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, 1997
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
Indicate the number of shares outstanding of the Registrant's Common Stock as of
October 31, 1997: 9,160,924
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ------------------------------
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES................................. $ 37,970 $ 29,857 $109,510 $ 88,614
OPERATING EXPENSES:
Transportation................................ 13,486 9,695 39,679 28,033
General and administrative.................... 6,875 4,503 18,719 15,352
Equipment..................................... 4,304 3,872 13,476 11,413
Maintenance of way............................ 3,692 3,678 10,658 10,392
Depreciation and amortization................. 3,265 2,638 9,353 7,365
-------- ------- -------- -------
Total operating expenses................ 31,622 24,386 91,885 72,555
------- ------- ------- -------
OPERATING INCOME................................... 6,348 5,471 17,625 16,059
INTEREST EXPENSE................................... (2,770) (1,829) (7,742) (4,848)
OTHER INCOME....................................... 1,278 248 1,577 688
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES......................... 4,856 3,890 11,460 11,899
INCOME TAXES....................................... (2,026) (1,582) (4,637) (4,786)
-------- --------- -------- ---------
NET INCOME......................................... $ 2,830 $ 2,308 $ 6,823 $ 7,113
======== ======== ======== ========
NET INCOME PER SHARE............................... $ 0.31 $ 0.25 $ 0.74 $ 0.77
======== ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS
OUTSTANDING ..................................... 9,228 9,231 9,224 9,230
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------ ----------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 1,031 $ 2,108
Accounts receivable, less doubtful receivables of $835; $612 in 1996 ..................... 29,239 26,834
Prepaid expenses and other current assets ................................................ 4,379 3,609
--------- ---------
Total current assets .................................................................. 34,649 32,551
--------- ---------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$38,046; $29,741 in 1996
248,710 209,420
--------- ---------
OTHER ASSETS:
Investments in Brazilian railroad companies, at cost ..................................... 19,984 21,380
Other .................................................................................... 6,152 6,119
--------- ---------
Total other assets .................................................................... 26,136 27,499
--------- ---------
Total assets .......................................................................... $ 309,495 $ 269,470
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable, net ............................................................ $ 522 $ 352
Current portion of long-term debt ........................................................ 9,648 6,361
Accounts payable ......................................................................... 14,865 14,624
Accrued liabilities ...................................................................... 15,238 11,445
--------- ---------
Total current liabilities ............................................................. 40,273 32,782
--------- ---------
DEFERRED INCOME TAXES ........................................................................ 19,342 17,703
--------- ---------
LONG-TERM DEBT ............................................................................... 10,496 36,391
--------- ---------
SENIOR NOTES PAYABLE ......................................................................... 100,842 50,952
--------- ---------
SENIOR SUBORDINATED NOTES PAYABLE ............................................................ 5,000 5,000
--------- ---------
OTHER LIABILITIES ............................................................................ 3,899 3,939
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock; $1.00 par value; 10 million shares authorized;
no shares issued or outstanding ........................................................ -- --
Common stock; $.10 par value; 30 million shares authorized; issued and
outstanding 9,160,924; 9,110,606 in 1996 ............................................... 916 912
Paid-in capital .......................................................................... 83,799 83,629
Retained earnings ........................................................................ 45,102 38,277
Cumulative translation adjustment ........................................................ (174) (115)
--------- ---------
Total shareholders' equity ........................................................... 129,643 122,703
--------- ---------
Total liabilities and shareholders' equity ........................................... $ 309,495 $ 269,470
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................................. $ 6,823 $ 7,113
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ....................................................... 9,353 7,365
Deferred income taxes ............................................................... 1,654 2,085
Amortization of deferred financing costs ............................................ 280 264
Provision for losses on accounts receivable ......................................... 229 479
Gain on sale of assets .............................................................. (1,508) (520)
Changes in working capital:
Accounts receivable ............................................................... (2,634) (1,325)
Prepaid expenses .................................................................. (770) (621)
Accounts payable and accrued liabilities .......................................... 4,035 3,662
-------- --------
Net cash provided by operating activities ........................................... 17,462 18,502
-------- --------
INVESTING ACTIVITIES:
Purchase of investments in Brazilian railroad companies ................................ (1,362) (16,051)
Sale of preferred shares of Brazilian railroad companies ............................... 2,758 --
Purchase of Detroit, Toledo and Ironton, including related costs ....................... (25,841) --
Purchase of Indiana & Ohio Rail Corp., net of cash acquired ............................ -- (8,989)
Purchase of property and equipment ..................................................... (22,464) (17,563)
Proceeds from sale of property and equipment ........................................... 1,685 580
Increase in other long-term assets ..................................................... (453) (1,792)
-------- --------
Net cash used in investing activities ................................................ (45,677) (43,815)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term notes, net ........................................... 169 (665)
Issuance of common stock ............................................................... 173 --
Proceeds from senior notes ............................................................. 50,000 --
Proceeds from long-term debt ........................................................... 23,500 30,946
Principal payments on long-term debt ................................................... (52,688) (3,500)
Net increase in working capital facility ............................................... 6,250 --
Deferred financing costs ............................................................... (309) (268)
-------- --------
Net cash provided by financing activities ............................................ 27,095 26,513
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................................................. 43 17
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................. (1,077) 1,217
CASH AND CASH EQUIVALENTS, beginning of period ........................................... 2,108 2,130
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................................. $ 1,031 $ 3,347
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................................ $ 7,973 $ 4,854
Income taxes ........................................................................ 2,128 1,751
Non-cash investing and financing activities:
Capital leases ...................................................................... 345 104
Grants .............................................................................. 18 771
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 intercompany
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 ("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, 1996 ("1996
Form 10-K"). 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. RECENTLY ISSUED PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 establishes standards for computing and presenting earnings
per share and applies to entities with publicly-held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and when adopted will require restatement
of prior years' earnings per share. Early adoption is not permitted. At
September 30, 1997 and 1996, basic and diluted earnings per share as calculated
under FAS 128, would have been the same as earnings per share reported by the
Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company believes the adoption of this
statement will not have a material effect on the financial condition or results
of operations of the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The Company believes the adoption of this statement will not have a
material effect on the financial condition or results of operations of the
Company.
