisition Facility (See Note 5).
During the three months ended September 30, 1996, the Company
completed its investment in FCA. The additional investment of approximately U.S.
$7.8 million was required to provide the initial working capital for FCA and to
pay for the Company's portion of auction related expenses. Approximately $7.7
million of the additional investment was funded by borrowings under the U.S.
Acquisition Facility (see Note 5).
7
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. LONG TERM DEBT:
On May 17, 1996, the Company entered into a new domestic credit
agreement consisting of a $10.0 million domestic working capital facility (the
"U.S. Working Capital Facility") and a $75.0 million domestic acquisition
facility (the "U.S. Acquisition Facility"), replacing similar facilities which
would expire in May 1996 and May 1997 respectively. The Company may borrow up to
65.0% of its eligible accounts receivable under the U.S. Working Capital
Facility to provide working capital and may borrow under the U.S. Acquisition
Facility to finance acquisitions of property and equipment which meet defined
criteria. The new facilities expire on April 30, 1999. Interest is payable
monthly under the U.S. Working Capital Facility until April 30, 1999 when all
borrowings become payable. New borrowings under the U.S. Acquisition Facility
are monthly interest only until they are rolled into a term note annually on
April 30. The term notes are amortized over a six year period; however, all
borrowings become payable three years from their date of funding, none later
than April 30, 2002. Both the U.S. Working Capital Facility and U.S. Acquisition
Facility bear interest based on stated borrowing margins over the London
Interbank Offered Rate ("LIBOR") or the U.S. prime rate. The borrowing margins
are dependent upon the Company's leverage ratio and are adjusted quarterly. At
September 30, 1996, borrowings outstanding and availability under the U.S.
Acquisition Facility were $30.4 million and $44.6 million, respectively. There
were no borrowings under the U.S. Working Capital Facility at September 30,
1996.
On June 21, 1996, the Company entered into a new Canadian credit
agreement consisting of a $5.0 million Canadian revolving working capital
facility (the "Canadian Working Capital Facility"), which replaced a revolving
credit facility that initially expired May 31, 1996 and was subsequently
extended until the closing of the new agreement, and a new $25.0 million
Canadian acquisition credit agreement (the "Canadian Acquisition Facility"). The
Canadian credit agreements contain terms and conditions similar to the domestic
agreements. The Canadian facilities bear interest based on stated borrowing
margins over the bankers acceptance rate (the "BA Rate") or the Canadian prime
rate. The borrowing margins are dependent upon the Company's leverage ratio and
are adjusted quarterly. At September 30, 1996 borrowings outstanding and
availability under the Canadian Working Capital Facility were CDN $1.0 million
and CDN $4.0 million, respectively. There were no borrowings under the Canadian
Acquisition Facility at September 30, 1996.
Covenants contained in the agreements evidencing the Company's senior
and senior subordinated debt prohibit the Company from paying dividends in its
capital stock and limit its ability to incur additional indebtedness, create
liens on its assets, make capital expenditures over a defined limit and
repurchase shares of its capital stock or any outstanding options or other
rights to acquire stock of the Company. The Company is also limited in its
ability to make loans, investments, or guarantees. The Company is required to
maintain a minimum tangible net worth and to meet certain other financial
ratios. At September 30, 1996 the Company was in compliance with all covenants.
6. STOCK OPTIONS:
The Company grants non-qualified stock options to outside Directors
and key employees of the Company. In September 1993, the Board of Directors and
shareholders of the Company approved an equity incentive plan (the "1993 Plan").
On June 12, 1996, the 1993 Plan was amended which (i) increased the maximum
number of shares of Common Stock under the 1993 Plan from 750,000 to 1,250,000,
without reduction for the number of shares issued upon exercise of options
granted outside of the 1993 Plan; (ii) extended the exercise period for Outside
Directors' Options from 2 to 10 years and increased the number of shares
which may be purchased under Outside Director's Options from 2,000 to 3,000;
(iii) specified 1,250,000 shares as the maximum number of shares issuable under
the 1993 Plan to any employee in any year; (iv) permitted the 1993 Plan
administrator to specify shorter vesting periods for non-qualified options; and
(v) clarified that cashless exercises of stock rights are permitted under the
1993 Plan.
8
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 1996, each outside Director of the Company received an
automatic grant of options to purchase 2,000 shares of Common Stock for a total
of 12,000 options under the 1993 Plan. These options are exercisable over a two
year period at the fair market value of Common Stock on the date of the grant of
$21.00 per share.
In January, March and June 1996, the Company granted options to
purchase 10,000 shares, 20,371 shares and 373,000 shares of Common Stock,
respectively, to certain key employees under the 1993 Plan, as amended. These
options are exercisable at the rate of 20.0% per year from the date of the grant
at the fair market value of Common Stock on the date of the grant of $21.13 per
share, $24.75 per share and $24.25 per share, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1995 1996
------- ------
<S> <C> <C>
Cash paid during the period for:
Interest.................................... $4,231 $4,854
Income Taxes................................ 1,865 1,751
Non-cash investing and financing activities:
Capital leases.............................. 930 104
Grants...................................... 382 771
Conversion of senior subordinated notes..... 5,000 --
Exercise of non-qualified stock options..... 2,574 --
Prepaid secondary offering costs............ 247 --
</TABLE>
On June 4, 1996, the Company acquired 100% of the outstanding capital
stock of Indiana & Ohio Railcorp for $8.9 million cash and the assumption of
approximately $3.5 million of long term debt and approximately $5.3 million of
other liabilities (see Note 3). In conjunction with the acquisition, liabilities
were assumed as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired................. $17,669
Cash paid for capital stock................... 8,873
------
Liabilities assumed $ 8,796
=======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
On September 9, 1996, the Company announced that it has signed a
letter of intent with Canadian National ("CN") to acquire, through a wholly
owned subsidiary, substantially all of the assets of the former Detroit, Toledo
& Ironton Railroad ("DTI"). The Company will purchase approximately 146 miles of
track for $27.0 million and, with trackage rights, will operate over
approximately 255 miles. Additionally, the Company has committed to invest, over
a three year period, approximately $9.7 million to return the DTI's track to
FRA Class 4 standards. The closing of the acquisition of the assets of the DTI
is contingent upon, among other things, the negotiation and execution of
definitive documentation, approval by the Company's Board of Directors and
receipt of necessary regulatory approvals. The Company anticipates funding this
acquisition of assets through borrowings under its U.S. Acquisition Facility
(see Note 5).
9
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 1996, one of the Company's railroads received notice from an
individual of his intent to file a citizen's suit under the Resource
Conservation and Recovery Act ("RCRA") primarily as a result of an oil spill
caused by a train derailment that occurred five years prior to the Company's
acquisition of the railroad property. The Company is unable to predict whether a
claim will be filed, the probable outcome of any such claim or the amount or
range of potential loss arising therefrom.
In October 1995 and April 1996, one of the Company's railroads received
notice of three environmental site evaluations being conducted by a state
environmental agency. The evaluations are the result of an alleged fuel spill
caused by a train derailment and alleged on-site burial of railroad ties and
unreported leaking underground storage tanks and an alleged presence of paint
and paint solvent wastes. The Company believes these evaluations relate to
events that occurred prior to the Company's acquisition of the railroad
property. The Company is cooperating with the state environmental agency to
complete these evaluations. However, the Company may be held liable for some or
all expenses associated with these evaluations and the expenses associated with
any necessary remedial actions. To the extent the Company incurs expenses in
connection with these evaluations, or remedial actions, it may seek to recover
such expenses from the prior owners of the property or other responsible
parties. The Company is unable to predict the probable outcome of these site
evaluations or the amount or range of potential loss arising therefrom.
A Class I Railroad, which interchanges traffic with one of the Company's
railroads has filed a complaint against the Company in the United States
District Court for the Western District of Missouri. In this lawsuit, the
Plaintiff seeks recovery of certain switching and joint facility charges
amounting to approximately $632,000. The Company has interposed certain
defenses, including payment of substantially all of the joint facility charges
and the inapplicability of the switching charges. Since the service for which
the switching charges have been asserted is ongoing, it is likely that
additional charges accruing through the date the lawsuit is resolved will be
asserted. Discovery is in progress and trial has been set for February 1997. The
Company believes it has meritorious defenses and is vigorously defending this
litigation, therefore, no amounts are recorded on the books of the Company in
anticipation of a loss as a result of this contingency.
The Company maintains insurance to cover costs associated with personal
injury, including death, and property damage, including derailments. The
Company's primary liability policy is subject to a self-insured retention which
was increased to $500,000 per occurrence from $250,000 per occurrence as of July
15, 1996. In addition, the Company maintains an excess liability policy which
provides supplemental coverage for losses in excess of primary policy limits.
With respect to its 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, including damage to property
of shippers, subject to applicable retention.
The Company is also involved in other litigation and various legal matters
which are being defended and handled in the ordinary course of business. In
management's judgment, based on the opinion of the Company's legal counsel
handling such matters, the ultimate liability, if any, from such legal
proceedings will not have a material effect on the Company's financial position
and results of operations.
