UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended
DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.10 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value (based on the closing sales price on March 20, 1998
as reported by the Nasdaq National Market) of the voting stock of the Registrant
held by non-affiliates of the Registrant was approximately $137.8 million. For
the sole purpose of making this calculation, the term "non-affiliate" has been
interpreted to exclude directors and executive officers of the Registrant. Such
interpretation is not intended to be, and should not be construed to be, an
admission by the Registrant or such directors or executive officers that such
directors and executive officers are "affiliates" of the Registrant, as that
term is defined under the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of the Registrant's Common Stock as of
March 20, 1998: 9,186,199
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III. The registrant intends to file such Proxy Statement no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM PAGE
- ---- ----
1. Business.................................................. 3
2. Properties................................................ 14
3. Legal Proceedings......................................... 20
4. Submission of Matters to a Vote of Security Holders....... 20
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 23
6. Selected Consolidated Financial and Operating Data.......... 24
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 25
8. Financial Statements......................................... 36
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 61
PART III
10. Executive Officers of the Registrant.......................... 62
11. Executive Compensation......................................... 62
12. Security Ownership of Certain Beneficial Owners and Management. 62
13. Certain Relationships and Related Transactions ................ 62
PART IV
14. Exhibits and Reports on Form 8-K............................... 63
2
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This Form 10-K contains certain "forward-looking" statements as such term is
defined in The Private Securities Litigation Reform Act of 1995 and information
relating to RailTex, Inc. 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, 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.
PART I
ITEM 1. BUSINESS
RailTex, Inc. ("RailTex" or the "Company") is the leading operator of short
line freight railroads in North America, based on total track miles and the
number of railroads operated. References to RailTex or the Company mean RailTex,
Inc. and, unless the context indicates otherwise, its consolidated subsidiaries.
The Company, through its subsidiaries, operates over 3,900 miles of track in 22
states, Canada and Mexico. In 1997, RailTex railroads transported almost 490,000
carloads of freight for more than 900 customers. Traffic which originated or
terminated on RailTex's lines generated more than 86.0% of the Company's total
freight revenues in 1997.
The Company built its portfolio of railroads through purchase, lease or
contract to operate. Of the 30 railroads RailTex has acquired to date, 19 are
owned, four are leased, four are partially owned and partially leased, two are
operated under long-term contracts and one ceased operations in 1996. RailTex
began operating its first railroad in 1984.
The Company also currently owns an approximate 10.0% equity interest in the
Ferrovia Centro Atlantica, S.A. ("FCA") which operates an approximately 4,400
mile railroad in central and eastern Brazil and owns an approximate 6.0%
interest in the Ferrovia Sul Atlantico, S.A. ("FSA") which operates a 4,200 mile
railroad in southern Brazil. In February 1997, 2.8 million shares of preferred
stock in FCA were sold for approximately R2.9 million (U.S. $2.8 million) to
fund a portion of the investment in FSA.
In February 1997, a wholly owned subsidiary of the Company, Indiana and Ohio
Railway Company, purchased substantially all of the assets of the former
Detroit, Toledo and Ironton Railroad ("DTI") from Grand Trunk Western Railroad,
Inc., a subsidiary of Canadian National ("CN"), for $22.0 million. IORY acquired
146 miles of track and with trackage rights will operate over 255 miles of track
between Detroit, Michigan and Cincinnati, Ohio.
In April 1997, the Company acquired for $400,000 from the Greenville
Northern Railway, approximately 12 miles of track which is being operated as
part of the Carolina Piedmont Railroad, a division of the Company's South
Carolina Central Railroad Company, Inc.
The Company's strategy is to grow through (i) additions to its portfolio of
short line railroad properties, primarily through strategic acquisitions of
Class I railroad divestitures or independently owned shortlines which complement
RailTex's current base of railroad properties, (ii) creation of new business on
currently owned properties, and (iii) improvement in the operating performance
of newly added and currently operated properties. RailTex believes its expertise
in adding railroad properties to its portfolio and its focus on customer
service, employee productivity and operating efficiency position it to implement
effectively its strategy.
3
<PAGE>
Since deregulation of the U.S. and Canadian railroad industries in the
1980's, major North American railroads have taken steps to improve profitability
and increase market share by streamlining their operations. These major
railroads have generally concentrated their management and marketing attention
on core, long-haul routes, while divesting (through sale or lease) many of their
branch lines to smaller and more cost-efficient freight railroad operators such
as RailTex. These short line "feeder" railroads typically serve multiple
industries located along branch lines and "feed" freight to the connecting main
line carriers. RailTex intends to continue to capitalize on the opportunities
created by the major railroad's ongoing commitment to streamline operations. In
addition, the Company believes that it may benefit from acquisition
opportunities created by mergers among long haul railroads (See Item 7.
Management Discussion and Analysis of Financial Condition and Results of
Operations-Recent Developments). These acquisition opportunities may arise as
routes are sold in response to regulatory requirements or in order to eliminate
duplicate routes. Almost all of the rail lines operated by the Company were
previously operated by four of North America's largest railroads. RailTex also
believes it has many opportunities to expand its portfolio by acquiring existing
short line railroads in both the United States and Canada.
In addition, the Company believes that international rail privatization may
offer additional long term opportunities as certain governments privatize their
country's rail systems. The Company's strategy regarding international
acquisitions includes analyzing the country's political and economic
environment, identifying potential country risks and attracting strong local
investment partners. Additionally, the Company has developed certain guidelines
regarding the percentage of assets and equity invested in international
acquisitions in relation to total assets and equity.
The Company has consistently increased the traffic volume and operating
efficiency of its portfolio of railroad properties. RailTex credits its
operating record in large part to its process oriented performance-based
management approach and decentralized management structure, which places primary
operating responsibility for each railroad with local management, and its
incentive-based compensation programs, which reward employees for improving
customer service and operating results. Unlike major rail carriers, the Company
also benefits from its flexible work environment in which the Company's
railroads can assign their operating employees to tasks on an as-needed basis
without regard for traditional railroad industry craft distinctions (pursuant to
which railroad operating employees are assigned to tasks based upon narrowly
defined job descriptions).
RailTex believes its established reputation as an acquirer and operator of
railroad properties, in combination with its managerial and financial resources,
has positioned the Company to take advantage of future growth opportunities.
The Company was incorporated in Texas in December 1977, and until 1984 its
principal business was the short-term, full-service leasing and management of
open top aggregate hopper railcars. In October 1984, RailTex entered the short
line freight railroad business by contracting to operate the San Diego &
Imperial Valley Railroad. By year end 1988, the Company's short line railroad
portfolio had grown to six rail lines and generated 85.0% of the Company's
operating revenues. In mid-1989, RailTex sold its railcar leasing assets,
utilizing the sale proceeds to purchase additional short line railroad
properties. Since the sale of its railcar leasing assets, the Company's sole
business activity has been the operation of short line railroads. The Company
added three short line railroad properties to its portfolio in 1989, six
properties in 1990, one property in 1991, four properties in 1992, three
properties in 1993, one property in 1994, one property in 1995, four properties
in 1996 and one property in 1997. The Company also invested in two separate
companies which began operating newly privatized railroads in Brazil in 1996 and
1997.
INDUSTRY OVERVIEW
The U.S. railroad industry is dominated by four major Class I railroads,
which operated approximately 127,000 miles of track at year end 1996 (the most
recent year for which data is available) and represented $31.9 billion, or
91.4%, of total rail industry operating revenues of $34.9 billion in 1996. In
addition to the large railroads, at year end 1996 there were more than 500 short
line and regional railroads, such as the Company, which generated $3.0 billion
of operating revenues in 1996 and operated approximately 47,000 miles of track
at year end 1996. Reflecting downsizing by major rail carriers, the proportion
of total track miles operated by short line and regional railroads in the United
States increased to 27.2% of total railroad industry track miles in 1996 from
17.0% in 1986.
4
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The Staggers Rail Act of 1980 ("Staggers Act") enabled many of the
structural changes in the U.S. rail industry which have favorably affected the
Company's ability to add short line railroads. Canada's National Transportation
Act of 1987 liberalized the process for branch line divestiture, much as the
Staggers Act facilitated the process for U.S. railroads (see page 12).
As a result of deregulation, major railroads have been able to concentrate
their management and marketing attention on core, long-haul routes, while
divesting (through sale or lease) many of their branch lines to smaller and more
cost-efficient freight railroad operators such as RailTex. The major railroads
have derived significant benefits from the divesting of branch lines to short
line operators. Divesting these branch lines allows major railroads to minimize
incremental capital expenditures, increase traffic density and improve railcar
utilization. Because of the focus of short line railroads on increasing traffic
volume through increased customer service and more efficient operations, traffic
volume on short line railroads frequently increases after divestiture.
Consequently, these transactions often result in net increases in divesting
carriers' freight traffic because much of the business originating or
terminating on branch lines feeds into divesting carriers' core routes.
The timing and pace of RailTex's acquisition activity with Class I railroads
is primarily dependent upon a timetable established by the Class I railroads.
The Company is continually proactively reviewing potential acquisitions for rail
lines offered by the Class I railroads; however, the number of lines available
for acquisition is often affected by Class I merger activity or other
commitments of the Class I railroads' resources.
Since 1980, more than 260 short line and regional railroads, operating
approximately 30,000 miles of track, have been created in the United States
primarily as a result of divestiture by major rail carriers. The Company
believes this trend is likely to provide a continuing source of expansion
opportunities for the next several years. In addition, there are over 500 other
small railroads, most of which are owned by other railroads, non-railroad
companies, investment partnerships, and individuals. The Company has purchased
four of the railroad properties it operates from sellers other than major
railroads, and believes other independent railroad operators represent
significant additional sources of desirable properties. The timing and pace of
the acquisition of existing short line railroads is primarily a function of
identifying the seller and then successfully negotiating financial, tax, and
other considerations.
BUSINESS STRATEGY
The Company's strategy is to grow through (i) additions to its portfolio of
short line railroad properties, primarily through strategic acquisitions of
Class I railroad divestitures or independently owned shortlines which complement
RailTex's current base of railroad properties, (ii) creation of new business on
currently owned properties, and (iii) improvement in the operating performance
of newly added and currently operated properties. RailTex believes its expertise
in adding railroad properties to its portfolio and its focus on customer
service, employee productivity and operating efficiency position it to implement
effectively its strategy.
EXPANSION STRATEGY
The key components of RailTex's expansion strategy are:
STRATEGIC ACQUISITIONS: RailTex believes that its current base of core
properties throughout the U.S. and Canada provide it with a substantial
advantage in acquiring railroad properties in geographic proximity to the
currently owned properties. In these instances, RailTex expects to achieve
certain operating and marketing efficiencies by combining the operations of the
acquired railroad with an existing railroad.
DIVERSIFICATION: RailTex believes that its revenue diversification limits
its exposure to geographic, economic and customer related risks, while it
positions the Company to take advantage of a broad range of business
opportunities. This diversification, and the stability it provides to the
Company's operations, differentiates RailTex from regional and other short line
carriers. Diversification also enables the Company to develop and maintain close
working relationships with essentially all major rail carriers in North America.
5
<PAGE>
EXPERIENCE: RailTex believes it has positioned itself as a reliable,
experienced acquirer and operator of railroad properties. The Company believes
its record, evidenced by its acquisition, integration and operation of 30 rail
properties since 1984, gives the Company a competitive advantage over other
bidders for short line railroad properties. RailTex also believes its ability to
finance and close transactions and commence operations in a timely manner is
well recognized by the major rail carriers. In addition, the Company believes it
has developed good relationships with the major rail carriers and that these
relationships provide an advantage in competing for additional properties.