3. LONG-TERM DEBT:
In July 1997, the Company completed a $50.0 million private placement
of senior unsecured notes ("Notes") with two institutions. The proceeds were
used to reduce outstanding bank debt under the Company's $75.0 million U.S.
acquisition facility ("U.S. Acquisition Facility"). The Notes bear interest at
7.44% with interest only due semiannually. The Notes mature in July 2012, and
are retired through six annual mandatory prepayments beginning July 2007.
5
<PAGE>
4. DERIVATIVE ACCOUNTING POLICIES:
The Company's operations involve managing market risks related to
changes in interest rates and diesel fuel prices. Derivative financial
instruments, specifically swaps and collars are used to manage market risks
related to changes in interest rates and diesel fuel prices, respectively. The
Company does not currently hold or issue financial instruments for trading
purposes.
By entering into interest rate swaps, the Company has functionally
converted certain floating-rate debt to fixed-rate debt in order to minimize
exposure to rising interest rates. The Company accounts for interest rate swaps
as hedges due to the fact that the derivative changes the nature of a designated
debt instrument which is on the Company's balance sheet and the underlying debt
obligation has a principal balance equal to or greater than the notional amount
of the related derivative. Any unrealized gains or losses from changes in the
value of the swaps are deferred and interest expense on the hedged debt
instrument is recorded using the interest rate as effectively revised by the
related swap. Any realized gain or loss incurred as a result of the termination
of the swap would be recorded in the period incurred.
At September 30, 1997, the Company had the following amortized interest
rate swap agreement in effect which was used to effectively fix future rates of
floating rate obligations:
<TABLE>
<CAPTION>
YEAR ENTERED YEAR OF COMPLETION NOTIONAL AMOUNT FIXED RATE PAID VARIABLE RATE RECEIVED
------------ ------------------ --------------- --------------- ----------------------
(in thousands)
<S> <C> <C> <C> <C>
1995 1999 CDN $10,526 9.55% Average three month
CDN BA rate
</TABLE>
In July 1997, the Company replaced the diesel fuel collars which
expired June 30, 1997 with two new collars. Each collar is effective July 1,
1997 and terminates on June 30, 1998. Each collar represents notional amounts
totaling 200,000 gallons per month with cap prices of $0.6100 and $0.6000 per
gallon and floor prices of $0.5165 and $0.5200 per gallon, respectively. For one
of the collars the counter party has an option, on a quarter by quarter basis,
to increase the notional amount to 400,000 gallons per month for the quarter
selected.
5. COMMITMENTS AND CONTINGENCIES:
In 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 release of diesel fuel during
locomotive refueling. 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 filed a complaint against one of the Company's
railroads in the United States District Court for the Western District of
Missouri seeking recovery of certain switching and joint facility charges. In
July 1997, the court ruled in favor of the plaintiff, and, as a result, the
Company paid the plaintiff approximately $635,000 in switching and joint
facility charges, including interest. The Company is currently negotiating
partial recovery with another Class I railroad on the basis that the Company was
acting as an agent for this railroad
6
<PAGE>
pursuant to the agreement under which the property was transferred to the
Company by this Class I railroad. In the second quarter of 1997, the Company
recorded a liability for the amount the plaintiff was seeking and a receivable
for the amount expected to be collected from the prior owner.
In December 1996, a corporation filed a construction lien against one
of the Company's railroads in the amount of approximately $600,000. The alleged
basis for the construction lien is the provision by the plaintiff of labor and
materials to the Company's railroad in connection with a train derailment in
August 1996. In March 1997, the Company filed a complaint in Federal Court
alleging negligence by the plaintiff. The Company believes that the plaintiff is
solely responsible for any and all damages arising out of the derailment due to
the plaintiff's negligent acts or the omission of its employees and agents. In
April 1997, the plaintiff filed a state action for relief for foreclosure of
construction lien in support of its previous lien filed in December 1996. The
Company believes that the filing and any subsequent enforcement of such lien is
wrongful and constitutes slander of and trespass to title. The Company also
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.
In connection with purchase of the assets of the former Detroit, Toledo
and Ironton ("DTI") on February 15, 1997, the Company has committed to invest,
over a three year period, approximately $9.7 million to return the DTI track to
Federal Railroad Administration Class IV standard. At September 30, 1997, the
Company has spent approximately $4.9 million.
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. See Note 15 of the 1996 Form 10-K.
7
<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.
This Form 10-Q contains certain "forward-looking" statements as such
term is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, distribution
networks, product introductions and acceptance, technological change, changes in
industry practices, one-time events and other factors described herein and in
other filings made by the Company with the Securities and Exchange Commission.
Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, or intended. The Company does not intend to
update these forward-looking statements.