10
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SUBSEQUENT EVENTS:
On November 2, 1996, a newly formed subsidiary of the Company, Ontario
L'Orignal Railway, Inc. (the "OLO") signed an asset purchase agreement with
Canadian National ("CN") to purchase certain assets consisting of 26 miles of
track extending from Glen Robertson to Hawkesbury, Ontario, Canada. The asset
purchase is subject to certain waiting periods under Ontario law and is expected
to close on or about December 2, 1996. However, the OLO was granted rights by CN
to operate the property and commenced operations on November 2, 1996. The
purchase price is CDN $1.1 million (approximately U.S. $800,000) and is expected
to be funded by borrowings under the Company's Canadian Acquisition Facility
(see Note 5).
The remainder of this page is intentionally left blank.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the Company's
Unaudited Consolidated Financial Statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q.
GENERAL
The Company's growth to date has resulted primarily from implementation of
its expansion strategy. The number of miles operated by RailTex has grown to
more than 3,500 at September 30, 1996.
The Company has added railroad properties to its portfolio primarily
through purchase of track and roadbed, lease of such assets, and contracts to
operate such assets under management agreements. These arrangements typically
relate only to the physical assets of the railroad property, and, except for the
purchase of the Indiana & Ohio Railcorp, the Company typically does not
contractually assume any of the operations or liabilities of the divesting
carriers. After acquiring the right to operate each of its railroad properties,
the Company must arrange for the purchase or lease of operating equipment and
hire the work force necessary to operate the railroad. Accordingly, for any
railroad property, the historical results of operations of the railroad property
as previously operated are not necessarily indicative of the results of
operations for the property following commencement of operations by the Company.
Because of variations in the structure, timing and size of portfolio
additions and differences in economics among the Company's portfolio railroads
resulting from the unique terms, rates and other provisions for each railroad's
operation established through negotiation between RailTex and each divesting
carrier, the Company's results of operations in any reporting period are not
directly comparable to (i) its results of operations in other reporting periods
or (ii) the results of operations of other railroad companies. Therefore, care
should be taken when using traditional measurements of railroad operating
performance, such as freight revenues per carload, operating ratio and labor
ratio, in assessing or comparing the Company's operating results.
"Comparable Railroad Properties" for each period are railroad properties
which the Company operated throughout both the full current year period and the
full prior year period. "New Railroad Properties" for each period are railroad
properties which the Company began operating after the start of the prior year
period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
Comparable Railroad Properties for the three months ended September 30,
1996, compared to the three months ended September 30, 1995, include all
railroads except for the Indiana & Ohio Railcorp (the "INOH") which commenced
operations on June 4, 1996, the Connecticut Southern Railroad (the "CSO") which
commenced operations on September 21, 1996 and the Austin and Northwestern
Railroad (the "AUNW") which terminated operations on May 6, 1996.
The Company's net income for the three months ended September 30, 1996,
increased approximately $254,000, or 12.4%, to $2.3 million from $2.1 million in
the prior year period and net income per share increased 13.6% to $0.25 per
share from $0.22 per share in the prior year period.
Operating Revenues. Operating revenues for the three months ended September
30, 1996 increased by $2.4 million, or 8.6%, to $29.9 million from $27.5 million
in the prior year period. Operating revenues attributable to New Railroad
Properties accounted for 79.4% of this increase. Operating revenues for
Comparable Railroad Properties increased approximately $913,000, or 3.4%.
Carloads transported increased by 9,615 carloads, or 12.1%, to 89,222 carloads
from 79,607 carloads in the prior year period. Carloads attributable to New
Railroad Properties accounted for 40.3% of this increase. Carloads attributable
to Comparable Railroad Properties increased by 6,809, or 8.7%, from the prior
year period.
12
<PAGE>
Freight revenues for the three months ended September 30, 1996 increased
$1.9 million, or 8.3%, to $25.3 million from $23.3 million in the prior year
period. The following table compares freight revenues, traffic volume (in
carloads) and average freight revenues per carload by commodity group for the
three months ended September 30, 1995 and 1996.
Freight Revenues and Carloads Comparison by Commodity Group
Three months Ended September 30, 1995 and 1996
(dollars in thousands, except per carload amounts)
<TABLE>
<CAPTION>
Average Freight
Revenues Per
Freight Revenues Carloads Carload(1)
-------------------------------------- -------------------------------- -----------
1995 1996 1995 1996 1995 1996
------------------- ---------------- -------------- --------------- ---- ----
% of % of % of % of
Commodity Group Dollars Total Dollars Total Number Total Number Total
- --------------- ------- ----- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products............ $ 5,226 22.4% $ 5,273 20.9% 12,029 15.1% 14,422 16.2% $434 $366
Coal.................................. 3,801 16.3 4,007 15.9 18,133 22.8 21,964 24.6 210 182
Chemicals............................. 2,140 9.2 2,698 10.7 6,640 8.3 7,620 8.5 322 354
Scrap paper & paper products.......... 2,358 10.1 2,470 9.8 5,727 7.2 6,181 6.9 412 400
Farm products......................... 1,870 8.0 2,051 8.1 8,621 10.8 7,467 8.4 217 275
Non-metallic ores..................... 1,565 6.7 1,715 6.8 8,176 10.3 9,529 10.7 191 180
Minerals & stone...................... 1,210 5.2 1,593 6.3 3,987 5.0 3,885 4.4 303 410
Food products......................... 1,313 5.6 1,577 6.2 5,163 6.5 5,534 6.2 254 285
Scrap metal & metal products.......... 1,745 7.5 1,433 5.7 5,522 6.9 5,090 5.7 316 282
Petroleum products.................... 1,165 5.0 1,216 4.8 2,654 3.3 2,982 3.3 439 408
Other................................. 955 4.0 1,243 4.8 2,955 3.8 4,548 5.1 323 273
------ ----- ------- ----- ------ ----- ------ -----
Total............................ $23,348 100.0% $25,276 100.0% 79,607 100.0% 89,222 100.0% $293 $283
======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
________________________
(1) Calculated as freight revenues divided by carloads.
Approximately $1.3 million, or 68.2%, of the increase in freight revenues
for the three months ended September 30, 1996, is attributable to New Railroad
Properties. These properties added 3,871 carloads consisting primarily of scrap
paper and paper products (876), chemicals (584), farm products (506), non-
metallic ores (460), minerals and stone (288), lumber and forest products (258)
and food products (224). Freight revenues for Comparable Railroad Properties
increased approximately $951,000, or 4.1%, while carloadings for Comparable
Railroad Properties increased by 6,809, or 8.7%, consisting primarily of coal
(3,831), lumber and forest products (2,191) and non-metallic ores (1,584).
Non-freight revenues for the three months ended September 30, 1996
increased approximately $431,000, or 10.4%, to $4.6 million from $4.2 million in
the prior year period. Non-freight revenues include joint facilities, switching,
demurrage, car hire, car repair and track maintenance services performed for
third parties and lease income. These non-freight revenues contributed 15.3% and
15.1% of operating revenues in the three months ended September 30, 1996 and
1995, respectively. New Railroad Properties contributed approximately $559,000
in non-freight revenues during the three months ended September 30, 1996,
consisting primarily of joint facilities income $185,000, car hire income
$154,000, demurrage $82,000 and switching income $59,000. Non-freight revenues
for Comparable Railroad Properties decreased approximately $38,000, or 1.0%,
primarily as a result of decreased car repair income which was partially offset
by increases in car hire income, switching income and demurrage. The Company is
focusing on unprofitable car repair activities and is reducing those activities
to only those required for safe operations.
Operating Expenses. Operating expenses for the three months ended
September 30, 1996 increased $1.5 million, or 6.7%, to $24.4 million from $22.9
million in the prior year period. The Company's operating ratio (operating
expenses divided by operating revenues) decreased for the period to 81.7%,
compared to 83.1% in the prior year period, primarily as a result of increased
operating revenues as discussed above.
13
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during the three month periods ended September 30, 1995 and 1996, in
dollars and as a percentage of operating revenues:
Operating Expenses Comparison
Three Months Ended September 30, 1995 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1996
----------------------- ---------------------
% of % of
Operating Operating
Dollars Revenue Dollars Revenue
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Labor and benefits......................... $ 8,563 31.1% $ 8,701 29.1%
Equipment rents............................ 3,218 11.7 3,364 11.3
Depreciation and amortization.............. 2,209 8.0 2,638 8.8
Purchased services......................... 1,724 6.3 2,006 6.7
Casualties and insurance................... 1,213 4.4 1,931 6.5
Diesel fuel................................ 1,837 6.7 1,910 6.4
Materials.................................. 1,204 4.4 1,077 3.6
Other...................................... 2,889 10.5 2,759 9.3
------- ---- ------- ----
Total.................................... $22,857 83.1% $24,386 81.7%
======= ==== ======= ====
</TABLE>
Labor and benefits for the three months ended September 30, 1996 increased
approximately $138,000, or 1.6%, to $8.7 million from $8.6 million in the prior
year period. Labor and benefits attributable to New Railroad Properties was
approximately $656,000, accounting for all of the increase. Labor and benefits
for Comparable Railroad Properties decreased by $206,000 as a result of the
capitalization of labor costs in connection with capital track projects and the
elimination of managerial positions by combining certain railroad properties
under common management. Additionally, headquarters' staff costs decreased by
approximately $228,000, or 15.6%, due primarily to adjustments made during the
quarter to executive and senior managers' incentive compensation benefits and
the reimbursement of salaries and benefits for Company employees' involved in
the transition and operations of FCA in Brazil. The remainder of the decrease is
primarily due to the termination of operations of AUNW in May 1996.