OPERATING STRATEGY
RailTex's operating strategy is to improve the performance of its same
railroad and newly added properties by focusing on improved customer service and
operating efficiency. The key components of RailTex's operating strategy are:
CUSTOMER SERVICE: The Company seeks to build its business by aggressively
marketing and delivering convenient and cost effective service to meet its
customers' transportation needs. To this end, the Company works with its
customers to assess their requirements, and then tailors its operations to
increase the frequency and reliability of service. The Company believes its
efforts to enhance customer service have generally resulted in increased traffic
with customers along the Company's lines.
OPERATING EFFICIENCY: RailTex focuses on promoting cost-efficient operations
at all levels of its organization. Unlike major rail carriers, the Company
benefits from its flexible work environment in which the Company's railroads can
assign their operating employees to tasks on an as-needed basis without regard
for traditional railroad industry craft distinctions (pursuant to which railroad
operating employees are assigned to tasks based upon narrowly defined job
descriptions).
MANAGEMENT PHILOSOPHY: RailTex, through its process oriented
performance-based management approach and decentralized management structure,
has developed a culture that encourages employees to take initiative and
responsibility. The Company rewards productivity through its performance-based,
incentive compensation programs. During the last three years, the Company's
employees received an average of 11.5% of their base pay in incentive payments.
PORTFOLIO EXPANSION
Since 1984, the Company has built a portfolio of railroads, almost all of
which were added as a result of a competitive bidding process. RailTex has
developed a disciplined approach for identifying, analyzing, negotiating and
structuring additions to RailTex's portfolio of short line railroads. The
Company believes this approach, together with its ability to finance
acquisitions quickly with borrowings under the Company's $75.0 million revolving
U.S. acquisition facility ("U.S. Acquisition Facility") and its CDN $25.0
million revolving Canadian acquisition facility ("Canadian Acquisition
Facility"), has provided it with a competitive advantage. At February 28, 1998,
the Company had $61.9 million and CDN $25.0 million available under the U.S.
Acquisition Facility and Canadian Acquisition Facility, respectively.
The Company has developed an acquisition team which is responsible for
implementing the Company's expansion program. Expansion opportunities are
presented to the Company by divesting carriers or are identified by the Company
through dialogues maintained by this acquisition team with major rail carriers
and other railroad operators.
Opportunities are evaluated according to Company guidelines with respect to,
among other matters, financial returns, size, revenue and operating synergies
with existing properties, effect on geographic, commodity, connecting carrier
and customer diversification. Members of the Company's acquisition team,
assisted by senior management, complete a thorough evaluation of each
opportunity. This evaluation includes in-depth, on-site investigations, reviews
of historical traffic volumes, interviews with operating personnel and current
and potential customers and conversations with local officials and members of
the business community.
6
<PAGE>
RailTex adds short line railroad properties to its portfolio through
purchase, lease or contract to operate. Typically, the Company bids against
other short line operators for available properties. The timing and structure of
each transaction is determined by the divesting railroad based upon strategic
and economic considerations. The primary factors considered by the divesting
carrier are the price they will receive for the sale of a railroad property and
the price per carload they will pay a new operator for interchanging traffic.
However, divesting carriers also consider a prospective operator's experience
and its ability to close a transaction and commence operations in a timely
manner.
Following the closing of a transaction, railroad properties acquired by
RailTex are integrated into the Company by "Go Teams" of RailTex professionals.
These transition teams, headed by the Company's regional general managers, are
composed of experienced Company employees assembled from throughout the RailTex
organization. These teams implement RailTex's policies and procedures at the
newly added railroad properties and conduct interim operations until the new
general managers of these railroads are able to hire and train a full-time work
force. The Company believes its approach to commencing operations on its
properties benefits its customers by helping to eliminate the service delays and
interruptions which often accompany transitions to new operators.
SHORT LINE OPERATIONS
MARKETING
Following commencement of operations by RailTex, the Company's railroads
generally have attracted increased rail shipments from existing customers and
obtained traffic from new customers which had not previously shipped by rail or
had ceased rail shipments. The Company believes its ability to generate
additional traffic is accomplished by its marketing and customer service efforts
which are aimed at identifying and responding quickly to the individual business
needs of customers along its rail lines. As part of these marketing efforts, the
Company often schedules more frequent rail service, helps customers negotiate
price and service levels with connecting carriers and assists customers in
obtaining the quantity and type of rail equipment required for their operations.
The Company also often runs non-scheduled trains on short notice to accommodate
customers' special or emergency needs.
The Company assigns primary responsibility for price and service decisions
affecting a railroad's customers to the general manager of each railroad,
thereby providing such managers the ability to respond to the needs of the
customer. These railroad managers encourage their entire staff to participate in
marketing efforts. General managers and marketing personnel at each railroad are
supported by senior marketing management at RailTex's headquarters, who assist
with sales calls, provide industrial development expertise, conduct formal
marketing training and make coordinated sales calls on national accounts which
have facilities on more than one Company railroad.
In 1997, the Company served more than 900 customers which shipped and
received a wide variety of products. RailTex's ten largest customers accounted
for 28.1% of the Company's operating revenues in 1997. The Company's largest
customer in 1997 was CN, representing 8.1% of operating revenues as a result of
bridge traffic with Indiana and Ohio Railway ("IORY", formerly the Detroit,
Toledo and Ironton). Assuming continuation of RailTex's expansion strategy,
management expects its reliance on any one customer, including CN, to diminish
over time. RailTex believes its relationships with its customers are excellent.
MANAGEMENT
The Company's three-tiered decentralized management structure is an
important element in its operating strategy. First, significant operational
autonomy and responsibility for operating financial results is given to local
railroad management. In addition, two regional managers provide supervision and
coordination for railroads under their jurisdiction, while corporate
headquarters has responsibility for centralized policy setting and strategic
capital and financial planning, as well as accounting and other shared services.
Also at headquarters, a group of experienced professionals provide additional
expertise to all the Company's railroads in certain technical fields including
engineering, mechanical, information technology, and safety programs. The
Company's management structure puts service-oriented decision making close to
the customer but also provides a centralized support system to ensure
consistency and efficiency in more specialized or technical areas.
7
<PAGE>
The Company has implemented a performance-based process management approach
which relies upon key performance indicators or critical success factors
("CSFs") to manage performance against previously defined targets. On a monthly
basis, each manager conducts a formal review of performance against target for
each CSF; focusing on items that are not on target, identifying the root cause
of the variance and formulating action plans for getting back on target. The
Company believes its decentralized management structure, in conjunction with
performance-based process management, enables each railroad to tailor its
operations to its customers' needs and optimize performance.
Each RailTex railroad is managed by a general manager who has broad
authority and responsibility for pricing, staffing, purchasing, marketing and
operations. General managers operate their railroads pursuant to business plans
developed annually. Most of the Company's general managers have been recruited
from operating or marketing management at the major railroads and typically have
several years of railroad industry experience. Each new general manager is
provided an extensive orientation to the Company's operating policies and
procedures. In addition, all general managers attend periodic staff meetings to
exchange information with respect to operating, marketing and regulatory issues.
General managers also remain current on industry developments by, among other
means, attending national and regional railroad conferences.
In addition to the general manager, the smaller railroad typically employs
an operations manager, a marketing manager, a clerk and several transportation
specialists. The larger railroads typically employ one or more operations and
marketing managers, several clerks, mechanical, maintenance of way and signal
specialists, as well as several transportation specialists. Most major track and
railcar repair and derailment work is contracted to outside specialists; however
the larger railroads often perform some of these repairs inhouse.
WORK FORCE
Flexibility with respect to work assignments is a key element of the
Company's operating strategy and contributes significantly to the operational
productivity of the Company's railroads. All of the Company's personnel are
trained in a wide range of skills necessary for short line operations. Railroad
operating employees can be assigned to tasks on an as-needed basis because the
Company's railroads are not bound by traditional railroad industry craft and
work distinctions (pursuant to which railroad operating employees are assigned
to tasks based upon narrowly defined job descriptions). Trains are typically
operated by two-person crews, consisting of transportation specialists who
operate the locomotive and couple and uncouple railcars. The Company believes
the organization of its railroads into relatively small work groups encourages
greater team effort and permits more clearly defined responsibility and
accountability than is obtainable by larger, more centrally managed railroads.
All but one of the Company's short line railroads maintains a
performance-based, incentive compensation program through which a portion of a
railroad's operating profits is distributed quarterly to its employees.
Incentive compensation programs are administered by the general managers and
distributions are made principally on the basis of individual performance.
A total of 84 employees of four of the Company's U.S. railroads have elected
to be represented by the United Transportation Union ("UTU") pursuant to
governing National Mediation Board ("NMB") procedures. One railroad is involved
in mediation with the UTU over the terms of a collective bargaining agreement,
one railroad has an active contract, and the two remaining railroads are in
negotiation. In each case all employees are represented by one union and there
are no craft distinctions or work rule limitations. In 1997 and 1998, the UTU
sought to organize another of the Company's railroads; however, on March 9,
1998, the employees elected to remain non-union.
Pursuant to the Ontario Labor Relations Act, 14 employees of one of the
Company's Canadian railroads have elected to be represented by the Brotherhood
of Locomotive Engineers ("BLE"). These employees did not seek to impose craft
distinctions on this railroad, but sought certain compensation levels before an
arbitration panel. The arbitration panel ruled that the railroad's wage rates
should be similar to wage rates paid to skilled unionized employees within the
railroad's local economy. The arbitration panel also ruled that these employees
may no longer participate in the Company's incentive compensation program.
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Because the union contracts negotiated provide for wage rates similar to the
wage rates already in existence at the Company's railroads and these railroads
remain free of craft distinctions and onerous work rules, union representation
of these employees (10.8% of the Company's total workforce as of February 28,
1998) is not expected to have a material adverse effect on the Company's
operations or financial condition.
At February 28, 1998, the Company had approximately 900 full-time employees.
The Company believes that its relations with its employees are good. An active
program of employee involvement was begun in late 1997 to further strengthen the
relationship between the employees and the Company.
SAFETY
An important component of the Company's operating strategy is its emphasis
on conducting safe railroad operations for the benefit and protection of
employees, customers and the communities served by the Company's railroads. All
general managers undergo a week-long training course at the Hazardous Materials
Training Center operated by the Association of American Railroads. Operations
managers of railroads which transport hazardous materials also attend this
course. New transportation specialists attend intensive ten day training courses
conducted by the Company which cover all aspects of safe and appropriate
locomotive and railcar handling. In addition, transportation specialists, prior
to receiving locomotive engineer certification, attend a special one week
training course conducted by the Company. This basic training is supplemented at
each railroad with field and classroom training and annual safety and rules
tests, conducted by operating and safety training specialists who visit each
railroad on a quarterly basis. The Company also conducts safety inspections on
each of its railroads. Each employee involved in train operations is subject to
pre-employment and random drug testing, whether or not required by federal
regulation. In addition, personnel from each railroad conduct
railroad/highway-crossing safety education programs at schools, driver education
courses and service clubs in the communities they serve.
TRAFFIC
Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other rail
carriers. Bridge traffic neither originates nor terminates on a rail carrier's
line, but rather passes over the line from one connecting rail carrier to
another.
Traffic which originated or terminated on RailTex's lines generated 86.8%
and 95.8% of the Company's total freight revenues in 1997 and 1996,
respectively. This decrease is a result of significant automotive bridge traffic
at IORY which moves between Detroit and Cincinnati under a haulage agreement
with CN. The Company believes that higher levels of interline and local traffic
provide it with greater stability of revenues because such traffic represents
shipments to or from customers located along its lines which, unlike bridge
traffic, cannot easily be diverted to other rail carriers.
The following table summarizes freight revenues by type of traffic carried
by the Company's railroads in 1997 and 1996, in dollars and as a percent of
total freight revenues.