GENERAL
The Company's growth to date has resulted from the implementation of
its two point strategy: to continually market and grow revenues and enhance
profitability on properties it currently operates and to acquire new railroad
properties.
The Company has historically added railroad properties to its portfolio
primarily through the purchase of track and roadbed, lease of such assets,
contracts to operate such assets under management agreements and purchase of
railroad company common stock. These arrangements typically relate only to the
physical assets of the railroad property, and, except for the purchase of the
Indiana & Ohio Rail Corp. ("INOH"), 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.
8
<PAGE>
RECENT DEVELOPMENTS
The Company has felt the effects of the congestion the Union Pacific
Corporation ("UP") is experiencing, primarily through car supply issues. As a
result, the Company expects fourth quarter net income to be affected by
approximately $200,000.
As a result of the acquisition of Consolidated Rail Corporation
("Conrail") by CSX Transportation, Inc. ("CSX") and Norfolk Southern Railway
Company ("NS"), Conrail's rail lines will be divided between CSX and NS which
may cause revenue to be diverted from the New England Central Railroad, Inc.
("NECR") and the Indiana Southern Railroad, Inc. ("ISRR"), wholly owned
subsidiaries of RailTex, Inc. Filings made by CSX and NS with the Surface
Transportation Board ("STB") indicated that approximately $1.6 million will be
diverted from the NECR. NECR estimates as much as $8.0 million and the ISRR
estimates $1.5 million could be diverted on an annual basis. In addition, the
Indiana and Ohio Rail Corp. ("INOH"), a wholly owned subsidiary of RailTex,
Inc., believes the division of rail lines between CSX and NS will cause
operating inefficiencies. As a result, NECR, ISRR and INOH have filed requests
with the STB for limited trackage rights to remedy the potential loss of revenue
and rectify operating inefficiencies. The Company is unable to predict the final
outcome of these filings at this time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
For the three months ended September 30, 1997, compared to the three
months ended September 30, 1996, New Railroad Properties include the Connecticut
Southern ("CSOR"), the Ontario L'Orignal ("OLOR"), the Pittsburgh Industrial
("PIRR") and the Detroit, Toledo and Ironton ("DTI").
The Company's net income for the three months ended September 30, 1997,
increased approximately $522,000, or 22.6%, to $2.8 million from $2.3 million in
the prior year period, and net income per share increased 24.0% to $0.31 per
share from $0.25 per share in the prior year period.
OPERATING REVENUES. Operating revenues for the three months ended
September 30, 1997 increased by $8.1 million, or 27.2%, to $38.0 million from
$29.9 million in the prior year period. Operating revenues attributable to New
Railroad Properties accounted for 67.9% of this increase. Operating revenues for
Comparable Railroad Properties increased $2.7 million, or 9.1%. Carloads
transported increased by 34,898 carloads, or 39.1%, to 124,120 carloads from
89,222 carloads in the prior year period. Carloads attributable to New Railroad
Properties accounted for 78.5% of this increase. Carloads attributable to
Comparable Railroad Properties increased by 7,495, or 8.4%, from the prior year
period.
Freight revenues for the three months ended September 30, 1997
increased $7.2 million, or 28.6%, to $32.5 million from $25.3 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, 1997 and 1996.
9
<PAGE>
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
AVERAGE FREIGHT
REVENUES PER
FREIGHT REVENUES CARLOADS CARLOAD(1)
------------------------------------- ------------------------------------ ------------
(DOLLARS IN THOUSANDS)
1997 1996 1997 1996 1997 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.... $ 6,352 19.5% $ 5,273 20.9% 16,811 13.5% 14,422 16.2% $378 $366
Coal.......................... 5,367 16.5 4,007 15.9 28,226 22.7 21,964 24.6 190 182
Chemicals..................... 3,817 11.7 2,698 10.7 11,731 9.5 7,620 8.5 325 354
Scrap paper & paper products.. 2,974 9.2 2,470 9.8 8,297 6.7 6,181 6.9 358 400
Scrap metal & metal products.. 2,645 8.1 1,433 5.7 10,076 8.1 5,090 5.7 262 282
Farm products................. 2,197 6.8 2,051 8.1 8,005 6.4 7,467 8.4 274 275
Non-metallic ores............. 1,629 5.0 1,715 6.8 9,052 7.3 9,529 10.7 180 180
Food products................. 1,449 4.5 1,577 6.2 5,665 4.6 5,534 6.2 256 285
Minerals & stone.............. 1,349 4.2 1,593 6.3 3,891 3.1 3,885 4.4 347 410
Autos and auto parts.......... 1,320 4.1 177 0.7 7,481 6.0 276 0.3 176 642
Petroleum products............ 1,220 3.8 1,216 4.8 3,546 2.9 2,982 3.3 344 408
Other......................... 2,178 6.6 1,066 4.1 11,339 9.2 4,272 4.8 192 249
------- ----- ------- ----- ------- ----- ------ -----
Total.................... $32,497 100.0% $25,276 100.0% 124,120 100.0% 89,222 100.0% $262 $283
======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
- ------------------
(1) Calculated as freight revenues divided by carloads.
Approximately $5.0 million, or 69.5%, of the increase in freight
revenues for the three months ended September 30, 1997, is attributable to New
Railroad Properties. These properties added 27,403 carloads consisting primarily
of auto and auto parts (7,222), scrap metal and metal products (3,883),
chemicals (3,081), scrap paper and paper products (2,462), lumber and forest
products (1,207) and other (7,079). Freight revenues for Comparable Railroad
Properties increased approximately $2.2 million, or 8.7%, while carloadings for
Comparable Railroad Properties increased by 7,495, or 8.4%, consisting primarily
of coal, due to a new customer at one of the Company's properties.