Equipment rents for the three months ended September 30, 1996 increased by
approximately $146,000, or 4.5%, to $3.4 million from $3.2 million in the prior
year period. Equipment rents attributable to New Railroad Properties accounted
for substantially all of this increase. Equipment rents for Comparable Railroad
Properties increased approximately $24,000 as an increase in leased railcar
expense was substantially offset by decreased car hire expense. The decrease in
car hire expense is due to certain arrangements made under which the Company
agreed to place over 2,300 freight cars on its railroads for prospective loading
by customers and, in exchange, the Company does not incur rent on these cars
when these cars are on one of its railroads. In addition, the car owners pay the
Company a portion of the rents earned when the freight cars are on railroads
other than the Company's. Additionally, the implementation of car hire reclaim
arrangements on certain types of equipment and a trackage rights arrangement
with a connecting Class I carrier on one of the Company's railroads, which
resulted in lower car hire rates, contributed to the decrease in car hire
expense.
Depreciation and amortization for the three months ended September 30, 1996
increased by approximately $429,000, or 19.4%, to $2.6 million from $2.2 million
in the prior year period. New Railroad Properties accounted for 37.3% of this
increase. The remainder is due to capital projects completed for Comparable
Railroad Properties in 1995 and 1996, increased locomotive depreciation related
to the 1995 fleet expansion and depreciation of new computer hardware and
software.
14
<PAGE>
Purchased services for the three months ended September 30, 1996 increased
approximately $282,000, or 16.4%, to $2.0 million from $1.7 million in the prior
year period. Purchased services attributable to New Railroad Properties
accounted for 22.3% of this increase. Purchased services for Comparable Railroad
Properties increased by approximately $31,000, or 2.1%. The remainder is
primarily due to increased headquarters' computer services expenses.
Casualties and insurance expense for the three months ended September 30,
1996 increased by approximately $718,000, or 59.2%, to $1.9 million from $1.2
million in the prior year period. Casualties and insurance expense for New
Railroad Properties accounted for $51,000, or 7.1%, of this increase. Casualties
and insurance expense for Comparable Railroad Properties increased by $999,000,
or 111.6%, due to a derailment and a personal injury which resulted in a
fatality. This increase for Comparable Railroad Properties was partially offset
by adjustments to headquarters' self insured retention liability.
Diesel fuel expense for the three months ended September 30, 1996 increased
by approximately $73,000, or 4.0%, to $1.9 million from $1.8 million in the
prior year period. New Railroad Properties accounted for 56.2% of this increase.
Diesel fuel expense for Comparable Railroad Properties increased by
approximately $80,000, or 4.4%, as a 2.0% decrease in consumption was offset by
a $0.06 per gallon, or 8.6%, increase in average fuel prices in the current year
period. The 2.0% decrease in same store fuel consumption, while carloadings
increased 8.7%, is a result of the Company's focus on improving fuel
efficiency. The Company has taken several steps to reduce its exposure to fuel
price fluctuations, including entering into a fuel hedging collar for
approximately 32.0% of the Company's estimated annual fuel consumption.
Additionally, the Company has retained an independent contractor to negotiate
fuel prices for the Company's railroads on a centralized basis. This contractor
will be compensated on a percentage of cost savings.
Materials expense for the three months ended September 30, 1996 decreased
by approximately $127,000, or 10.5%, to $1.1 million from $1.2 million in the
prior year period. Materials costs associated with New Railroad Properties
increased by approximately $90,000. Materials expense for Comparable Railroad
Properties decreased approximately $325,000, or 26.6%, primarily as a result of
decreased car repair and locomotive materials in the current year period.
Other expenses for the three months ended September 30, 1996, including
property and franchise taxes and joint facilities, decreased approximately
$130,000, or 4.5%, to $2.8 million from $2.9 million in the prior year period.
Other expenses for New Railroad Properties increased $248,000. Other expenses
for Comparable Railroad Properties decreased by approximately $483,000, or
22.0%, due primarily to decreased property taxes. 1996 property valuations were
received during the quarter and were substantially less than estimated,
resulting in an adjustment to expense.
Interest Expense. Interest expense for the three months ended September 30,
1996 increased by approximately $455,000, or 33.1%, to $1.8 million from $1.4
million in the prior year period due primarily to additional borrowings of $30.9
million under the Company's $75.0 million domestic acquisition facility ("the
U.S. Acquisition Facility") during the nine months ended September 30, 1996.
These borrowings were used to fund the INOH acquisition, the equity investment
in FCA and the CSO acquisition.
Other Income. Other income for the three months ended September 30, 1996
increased by approximately $154,000, or 163.8%, to $248,000 from $94,000 in the
prior year period due primarily to increased sales of non-operating properties.
Income Taxes. The Company's effective tax rate increased in the three
months ended September 30, 1996 to 40.7% from 38.9% in the prior year period due
primarily to an increase in the Company's effective state income tax rate in the
current year period.
15
<PAGE>
Nine months Ended September 30, 1996 Compared to Nine months Ended
September 30, 1995.
Comparable Railroad Properties for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995 include all railroads
except for the INOH which commenced operations on June 4, 1996, the CSO which
commenced operations on September 21, 1996, the New England Central Railroad
(the "NECR") which commenced operations on February 4, 1995 and the AUNW which
terminated operations on May 6, 1996.
Excluding the impact of the special charge recorded in 1995, representing
the write down of the unamortized value of leasehold improvements of the AUNW,
the Company's net income for the nine months ended September 30, 1996 increased
by $1.3 million, or 22.3%, to $7.1 million from $5.8 million in the prior year
period. Net income per share increased 18.5% to $0.77 per share from $0.65 per
share in the prior year period. Including the special charge recorded in 1995,
the Company's net income increased by $2.7 million, or 60.7%, to $7.1 million
from $4.4 million in the prior year period and net income per share increased
54.0% to $0.77 per share from $0.50 per share in the prior year period.
The following table compares operating revenues, operating expenses,
operating income and income before income taxes, excluding the special charge,
for the nine months ended September 30, 1995 and 1996:
<TABLE>
<CAPTION>
Nine months
Ended September 30,
1995 1996
------- ----------
<S> <C> <C>
Operating Revenues................ $79,936 $88,614
Operating Expenses................ 66,850 72,555
------ ------
Operating Income.................. 13,086 16,059
Other Income (Expense)............ (3,473) (4,160)
------- -------
Income Before Income Taxes........ $ 9,613 $11,899
======== ========
</TABLE>
Operating Revenues. Operating revenues for the nine months ended September
30, 1996 increased by $8.7 million, or 10.9%, to $88.6 million from $79.9
million in the prior year period. Operating revenues attributable to New
Railroad Properties accounted for 53.8% of this increase. Operating revenues for
Comparable Railroad Properties increased $4.3 million, or 6.5%. Carloads
transported increased by 29,480 carloads, or 12.5%, to 265,356 carloads from
235,876 carloads in the prior year period. Carloads attributable to New Railroad
Properties accounted for 33.3% of this increase. Carloads attributable to
Comparable Railroad Properties increased by 21,184, or 9.9%, from the prior year
period.
16
<PAGE>
Freight revenues for the nine months ended September 30, 1996 increased
$7.4 million, or 10.8%, to $75.4 million from $68.1 million in the prior year
period. The following table compares freight revenues, traffic volume (in
carloads) and average freight revenues per carload by commodity group for the
nine months ended September 30, 1995 and 1996.