FREIGHT REVENUES
(DOLLARS IN THOUSANDS)
1997 1996
--------------- -------------------
Interline............................. $ 97,243 76.0% $ 87,331 84.8%
Local................................. 13,850 10.8 11,341 11.0
Bridge................................ 16,921 13.2 4,345 4.2
--------- ------ --------- ------
Total freight revenues................ $128,014 100.0% $103,017 100.0%
======== ====== ======== ======
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CONNECTING CARRIERS
Most of RailTex's short line properties interchange traffic with multiple
carriers. At February 28, 1998, the Company's railroads connected with 30
railroads operated by other carriers. Of the Company's rail lines, 52.0% connect
with two or more carriers.
The following table summarizes the Company's significant connecting carriers
in 1997 and 1996 by freight revenues and carloads as a percentage of total
interchanged (interline and bridge) traffic.
INTERCHANGED TRAFFIC
<TABLE>
<CAPTION>
1997 1996
--------------------- -----------------
FREIGHT FREIGHT
CONNECTING CARRIER REVENUES CARLOADS REVENUES CARLOADS
<S> <C> <C> <C> <C>
Union Pacific Corporation........................ 31.8% 27.8% 37.3% 38.2%
Canadian National Railways....................... 19.8 19.3 20.5 13.9
CSX Transportation, Inc.......................... 18.9 22.1 16.2 19.1
Consolidated Rail Corporation.................... 10.6 8.6 8.4 6.8
Norfolk Southern Railway Company................. 8.0 10.7 6.2 9.8
Burlington Northern Santa Fe Railway Company..... 3.7 2.4 4.7 3.3
All other railroads.............................. 7.2 9.1 6.7 8.9
------- ------- ------ ------
Total interchanged traffic.................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>
Charges for interchanged traffic are generally billed to the customer by the
connecting carrier and cover the entire transportation of a shipment from origin
to destination, including the portion that travels over the Company's lines. The
Company's revenues from such traffic are generally collected through fees paid
directly to the Company by the connecting carriers rather than by customers on
its lines, and are payable regardless of whether the connecting carriers are
able to collect from the customers. The fees payable by connecting carriers are
set forth in contracts entered into by each of the Company's railroads with
their respective connecting carriers and are subject to periodic adjustments.
COMMODITIES
RailTex's railroads transport a wide variety of commodities for their
customers. Some of the Company's railroads have a well-diversified commodity
base, while other Company railroads transport one or two dominant commodities.
By favoring portfolio additions whose commodity mix would further diversify the
Company's railroad portfolio, RailTex seeks over the long term to limit its
exposure to any single commodity to no more than 20.0% of freight revenues. In
1997, lumber and forest products and coal, which contributed 18.9% and 14.8%,
respectively, of freight revenues, were the two largest commodity groups
transported by the Company's railroads. See table summarizing the Company's
freight revenues and traffic volume in 1997 and 1996 by commodity group at page
27.
The following is a description of the commodities transported by the
Company:
LUMBER AND FOREST PRODUCTS represented 18.9% of 1997 freight revenues and
13.1% of 1997 traffic volume. The Company transports finished lumber used in
construction, as well as woodchips and pulpwood used in particle board and paper
manufacturing. The Company serves paper mills and lumber producers in Oregon,
Georgia, and Nova Scotia as well as lumber distribution facilities in New
England.
COAL for electric power generating plants represented 14.8% of 1997 freight
revenues and 20.3% of 1997 traffic volume. The Company provides freight services
for six large electric utilities located in Indiana, Missouri, Arkansas and Nova
Scotia, Canada. In Indiana and Nova Scotia, the Company transports unit coal
trains from local coal mines to the utility's power plants. The Company
transports unit trains of Powder River Basin coal to power plants in Missouri
and Arkansas and unit trains of West Virginia, Indiana and Nova Scotia coal to
co-generation plants in Virginia, Indiana and Nova Scotia, respectively.
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CHEMICALS represented 11.8% of 1997 freight revenues and 9.6% of 1997
traffic volume, and consists primarily of chemicals used in the manufacturing of
polyester fiber in South Carolina. Chemicals also include liquid and bulk
agricultural fertilizers and plastic pellets.
SCRAP PAPER AND PAPER PRODUCTS represented 9.5% of 1997 freight revenues and
7.0% of 1997 traffic volume. The Company serves paper mills that produce paper
products in Oregon and newsprint and paper in Nova Scotia. The Company also
serves warehouses for paper and paper products in New England and South Carolina
manufacturing facilities that produce paper plates, cups and bowls and specialty
paper products.
FARM PRODUCTS represented 8.0% of 1997 freight revenues and 8.2% of 1997
traffic volume. Farm products consist primarily of corn, wheat, peanuts and
soybeans. Field crops produced in Georgia, North Carolina, Kansas, Missouri,
Michigan and Texas account for the majority of this traffic; however, the
Company also transports unit trains of soybeans and grain to Louisiana for
export.
SCRAP METAL AND METAL PRODUCTS represented 7.9% of 1997 freight revenues and
7.7% of 1997 traffic volume. The Company serves a steel works in Nova Scotia
that utilizes scrap metal to manufacture railroad rail and steel blooms. The
Company also serves a steel mini-mill in South Carolina that utilizes scrap
steel and a steel works in Missouri that utilizes coiled steel for the
manufacture of steel springs. In Connecticut, the Company serves a plant that
manufactures rolled copper coil wire from copper bundles and in Ontario the
Company serves a steel mill.
FOOD PRODUCTS represented 5.0% of 1997 freight revenues and 5.0% of 1997
traffic volume. Food products consist primarily of vegetable oils, peanut meal,
canned goods, lard and other products.
NON-METALLIC ORES represented 5.0% of 1997 freight revenues and 7.3% of 1997
traffic volume. Non-metallic ores consist primarily of limestone used in road
construction in Texas, Virginia and Georgia. Non-metallic ores also include salt
transported by the Company from a large mine in Ontario, Canada and sand which
is used in glass manufacturing and in foundries supporting the automotive
industry.
AUTOS AND AUTO PARTS represented 4.2% of 1997 freight revenues and 6.3% of
1997 traffic volume. The Company moves significant automotive bridge traffic
between Detroit and Cincinnati under a haulage agreement with CN.
PETROLEUM PRODUCTS represented 4.2% of 1997 freight revenues and 2.9% of
1997 traffic volume. The majority of this traffic is liquefied petroleum gas
produced in New Mexico and Texas which is destined for southern California and,
ultimately, Tijuana, Mexico. The Company also serves a large petrochemical plant
in Louisiana which manufactures fuel additives.
MINERALS AND STONE represented 4.1% of 1997 freight revenues and 3.2% of
1997 traffic volume. The Company transports chemical lime used in the
manufacturing of manganese, calcium carbonate, finished brick and cement.
RAILROAD EQUIPMENT represented 3.0% of 1997 freight revenues and 5.1% of
1997 traffic volume. Railroad equipment consists primarily of empty auto
railcars transported for automobile manufacturers in Michigan and new railcars
manufactured in Nova Scotia.
OTHER traffic volume represented 3.6% of 1997 freight revenues and 4.3% of
1997 traffic volume. Other traffic is primarily composed of machinery and fuel
blending agents.
COMPETITION
PORTFOLIO ADDITIONS
In the process of building its portfolio of short line railroads, RailTex
typically competes with other short line railroad operators and regional
railroads. Competition for railroad properties is based primarily upon price,
operating history and financing capability. The current acquisition market is
very competitive as capital is readily available to our competitors and the
availability of new properties has slowed because of the mergers of the larger
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U.S. railroads. The Company believes its established reputation as an acquirer
and operator of short line rail properties, in combination with its managerial
and financial resources, effectively positions it to be competitive on future
strategic acquisitions.
RAILROAD OPERATIONS
Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a much lesser
extent, barge operators. The extent of this competition varies significantly
among RailTex's railroads. Competition is based primarily upon the rate charged
and the transit time required, as well as the quality and reliability of the
service provided, for an origin-to-destination transportation package. Cost
reductions achieved by major rail carriers over the past several years have
generally improved their ability to compete with truckload carriers. Since
traffic on most of the Company's railroads is interchanged with long-haul rail
lines, the Company believes it benefits from the improving competitiveness of
its connecting carriers.
INSURANCE
RailTex maintains insurance to cover costs associated with personal injury,
including death, and property damage, including derailments. The Company's
liability policies, which include third party property damage, are currently
subject to a self-insured retention of $500,000 per occurrence. With respect to
its transportation of hazardous commodities, the Company's liability policies
cover sudden releases of hazardous materials, including expenses related to
evacuation. Personal injuries associated with grade crossing accidents and
damage to property of shippers are also covered under the Company's liability
policies. The Company's property damage policies, which cover owned/leased
property, are currently subject to a self-insured retention of $100,000 per
occurrence.
The Company's railroad employees are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths of
railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims are
covered under the Company's liability insurance policies.
The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, the Company can
give no assurance as to the adequacy, availability or cost of insurance in the
future.
REGULATION
UNITED STATES
OVERVIEW. In addition to the environmental, safety, and other regulations
generally applicable to all businesses, the Company's railroad subsidiaries are
subject to regulation by the Surface Transportation Board ("STB"), the successor
to the Interstate Commerce Commission ("ICC"), and the Federal Railroad
Administration ("FRA") and by regulatory agencies in the various states in which
they do business. The Company believes its operations are in material compliance
with these regulations. Additionally, the Company is subject to STB regulation
in its acquisition of new railroad properties by purchase, lease or contract to
operate. Since 1980, there has been a significant relaxation in regulations
governing such transactions, and this change has favorably affected the
Company's ability to add railroad properties to its portfolio. Various interests
in the United States have sought and continue to seek reimposition of government
controls on the railroad industry in areas deregulated in whole or in part since
1980, including stricter rate regulation and more onerous labor protection
conditions for rail line transfers.
STB. The ICC Termination Act, which was enacted on December 29, 1995,
eliminated the ICC as an independent agency and created the STB, a new agency
within the Department of Transportation which began functioning on January 1,
1996. The ICC Termination Act made a number of changes which have altered the
procedure and timing for federal approval of rail projects, including
abandonments, line sales, mergers, rates and tariffs. The ICC Termination Act
made significant changes in line sale procedures, particularly with respect to
labor protection on Class II and III acquisitions. Specifically, a Class II
carrier that acquires a line must provide
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one year of severance pay to employees who lose their jobs as a result of the
acquisition, less any railroad earnings the employee may receive from the
acquiring carrier. Class III carriers and non carriers are exempt from paying
labor protection as a consequence of acquiring a line. With respect to mergers,
the STB is required to approve mergers of two or more Class II or Class III
carriers. Employees adversely affected by a merger, involving at least one Class
II and one or more Class III carriers, must receive one year of severance pay
reduced by any railroad earnings the employee may receive from the acquiring
carrier. If the merger involves only Class III carriers, no labor protection may
be imposed. The ICC Termination Act also simplified and streamlined the
abandonment process. With respect to rates and tariffs, railroads no longer have
an obligation to file tariffs with the federal government. However, in some
instances, primarily for agricultural products, railroads must make those rates
available to persons requesting them in writing.
FRA. The FRA regulates railroad safety and equipment standards, including
track maintenance and train speed standards, special procedures for handling
hazardous shipments, locomotive and railcar inspection and repair requirements,
operating practices and crew qualifications.
STATE REGULATORY AGENCIES. State regulatory agencies do not have authority
to engage in economic regulation of railroads that are part of the interstate
network. State and local governments generally retain jurisdiction over local
rail safety matters, such as the installation of grade crossings, grade crossing
warning devices and safety inspectors.