Non-freight revenues for the three months ended September 30, 1997
increased approximately $892,000, or 19.5%, to $5.5 million from $4.6 million in
the prior year period. Non-freight revenues include joint facilities, switching,
demurrage, car hire and car repair services performed for third parties, and
lease income. These non-freight revenues contributed 14.4% and 15.3% of
operating revenues in the three months ended September 30, 1997 and 1996,
respectively. New Railroad Properties contributed approximately 55.2% of the
increase. Non-freight revenues for Comparable Railroad Properties increased
approximately $508,000, or 11.1%, primarily as a result of increased car repair
income.
OPERATING EXPENSES. Operating expenses for the three months ended
September 30, 1997 increased $7.2 million, or 29.7%, to $31.6 million from $24.4
million in the prior year period. New Railroad Properties accounted for 65.8% of
the increase. Operating expenses for Comparable Railroad Properties increased
$665,000, or 3.2% and corporate operating expenses increased $1.9 million, or
56.7% primarily due to an increase in labor and benefits and casualties and
insurance. The Company's operating ratio (operating expenses divided by
operating revenues) increased for the period to 83.3%, compared to 81.7% in the
prior year period, primarily as a result of expenses associated with the
start-up of recently acquired railroad properties. The Company's operating ratio
for Comparable Railroad Properties improved to 74.0%, compared to 76.5% in the
prior year period.
10
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during the three month periods ended September 30, 1997 and 1996, in
dollars and as a percentage of operating revenues:
OPERATING EXPENSES COMPARISON
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
% OF OPERATING % OF OPERATING
DOLLARS REVENUE DOLLARS REVENUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Labor and benefits.......................... $12,033 31.7% $ 8,701 29.1%
Equipment rents............................. 3,815 10.0 3,364 11.3
Depreciation and amortization 3,265 8.6 2,638 8.8
Diesel fuel................................. 2,299 6.1 1,910 6.4
Purchased services.......................... 2,258 5.9 2,006 6.7
Casualties and insurance.................... 1,808 4.8 1,931 6.5
Materials................................... 1,495 3.9 1,077 3.6
Joint Facilities............................ 1,330 3.5 631 2.1
Other....................................... 3,319 8.7 2,128 7.1
------- ---- ------- ----
Total.................................. $31,622 83.3% $24,386 81.7%
======= ==== ======= ====
</TABLE>
Labor and benefits for the three months ended September 30, 1997
increased approximately $3.3 million, or 38.3%, to $12.0 million from $8.7
million in the prior year period. Labor and benefits attributable to New
Railroad Properties accounted for 51.1% of this increase. Labor and benefits for
Comparable Railroad Properties increased $1.0 million, or 14.3%, reflecting
increased profit sharing incentives to employees of Comparable Railroad
Properties as a result of increased profitability of those railroads, increased
overtime related to increased traffic volumes on certain railroads, and the
maintenance of track and signal by employees rather than contract forces on
certain railroads. The remainder of the increase is due to an increase in
employment at the Company's corporate headquarters.
Equipment rents for the three months ended September 30, 1997 increased
by approximately $451,000, or 13.4%, to $3.8 million from $3.4 million in the
prior year period. The increase in equipment rents attributable to New Railroad
Properties of approximately $776,000 was offset by a decrease of $409,000 or
12.0%, for Comparable Railroad Properties .
Depreciation and amortization for the three months ended September 30,
1997 increased by approximately $627,000, or 23.8%, to $3.3 million from $2.6
million in the prior year period. New Railroad Properties accounted for 48.6% of
this increase. The remainder is due to capital projects completed for Comparable
Railroad Properties, increased locomotive depreciation related to fleet
expansion, and depreciation of new computer hardware and software.
Diesel fuel expense for the three months ended September 30, 1997
increased by approximately $389,000, or 20.4%, to $2.3 million from $1.9 million
in the prior year period. New Railroad Properties accounted for 52.7% of this
increase. Diesel fuel expense for Comparable Railroad Properties increased by
approximately $156,000, or 8.1%, due to increased consumption related to
increased carloadings offset by lower fuel prices during the current year
period. The Company has taken several steps to reduce its exposure to fuel price
fluctuations, including entering into fuel hedging collars for approximately
34.0% of the Company's estimated annual fuel consumption.
Purchased services for the three months ended September 30, 1997
increased approximately $252,000, or 12.6%, to $2.3 million from $2.0 million in
the prior year period. Purchased services attributable to New
11
<PAGE>
Railroad Properties accounted for 69.0% of the increase. Purchased services for
Comparable Railroad Properties increased $48,000 or 3.3%, primarily a result of
increased contract labor for repair and maintenance and increased car repair
activity. Corporate purchased services expenses increased $103,000, or 22.1%,
due to an increase in locomotive repairs and professional fees.
Casualties and insurance expense for the three months ended September
30, 1997 decreased by approximately $123,000, or 6.4%, to $1.8 million from $1.9
million in the prior year period. Casualties and insurance expense for New
Railroad Properties increased $157,000. Casualties and insurance expense for
Comparable Railroad Properties decreased by $824,000, or 42.4%, due to a
decrease in derailments. Expenses related to self-insurance and litigation
reserves increased.