Freight Revenues and Carloads Comparison by Commodity Group
Nine months Ended September 30, 1995 and 1996
(dollars in thousands, except per carload amounts)
<TABLE>
<CAPTION>
Average Freight
Revenues Per
Freight Revenues Carloads Carload(1)
---------------------------------- ------------------------------ ---------------
1995 1996 1995 1996 1995 1996
--------------- ------------- --------- ------------------ ----- ----
% of % of % of % of
Commodity Group Dollars Total Dollars Total Number Total Number Total
- --------------- ------- ----- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products... $14,367 21.1% $16,069 21.3% 35,316 15.0% 42,311 15.9% $407 $380
Coal......................... 11,220 16.5 12,157 16.1 53,740 22.8 64,186 24.2 209 189
Chemicals.................... 7,197 10.6 8,098 10.7 22,002 9.3 23,695 8.9 327 342
Scrap paper & paper products. 7,139 10.5 6,996 9.3 17,176 7.3 17,108 6.4 416 409
Farm products................ 5,270 7.7 6,223 8.2 23,304 9.9 24,477 9.2 226 254
Scrap metal & metal products. 5,728 8.4 5,548 7.4 18,014 7.6 17,149 6.5 318 324
Non-metallic ores............ 4,232 6.2 5,412 7.2 22,951 9.7 28,734 10.8 184 188
Food products................ 3,634 5.3 4,239 5.6 14,818 6.3 15,585 5.9 245 272
Minerals & stone............. 2,996 4.4 3,744 5.0 10,444 4.4 10,565 4.0 287 354
Petroleum products........... 3,370 5.0 3,435 4.6 7,705 3.3 8,446 3.2 437 407
Other........................ 2,920 4.3 3,519 4.6 10,406 4.4 13,100 5.0 281 269
------- ----- ------- ----- ------- ----- ------- -----
Total ................. $68,073 100.0% $75,440 100.0% 235,876 100.0% 265,356 100.0% $289 $284
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
________________________
(1) Calculated as freight revenues divided by carloads.
Approximately $4.2 million, or 56.8%, of the $7.4 million increase in
freight revenues for the nine months ended September 30, 1996, is attributable
to New Railroad Properties. These properties added approximately 9,825 carloads
consisting primarily of scrap paper and paper products (2,142), chemicals
(1,652), non-metallic ores (1,245), scrap metal and metal products (1,210), food
products (986), lumber and forest products (959) and minerals and stone (703).
Freight revenues for Comparable Railroad Properties increased $3.5 million, or
6.1%, while carloadings for Comparable Railroad Properties increased by 21,184,
or 9.9%, consisting primarily of coal (11,016), lumber and forest products
(6,097) and non-metallic ores (5,494).
Non-freight revenues for the nine months ended September 30, 1996 increased
$1.3 million, or 11.1%, to $13.2 million from $11.9 million in the prior year
period. Non-freight revenues include joint facilities, switching, demurrage, car
hire, car repair and track maintenance services performed for third parties and
lease income. These non-freight revenues contributed 14.9% and 14.8% of
operating revenues in the nine months ended September 30, 1996 and 1995,
respectively. New Railroad Properties contributed approximately $488,000, or
37.2%, of the increase, primarily as a result of demurrage, car hire income and
joint facility income. Non-freight revenues for Comparable Railroad Properties
increased approximately $799,000, or 8.4%, primarily as a result of increased
car hire, switching, demurrage and other income which were partially offset by
corresponding decreases in car repair income.
Operating Expenses. Operating expenses for the nine months ended September
30, 1996, excluding the effects of the special charge recorded in 1995,
increased $5.7 million, or 8.3%, to $72.6 million from $66.9 million in the
prior year period. The Company's operating ratio (operating expenses divided by
operating revenues), decreased for the period to 81.9%, compared to 83.6% in the
prior year period, primarily as a result of decreased equipment rents and
materials as discussed below. Including the special charge recorded in 1995, the
Company's operating ratio improved by 4.4 points to 81.9% from 86.3% in the
prior year period.
17
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during the nine month periods ended September 30, 1995 and 1996, in
dollars and as a percentage of operating revenues:
<TABLE>
<CAPTION>
Operating Expenses Comparison
Nine months Ended September 30, 1995 and 1996
(dollars in thousands)
1995 1996
---------------------- ---------------------
% of Operating % of Operating
Dollars Revenue Dollars Revenue
------- ------- ------- -------
<S> <C> <C> <C> <C>
Labor and benefits............ $24,708 30.9% $25,789 29.1%
Equipment rents............... 10,899 13.6 10,050 11.4
Depreciation and amortization. 6,017 7.5 7,365 8.3
Diesel fuel................... 5,623 7.0 6,589 7.4
Purchased services............ 4,435 5.5 5,981 6.7
Casualties and insurance...... 3,882 4.9 4,850 5.5
Materials..................... 3,654 4.6 3,187 3.6
Other......................... 7,632 9.6 8,744 9.9
------- ---- ------- ----
Total excluding special
charge.................. $66,850 83.6% $72,555 81.9%
Special charge................ 2,140 2.7 -- --
------- ---- ------- ----
Total.................... $68,990 86.3% $72,555 81.9%
======= ==== ======= ====
</TABLE>
Labor and benefits for the nine months ended September 30, 1996 increased
$1.1 million, or 4.4%, to $25.8 million from $24.7 million in the prior year
period. Labor and benefits attributable to New Railroad Properties increased
$1.3 million and represented substantially all of the overall increase. Labor
and benefits for Comparable Railroad Properties increased approximately $77,000,
or 0.1%, despite the 9.9% increase in carloadings due primarily to a focus on
cost containment. Headquarters' labor and benefits decreased by approximately
3.6% due primarily to adjustments made during the quarter to executive and
senior managers' incentive compensation benefits and the reimbursement of
salaries and benefits for Company employees' involved in the transition and
operations of FCA in Brazil.
Equipment rents for the nine months ended September 30, 1996 decreased by
approximately $849,000, or 7.8%, to $10.1 million from $10.9 million in the
prior year period. Equipment rents attributable to New Railroad Properties
increased approximately $405,000, or 17.1%, due primarily to operating the New
England Central Railroad for nine months in the current year period versus eight
months in the prior year period and equipment rents related to the INOH and CSO
in the current year period. Equipment rents for Comparable Railroad Properties
decreased approximately 3.6% due primarily to decreased car hire expense. The
decrease in car hire expense is due to certain arrangements made under which the
Company has placed over 2,300 freight cars on its railroads for prospective
loading by customers and, in exchange, the Company does not incur rent on these
cars when these cars are on one of its railroads. In addition, the car owners
pay the Company a portion of the rents earned when the freight cars are on
railroads other than the Company's. Additionally, the implementation of car
hire reclaim arrangements on certain types of equipment and the trackage rights
arrangement with a connecting Class I carrier on one of the Company's
railroads, which resulted in lower car hire rates, contributed to the decrease
in car hire expense. The remainder of the decrease is attributable to the AUNW
which ceased operations in May 1996.
Depreciation and amortization for the nine months ended September 30, 1996
increased $1.4 million, or 22.4%, to $7.4 million from $6.0 million in the prior
year period. New Railroad Properties accounted for 34.6% of this increase. The
remainder is due to capital projects completed for Comparable Railroad
Properties in 1995 and 1996, increased locomotive depreciation related to the
1995 fleet expansion and depreciation of new computer hardware and software.
18
<PAGE>
Diesel fuel expense for the nine months ended September 30, 1996 increased
by approximately $966,000, or 17.2%, to $6.6 million from $5.6 million in the
prior year period. New Railroad Properties accounted for 49.2% of this increase.
Diesel fuel expense for Comparable Railroad Properties increased by
approximately $540,000, or 11.3%, due to a combination of increased consumption
related to increased carloadings and higher fuel prices during the current year
period. The Company's average fuel cost per gallon increased approximately
$0.07 per gallon, or 10.0%, in the current year period. The Company has taken
several steps to reduce its exposure to fuel price fluctuations, including
entering into a fuel hedging collar for approximately 32.0% of the Company's
estimated annual fuel consumption. Additionally, the Company has retained an
independent contractor to negotiate fuel prices for the Company's railroads on
a centralized basis. This contractor will be compensated on a percentage of cost
savings.
Purchased services for the nine months ended September 30, 1996 increased
$1.6 million, or 34.8%, to $6.0 million from $4.4 million in the prior year
period. Purchased services attributable to New Railroad Properties accounted for
12.7% of this increase. Purchased services for Comparable Railroad Properties
increased by approximately $812,000, or 22.3%, and was due primarily to
increased contract labor related to maintenance of way, locomotive repairs and
warehousing activities. The remainder is primarily due to increased
headquarters' computer services expenses.
Casualties and insurance expense for the nine months ended September 30,
1996 increased by approximately $968,000, or 24.9%, to $4.9 million from $3.9
million in the prior year period. New Railroad Properties accounted for 10.6% of
this increase. Casualties and insurance expense for Comparable Railroad
Properties increased by $1.2 million, or 37.5%, as lower insurance premiums
related to an increase in the Company's self insured retention were offset by
higher casualty expenses related to derailments and a personal injury which
resulted in a fatality. The increase for Comparable Railroad Properties was
partially offset by adjustments to headquarters' self insured retention
liability.
Materials expense for the nine months ended September 30, 1996 decreased by
approximately $467,000, or 12.8%, to $3.2 million from $3.7 million in the prior
year period. Materials costs associated with New Railroad Properties increased
by approximately $231,000. Materials expense for Comparable Railroad Properties
decreased approximately $871,000, or 28.0%, primarily as a result of decreased
car repair and locomotive repair materials in the current year period.