CANADA
OVERVIEW. The Company's Canadian railroad subsidiaries are subject to
regulation by the various governmental departments or regulatory agencies in the
provinces in which they do business. The Company believes its operations are in
material compliance with provincial regulations, except for those which are
obsolete and, therefore, not regularly enforced. Additionally, the Company is
subject to Canadian Transportation Agency ("CTA") regulation with regard to the
transfer of federally regulated railroad properties.
Under the Canada Transportation Act ("C-101"), the sale of a federal rail
line is not subject to federal approval, although a process of advertising and
negotiations may be required. In addition, a certificate of fitness, which is
issued to a company which proposes to construct or operate a railway in Canada,
is required and is issued on proof of insurance.
FEDERAL. A Canadian railroad generally falls under federal regulation if its
operations cross any borders between provinces, if it operates internationally
or if Parliament has declared it a federal work or undertaking. The two major
railroads of Canada, CN and the Canadian Pacific Railway Company, are subject to
CTA regulation because they operate nationwide. Consequently, additions to the
Company's portfolio in Canada will be subject to federal regulatory approval
(mainly Certificates of Fitness) through the CTA as well as Investment Canada
pursuant to the Investment Canada Act, the federal act in Canada governing
purchases of Canadian businesses by non-Canadians.
PROVINCIAL. Short lines which reside wholly within the boundaries of a
particular province are governed almost exclusively by the laws of that
province. Each of the ten provinces in Canada has different laws with respect to
regulation of railroads. Most of the provinces have drafted new legislation
which is more favorable to the operation of short lines than previous provincial
laws.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various U.S. and Canadian federal,
state, provincial and local laws and regulations relating to the protection of
the environment, which have become increasingly stringent. These environmental
laws and regulations, which are implemented principally in the U.S. by the
Environmental Protection Agency and comparable state agencies and principally in
Canada by provincial agencies, govern the management of hazardous wastes, the
discharge of pollutants into the air and into surface and underground waters,
and the manufacture and disposal of certain substances.
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The Oregon Department of Environmental Quality ("DEQ") has filed an
administrative action against one of the Company's railroads for alleged
violations of the Clean Water Act by the disposal of landslide debris into a
waterway. The administrative action requires the railroad to cease and desist
all further disposal of slide material and to develop a plan for the appropriate
disposal of future material and subjects the Company to a potential civil
penalty of up to $10,000 per day of violation. Upon receipt of the
administrative action the Company filed an answer denying the charges and
asserted various affirmative defenses to the violation and requested an informal
conference to see if the matter could be resolved. The representatives from the
DEQ and the Company met in November 1997 to discuss an informal resolution of
the administrative proceedings and the DEQ agreed to dismiss the administrative
enforcement actions if the Company would develop, with the assistance of an
appropriate environmental consultant, a landslide excavation and debris disposal
plan. A plan was prepared, with the assistance of an environmental consultant,
which has been submitted to the DEQ. The DEQ has not responded formally but the
Company believes it will be able to resolve the matter and have the
administrative proceedings withdrawn.
In connection with the alleged Clean Water Act violation discussed above,
the Environmental Protection Agency ("EPA") has commenced a criminal
investigation. In connection with the investigation, a subpoena was issued on
October 29, 1997, requesting various documents from the Company. The Company
complied with the subpoena and there has been no additional action by the EPA.
The Company intends to vigorously defend its position but is unable to predict
the outcome of this investigation. Other than the administrative action filed by
the DEQ and the EPA criminal investigation, there are no other material
environmental claims pending or, to the Company's knowledge at this time,
threatened against the Company.
The Company also believes that its operations are in material compliance
with current environmental laws and regulations. The Company estimates that any
expenses incurred in maintaining compliance with current laws and regulations
will not have any material effect on the Company's earnings or capital
expenditures. However, the Company can provide no assurance that the current
regulatory requirements will not change or that currently unforeseen
environmental incidents will not occur or that past non-compliance with
environmental laws will not be discovered on the Company's properties.
ITEM 2. PROPERTIES
The Company, through its subsidiaries, operates over 3,900 miles of track in
22 states in the U.S., two provinces in Canada and Baja, Mexico. The Company has
added railroad properties to its portfolio through purchase of track and
roadbed, lease of such assets, contracts to operate properties under management
agreements and purchase of railroad company common stock, depending upon the
economic and strategic considerations of the divesting carriers. Of the 30
properties the Company has acquired to date, 19 are owned, four are leased, four
are partially owned and partially leased, two are operated under long-term
management agreements and one ceased operations in 1996. After acquiring the
right to operate a railroad property, the Company must arrange for the purchase
or lease of operating equipment and hire the work force necessary to operate the
property.
For properties which the Company owns, the continuity of operations of
purchased railroad properties has been limited to the physical transfer of these
assets. The Company typically does not contractually assume any of the
operations or liabilities of the divesting carriers. Quality of the Company's
title to its owned rights-of-way varies. The Company's properties were acquired
by its predecessors over extended periods of time and by different companies.
Accordingly, the original conveyancing documents were not standardized and are
subject to judicial interpretation as to the interest conveyed to the original
acquiring railroad. In cases involving other railroads, deeds have sometimes
been construed to create either an easement for railroad purposes or an
ownership interest that terminated upon the cessation of use for railroad
purposes. If the Company ceases to operate its railroad over a parcel, the
Company's interest in the parcel could revert to adjacent landowners or to
others holding a reversionary interest. Under certain limited circumstances,
two of the railroad properties may be repurchased by the original selling
carriers for their original purchase prices. In addition, the purchase price of
one of the Company's railroads is subject to reimbursement up to $5 million if
certain levels of carloadings are not achieved within a specified time period,
as detailed in the purchase and sale agreement.
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For properties it leases, the Company ordinarily assumes upon the
commencement date all operating and financial responsibilities including
maintenance, payment of property taxes and regulatory compliance. Lease payments
on three railroads leased from one major railroad are structured to ensure that
the Company interchanges an agreed upon percentage of outbound carloads with the
lessor railroad. Under these leases, the Company makes no payments as long as it
interchanges a minimum percentage of its traffic with the lessor; therefore, the
Company controls the amount that may be payable under these leases. These leases
have an initial 20 year term with one or more renewal terms at the Company's
option. In addition, lease payments on five properties leased from two other
major railroads are subject to reduction from the base rate, down to zero,
depending upon the level of traffic interchanged with the lessors. The maximum
aggregate annual base rate lease payments under these leases is approximately
$1.7 million. These leases have initial lease terms of five years to 20 years
and include purchase options which may be exercised by the Company after one to
three years of operation. No payments have been required under any of the
Company's railroad property leases, and the Company anticipates that its traffic
interchange for the foreseeable future will not result in any payments being
incurred under any railroad property leases. Generally, upon the termination of
a lease, the Company does not have a right to the return of any capital
investment made in its property leased.
Rail properties operated by the Company under management agreements
typically have initial ten year terms followed by either a purchase option or
one or more renewal terms at the Company's option. These operating contracts
typically require that the Company assume all operating and financial
responsibilities for freight operations on the property including maintenance,
payment of property taxes and regulatory compliance. Payments by RailTex for the
right to conduct rail operations on these properties are typically calculated as
percentages of its revenues from the respective properties. Generally, as in the
case of leases, upon termination of these agreements the Company does not have a
right to the return of any capital investment made in the property managed.
Railroad properties owned, leased or operated under contract by the
Company's subsidiaries typically consist of the track, ties and underlying land.
Real estate adjacent to the railroad rights-of-way is generally retained by the
seller, and the Company's holdings of such property is not significant.
Similarly, the seller typically retains mineral rights and fiber optics
easements in the properties acquired by the Company. Revenues derived by the
Company from various rentals and easements totaled approximately $3.0 million in
1997.
In order to improve its overall profitability and financial returns, the
Company has performed an analysis of its portfolio railroad properties with the
objective of identifying those properties which do not meet the Company's
overall financial objectives and which do not offer significant revenue or
operating expansion opportunities. The Company is currently pursuing its
alternatives with respect to these properties, which may include possible sale
of the railroad property.
The following list describes each of the railroads operated by the Company
as of February 28, 1998:
The assets of the Cape Breton & Central Nova Scotia ("CBNS") were purchased
from CN on October 1, 1993. The line is approximately 245 miles long, and runs
from Truro to Sydney, Nova Scotia. Traffic includes coal, which both originates
and terminates on the line. Inbound traffic consists of scrap iron, chemicals,
and salt. Outbound traffic consists of newsprint, woodpulp, steel railroad rail,
and railroad cars.
The assets of the Carolina Piedmont ("CPDR") were purchased from CSX
Transportation, Inc. ("CSX") on November 2, 1990. The line is approximately 37
miles long and runs from Greenville to Laurens, South Carolina. On April 28,
1997, the assets of the Greenville and Northern Railway were purchased. The line
is approximately 12 miles long and runs from Travelers Rest to Greenville, South
Carolina and is operated as part of the Carolina Piedmont. Inbound traffic
consists of plastics, resins, vegetable oils, cement, lumber, potash, glass
sand, brick, newsprint and various chemicals. Outbound traffic consists of
pulpwood, scrap paper and industrial engines.
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The assets of the Central Oregon & Pacific ("CORP") were partially purchased
and partially leased from Southern Pacific Transportation Company ("SP") on
December 31, 1994. SP was subsequently acquired by Union Pacific Corporation
("UP").The purchased segment is approximately 336 miles long and runs from
Belleview to Eugene, Oregon and from Eugene to Cordes, Oregon. Another 105 miles
is leased for five years and runs from Cordes to Coquille, Oregon and from
Belleview, Oregon to Black Butte, California. The CORP operates an additional 8
miles of track from Danebo to Springfield Jct., Oregon under trackage rights.
Outbound traffic consists of lumber and wood products, and pulp and paper
products. Traffic also includes lumber and wood products which both originate
and terminate on the line.
The Chesapeake & Albemarle ("C&A") was leased from Norfolk Southern Railway
Company ("NS") on April 2, 1990 for a term of 20 years, with an option in favor
of C&A to purchase the line during the term of the lease. The railroad is
approximately 82 miles long and runs from Chesapeake, Virginia to Edenton, North
Carolina. Inbound traffic consists of limestone and lumber. Outbound traffic
consists of grain, lumber and scrap metal.
The assets of the Connecticut Southern ("CSOR") were purchased from
Consolidated Rail Corporation ("Conrail") on September 21, 1996. The purchased
segment is approximately 23 miles long and is located in Hartford, Connecticut.
The CSOR operates an additional 55 miles of track from just north of New Haven,
Connecticut to Springfield, Massachusetts under a trackage rights agreement with
Amtrack. Inbound traffic consists of lumber and wood products, pulp and paper
products and metal products. Outbound traffic consists of scrap paper.
The assets of the Dallas, Garland and Northeastern ("DGNO") were partially
purchased and partially leased from UP on February 9, 1992. The lease agreement
provides for a 20 year term and grants RailTex three options to renew for
additional 20 year terms. The line is approximately 92 miles long and extends
from Trenton to Garland, Texas. Inbound traffic consists of limestone, food,
farm products and plastics. Outbound traffic consists of food, farm products and
plastics.
Substantially all of the assets of the Georgia Southwestern ("GSWR") were
purchased from CSX on June 5, 1989. In 1995, the operations of the Georgia Great
Southern ("GGS") and the Georgia and Alabama ("GAAB") were consolidated into the
GSWR. The GSWR currently operates, in total, over 357 miles. One segment extends
from Preston east to Rochelle, Georgia, and another segment extends from
Cuthbert south to Bainbridge, Georgia. The GSWR also operates from Columbus to
Cusseta, Georgia and from Columbus, east to Americus then south to Albany,
Georgia under a combination of track lease and operating rights with NS
and from Bainbridge to Saffold, Georgia under trackage rights with CSX
including two miles of track in Dawson, Georgia which was acquired by GGS from
CSX on December 14, 1990. The GAAB was leased from NS on June 1, 1989 for a term
of 20 years with an option in favor of RailTex to purchase the line during the
term of the lease. The railroad runs from Smithville, Georgia to White Oak,
Alabama. Inbound traffic consists of cement, fertilizer, sugar, forest products
and chemicals. Outbound traffic consists of forest products, grain, food
products, lumber, auto parts, paper and scrap metal.