Materials expense for the three months ended September 30, 1997
increased by approximately $418,000, or 38.8%, to $1.5 million from $1.1 million
in the prior year period. New Railroad Properties accounted for 28.2% of the
increase. Materials expense for Comparable Railroad Properties increased
approximately $236,000, or 24.9%, primarily as a result of increased car repair
activity. The remainder of the increase is due to increased locomotive repair
materials.
Joint facilities expense for the three months ended September 30, 1997
increased by approximately $699,000, or 111% to $1.3 million from $631,000 in
the prior year period. Joint facilities expense increased approximately $748,000
reflecting the higher level of joint facilities expense for New Railroad
Properties relative to Comparable Railroad Properties. Joint facilities expense
for Comparable Railroad Properties decreased approximately $48,000, or 7.8%, due
primarily to a decrease in haulage fees.
Other expenses for the three months ended September 30, 1997, including
property and franchise taxes, increased approximately $ 1.2 million, or 56.0%,
to $ 3.3 million from $2.1 million in the prior year period. New Railroad
Properties accounted for 70.1% of this increase. Other expense for Comparable
Railroad Properties increased $ 382,000, or 28.7%, primarily due to an increase
in property taxes and travel. Corporate expenses represent the remainder of the
increase primarily due to an increase in travel expenses.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1997 increased by approximately $941,000, or 51.4%, to $2.8 million from
$1.8 million in the prior year period due primarily to borrowings totaling $29.3
million to fund the acquisition of New Railroad Properties and an additional
$13.0 million to fund the Company's investments in Brazil.
OTHER INCOME. Other income for the three months ended September 30,
1997 increased by approximately $1.0 million to $1.3 million from $248,000 in
the prior year period due primarily to an increase in gain on the sale of
non-operating assets.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
For the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996 New Railroad Properties include the INOH, the
CSOR, the OLOR, the PIRR and the DTI.
The Company's net income for the nine months ended September 30, 1997
decreased by approximately $290,000, or 4.1%, to $6.8 million from $7.1 million
in the prior year period and net income per share decreased 3.9% to $0.74 per
share from $0.77 per share in the prior year period. The decrease in net income
and net income per share is primarily the result of interest expense on $63.2
million of debt incurred to finance New Railroad Properties and the Company's
investments in Brazilian railroad companies and expenses associated with the
start-up of railroad properties acquired in 1997.
12
<PAGE>
OPERATING REVENUES. Operating revenues for the nine months ended
September 30, 1997 increased by $20.9 million, or 23.6%, to $109.5 million from
$88.6 million in the prior year period. Operating revenues attributable to New
Railroad Properties accounted for 81.1% of this increase. Operating revenues for
Comparable Railroad Properties increased $4.7 million, or 5.6%. Carloads
transported increased by 90,704 carloads, or 34.2%, to 356,060 carloads from
265,356 carloads in the prior year period. Carloads attributable to New Railroad
Properties accounted for 87.7% of this increase. Carloads attributable to
Comparable Railroad Properties increased by 12,337, or 4.8%, from the prior year
period.
Freight revenues for the nine months ended September 30, 1997 increased
$18.7 million, or 24.9%, to $94.2 million from $75.4 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, 1997 and 1996.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
AVERAGE FREIGHT
REVENUES PER
FREIGHT REVENUES CARLOADS CARLOAD(1)
------------------------------------- ------------------------------------ ------------
(DOLLARS IN THOUSANDS)
1997 1996 1997 1996 1997 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..... $18,183 19.3% $16,069 21.3% 48,330 13.6% 42,311 15.9% $376 $380
Coal........................... 13,438 14.3 12,157 16.1 71,463 20.1 64,186 24.2 188 189
Chemicals...................... 11,300 12.0 8,098 10.7 35,240 9.9 23,695 8.9 321 342
Scrap paper & paper products... 9,128 9.7 6,996 9.3 25,318 7.1 17,108 6.4 361 409
Farm products.................. 7,492 8.0 6,223 8.2 29,264 8.2 24,477 9.2 256 254
Scrap metal & metal products... 7,338 7.8 5,548 7.4 27,155 7.6 17,149 6.5 270 324
Food products.................. 4,803 5.1 4,239 5.6 18,241 5.1 15,585 5.9 263 272
Non-metallic ores.............. 4,767 5.1 5,412 7.2 26,587 7.5 28,734 10.8 179 188
Minerals & stone 4,023 4.3 3,744 5.0 11,880 3.3 10,565 4.0 339 354
Petroleum products............. 3,896 4.1 3,435 4.6 10,383 2.9 8,446 3.2 375 407
Autos and auto parts........... 3,664 3.9 356 0.5 20,153 5.7 555 0.2 182 642
Other.......................... 6,157 6.4 3,164 4.1 32,046 9.0 12,545 4.8 192 252
------- ----- ------- ----- ------- ----- ------- -----
Total..................... $94,189 100.0% $75,441 100.0% 356,060 100.0% 265,356 100.0% $265 $284
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ------------------
(1) Calculated as freight revenues divided by carloads.