Other expenses for the nine months ended September 30, 1996, including
property and franchise taxes and joint facilities, increased $1.1 million, or
14.6%, to $8.7 million from $7.6 million in the prior year period. Approximately
49.4% of this increase is attributable to New Railroad Properties. Other
expenses for Comparable Railroad Properties increased by approximately $20,000,
or 0.4%, as increased trackage rights expense and bad debt expenses were offset
by decreased property taxes. Trackage rights expense increased due to the track
lease and operating rights agreement with a connecting Class I carrier on one of
the Company's railroads. 1996 property valuations were received during the
three months ended September 30, 1996 and were substantially less than
estimated, resulting in an adjustment to expense. The remainder of the increase
is due to an increase in headquarters' expenses attributable to the Company's
growth.
Interest Expense. Interest expense for the nine months ended September 30,
1996 increased approximately $644,000, or 15.3%, primarily due to additional
borrowings under the Company's U.S. Acquisition Facility to fund the
acquisitions of the INOH and CSO and to fund the Company's equity investment in
FCA.
Other Income. Other income for the nine months ended September 30, 1996
decreased by approximately $43,000, or 5.9%, to $688,000 from $731,000 in the
prior year period due primarily to fewer sales of non-operating properties
partially offset by increased interest income.
Income Taxes. The Company's effective tax rate, excluding the 1995 special
charge, increased in the nine months ended September 30, 1996 to 40.2% from
39.5% in the prior year period due primarily to an increase in the effective
state income tax rate.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURSES
The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditure needs relating to
ongoing operations while relying on contributed capital and borrowed funds to
finance its acquisitions.
During the nine months ended September 30, 1996, the Company generated cash
from operations of $18.5 million, of which $14.9 million was used to fund non-
acquisition related capital expenditures and $1.4 million was used to reduce
outstanding borrowings under the Company's bank credit facilities exclusive of
a $2.1 million paydown of long term debt assumed in the INOH acquisition. Cash
and cash equivalents increased by $1.2 million during the nine months ended
September 30, 1996 resulting in a cash balance at September 30, 1996 of $3.3
million.
On June 4, 1996, the Company acquired 100% of the outstanding stock of the
INOH for $8.9 million cash and the assumption of approximately $3.5 million of
debt. This acquisition was funded by borrowings under the U.S. Acquisition
Facility.
In June 1996, a newly formed wholly owned subsidiary of the Company,
RailTex International Holdings, Inc., completed its initial investment in
Ferrovia Centro-Atlantica S.A. ("FCA"), which was awarded a 30 year concession
to operate the 4,400 mile Center Eastern Network of the Brazilian federal
railroad. FCA was awarded the concession at the government's minimum bid price
of approximately U.S. $318.0 million. The Brazilian government structured the
transaction as a 30 year concession with a 20.0% down payment and future lease
payments due in quarterly installments after an initial two year grace period.
RailTex International Holdings owns 12.5% of the voting stock and 13.4% of the
non-voting stock of FCA and will account for the transaction using the cost
method of accounting. The Company's initial Investment, which funded its share
of the down payment, was approximately U.S. $8.2 million and was funded by
borrowings under the U.S. Acquisition Facility.
During the three months ended September 30, 1996, the Company completed its
investment in FCA. The additional investment of approximately U.S. $7.8 million
was required to provide the initial working capital for FCA and to pay for the
Company's portion of auction related expenses. Approximately $7.7 million of
the additional investment was funded by borrowings under the U.S. Acquisition
Facility.
On September 21, 1996, a newly formed subsidiary of the Company,
CSO, purchased from Consolidated Rail Corp. ("Conrail") certain assets including
23 miles of rail segments located in the Hartford, Connecticut area and six
locomotives. The CSO was also granted rights to operate over an additional 49
miles of track, from North Haven, Connecticut to Springfield, Massachusetts,
under a freight operating agreement with Amtrak. The purchase price, $3.5
million, was funded by borrowings under the Company's U.S. Acquisition Facility.
On September 9, 1996, the Company announced that it has signed a letter of
intent with Canadian National ("CN") to acquire, through a wholly owned
subsidiary, substantially all of the assets of the former Detroit, Toledo &
Ironton Railroad ("DTI"). The Company will purchase approximately 146 miles of
track for $27.0 million and, with trackage rights, will operate over
approximately 255 miles. Additionally, the Company has committed to invest, over
a three year period, approximately $9.7 million to return the DTI's track to
FRA Class 4 standards. The closing of the acquisition of the assets of the DTI
is contingent upon, among other things, the negotiation and execution of
definitive documentation, approval by the Company's Board of Directors and
receipt of necessary regulatory approvals. The Company anticipates funding this
acquisition of assets through borrowings under its U.S. Acquisition Facility.
20
<PAGE>
At September 30, 1996, the Company had long-term senior debt, capital
leases and senior subordinated debt outstanding totaling $89.3 million, which
constituted 42.7% of its total capitalization. Comparable figures at December
31, 1995 were $58.9 million and 34.3%, respectively.
The Company now anticipates that its maintenance capital expenditure
requirements in 1996 for track, locomotives and equipment on properties it
currently operates will be approximately $15.0 million. Additionally, computer
hardware, software and related capital expenditures are currently expected to be
approximately $4.5 million.
On May 17, 1996, the Company entered into a new domestic credit agreement
consisting of a $10.0 million domestic working capital facility (the "U.S.
Working Capital Facility") and a $75.0 million domestic acquisition facility
(the "U.S. Acquisition Facility"), replacing similar facilities which would
expire in May 1996 and May 1997 respectively. The Company may borrow up to 65.0%
of its eligible accounts receivable under the U.S. Working Capital Facility to
provide working capital and may borrow under the U.S. Acquisition Facility to
finance acquisitions of property and equipment which meet defined criteria. The
new facilities expire on April 30, 1999. Interest is payable monthly under the
U.S. Working Capital Facility until April 30, 1999 when all borrowings become
payable. New borrowings under the U.S. Acquisition facility are monthly interest
only until they are rolled into a term note annually on April 30. The term notes
are amortized over a six year period; however, all borrowings become payable
three years from their date of funding, none later than April 30, 2002. Both the
U.S. Working Capital Facility and U.S. Acquisition Facility bear interest based
on stated borrowing margins over the London Interbank Offered Rate ("LIBOR") or
the U.S. prime rate. The borrowing margins are dependent upon the Company's
leverage ratio and are adjusted quarterly. At September 30, 1996, borrowings
outstanding and availability under the U.S. Acquisition Facility were $30.4
million and $44.6 million, respectively. There were no borrowings under the U.S.
Working Capital Facility at September 30, 1996.
On June 21, 1996, the Company entered into a new Canadian credit agreement
consisting of a $5.0 million Canadian revolving working capital facility (the
"Canadian Working Capital Facility"), which replaced a revolving credit facility
that initially expired May 31, 1996 and was subsequently extended until the
closing of the new agreement, and a new $25.0 million Canadian acquisition
credit agreement (the "Canadian Acquisition Facility"). The Canadian credit
agreements contain terms and conditions similar to the domestic agreements. The
Canadian facilities bear interest based on stated borrowing margins over the
bankers acceptance rate (the "BA Rate") or the Canadian prime rate. The
borrowing margins are dependent upon the Company's leverage ratio and are
adjusted quarterly. At September 30, 1996 borrowings outstanding and
availability under the Canadian Working Capital Facility were CDN $1.0 million
and CDN $4.0 million, respectively. There were no borrowings under the Canadian
Acquisition Facility at September 30, 1996.
Covenants contained in the agreements evidencing the Company's senior and
senior subordinated debt prohibit the Company from paying dividends on its
capital stock and limit its ability to incur additional indebtedness, create
liens on its assets, make capital expenditures over a defined limit and
repurchase shares of its capital stock or any outstanding options or other
rights to acquire stock of the Company. The Company is also limited in its
ability to make loans, investments, or guarantees. The Company is required to
maintain a minimum tangible net worth and to meet certain other financial
ratios. At September 30, 1996 the Company was in compliance with all covenants.
At September 30, 1996, availability under the U.S. Acquisition Facility,
the U.S. Working Capital Facility and the Canadian Working Capital Facility and
Canadian Acquisition Facility was, in U.S. dollars, $44.6 million, $10.0
million, approximately $2.9 million and approximately $18.4 million,
respectively. The unused portion of all of the Company's senior bank credit
facilities are subject to a 0.25% commitment fee. In addition, RailTex, Inc.,
the parent company, is a guarantor of the Canadian Credit Facility.
21
<PAGE>
The Company believes its cash flow from operations together with available
amounts under the U.S. Working Capital Facility and Canadian Working Capital
Facility will allow it to meet its liquidity and capital expenditure
requirements for railroads it currently operates through the expiration of these
facilities in April 1999.
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 Company's per car fees based on the Surface
Transportation Board's ("STB") cost or inflation indices.