The assets of the Goderich-Exeter ("GEXR") were purchased from CN on April
3, 1992. The line is approximately 70 miles long and runs from Goderich to
Centralia, Ontario and from Goderich to Stratford, Ontario. Inbound traffic
consists of fertilizer and grain. Outbound traffic consists of salt, grain and
road machinery.
The assets of the Grand Rapids Eastern ("GRE") were purchased from Central
Michigan Railway Company ("CMGN") on July 10, 1993. The line is approximately 45
miles long and extends from Marne to Ionia, Michigan. Inbound traffic consists
of chemicals. Outbound traffic consists of auto parts.
The stock of the Indiana & Ohio Rail Corp. ("INOH") was purchased on June 4,
1996. On February 15, 1997, a subsidiary of the INOH, purchased from Grand Trunk
Western Railroad, Inc. the assets of the former Detroit, Toledo and Ironton
("DTI"). Together, the INOH line and the DTI line operate 576 miles of track
under a combination of owned track, lease and operating rights in southeastern
Indiana and western Ohio extending
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north to Detroit, Michigan. Beginning January 1, 1998, the operations of the
former INOH and DTI were restructured to operate as the Indiana and Ohio
("IORY") and the Indiana and Ohio Central ("IORC"). Inbound traffic consists of
automobiles and automobile parts, farm products, non-metallic ores, chemicals
and scrap metal. Outbound traffic consists of automobiles and automobile parts,
farm products, food, chemicals, clay, concrete, stone and scrap metal.
The assets of the Indiana Southern ("ISRR") were purchased from Conrail on
April 11, 1992. The line extends 170 miles from Indianapolis to Evansville,
Indiana. In addition, ISRR operates six miles of trackage rights over Canadian
Pacific Railway Company ("CP") rail between Elnora and Bee Hunter, Indiana.
Traffic consists primarily of coal, which both originates and terminates on the
line.
The assets of the Michigan Shore ("MS") were purchased from CMGN on December
14, 1990. The line runs approximately 7 miles and is located in Muskegon,
Michigan. Outbound traffic consists of sand and chemicals.
The assets of the Mid-Michigan ("MMRR") were purchased from CSX on December
19, 1987. The MMRR consists of two separate line segments. One segment is
approximately 30 miles long and runs from Elmdale to Greenville, Michigan. The
other segment is approximately 37 miles long and runs from Paines to Alma,
Michigan. Inbound traffic consists of fertilizer, plastic and lumber. Outbound
traffic consists of refrigerators, unit grain trains, liquified petroleum gas,
scrap metal, auto parts and farm and food products.
The assets of the Missouri & Northern Arkansas ("M&NA") were partially
purchased and partially leased from UP on December 13, 1992. The lease has a 20
year term with three 20 year renewal options. The line is approximately 497
miles long and runs from Kansas City, Missouri to Newport, Arkansas; from Fort
Scott, Kansas to Clinton, Missouri, from Carthage to Joplin, Missouri and from
Springfield to Wallis, Missouri. The M&NA operates over trackage rights on the
UP from Pleasant Hill to Kansas City, Missouri and from Diaz Junction to
Newport, Arkansas. Inbound traffic consists of coal and food products. Outbound
traffic consists of grain products, frozen food, minerals, chemicals, forest
products and steel. The Branson Scenic Railroad, Inc. ("BSR"), a passenger
railroad operator which is not affiliated with the Company, operates passenger
excursion trains over a 44-mile segment of the M&NA. The M&NA provides the crews
to the BSR and, in turn, receives a flat fee plus a specified percentage of the
BSR's revenues over a base amount. In addition, the White River Scenic Railroad,
a passenger railroad operator which is not affiliated with the Company, operates
passenger excursion trains using their own crews over certain segments of the
M&NA and, in turn the M&NA receives a flat fee.
The assets of the New England Central ("NECR") were purchased from Grand
Trunk Corporation ("GTC"), an affiliate of CN, on February 4, 1995. The NECR
operates over approximately 330 miles of track, extending from East Alburg,
Vermont to New London, Connecticut. In addition, Amtrack provides passenger
service over track extending from St Albans, Vermont and Palmer, Massachusetts
under a trackage rights contract with the NECR. Inbound traffic consists
primarily of paper, lumber, copper and wood products. A significant portion of
the inbound lumber and paper products is received by transload facilities
located on the NECR. These facilities transload the commodities to truck for
further distribution throughout the New England area and beyond. The majority of
these transload operations are affiliated with the CN. Outbound traffic consists
primarily of corrugated paper and coal fly ash.
The assets of the New Orleans Lower Coast ("NOLR") were purchased from UP on
March 17, 1991. The line is approximately 24 miles long and runs from Gouldsboro
to Myrtle Grove, Louisiana. Inbound traffic consists of unit grain trains and
petroleum products. Outbound traffic consists of petroleum products.
The assets of the North Carolina & Virginia ("NCVA") were purchased from CSX
on November 1, 1987. The line is approximately 53 miles long and runs from
Boykins, Virginia, south to Kelford, North Carolina, then northeast to Tunis,
North Carolina. Inbound traffic consists of grain and chemicals. Outbound
traffic consists of woodchips, lumber, particle board, peanuts and peanut hulls.
The assets of the Northeast Kansas & Missouri ("NEKM") were purchased from
UP on February 26, 1990. The railroad is approximately 125 miles long and
extends west from St. Joseph, Missouri to Upland, Kansas. Inbound traffic
consists of fertilizers. Outbound traffic consists of grain and food products.
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The assets of the Ontario L'Orignal ("OLOR") were purchased from CN
effective November 2, 1996. The line is approximately 26 miles long and is
located in eastern Ontario, Canada. Traffic consists primarily of scrap iron and
steel products, which both originate and terminate on the line.
The assets of the Pittsburgh Industrial ("PIRR") were purchased from Conrail
on December 7, 1996. The line is approximately 42 miles long and is located in
the Pittsburgh metropolitan area. Inbound traffic consists of scrap metal,
plastics, lubricating oils, chemicals and food products. Outbound traffic
consists of scrap metal, plastics and chemicals.
The Salt Lake City Southern ("SLCS") began operating over property owned by
the Utah Transit Authority ("UTA") on April 19, 1993. The SLCS operates the
property under a freight easement granted by UP, the former owner of the line.
The easement may be repurchased by UP for a nominal amount at any time after
October 30, 1997. The line is approximately 25 miles long and extends from Salt
Lake City to Mount, Utah. Inbound traffic consists of cement, grain, lumber and
coal.
The San Diego & Imperial Valley ("SDIV") began operations on October 15,
1984 under a ten year contract with the San Diego Metropolitan Transit
Development Board ("MTDB") in the San Diego, California area. Under the terms of
this contract, the SDIV provides freight service over trackage owned by a
subsidiary of MTDB and over which MTDB provides passenger service. In 1994, the
SDIV exercised an option to renew the contract until 2004. Additionally, this
contract has three remaining ten year renewal options. SDIV also has a trackage
rights agreement with Ferrocarriles Nacionales de Mexico Region Pacifico
("Ferrocarriles") to operate between Tijuana and Tecate, Mexico. This is an open
agreement that may be cancelled at any time by either party. The SDIV has
authority to operate 153 miles of track that and extends from San Diego,
California through Tijuana and Tecate, Mexico, to Plaster City, California.
Inbound traffic consists of liquified petroleum gas, lumber, beverages, paper,
plastics, lard and grain. Outbound traffic consists of scrap metal and scrap
paper.
The assets of the South Carolina Central ("SCC") were purchased from CSX on
December 1, 1987. The railroad is composed of two line segments. One is
approximately 46 miles long and runs from Florence to Bishopville, South
Carolina. The other is approximately 12 miles long and runs from Cheraw to
Society Hill, South Carolina. Inbound traffic consists of scrap metal,
chemicals, coal, scrap paper and corn sweeteners. Outbound traffic consists of
finished steel and paper.
The assets of the Texas-New Mexico ("TNMR") were purchased from UP on
September 18, 1989. The line is approximately 107 miles long and runs from
Monahans, Texas north to Lovington, New Mexico. Outbound traffic consists of
liquified petroleum gas, chemicals, farm products, scrap metal and minerals.
The Texas Northeastern ("TNER") was leased from UP effective October 22,
1990 under a 20 year lease with three 20 year options to renew. The line is
approximately 107 miles long and runs from Texarkana to New Boston, Texas, from
Paris to Sherman, Texas, from Sherman north to Denison, Texas and from Bells
south to Trenton, Texas where it connects with the DGNO. Inbound traffic
consists of food, paper products and edible oils. Outbound traffic consists of
grain.
The Virginia Southern ("VSRR") was leased from NS on November 28, 1988 under
a 20 year lease agreement. The lease grants VSRR a right to purchase
substantially all of the line during the term of the lease for its net
liquidation value. The line is approximately 75 miles long and extends from
Burkeville, Virginia to Oxford, North Carolina. Inbound traffic consists of
coal, wool, fructose and chemicals. Outbound traffic consists of pulpwood and
woodchips.
In August 1995, the Company entered into a management agreement with
Tengizchevroil ("TCO"), a limited partnership of Chevron Overseas Company and
Tengizmunaygaz, to provide on-site technical and operating management of the TCO
railroad. The railroad runs from Kulsary, Kazakhstan to the TCO plant complex at
Tengiz, Kazakhstan, a distance of approximately 104 kilometers or 62 miles. The
initial term of the agreement was for two years with year-to-year extensions
after the initial term. Currently, the Company is operating under the terms of
the initial two year agreement and is in the process of renegotiating the
contract.
18
<PAGE>
TRACK
RailTex conducted its freight operations on 3,915 miles of track as of
February 28, 1998, including 2,564 miles of owned track, 782 miles of leased
track, and 178 miles of track operated under long-term operating contracts. In
addition, the Company operated on 391 miles of track owned by other railroads
pursuant to trackage rights agreements.
Because of the relatively short length of the typical RailTex railroad and
the stop-and-start nature of its switching activity, the majority of the
Company's freight operations are conducted at speeds of 25 miles per hour or
less. Of the track operated by RailTex, 70.0% was rated FRA Class II or higher
and 20.0% was rated FRA Class I or lower at February 28, 1998. The remaining
10.0% was located in Mexico or Canada and not subject to FRA inspection and
regulation.
TRACK CONDITION
<TABLE>
<CAPTION>
FRA CLASS
-------------------------------------
V IV III II I EXCEPTED OTHER TOTAL %
-- -- --- -- -- -------- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned.............................. -- 124 463 1,069 343 224 341 2,564 65%
Leased............................. -- -- 386 268 74 54 -- 782 20%
Contract........................... -- -- 33 25 76 -- 44 178 5%
Trackage Rights(1)................. 144 143 15 63 26 -- -- 391 10%
--- --------------------- ----- ------ ------ -----
Total Miles..................... 144 267 897 1,425 519 278 385 3,915 100%
=== === ===== ===== ==== === ==== ===== ====
FRA Track Class as Percentage
of Miles......................... 4% 7% 23% 36% 13% 7% 10% 100%
Maximum speed in M.P.H............. 80 60 40 25 10 10 N/A
</TABLE>
- --------------------
(1) Includes trackage rights associated with owned or leased railroad
properties.