13
<PAGE>
Approximately $15.2 million, or 81.2%, of the $18.7 million increase in
freight revenues for the nine months ended September 30, 1997, is attributable
to New Railroad Properties. These properties added approximately 79,523 carloads
consisting primarily of autos and auto parts (19,721), scrap metal and metal
products (10,613), chemicals (9,262), scrap paper and paper products (6,406),
farm products (3,653), lumber and forest products (3,313). Freight revenues for
Comparable Railroad Properties increased $3.9 million, or 5.3%, while
carloadings for Comparable Railroad Properties increased by 12,337, or 4.8%,
consisting primarily of increases in coal (7,192), lumber and forest products
(2,869), chemicals (2,357), and scrap paper and paper products (2,057) due
primarily to one new customer and increased business with existing customers
offset by a decrease in non-metallic ores (2,492) due to fewer salt moves as a
result of the weather and a decrease in activity from existing customers.
Non-freight revenues for the nine months ended September 30, 1997
increased approximately $2.1 million, or 16.3%, to $15.3 million from $13.2
million in the prior year period. Non-freight revenues include joint facilities,
switching, demurrage, car hire and car repair services performed for third
parties and lease income. These non-freight revenues contributed 14.0% and 14.9%
of operating revenues in the nine months ended September 30, 1997 and 1996,
respectively. New Railroad Properties accounted for 79.9% of the increase.
Non-freight revenues for Comparable Railroad Properties increased approximately
$847,000, or 7.0%, primarily due to an increase in car repair activity offset by
approximately $275,000, representing a one-time consulting fee earned in the
prior year period, but with no corresponding amount earned in the current year
period.
OPERATING EXPENSES. Operating expenses for the nine months ended
September 30, 1997 increased $19.3 million, or 26.6%, to $91.9 million from
$72.6 million in the prior year period. New Railroad Properties accounted for
84.2% of this increase. Operating expenses for Comparable Railroad Properties
increased, $104,000, or 0.2%, and corporate operating expenses increased $3.6
million, or 35.4%, offset by a decrease of $571,000 due to the Austin &
Northwestern Railroad which ceased operations in May 1996. The Company's
operating ratio (operating expenses divided by operating revenues) increased for
the period to 83.9% compared to 81.9% in the prior year period, primarily as a
result of expenses associated with the startup of recently acquired railroad
properties. The Company's operating ratio for Comparable Railroad Properties
improved for the period to 74.2%, compared to 76.5% in the prior year period.
The following table sets forth a comparison of the Company's operating
expenses during the nine month periods ended September 30, 1997 and 1996, in
dollars and as a percentage of operating revenues:
OPERATING EXPENSES COMPARISON
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------------------------- ----------------------------
% OF OPERATING % OF OPERATING
DOLLARS REVENUE DOLLARS REVENUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Labor and benefits............... $33,927 31.0% $25,789 29.1%
Equipment rents.................. 12,107 11.1 10,050 11.3
Depreciation and amortization 9,353 8.5 7,364 8.3
Diesel fuel...................... 8,372 7.6 6,589 7.4
Purchased services............... 6,532 6.0 5,982 6.8
Casualties and insurance......... 4,491 4.1 4,850 5.5
Materials........................ 4,177 3.8 3,187 3.6
Joint facilities................. 3,515 3.2 1,583 1.8
Other............................ 9,411 8.6 7,161 8.1
------- ---- ------- ----
Total....................... $91,885 83.9% $72,555 81.9%
======= ==== ======= ====
</TABLE>
14
<PAGE>
Labor and benefits for the nine months ended September 30, 1997
increased approximately $8.1 million, or 31.6%, to $33.9 million from $25.8
million in the prior year period. Labor and benefits attributable to New
Railroad Properties accounted for 69.1% of this increase. Labor and benefits for
Comparable Railroad Properties increased approximately $1.7 million, or 8.4%,
reflecting increased profit sharing incentives to employees of Comparable
Railroad Properties as a result of increased profitability of those railroads,
increased overtime related to increased traffic volumes on certain railroads,
and the maintenance of track and signal by employees rather than contract forces
on certain railroads. The remainder of the increase is due to an increase in
employment at the Company's corporate headquarters.
Equipment rents for the nine months ended September 30, 1997 increased
by approximately $2.0 million, or 20.5%, to $12.1 million from $10.0 million in
the prior year period. Equipment rents attributable to New Railroad Properties
increased $2.8 million. Equipment rents for Comparable Railroad Properties
decreased $1.0 million, or 10.2%, due primarily to decreased car hire expense.
Depreciation and amortization for the nine months ended September 30,
1997 increased by approximately $2.0 million, or 27.0%, to $9.4 million from
$7.4 million in the prior year period. New Railroad Properties accounted for
52.0% of this increase. The remainder is due to capital projects completed for
Comparable Railroad Properties, increased locomotive depreciation related to
fleet expansion, and depreciation of new computer hardware and software.
Diesel fuel expense for the nine months ended September 30, 1997
increased by approximately $1.8 million, or 27.1%, to $8.4 million from $6.6
million in the prior year period. New Railroad Properties accounted for 80.0% of
this increase. Diesel fuel expense for Comparable Railroad Properties increased
by approximately $422,000, or 6.5%, due to increased consumption related to
increased carloadings and higher fuel prices during the current year period. The
Company has taken several steps to reduce its exposure to fuel price
fluctuations, including entering into fuel hedging collars for approximately
34.0% of the Company's estimated annual fuel consumption.
Purchased services for the nine months ended September 30, 1997
increased approximately $550,000, or 9.2%, to $6.5 million from $6.0 million in
the prior year period. Purchased services attributable to New Railroad
Properties increased approximately $526,000 which accounts for substantially all
of this increase.