SEASONALITY
The Company's operating revenues from existing operations have not
historically been subject to significant seasonal changes.
ACCOUNTING MATTERS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
remain with the accounting prescribed by APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method
recommended by FAS 123 had been applied. The accounting requirements of FAS 123
are effective for transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted on issuance. The disclosure
requirements of FAS 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. The Company intends to continue measuring
compensation costs using APB 25 and to provide pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
under FAS 123 had been applied. Therefore, FAS 123 is not expected to have a
material effect on the financial condition or results of operations of the
Company.
The remainder of this page is intentionally left blank.
22
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings - None
- ------ ------------------------
Item 2. Changes in Securities - None
- ------ ----------------------------
Item 3. Defaults Upon Senior Securities - None
- ------ --------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
- ------ ----------------------------------------------------------
Item 5. Other Information -None
- ------ -----------------------
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(A). Exhibits
Exhibit
Number Description of Document
------- -----------------------
*3(i) Restated Articles of Incorporation of the Company.
*3(ii) Bylaws of the Company.
*4.1 Specimen Common Stock Certificate.
*4.2 Note Agreement, dated as of January 1, 1993, among the Company
and Massachusetts Mutual Life Insurance Company, MassMutual
Participation Investors and MassMutual Corporate Investors.
*4.3 Purchase Agreement, dated as of August 28, 1991, among the
Company and Banc One Capital Partners Corporation, Ventex
Partners Ltd., and First Century Partnership III.
++10.1 Credit Agreement, dated as of May 17, 1996, between the Company;
First Interstate Bank of Texas, N.A.; as Agent, and the several
financial institutions that are parties to the Credit Agreement.
++10.2 First Amendment to Credit Agreement, dated as of June 11, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent,
and the several financial institutions that are parties to the
Credit Agreement.
++10.3 Second Amendment to Credit Agreement, dated as of July 22, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent,
and the several financial institutions that are parties to the
Credit Agreement.
++10.4 Loan Agreement, dated as of June 21, 1996, between RailTex
Canada, Inc., as Borrower and National Bank of Canada and ABN
AMRO Bank Canada, as Lenders and National Bank of Canada, as
Agent.
10.5 Third Amendment to Credit Agreement, dated August 13, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.
23
<PAGE>
10.6 (This exhibit is intentionally left blank.)
10.7 (This exhibit is intentionally left blank.)
*10.8 Contract for Rail Freight Service, dated July 31, 1986, by and
between the City of Austin, Capital Metropolitan Transportation
Authority and Austin Railroad Company, Inc.
*10.9 Indenture of Lease and Option to Purchase Agreement, dated
February 28, 1990, by and between Southern Railway Company and
Chesapeake and Albemarle Railroad Company, Inc.
*10.10 Lease Agreement, dated February 9, 1992, by and between Missouri
Pacific Railroad Company and Dallas, Garland & Northeastern
Railroad Company, Inc.
*10.11 Line Sale Contract, dated February 5, 1992, by and between
Missouri Pacific Railroad Company and Dallas, Garland &
Northeastern Railroad Company, Inc.
*10.12 Smithville, GA to White Oak, AL Lease and Option to Purchase
Agreement, dated December 22, 1988, by and between Central of
Georgia Railroad Company, the South Western Rail Road Company and
South Carolina Central Railroad Company, Inc.
*10.13 Asset Purchase Agreement, dated October 29, 1990, by and between
the Goderich Exeter Railway Company Limited and Canadian National
Railway Company.
*10.14 Operating and Marketing Agreement, dated October 29, 1990,
between Goderich Exeter Railway Company Limited and Canadian
National Railway Company.
*10.15 Purchase and Sale Agreement, dated July 9, 1993, by and between
Central Michigan Railway Company and Grand Rapids Eastern
Railroad.
*10.16 Purchase and Sale Agreement, dated March 19, 1992, by and between
Indiana Southern Railroad, Inc. and Consolidated Rail
Corporation.
*10.17 Transportation Contract ICC-CR-C-4553, dated September 28, 1987,
by and between Consolidated Rail Corporation and Indianapolis
Power & Light Company and all amendments thereto.
*10.18 Lease Agreement, dated December 11, 1992, by and between Missouri
Pacific Railroad Company and Missouri & Northern Arkansas
Railroad Company, Inc.
*10.19 Line Sale Contract, dated December 11, 1992, by and between
Missouri Pacific Railroad Company and Missouri & Northern
Arkansas Railroad Company, Inc.
*10.20 Permanent Freight Railroad Operating Easement, dated March 31,
1993, by and between the Union Pacific Railroad Company and the
Salt Lake City Southern Railroad Co., Inc.
*10.21 Administration and Coordination Agreement, dated March 31, 1993,
by and between the Salt Lake City Southern Railroad Co., Inc. and
the Utah Transit Authority.
*10.22 Agreement for Operation of Freight Service and Control Through
Management of SD&AE, dated March 8, 1984, between San Diego and
Arizona Eastern Railway Company, San Diego Metropolitan Transit
Development Board and the Company.
24
<PAGE>
*10.23 Agreement, dated July 15, 1986, between San Diego and Imperial
Valley Railroad and Ferrocarril Sonora-Baja California.
*10.24 Lease Agreement, dated March 2, 1990, between Missouri Pacific
Railroad Company and Mid-Michigan Railroad, Inc.
*10.25 Lease and Option to Purchase Agreement, dated November 10, 1988,
by and between Southern Railway Company and North Carolina &
Virginia Railroad.
*10.26 Asset Purchase Agreement, dated September 18, 1992, by and
between Cape Breton & Central Nova Scotia Railway Limited and
Canadian National Railway Company.
*10.27 Operating and Marketing Agreement, dated September 18, 1992,
between Cape Breton & Central Nova Scotia Railway Limited and
Canadian National Railway Company.
*10.28 Note Agreement, dated as of January 1, 1993, among the Company
and Massachusetts Mutual Life Insurance Company, MassMutual
Participation Investors and MassMutual Corporate Investors
(included as Exhibit 4.2).
*10.29 Purchase Agreement, dated as of August 28, 1991, among the
Company and Banc One Capital Partners Corporation, Ventex
Partners Ltd., and First Century Partners III (included as
Exhibit 4.3).
++10.30 Form of Amended 1993 Stock Plan of the Company.
*10.31 Form of Non-Statutory Stock Option Agreement between the Company
and its officers.
*10.32 Interest Rate Swap Agreement, dated September 16, 1992, between
the Company and First Interstate Bank of Texas, N.A.
*10.33 Form of Indemnification Agreement between the Company and its
officers and directors.
*10.34 Form of Indemnification Agreement between RailTex Service Co.,
Inc. and its officers and directors
***10.35 First Amendment to Credit Agreement, dated as of February 3,
1995, between the Company; First Interstate Bank of Texas, N.A.;
National Bank of Canada; First Interstate Bank of Texas, N.A., as
Agent, and the several financial institutions that are a party to
the Credit Agreement.
*10.36 Right of First Refusal Agreement, dated October 1, 1993, between
Cape Breton & Central Nova Scotia Railway Limited and Canadian
National Railway Company.
***10.37 Sale Agreement--Siskiyou Line, Coos Bay Branch and White City
Branch, dated as of November 21, 1994, by and between Southern
Pacific Transportation Company and Central Oregon & Pacific
Railroad, Inc.
***10.38 First Amendment to Sale Agreement--Siskiyou Line, Coos Bay Branch
and White City Branch, dated as of December 31, 1994, by and
between Southern Pacific Transportation Company and Central
Oregon & Pacific Railroad, Inc.
***10.39 Lease Agreement, dated as of December 31, 1994, by and between
Southern Pacific Transportation Company and Central Oregon &
Pacific Railroad, Inc.
25
<PAGE>
***10.40 Cooperative Marketing Agreement, dated as of December 31, 1994,
by and between Southern Pacific Transportation Company and
Central Oregon & Pacific Railroad, Inc.
*****10.41 The Note Agreement, dated as of September 1, 1995, between the
Company and the Purchasers named on Schedule I on Note Agreement.
10.42 (This exhibit is intentionally left blank.)
10.43 (This exhibit is intentionally left blank.)
+10.44 Form of Non-Statutory Stock Option Agreement between the Company
and its outside directors.
***10.45 Letter of Intent, dated May 23, 1994, between Central Vermont
Railway, Inc. and RailTex Service Company, Inc.
****10.46 Lease and Sale Agreement, dated October 6, 1994, by and between
New England Central Railroad, Inc. and Central Vermont Railway,
Inc.
*****10.47 The Note Agreement (the "Canadian Note Agreement"), dated as of
September 1, 1995, between RailTex Canada, Inc. and the
Purchasers named on Schedule I to the Canadian Note Agreement.
*****10.48 Guaranty Agreement, dated as of September 1, 1995, by RailTex,
Inc. in favor of Purchasers named on Schedule I to the Canadian
Note Agreement.