The Company's track maintenance strategy is to maintain its track, ties,
roadbed and structures consistent with safe operations and with the volume of
traffic transported over its lines. The Company believes its capital expenditure
requirements for track maintenance are lower than those incurred by the major
rail carriers which previously operated most of the Company's railroad
properties because such major rail carriers generally operated at higher speeds
over this track and, therefore, required greater levels of track maintenance.
Also, the labor costs incurred by major railroads for track maintenance are
typically higher than the Company's labor costs.
Safety-related maintenance needs receive the Company's highest maintenance
priority, followed by high density track segments on which the highest volume of
traffic is transported. Low-density segments, sidings, and lines for which
higher transit speeds are not essential to providing timely and effective
customer service are maintained at lower FRA class conditions. Track maintenance
is performed by each railroad's operating personnel with local track contractors
supplementing this effort on an as-needed basis. In connection with the lease of
one of its railroad properties, the Company has committed to upgrade
approximately 107 miles, net of abandonments, of track to Class II standards by
October 1998; however, the Company is negotiating with the lessor to extend this
period. The Company now estimates the cost of this upgrade to be approximately
$2.0 million, net of state funding.
19
<PAGE>
EQUIPMENT
At February 28, 1998, the Company's rolling stock consisted of 266
locomotives and 3,416 freight cars, some of which it owned and some of which
were leased from others. All of the leased locomotives and freight cars were
provided under short-term operating lease agreements or per diem sharing
agreements. The following table summarizes the composition of the Company's
equipment fleet at February 28, 1998:
LOCOMOTIVES
HORSEPOWER/UNIT OWNED LEASED TOTAL
--------------- ----- ------ -----
1500 to 3000......................... 223 35 258
1499 and under....................... 8 -- 8
----- ---- -----
Total........................... 231 35 266
===== ==== =====
The average age of the Company's locomotive fleet is 32 years. Of the 231
locomotives owned by RailTex, most have been rebuilt, updated or overhauled.
Calculating locomotive age from the date of rebuild, the Company's locomotives
have an average age of 26 years. The Company's availability rate with respect to
its locomotive fleet was 90.0% in 1997.
FREIGHT CARS
<TABLE>
<CAPTION>
PER DIEM
SHARING
TYPE OWNED LEASED ARRANGEMENTS TOTAL
---- ----- ------ ------------ -----
<S> <C> <C> <C> <C>
Hopper cars......................... 32 674 103 809
Flat cars........................... 104 74 643 821
Gondola cars........................ -- 54 525 579
Box cars............................ 24 151 1,032 1,207
---- --- ----- -----
Total........................... 160 953 2,303 3,416
=== === ===== =====
</TABLE>
The Company has entered into per diem sharing arrangements covering 2,303
cars as of February 28, 1998. Under these arrangements, the Company agrees to
place the 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, car owners pay the Company a portion
of the rents earned when the freight cars are on railroads other than the
Company's.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently subject to a number of claims and legal actions that
arose in the ordinary course of business, including FELA claims by its employees
and personal injury claims (including wrongful death claims) by third parties.
The Company believes these claims, taking into account reserves and applicable
insurance, will not have a material adverse effect on the Company. Adverse
judgments in these claims, individually or in the aggregate, in excess of
related reserves and applicable insurance, could have a materially adverse
effect on the Company's financial condition and results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers of
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Bruce M. Flohr........................ 58 Chairman of the Board, Chief Executive
Officer, and Director
Laura D. Davies ...................... 39 Vice President-Finance, Chief Financial
Officer and Director
Michael T. Brigham.................... 51 Vice President-Sales and Marketing
James R. Davis........................ 38 Vice President-Operations (Interim)
James C. Dodge........................ 44 Vice President-Chief Engineer
Michael A. Nosil...................... 50 Vice President-Administration
Greg B. Petersen ..................... 34 Vice President-Corporate Development
James H. Wagner....................... 54 Vice President-Chief Mechanical Officer
</TABLE>
Mr. Flohr founded RailTex in 1977 and has served as Chairman of the Board of
Directors, and Chief Executive Officer since that date. From 1977 to October
1995, Mr. Flohr also served as President of RailTex. From 1975 through 1977, Mr.
Flohr held the positions of Deputy Administrator and Acting Administrator of the
Federal Railroad Administration in Washington, DC. In those positions he had
primary responsibility for rail safety, operation of the Alaska Railroad, and
operation of the Transportation Test Center at Pueblo, Colorado. Mr. Flohr was
employed by the Southern Pacific Transportation Company from 1965 through 1975
and served as Division Superintendent of its San Antonio Division from 1971
through 1975. He is a founder and past Chairman of the Regional Railroads of
America and is a Director of the Association of American Railroads. Mr. Flohr is
also a director of Harmon Industries, Inc. and Transportation Technology Center,
Inc.
Mrs. Davies has served as Vice President-Finance and Chief Financial Officer
since July 1995. Mrs. Davies was Vice President-Finance of RailTex Service Co.,
Inc. ("RSC"), a subsidiary of RailTex from February 1995 to June 1995 and as
Controller of RSC since 1986. She was elected to be a Director of RailTex in
June 1996. Mrs. Davies is a Certified Public Accountant and from 1981 to 1986
was employed by Arthur Andersen LLP.
Mr. Brigham has served as Vice President-Sales and Marketing of RSC since
October, 1995. Mr. Brigham was Regional General Manager of RSC from 1993 to
October, 1995. From 1991 to 1993, Mr. Brigham was General Manager of the ISRR.
From 1989 to 1991, Mr. Brigham was General Manager of the GAAB, the NEKM and the
TNER. Mr. Brigham joined RailTex in 1987 as Marketing Manager on the AUNW. Prior
to joining RailTex, Mr. Brigham was employed by the Missouri-Kansas-Texas
Railroad in the marketing department from 1973 to 1987.
Mr. Davis has served as Interim Vice President-Operations of RSC since
September, 1997. From 1996 to September 1997, Mr. Davis served as Regional
General Manager. Mr. Davis was the General Manager of the New England Central
from 1994 to 1996. From 1991 to 1994, he was General Manager of the Georgia
Southwestern. From 1990 to 1991, he was General Manager of the Chesapeake and
Albemarle. Prior to joining RailTex, Mr. Davis was with Union Pacific Railroad
from 1988 to 1990 as Manager of Train & Industry Operations. From 1981 to 1988,
Mr. Davis was employed by Missouri-Kansas-Texas Railroad most recently as
Trainmaster.
Mr. Dodge has served as Vice President-Chief Engineer of RSC since August,
1997. Mr. Dodge was Assistant Vice President and Chief Engineer of RSC from
April 1995 to August 1997. Prior to joining RailTex, Mr. Dodge was with the
Atchison, Topeka and Santa Fe Railway Company for 20 years, most recently as
General Director Maintenance Planning.
21
<PAGE>
Mr. Nosil has served as Vice President-Administration of RSC since
September, 1997. From June 1996 to September 1997, Mr. Nosil was Vice
President-Human Resources. Prior to joining RailTex, Mr. Nosil was managing
consultant for Hewitt Associates, LLC, a major international human resource
consulting firm, from 1993 to 1996. From 1975 to 1992, Mr. Nosil was employed by
La Quinta Motor Inns, Inc., most recently as Vice President of Human Resources.
Mr. Nosil was plant personnel manager in Arlington, Texas for NCR Corporation
from 1972 to 1975.
Mr. Petersen has served as Vice President-Corporate Development of RSC since
June, 1997. Prior to joining RailTex, from 1989 to 1997, Mr. Petersen served in
a variety of corporate development positions with AMR, Inc. and its subsidiary,
American Airlines, most recently as Managing Director, Corporate Development.
Mr. Wagner has served as Vice President-Chief Mechanical Officer of RSC
since August, 1997. Mr Wagner was Chief Mechanical Officer from January 1997 to
August 1997. Prior to joining RailTex, Mr. Wagner was with Southern Pacific
Transportation from 1962 to 1996, most recently as Vice President and Chief
Mechanical Officer.
The executive officers of the Company serve at the discretion of the
Company's Board of Directors.
The remainder of this page is intentionally left blank
22
<PAGE>
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "RTEX". The following table sets forth, for the periods indicated, the
high and low sales price per share of the Company's Common Stock as quoted on
the Nasdaq National Market.
PRICE PER SHARE
---------------
HIGH LOW
---- ---
1996
First Quarter............................. $25 5/8 $20 1/4
Second Quarter............................ 25 3/4 23 1/4
Third Quarter............................. 26 1/2 21 1/2
Fourth Quarter............................ 27 3/8 19 3/4
1997
First Quarter............................. $25 1/4 $16
Second Quarter............................ 19 1/2 13 3/4
Third Quarter............................. 20 1/4 15
Fourth Quarter............................ 19 3/8 13 7/8
Since its inception, the Company has not paid, and it has no current plans
to pay, cash dividends on the Common Stock. The Company currently intends to
retain all earnings to support the Company's operations and future growth. The
payment of any future dividends will be determined by the Board of Directors
based upon the Company's earnings, financial condition and cash requirements,
restrictions in financing agreements, business conditions and other factors that
the Board of Directors may deem relevant. The Company's financing agreements
prohibit the payment of dividends. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As of March 20, 1998, the Company had 9,186,199 shares of Common Stock
outstanding and there were 415 shareholders of record.
23
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME STATEMENT DATA:
Operating revenues ......................... $ 59,849 $ 74,528 $ 107,841 $ 121,106 $ 148,791
Operating expenses ......................... (49,534) (61,351) (90,046) (99,065) (125,790)
--------- --------- --------- --------- ---------
Operating income before Special Charge ..... 10,315 13,177 17,795 22,041 23,001
Special Charge (1) ......................... -- -- (2,140) -- --
--------- --------- --------- --------- ---------
Operating income ........................... 10,315 13,177 15,655 22,041 23,001
Interest expense ........................... (4,719) (2,965) (5,696) (6,893) (10,527)
Other income, net .......................... 504 1,287 1,715 1,521 4,198
--------- --------- --------- --------- ---------
Income before taxes ........................ 6,100 11,499 11,674 16,669 16,672
Income taxes ............................... (2,467) (4,618) (4,776) (6,708) (6,048)
--------- --------- --------- --------- ---------
Net income.................................. $ 3,633 $ 6,881 $ 6,898 $ 9,961 $ 10,624
========= ========= ========= ========= =========
PER SHARE DATA (2):
Basic earnings per share.................... $ 0.73 $ 0.96 $ 0.79 $ 1.09 $ 1.16
========= ========= ========= ========= =========
Weighted average number of basic shares of
Common Stock (in thousands) ............. 4,991 7,157 8,699 9,112 9,153
Diluted earnings per share.................. $ 0.65 $ 0.88 $ 0.78 $ 1.08 $ 1.15
========= ========= ========= ========= =========
Weighted average number of diluted shares of
Common Stock (in thousands) ............. 5,621 7,820 8,897 9,231 9,222
OPERATING DATA:
Total track mileage (3) .................... 2,496 2,713 3,390 3,431 3,884
Total carloads ............................. 222,909 253,163 318,187 359,669 488,264
Total employees (3) ........................ 402 505 681 720 873
Operating revenues per mile (3) ............ $ 23,978 $ 27,471 $ 31,812 $ 35,298 $ 38,309
Operating revenues per carload ............. $ 268 $ 294 $ 339 $ 337 $ 305
Operating revenues per employee ............ $ 148,878 $ 147,580 $ 158,357 $ 168,203 $ 170,436
Carloads per mile (3) ...................... 89 93 94 105 126
Carloads per employee (3) .................. 555 501 467 500 559
Labor ratio (4) ............................ 30.6% 29.1% 30.3% 28.9% 30.9%
Operating ratio before Special Charge (5) . 82.8% 82.3% 83.5% 81.8% 84.5%
Operating ratio after Special Charge (5) ... 82.8% 82.3% 85.5% 81.8% 84.5%
BALANCE SHEET DATA AS OF PERIOD END:
Total assets ............................... $ 113,303 $ 139,656 $ 204,982 $ 269,470 $ 319,908
Long-term debt ............................. 29,310 43,389 58,911 98,704 125,656
Shareholders' equity ....................... 65,671 72,382 112,602 122,703 133,258
</TABLE>
- ------------------
(1) A result of the disposition of a railroad.