Casualties and insurance expense for the nine months ended September
30, 1997 decreased by approximately $359,000, or 7.4%, to $4.5 million from $4.9
million in the prior year period. New Railroad Properties increased
approximately $508,000 while casualties and insurance expense for Comparable
Railroad Properties decreased by approximately $1.7 million, or 29.0%, due to
fewer incidents and derailments in the current year period. Additionally,
casualties and insurance expense increased approximately $842,000 in corporate
self-insured and litigation liability reserves.
Materials expense for the nine months ended September 30, 1997
increased by approximately $990,000, or 31.1%, to $4.2 million from $3.2 million
in the prior year period. Materials costs associated with New Railroad
Properties accounted for 48.0% of the increase. Materials expense for Comparable
Railroad Properties increased approximately $335,000, or 11.9%, primarily as a
result of increased car repair activity in the current year period. The
remainder of the increase is due to an increase in locomotive repair materials.
Joint facilities expense for the nine months ended September 30, 1997
increased by approximately $1.9 million, or 122%, to $3.5 million from $1.6
million in the prior year period. Joint facilities expense increased
approximately $2.1 million reflecting the higher level of joint facilities
expense for New Railroad Properties relative to Comparable Railroad Properties.
Joint facilities expense for Comparable Railroad Properties decreased
approximately $169,000, or 11.8%, due primarily to a decrease in switching
charges and haulage fees.
15
<PAGE>
Other expenses for the nine months ended September 30, 1997, including
property and franchise taxes, increased $ 2.2 million, or 31.4%, to $ 9.4
million from $ 7.2 million in the prior year period. New Railroad Properties
account for 75.0% of the increase. Other expenses for Comparable Railroad
Properties increased $229,000, or 4.9%, primarily due to an increase in property
taxes and travel.
INTEREST EXPENSE. Interest expense for the nine months ended September
30, 1997 increased by $2.9 million, or 59.7%, to $7.7 million from $4.8 million
in the prior year period due primarily to borrowings totaling $42.0 million to
fund the acquisition of New Railroad Properties and an additional $21.2 million
to fund the Company's equity investments in Brazil.
OTHER INCOME. Other income for the nine months ended September 30, 1997
increased by approximately $889,000, to $1.6 million from $688,000 in the prior
year period due primarily to an increase in gain on the sale of non-operating
assets in the current year period.
LIQUIDITY AND CAPITAL RESOURCES
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, 1997, the Company generated
cash from operations of $17.5 million, borrowed a net $6.3 million on its $10.0
million U.S. working capital facility ("U.S. Working Capital Facility") and
received $1.7 million from the sales of non-operating assets which was primarily
used to fund $16.4 million of non-acquisition related capital expenditures and
$8.7 million of track and locomotive capital expenditures on the DTI.
Non-acquisition capital expenditures for the nine months ended September 30,
1997 included $9.7 million for track improvement, $3.9 million for locomotives,
$1.5 million for technology and $1.3 million for vehicles and other. Capital
expenditures for the DTI included $4.9 million for track improvement, $3.3
million for locomotives, $370,000 for railcars and $100,000 for technology and
other.
At September 30, 1997, the Company had long-term senior debt, capital
leases and senior subordinated debt outstanding totaling $126.0 million, which
constituted 49.3% of its total capitalization. Comparable figures at December
31, 1996 were $98.7 million and 44.6%, respectively.
The Company currently anticipates that its maintenance capital
expenditure requirements in 1997 for track, locomotives and equipment on
properties it currently operates will be approximately $15.5 million.
Additionally, computer hardware, software and related capital expenditures are
expected to be approximately $4.5 million. The Company has also committed to
invest, over a three year period, approximately $9.7 million to return the DTI
track to Federal Railroad Administration Class IV standard. At September 30,
1997, the Company has spent approximately $4.9 million. The remaining $4.8
million will be funded through cash flow from operations or borrowings under the
Company's $75.0 million U.S. Acquisition Facility ("U.S. Acquisition Facility").
Additionally, the Company expects to spend an additional $400,000 in 1997 for
locomotives and equipment at the DTI which will be funded through cash flow from
operations or borrowings under the Company's U.S. Acquisition Facility.
At September 30, 1997, availability under the U.S. Acquisition
Facility, the U.S. Working Capital Facility, the CDN $25.0 million Canadian
acquisition agreement and the CDN $5.0 million Canadian working capital facility
("Canadian Working Capital Facility") was, in U.S. dollars, $64.1 million, $3.8
million, approximately $17.3 million and approximately $3.6 million,
respectively. The unused portion of all of the Company's senior bank credit
facilities are subject to a 0.25% commitment fee.
16
<PAGE>
In July 1997, the Company completed a $50.0 million private placement
of senior unsecured notes ("Notes") with two institutions. The proceeds were
used to reduce outstanding bank debt under the Company's U.S. Acquisition
Facility. The Notes bear interest at 7.44% with interest only due semiannually.
The Notes mature in July 2012, and are retired through six annual mandatory
prepayments beginning July 2007.
A Class I railroad filed a complaint against one of the Company's
railroads in the United States District Court for the Western District of
Missouri seeking recovery of certain switching and joint facility charges. In
July 1997, the court ruled in favor of the plaintiff, and, as a result, the
Company paid the plaintiff approximately $635,000 in switching and joint
facility charges, including interest. The Company is currently negotiating
partial recovery with another Class I railroad on the basis that the Company was
acting as an agent for this railroad pursuant to the agreement under which the
property was transferred to the Company by this Class I railroad. In the second
quarter of 1997, the capital company recorded a liability for the amount the
plaintiff was seeking and a receivable for the amount expected to be collected
from the prior owner.