+10.49 Interest Rate Swap Agreement, dated January 24, 1995, between
National Bank of Canada and RailTex Canada, Inc.
+10.50 Form of Split Dollar Insurance Agreement between the Company and
its Executive Officers.
++10.51 Agreement of Sale Among RailTex, Inc. and Indiana & Ohio Rail
Corp. and all of the Shareholders of Indiana & Ohio Rail Corp.
11.1 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
______________
* These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement No. 33-68938 filed on Form S-1
with the Securities and Exchange Commission (the "Commission") on
September 16, 1993, as amended by Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on November 1, 1993,
Amendment No. 2 to Form S-1 Registration Statement filed with the
Commission on November 16, 1993 and Post-Effective Amendment No. 1 to
Form S-1 Registration Statement filed with the Commission on November
19, 1993.
** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994.
*** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement No. 33-80782 filed on Form S-1
with the Commission on June 28, 1994, as amended by Amendment No. 1 to
Form S-1 Registration Statement filed with the Commission on September
1, 1994, Amendment No. 2 to
26
<PAGE>
Form S-1 Registration Statement filed with the Commission on February
17, 1995 and Amendment No. 3 to Form S-1 Registration Statement filed
with the Commission on March 6, 1995.
**** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994.
***** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.
****** This exhibit is incorporated by reference to the same Exhibit to
the Registrant's Form 10-K for the year ended December 31, 1993.
+ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 filed with the Commission on March 29, 1996.
++ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996.
(b). Reports on Form 8-K:
-------------------
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Antonio,
Texas.
RAILTEX, INC.
Date: November 14, 1996 By: /s/ Laura D. Davies
------------------------------
Name: LAURA D. DAVIES
Title: Vice President and
Chief Financial Officer
Date: November 14, 1996 By: /s/ Allen L. Smith
------------------------------
Name: ALLEN L. SMITH
Title: Controller, RailTex, Inc.
28
<PAGE>
================================================================================
THIRD AMENDMENT
TO
CREDIT AGREEMENT
By and Among
RAILTEX, INC.,
THE SEVERAL FINANCIAL INSTITUTIONS
PARTY TO THIS AGREEMENT,
and
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION,
As Agent
Dated as of August 13, 1996
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Section 1........................................Certain Defined Terms 1
Section 2.....................................................Recitals 1
Section 3...................................................Amendments 1
Section 4...................Ratification of Continued Force and Effect 4
Section 5.........................................Conditions Precedent 4
Section 6...............................................Applicable Law 4
Section 7.......................................Successors and Assigns 4
Section 8.................................................Counterparts 4
Section 9.............................................Effect of Waiver 4
Section 10....................................................Headings 5
Section 11..........Non-Application of Chapter 15 of Texas Credit Code 5
Section 12............................................ENTIRE AGREEMENT 5
</TABLE>
i
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT
This is the Third Amendment (the "Amendment") dated as of August 13,
1996 to a Credit Agreement, dated as of May 17, 1996, among Wells Fargo Bank
(Texas), National Association (formerly known as First Interstate Bank of Texas,
N.A.), individually and as Agent, National Bank of Canada, New York Branch, ABN
Amro Bank, N.V. - Houston Agency, National City Bank, Kentucky and RailTex, Inc.
(as amended, the "Agreement").
In consideration of the following Recitals, for $10 in hand paid and
for other good and valuable considerations, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows, intending to be legally
bound:
Section 1. Certain Defined Terms. Capitalized terms used but not
defined herein have the meanings ascribed to them in the Agreement.
Section 2. Recitals. The Borrower has requested that the Issuing
Bank issue Letters of Credit. The Agent and the Banks concur in the request to
provide for Letters of Credit. This Amendment shall be effective on the date
(the "Effective Date") that all of the Conditions Precedent set out in Section 5
hereof have been met.
Section 3. Amendments. The Agreement is amended as follows:
(A) The definitions of "Credit Exposure," "Letter of Credit" and
"Letter of Credit Agreement" are amended in their entirety to read as follows:
"Credit Exposure" means the sum of the aggregate face amount of
the Letters of Credit minus the aggregate amount of drafts paid under
Letters of Credit for which the Issuing Bank has been reimbursed.
"Letter of Credit" means a letter of credit issued pursuant to
Section 3.1(b) of the Agreement; "Letters of Credit" means all
letters of credit issued pursuant to Section 3.1(b) of the Agreement.
"Letter of Credit Agreement" means each application and letter
of credit agreement now or hereafter executed by the Borrower or a
Subsidiary, or both, such agreement to be on the Issuing Bank's
standard form (with such changes thereto as the Borrower and the
Issuing Bank may agree to from time to time) and completed in form
and substance satisfactory to the Issuing Bank; "Letter of Credit
Agreements" means all of the Letter of Credit Agreements.
(B) The definition of "Loan Documents" found in Section 1.2 of the
Agreement is amended by changing the references to "Letter of Credit" and
"Letter of Credit Agreement" to be plural.
(C) Section 3.1 of the Agreement is amended by labeling the first
paragraph thereto "(a)", and by adding the following new subsections to the end
of Section 3.1:
<PAGE>
"(b) Letters of Credit. Subject to, and upon the terms,
conditions, covenants and agreements contained herein and in the Letter of
Credit Agreements, prior to the Revolving Termination Date, the Issuing
Bank agrees to issue nontransferable standby Letters of Credit, in form and
substance satisfactory to the Issuing Bank, for the account of a Borrower
or a Subsidiary in an aggregate undrawn face amount at any time outstanding
not to exceed the lesser of the (a) Revolving Loan Commitments and (b) the
sum of (A) the then existing Credit Exposure plus (B) the then outstanding
Borrowings on the Revolving Loan Commitments. In the event of an actual
conflict between the terms and conditions of this Agreement and the terms
and conditions of any Letter of Credit Agreement, the terms and conditions
of this Agreement shall prevail. Letters of Credit shall be issued for a
period not exceeding the Revolving Termination Date.
"(c) In the event, on the Revolving Termination Date, there
remains any Credit Exposure, the Borrower agrees to deposit in a cash
collateral account maintained by the Agent an amount equal to the aggregate
undrawn amount of its respective Letters of Credit that are unmatured as of
such date or with respect to which presentment for honor may not then be
made; the unused portion thereof applicable to each respective Letter of
Credit, if any, shall be returned to the Borrower after the expiration date
of the Letter of Credit and after all Notes and Obligations hereunder and
under the Loan Documents applicable to the Letter of Credit are paid in
full."
(D) Section 3.2 of the Agreement is amended deleting subsections (c)
and (d) thereto.
(E) The first paragraph of Section 3.2(a) of the Agreement is
amended by deleting each reference to "plus any Credit Exposure."
(F) Subsection (d) of Section 3.6 of the Agreement is amended in its
entirety to read as follows:
"(d) Letter of Credit Fee. The Borrower agrees to pay to the
Agent, for the benefit of the Lenders in proportion to their respective
Commitment Percentages, a letter of credit fee of 1% per annum of the face
amount of each Letter of Credit. Such fee shall be paid, fully earned and
non-refundable upon acceptance by the Agent of the applicable Letter of
Credit Agreement."
(G) Subsection (a) of Section 3.20 of the Agreement is amended by
(1) adding the letter "s" to the end of the word "Letter" in the heading
thereto, (2) deleting the word "the" before the first, second and fifth
references to Letter of Credit and inserting the letter "a" therefor, (3) by
deleting the word "the" before the third and fourth references to Letter of
Credit and inserting the word "such" therefor, and (4) inserting the word
"applicable" before the word beneficiary in the second sentence thereto.
-2-
<PAGE>
(H) Subsections (i), (ii) and (iii) of Section 3.20(a) are amended
by deleting the word "the" before each reference to Letter of Credit and
inserting the word "any" therefor.
(I) Subsection (iv) of Section 3.20(a) of the Agreement is amended
by deleting the word "the" before the first and second reference to Letter of
Credit and inserting the word "any" in lieu thereof before the first reference,
and the letter "a" in lieu thereof before the second reference.
(J) Subsection (v) of Section 3.20(a) of the Agreement is amended by
deleting the word "the" before Letter of Credit and inserting the letter "a"
therefor.
(K) Subsection (b) of Section 3.20 of the Agreement is amended by (1)
deleting the word "the" before each reference to Letter of Credit and inserting
the word "each" before the first reference, the word "such" before the second
and fourth references, and the letter "a" before the third and fifth reference,
and (2) deleting the word "Acquisition" before each reference to Loan Commitment
and inserting the word "Revolving" therefor.
(L) Subsection (c) of Section 3.20 of the Agreement is amended by
deleting the word "the" before Letter of Credit and inserting the word "any"
therefor .
(M) Subsection (d) of Section 3.20 of the Agreement is amended by (1)
deleting the word "Acquisition" before each reference to Loan Commitments and
inserting the word "Revolving" therefor; (2) deleting the word "the" before the
second, third and fourth reference to Letter of Credit and inserting the letter
"a" therefor before the second reference, and the word "such" therefor before
the second and third reference; and (3) deleting each reference to "Interim
Acquisition Loan" and inserting the words "Borrowings under the Revolving Loan
Commitments" therefor.