(2) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", effective December 15, 1997 and as a result
reported earnings per share for 1993, 1994, 1995 and 1996 were restated.
(3) Total track mileage and total employees are calculated based on weighted
monthly averages over the respective periods.
(4) Labor ratio equals labor expenses divided by operating revenues. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
(5) Operating ratio equals operating expenses divided by operating revenues.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONNECTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES AND OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
FORWARD-LOOKING STATEMENTS
This section contains forward-looking statements that are based on current
expectations, estimates and projections. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcome and results may differ
materially from what is expressed in such forward-looking statements.
GENERAL
The Company's growth to date has resulted primarily from implementation of
its expansion strategy. The number of miles of track operated by RailTex has
grown to more than 3,900 at December 31, 1997.
The Company has added railroad properties to its portfolio primarily through
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 workforce 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 may not be
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 and the full
prior year. "New Railroad Properties" for each period are railroad properties
which the Company began operating after the start of the prior year.
For 1997, New Railroad Properties include the INOH, the Connecticut Southern
Railroad ("CSOR"), the Ontario L'Orignal Railway, Inc. ("OLOR"), the Pittsburgh
Industrial Railroad, Inc. ("PIRR") and the Detroit, Toledo and Ironton ("DTI").
RECENT DEVELOPMENTS
The Company has been impacted by the congestion the Union Pacific Railroad
("UP") is experiencing primarily through car supply issues and increased
operating expenses due to overtime associated with running trains on unscheduled
days and delays caused by waiting for access to UP yards. Additionally, revenues
have been lost to other modes of transportation as customers avoid the service
problems caused by the UP congestion. At this time, the Company is unable to
estimate the total impact of these issues on its results of operations. To the
extent that the UP problems continue or worsen, the Company's results of
operations could be materially adversely impacted.
25
<PAGE>
During 1997, certain Asian countries experienced a financial crisis
resulting in the devaluation of their currencies. The Asian crisis increased
speculation that the Brazilian currency ("Real") would be devalued. In response
to the Asian crisis, the Brazilian government invoked certain fiscal measures,
including raising the domestic interest rate in Brazil, in an effort to
stabilize the Real. Although the Real continues to gradually decline relative to
the U.S. dollar, the government's measures averted a significant devaluation of
the Real. However, there can be no assurances that these measures will prevent
future currency devaluations. In addition, it is generally believed that the
increase in domestic interest rates may slow economic growth in Brazil, which
could impact the growth potential for the Ferrovia Centro Atlantica, S.A.
("FCA") and Ferrovia Sul Atlantico, S.A. ("FSA").
Additionally, the economic uncertainty related to Brazil has impacted the
ability of FCA and FSA to finance short-term capital needs. To the extent that
this situation continues and the FCA or the FSA is unable to externally finance
working capital or vital capital expenditures, the respective Board of Directors
of FCA and FSA may implement a call for additional capital contributions from
the existing shareholders. While the Company is not obligated to contribute
additional capital, in the event the Company does not participate in the capital
call, its equity percentage could be diluted.
As a result of the gradual decline in the Real since the time the Company
originally invested in FCA and FSA, the Company recorded a charge of $2.1
million against its investments in FCA and FSA in 1997. The Company believes it
will be able to recoup the carrying value of its investments in FCA and FSA,
which totaled $17.8 million as of December 31, 1997, however, dependent upon the
ultimate outcome of the events and conditions discussed above, the financial
condition of the Company could be adversely affected.
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 traffic with revenues of approximately $1.6 million will be
diverted from the NECR. NECR estimates that traffic with revenues of as much as
$8.0 million and the ISRR estimates that traffic with revenues of $1.5 million
could be diverted on an annual basis. In addition, the INOH , a wholly owned
subsidiary of RailTex, Inc., believes the division of rail lines between CSX and
NS will cause operating inefficiencies for INOH. 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.
In order to improve its overall profitability and financial returns, the
Company has performed an analysis of its portfolio railroad properties with the
objective of identifying those properties which do not meet the Company's
overall financial objectives and which do not offer significant revenue or
operating expansion opportunities. The Company is currently pursuing its
alternatives with respect to these properties, which may include possible sale
of the railroad property.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's net income increased by $663,000, or 6.7%, to $10.6 million in
1997 from $10.0 in the prior year, basic earnings per share increased by 6.4% to
$1.16 from $1.09 in the prior year and diluted earnings per share increased by
6.5% to $1.15 from $1.08 in the prior year.
OPERATING REVENUES. Operating revenues in 1997 increased by $27.7 million,
or 22.9%, to $148.8 million from $121.1 million in the prior year. Operating
revenues attributable to New Railroad Properties accounted for 79.4% of this
increase. Operating revenues for Comparable Railroad Properties increased $7.0
million, or 6.1%. Corporate operating revenues decreased by $904,000, or 106.0%.
Carloads transported increased by 128,595 carloads, or 35.8%, to 488,264
carloads from 359,669 carloads in the prior year. Carloads attributable to New
Railroad Properties accounted for 85.6% of this increase while carloads
attributable to Comparable Railroad Properties increased by 19,642 or 5.7% from
the prior year.
26
<PAGE>
Freight operating revenues in 1997 increased by $25.0 million, or 24.3%, to
$128.0 million from $103.0 million in the prior year. The following table
compares freight revenues, traffic volume (in carloads) and average freight
revenues per carload by commodity group for the years ended December 31, 1997
and 1996.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
<TABLE>
<CAPTION>
FREIGHT REVENUES CARLOADS
-------------------------------------- ----------------------------------- AVEAGE
1997 1996 1997 1996 FREIGHT
------------------ ----------------- ---------------- --------------- REVENUES PER
(DOLLARS IN THOUSANDS) CARLOAD (1)
%OF % OF % OF % OF ------------
COMMODITY GROUP DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL 1997 1996
-------- ----- -------- ----- ------ ------ ------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products .............. $ 24,155 18.9% $ 21,811 21.2% 63,903 13.1% 57,456 16.0% $378 $380
Coal..................................... 18,937 14.8 16,240 15.8 99,322 20.3 84,957 23.6 191 191
Chemicals................................ 15,120 11.8 11,484 11.1 47,066 9.6 33,221 9.2 321 346
Scrap paper & paper products ............ 12,113 9.5 9,758 9.5 33,996 7.0 24,075 6.7 356 405
Farm products............................ 10,269 8.0 8,986 8.7 40,276 8.2 34,767 9.7 255 258
Scrap metal & metal products ............ 10,107 7.9 7,419 7.2 37,354 7.7 23,231 6.5 271 319
Food products ........................... 6,461 5.0 5,944 5.8 24,625 5.0 22,049 6.1 262 270
Non-metallic ores ....................... 6,346 5.0 6,898 6.7 35,511 7.3 36,365 10.1 179 190
Autos and auto parts .................... 5,385 4.2 478 0.5 31,003 6.3 738 0.2 174 647
Petroleum products ...................... 5,375 4.2 4,767 4.6 14,162 2.9 11,623 3.2 380 410
Mineral & stone ......................... 5,228 4.1 5,008 4.9 15,457 3.2 14,306 4.0 338 350
Railroad equipment ...................... 3,900 3.0 1,374 1.3 24,901 5.1 7,284 2.0 157 189
Other ................................... 4,618 3.6 2,850 2.7 20,688 4.3 9,597 2.7 223 297
-------- ----- -------- ----- ------ ------ ------ -----
$128,014 100.0% $103,017 100.0% 488,264 100.0% 359,669 100.0% $262 $286
======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) Calculated as freight revenues divided by carloads.
Approximately $20.0 million, or 79.9%, of the $25.0 million increase in
freight operating revenues in 1997 is attributable to New Railroad Properties.
These properties added approximately 110,109 carloads consisting primarily of
auto and auto parts (30,239), railroad equipment (19,167), scrap metal and metal
products (13,377), chemicals (11,559), scrap paper and paper products (7,438),
farm products (6,423) and other (9,703). Freight revenues for Comparable
Railroad Properties in 1997 increased by $5.4 million, or 5.5%, while
carloadings for Comparable Railroad Properties increased 19,642, or 5.7%,
consisting primarily of coal due to a new customer at one of the Company's
properties.
Average freight revenues per carload decreased by $24, primarily due to more
bridge traffic, as a percent of total freight revenues in 1997. Bridge revenue,
as a percentage of total freight revenues, increased to 13.2% from 4.2% in 1996.
This increase reflects the higher level of bridge traffic at our New Railroad
Properties relative to Comparable Railroad Properties.
Non-freight operating revenues in 1997 increased by $2.7 million, or 14.9%,
to $20.8 million from $18.1 million in the prior year. Non-freight operating
revenues include joint facilities, switching, demurrage, car hire, and car
repair services performed for third parties and lease income. These revenues
contributed 14.0% and 14.9% of operating revenues in 1997 and 1996,
respectively. New Railroad Properties contributed approximately 75.2% of the
increase. Non-freight revenues for Comparable Railroad Properties increased
approximately $1.6 million, or 10.0%, primarily as a result of increased car
repair, switching, car hire and other income which were partially offset by a
decrease in demurrage. These increases were offset by approximately $904,000,
primarily a result of a one time transaction fee income in connection with the
Company's investments in Brazil and higher logistics contract income in the
prior year.
OPERATING EXPENSES. Operating expenses in 1997 increased by $26.7 million,
or 27.0%, to $125.8 million from $99.1 million in the prior year. New Railroad
Properties represent 77.5% of the increase in expenses. Operating expenses for
Comparable Railroad Properties increased by approximately $665,000, or 0.8%, and
corporate operating expenses increased by $6.3 million, or 46.7%, primarily due
to increases in labor and
27
<PAGE>
benefits, casualties and insurance, depreciation and amortization and other
expenses. The Company's operating ratio (operating expenses divided by operating
revenues) increased for the year to 84.5% compared to 81.8% in the prior year,
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 74.2%, compared to 76.5% in the prior year.
The following table sets forth a comparison of the Company's operating
expenses during 1997 and 1996, in dollars and as a percentage of operating
revenues.
OPERATING EXPENSES COMPARISON
(DOLLARS IN THOUSANDS)
1997 1996
---------------- ----------------
Labor and benefits............... $ 45,973 30.9% $35,025 28.9%
Equipment rents.................. 16,192 10.9 13,845 11.5
Depreciation and amortization.... 12,940 8.7 10,147 8.4
Diesel fuel...................... 11,334 7.6 9,307 7.7
Purchased services............... 9,288 6.2 8,129 6.7
Casualties and insurance......... 6,323 4.2 5,867 4.8
Materials........................ 5,713 3.8 4,387 3.6
Joint facilities................. 4,912 3.3 2,430 2.0
Other............................ 13,115 8.8 9,928 8.2
---------- ----- --------- -----
Total....................... $125,790 84.5% $99,065 81.8%
========== ===== ========= =====
Labor and benefits in 1997 increased by $10.9 million, or 31.3%, to $46.0
million from $35.0 million in the prior year. Labor and benefits attributable to
New Railroad Properties accounted for 63.5% of the overall increase. Labor and
benefits for Comparable Railroad Properties increased by $2.7 million, or 9.8%,
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 in 1997 increased by $2.3 million, or 17%, to $16.2 million
from $13.8 million in the prior year. Equipment rents attributable to New
Railroad Properties increased $3.5 million. Equipment rents for Comparable
Railroad Properties decreased by $1.2 million, or 8.9%, due primarily to
decreased car hire expense.