As a result of the devaluation of certain currencies in Southeast Asia
and the resulting increase in volatility in financial markets, the Brazilian
Real has experienced increased volatility recently. The result of the volatility
could be a significant devaluation of the Real. The government of Brazil may act
by implementing measures, including but not limited to, using U. S. dollar
reserves to support the valuation of the Real. The Company cannot predict the
effects of the volatility of the financial markets upon the Real and what, if
any, steps the Brazilian government may take to protect the current valuation.
Therefore, the Company cannot predict the effect upon the Company's investments
in Brazil.
Covenants contained in the agreements evidencing the Company's senior
bank, senior unsecured 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 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. Additionally, the Company is
required to maintain a minimum tangible net worth and certain ratios of leverage
and cash flow to debt service. At September 30, 1997, the Company was in
compliance with all covenants.
The Company believes its cash flow from operations together with
available amounts under the U.S. Working Capital Facility and Canadian Working
Capital Facility (and the Company's U.S. Acquisition Facility for amounts under
the DTI capital expenditure program) will allow it to meet its liquidity and
capital expenditure requirements for railroads it currently operates.
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 certain
inflation indices.
SEASONALITY
Except for revenues from the shipment of farm products, which represent
less than 10.0% of revenues, the Company's operating revenues from existing
operations have not historically been subject to significant seasonal changes.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 establishes standards for computing and presenting earnings
per share and applies to entities with publicly-held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and when adopted will require restatement
of prior years' earnings per share. Early adoption is not permitted. The Company
believes the adoption of this statement would have been the same as earnings per
share reported by the Company.
17
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company believes the adoption of this
statement will not have a material effect on the financial condition or results
of operations of the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The Company believes the adoption of this statement will not have a
material effect on the financial condition or results of operations of the
Company.
In April 1997, the Accounting Standards Executive Committee ("AcSEC")
issued a proposed Statement of Position ("SOP"), "Reporting on the Costs of
Start-up Activities." The proposed SOP would require all start-up activities, as
defined, to be expensed as incurred. The Company currently capitalizes start-up
activities associated with the acquisition of new railroad properties and
amortizes these costs over five years. If the proposed SOP is approved in the
fourth quarter of 1997, it is expected to be effective for financial statements
for fiscal years beginning after December 15, 1997. Earlier application would be
encouraged, initial application would be reported as a cumulative effect of a
change in accounting principle, and restatement of previously issued financial
statements would not be permitted. The Company may decide to apply the SOP in
the fourth quarter of 1997 by reporting a cumulative effect of a change in
accounting principle in the amount of approximately $1.8 million, net of tax.
Consequently, the Company's results of operations will reflect higher costs
associated with the acquisition of new railroad properties prospectively if the
proposed SOP is approved.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
11.1 Statement Regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
19
<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 13, 1997 By: /s/ LAURA D. DAVIES
Name: LAURA D. DAVIES
Title: Vice President and
Chief Financial Officer
Date: November 13, 1997 By: /s/ CLEMENT J. WYDRA
Name: CLEMENT J. WYDRA
Title: Controller and
Chief Accounting Officer
EXHIBIT 11.1
RAILTEX, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE CALCULATION:
Net income ............................................. $2,830 $2,308 $6,823 $7,113
====== ====== ====== ======
Weighted average number of common stock and
common stock equivalents outstanding:
Weighted average number of shares of
common stock outstanding ......................... 9,161 9,110 9,150 9,110
Weighted average number of common
stock equivalents applicable to stock
options .......................................... 67 121 74 120
------ ------ ------ ------
Common stock and common stock
equivalents ...................................... 9,228 9,231 9,224 9,230
====== ====== ====== ======
Earnings per share - primary ....................... $ 0.31 $ 0.25 $ 0.74 $ 0.77
====== ====== ====== ======
FULLY DILUTED EARNINGS PER SHARE CALCULATION (1):
Net income ............................................. $2,830 $2,308 $6,823 $7,113
====== ====== ====== ======
Weighted average number of common stock and
common stock equivalents outstanding:
Weighted average number of shares of
common stock outstanding ......................... 9,161 9,110 9,150 9,110
Weighted average number of common
stock equivalents applicable to stock
options .......................................... 67 122 74 122
------ ------ ------ ------
Common stock assuming full dilution ................ 9,228 9,232 9,224 9,232
====== ====== ====== ======
Earnings per share - fully diluted ................. $ 0.31 $ 0.25 $ 0.74 $ 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>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,031
<SECURITIES> 0
<RECEIVABLES> 30,074
<ALLOWANCES> 835
<INVENTORY> 0
<CURRENT-ASSETS> 34,649
<PP&E> 286,756
<DEPRECIATION> 38,046
<TOTAL-ASSETS> 309,495
<CURRENT-LIABILITIES> 40,273
<BONDS> 125,986
0
0
<COMMON> 916
<OTHER-SE> 129,643
<TOTAL-LIABILITY-AND-EQUITY> 309,495
<SALES> 0
<TOTAL-REVENUES> 109,510
<CGS> 0
<TOTAL-COSTS> 91,885
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 229
<INTEREST-EXPENSE> 7,742
<INCOME-PRETAX> 11,460
<INCOME-TAX> 4,637
<INCOME-CONTINUING> 6,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,823
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