(N) Subsection (g) of Section 3.20 of the Agreement is amended by
deleting the word "the" before Letter of Credit and inserting the letter "a"
therefor.
(O) Subsection (h) of Section 3.20 of the Agreement is amended by
changing the first three references of "Letter of Credit" to be references to
"Letters of Credit"; the fourth reference to "Letter of Credit" is amended by
inserting the word "applicable" before "Letter of Credit"; the fifth reference
to "Letter of Credit" is amended by deleting the word "the" before Letter of
Credit and inserting the word "any" therefor; the sixth reference to "Letter of
Credit" is amended by deleting the word "the" before "Letter of Credit" and
inserting the words "any such" therefor.
(P) Subsection (i) of Section 3.20 of the Agreement is amended by
deleting the word "the" before each reference to "Letter of Credit" and
inserting the letter "a" therefor.
(Q) Subsection (a) of Section 4.5 of the Agreement is amended by (1)
deleting the word "the" before the first reference to "Letter of Credit" and
inserting the word "each" therefor; (2) deleting the word "the" before the
fourth reference to "Letter of Credit" and inserting the word
-3-
<PAGE>
"such" therefor; and (3) deleting the word "the" before "Credit Request" in the
second paragraph thereof and inserting the word "each" therefor.
Section 4. Ratification of Continued Force and Effect. Ratification of
Continued Force and Effect". Except as specifically amended herein, all of the
terms and conditions of the Agreement and all of the Loan Documents executed in
connection therewith or contemplated thereby are and remain in full force and
effect in accordance with their respective terms. All of the terms used herein
have the same meanings as set out in the Agreement, unless amended hereby or
unless the context clearly required otherwise. References in the Agreement to
the "Agreement," and the "Credit Agreement," "hereof," "herein" and the words of
similar import shall be deemed to be references to the Agreement as amended
through the Effective Date. Any reference in any Note or any other Loan
Documents to the "Credit Agreement" shall be deemed to be references to the
Agreement as amended through the Effective Date.
Section 5. Conditions Precedent. The effectiveness of this Amendment is
subject to the full and complete satisfaction of the following conditions
precedent:
(A) Certain Authorizations. The Agent shall have received any
evidence of corporate authorization by the Borrower and such other
corporate documents as it may reasonably request.
(B) Certain Documents. The Agent shall have received the following
documents:
(1) This Amendment executed by all parties; and
(2) Such other and further documents and agreements as the Agent
or its counsel shall reasonably request.
Section 6. Applicable Law. This Amendment and all other Loan Documents
executed pursuant hereto shall be deemed to have been made and to be performable
in Houston, Harris County, Texas and shall be governed by and construed in
accordance with the laws of the State of Texas.
Section 7. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of the Lenders, the Agent and the Borrower and their
respective successors and assigns, except the Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Lenders and the Agent.
Section 8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
Section 9. Effect of Waiver. No consent or waiver, express or implied, by
any Lender
-4-
<PAGE>
or the Agent to or for any breach of or deviation from any covenant, condition
or duty by the Borrower shall be deemed a consent or waiver to or of any other
breach of the same or any other covenant, condition or duty.
Section 10. Headings. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 11. Non-Application of Chapter 15 of Texas Credit Code. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Annotated Texas
Statutes, Article 5069-15) are specifically declared by the parties not to be
applicable to this Amendment or any of the Loan Documents or the transactions
contemplated hereby.
Section 12. ENTIRE AGREEMENT. ENTIRE AGREEMENT". THIS AMENDMENT, THE
AGREEMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND
DELIVERED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES HERETO MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered effective as of August 13, 1996.
BORROWER:
RAILTEX, INC. Address: 4040 Broadway, Suite 200
San Antonio, Texas 78209
Attn: Laura D. Davies
By: _________________________ Vice President and
Laura D. Davies Chief Financial Officer
Vice President and Telephone No. (210) 841-7600
Chief Financial Officer Telecopy No. (210) 841-7629
AGENT:
WELLS FARGO BANK (TEXAS), Address: 1000 Louisiana
NATIONAL ASSOCIATION Houston, Texas 77002
(formerly known as FIRST INTERSTATE
BANK OF TEXAS, N.A.)
-5-
<PAGE>
Attn: Bennett D. Douglas
Vice President
Telephone No. (713) 250-1039
Telecopy No. (713) 250-7031
By
-------------------------
Bennett D. Douglas
Vice President
-6-
<PAGE>
LENDERS:
WELLS FARGO BANK (TEXAS), Domestic Lending Office and
NATIONAL ASSOCIATION Eurodollar Lending Office
(formerly known as FIRST INTERSTATE
BANK OF TEXAS, N.A.)
Address: 1000 Louisiana
By___________________________ Houston, Texas 77002
Bennett D. Douglas Attn: Bennett D. Douglas
Vice President Vice President
Telephone No. (713) 250-1039
Telecopy No. (713) 250-7031
Domestic Lending Office and
Eurodollar Lending Office
NATIONAL BANK OF CANADA, Address: National Bank of Canada,
NEW YORK BRANCH 125 W. 55th Street
New York, New York 10019
Attn: Mr. Wayne Rosen
Telephone No. (212) 632-8568
Telecopy No. (212) 632-8736
By
-------------------------
Larry L. Sears
Group Vice President With a copy to:
and National Bank of Canada
2121 San Jacinto, Suite 1850
Dallas, Texas 75201
By Attn: Mr. Douglas Clark
------------------------- Vice President
Douglas Clark Telephone No. (214) 871-1265
Vice President Telecopy No. (214) 871-2015
Domestic Lending Office and
Eurodollar Lending Office
-7-
<PAGE>
ABN AMRO BANK, N.V.- Address: 3 Riverway, Suite 1700
HOUSTON AGENCY Houston, Texas 77056
By: ABN AMRO NORTH AMERICA, INC., Attn: Belinda Rowell
as Agent Telephone No. (713) 964-3363
Telecopy No. (713) 629-7533
Domestic Lending Office and
Eurodollar Lending Office
By:
--------------------------
Name:
Title:
and
By:
--------------------------
Name:
Title:
NATIONAL CITY BANK, KENTUCKY Address: 101 South Fifth Street
Louisville, Kentucky 40202
Attn: Donald R. Pullen, Jr.
Telephone No. (502) 581-6352
By:_________________________ Telecopy No. (502) 581-5122
Donald R. Pullen
Vice President Domestic Lending Office and
Eurodollar Lending Office
-8-
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1995 1996 1995 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE CALCULATION:
- ---------------------------------------
Net income................................. $ 2,054 $ 2,308 $ 4,427 $ 7,113
======= ======= ======= =======
Weighted average number of common stock and
common stock equivalents outstanding:
Weighted average number of shares of
common stock outstanding................ 9,090 9,110 8,624 9,110
Weighted average number of common
stock equivalents applicable to stock
options................................. 120 121 169 120
Common stock and common stock ------- ------- ------- -------
equivalents............................. 9,210 9,231 8,793 9,230
======= ======= ======= =======
Earnings per share - primary............. $ 0.22 $ 0.25 $ 0.50 $ 0.77
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
CALCULATION:
------------
Net income................................. $2,054 $2,308 $4,427 $7,113
====== ====== ====== ======
Weighted average number of common stock and
common stock equivalents outstanding:
Weighted average number of shares of
common stock outstanding................ 9,090 9,110 8,624 9,110
Weighted average number of common
stock equivalents applicable to stock
options................................. 120 122 169 122
------ ------ ------ ------
Common stock and common stock equivalents
assuming full dilution................. 9,210 9,232 8,793 9,232
====== ====== ====== ======
Earnings per share - fully diluted (1)... $ 0.22 $ 0.25 $ 0.50 $ 0.77
====== ====== ====== ======
</TABLE>
(1) This calculation is submitted in accordance with item 601(b)11 of
regulation S-K although it is not required by APB Opinion No. 15 because it
results in dilution of less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,347
<SECURITIES> 0
<RECEIVABLES> 22,249
<ALLOWANCES> 749
<INVENTORY> 0
<CURRENT-ASSETS> 30,011
<PP&E> 230,119
<DEPRECIATION> 27,526
<TOTAL-ASSETS> 254,320
<CURRENT-LIABILITIES> 27,735
<BONDS> 0
0
0
<COMMON> 911
<OTHER-SE> 118,844
<TOTAL-LIABILITY-AND-EQUITY> 254,320
<SALES> 0
<TOTAL-REVENUES> 88,614
<CGS> 0
<TOTAL-COSTS> 72,174
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 381
<INTEREST-EXPENSE> 4,848
<INCOME-PRETAX> 11,899
<INCOME-TAX> 4,786
<INCOME-CONTINUING> 7,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,113
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