Depreciation and amortization in 1997 increased by $2.8 million, or 27.5%,
to $12.9 million from $10.1 million in the prior year. New Railroad Properties
accounted for 47.5% 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 in 1997 increased by $2.0 million, or 21.8%, to $11.3
million from $9.3 million in the prior year. New Railroad Properties accounted
for 94.6% of this increase. Diesel fuel expense for Comparable Railroad
Properties remained relatively flat, due to a combination of increased
consumption related to increased carloadings and lower fuel prices during the
current year. The Company has taken several steps to reduce its exposure to fuel
price fluctuations, including entering into a fuel hedging collar for
approximately 36.0% of the Company's estimated annual fuel consumption.
Purchased services in 1997 increased by $1.2 million, or 14.3%, to $9.3
million from $8.1 million in the prior year. Purchased services attributable to
New Railroad Properties accounted for 59.5% of this increase. Purchased services
for Comparable Railroad Properties decreased by approximately $104,000, or 1.7%.
The remainder is primarily due to increased headquarters' expense due in part to
certain non-recurring expenses.
28
<PAGE>
Casualties and insurance expense in 1997 increased by approximately
$456,000, or 7.8%, to $6.3 million from $5.9 million in the prior year. New
Railroad Properties increased by approximately $665,000 while casualties and
insurance expense for Comparable Railroad Properties decreased by $1.4 million,
or 26.5% due to fewer incidents and derailments in the current year. Casualties
and insurance expense increased by $1.2 million in corporate self-insured
retention and litigation liability reserves.
Materials expense in 1997 increased by $1.3 million, or 30.2%, to $5.7
million from $4.4 million in the prior year. Materials costs associated with New
Railroad Properties accounted for 42.9% of the increase. Materials expense for
Comparable Railroad Properties increased by approximately $438,000, or 11.6%,
primarily as a result of increased car repair activity in the current year. The
remainder of the increase is due to an increase in locomotive repair materials.
Joint facilities expense in 1997 increased by $2.5 million, or 102.1%, to
$4.9 million from $2.4 million in the prior year. Joint facilities expense
increased by $2.7 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 by
approximately $227,000, or 11.9%, due primarily to a decrease in switching
charges and haulage fees.
Other expenses in 1997, increased by $3.2 million, or 32.1%, to $13.1
million from $9.9 million in the prior year. Other expenses for New Railroad
Properties accounted for 73.5% of this increase. Other expenses for Comparable
Railroad Properties increased by approximately $367,000, or 5.6%, primarily due
to an increase in property taxes and travel. Corporate other expenses increased
by approximately $826,000, or 28.6%, primarily due to an increase in corporate
travel and communications.
INTEREST EXPENSE. Interest expense in 1997 increased by $3.6 million, or
52.7%, to $10.5 million from $6.9 million in the prior year due 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 in 1997 increased by $2.7 million, or 176.0%, to
$4.2 million from $1.5 million in the prior year primarily due to the completion
of the sale of certain railroad real estate which resulted in a gain of $4.5
million which was offset by a $2.1 million charge against the Company's two
investments in Brazil.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net income increased by $1.7 million, or 20.1%, to $10.0
million in 1996 excluding the impact of a special charge ("Special Charge")
recorded in 1995, representing the write down in the amount of $2,140,000 before
taxes ($1,389,000 or $0.16 per basic share after taxes and $0.15 per diluted
share after taxes) to reflect the unamortized value of leasehold improvements of
the Austin and Northwestern Railroad ("AUNW"), which ceased operations in May
1996. Basic earnings per share and diluted earnings per share both increased by
approximately 16.0%, excluding Special Charge, to $1.09 and $1.08, respectively.
Including the Special Charge recorded in 1995, the Company's net income
increased by $3.0 million, or 44.0%, to $10.0 million from $6.9 million in the
prior year and basic earnings per share increased 38.0% to $1.09 from $0.79 in
the prior year.
The following table compares operating revenues, operating expenses,
operating income and income before income taxes, excluding the Special Charge,
for the years ended December 31, 1996 and 1995, (in thousands):
1996 1995
--------- ---------
Operating revenues............... $121,106 $107,841
Operating expenses............... (99,065) (90,046)
--------- ---------
Operating income................. 22,041 17,795
Other income (expense)........... (5,372) (3,981)
--------- ---------
Income before income taxes....... $ 16,669 $ 13,814
======== ========
29
<PAGE>
OPERATING REVENUES. Operating revenues in 1996 increased by $13.3 million,
or 12.3%, to $121.1 million from $107.8 million in the prior year. Operating
revenues attributable to New Railroad Properties accounted for 60.3% of this
increase. Operating revenues for Comparable Railroad Properties increased by
$5.5 million, or 6.2%. Carloads transported increased by 41,482 carloads, or
13.0%, to 359,669 carloads from 318,187 carloads in the prior year. Carloads
attributable to New Railroad Properties accounted for 48.9% of this increase
while carloads attributable to Comparable Railroad Properties increased by 8.3%
over the prior year.
Freight operating revenues in 1996 increased by $11.1 million, or 12.1%, to
$103.0 million from $91.9 million in the prior year. The following table
compares freight revenues, traffic volume (in carloads) and average freight
revenues per carload by commodity group for the years ended December 31, 1996
and 1995.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
<TABLE>
<CAPTION>
FREIGHT REVENUES CARLOADS
-------------------------------------- ----------------------------------- AVERAGE
1996 1995 1996 1995 FREIGHT
------------------ ----------------- ---------------- --------------- REVENUES PER
(DOLLARS IN THOUSANDS) CARLOAD (1)
%OF % OF % OF % OF -----------
COMMODITY GROUP DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL 1996 1995
--------- ------ -------- ------ -------- ------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products ............. $21,811 21.2% $18,875 20.5% 57,456 16.0% 46,748 14.7% $380 $404
Coal ................................... 16,240 15.8 15,307 16.7 84,957 23.6 72,864 22.9 191 210
Chemicals .............................. 11,484 11.1 9,652 10.5 33,221 9.2 29,361 9.2 346 329
Scrap paper & paper products ........... 9,758 9.5 9,452 10.3 24,075 6.7 22,724 7.1 405 416
Scrap metal & metal products ........... 7,419 7.2 7,808 8.5 23,231 6.5 24,347 7.7 319 321
Farm products .......................... 8,986 8.7 7,476 8.1 34,767 9.7 31,754 10.0 258 235
Non-metallic ores ...................... 6,898 6.7 5,980 6.5 36,365 10.1 32,246 10.1 190 185
Food products .......................... 5,944 5.8 4,954 5.4 22,049 6.1 19,837 6.2 270 250
Petroleum products ..................... 4,767 4.6 4,592 5.0 11,623 3.2 10,476 3.3 410 438
Minerals and stone ..................... 5,008 4.9 3,983 4.3 14,306 4.0 13,659 4.3 350 292
Other .................................. 4,702 4.5 3,830 4.2 17,619 4.9 14,171 4.5 267 270
-------- ----- ------- ----- ------- ----- ------- -----
Total.............................. $103,017 100.0% $91,909 100.0% 359,669 100.0% 318,187 100.0% $286 $289
======== ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------------
(1) Calculated as freight revenues divided by carloads.
Approximately $7.4 million, or 66.7%, of the $11.1 million increase in
freight operating revenues in 1996 is attributable to New Railroad Properties.
These properties added approximately 20,278 carloads consisting primarily of
lumber and forest products (2,318), chemicals (3,389), scrap paper and paper
products (4,294), scrap metal and metal products (2,540), farm products (1,815),
non-metallic ores (1,790), food products (1,777), and minerals and stone
(1,247). Freight revenues for Comparable Railroad Properties in 1996 increased
by $4.4 million, or 5.7%, while carloadings for Comparable Railroad Properties
increased 23,869, or 8.0%, consisting primarily of lumber and forest products
(8,390), coal (12,688) and non-metallic ores (2,329).
Non-freight operating revenues in 1996 increased by $2.2 million, or 13.8%,
to $18.1 million from $15.9 million in the prior year. Non-freight operating
revenues include joint facilities, switching, demurrage, car hire, car repair
and track maintenance services performed for third parties and lease income.
These revenues contributed 14.9% and 14.8% of operating revenues in 1996 and
1995, respectively. New Railroad Properties contributed approximately $550,000,
or 25.0%, of the increase, primarily as a result of demurrage, car hire income
and joint facility income. Non-freight revenues for Comparable Railroad
Properties increased by $1.1 million, or 9.2%, primarily as a result of
increased car hire, switching, demurrage and other income which were partially
offset by decreases in car repair income.
OPERATING EXPENSES. Operating expenses, excluding the effects of the Special
Charge recorded in 1995, increased by $9.0 million, or 10.0%, to $99.1 million
from $90.1 million in the prior year. The Company's operating ratio (operating
expenses divided by operating revenues), decreased for the year, to 81.8%,
compared to 83.5% in the prior year. New Railroad Properties represent 73.5% of
the increase in expenses. The remainder of the increase is attributable to a
2.6% increase in expenses for Comparable Railroad Properties and a 12.7%
increase in corporate expenses including depreciation expense on locomotives
acquired for New Railroad Properties.
30
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during 1996 and 1995, in dollars and as a percentage of operating
revenues.
OPERATING EXPENSES COMPARISON
(DOLLARS IN THOUSANDS)
1996 1995
--------------- ----------------
Labor and benefits........................ $35,025 28.9% $32,662 30.3%
Equipment rents........................... 13,845 11.5 14,170 13.2
Depreciation and amortization............. 10,147 8.4 8,237 7.6
Diesel fuel............................... 9,307 7.7 7,666 7.1
Purchased services........................ 8,129 6.7 6,179 5.7
Casualties and insurance.................. 5,867 4.8 5,607 5.2
Materials................................. 4,387 3.6 4,880 4.5
Joint facilities.......................... 2,430 2.0 1,712 1.6
Other..................................... 9,928 8.2 8,933 8.3
------- ---- ------- -----
Total excluding Special Charge....... 99,065 81.8 90,046 83.5
Special Charge............................ -- -- 2,140 2.0
------- ---- ------- -----
Total................................ $99,065 81.8% $92,186 85.5%
======= ==== ======= =====
Labor and benefits in 1996 increased by $2.4 million, or 7.4%, to $35.0
million from $32.6 million in the prior year. Labor and benefits attributable to
New Railroad Properties increased by $2.3 million and accounted for 95.8% of the
overall increase. Labor and benefits for Comparable Railroad Properties
increased by approximately $200,000, or only 1.0%, despite the 8.0% increase in
carloadings.
Equipment rents in 1996 decreased by approximately $325,000, or 2.3%, to
$13.8 million from $14.2 million in the prior year. Equipment rents attributable
to New Railroad Properties increased by $1.1 million, or 37.2%. Equipment rents
for Comparable Railroad Properties decreased by 3.3% due primarily to decreased
car hire expense. The decrease in car hire expense is due to certain per diem
sharing arrangements 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 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. The remainder of the
decrease is due primarily to the AUNW which ceased operations in May 1996.
Depreciation and amortization in 1996 increased by $1.9 million, or 23.2%,
to $10.1 million from $8.2 million in the prior year. Depreciation and
amortization attributable to New Railroad Properties accounted for 30.3% 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 in 1996 increased by $1.7 million, or 22.4%, to $9.3
million from $7.6 million in the prior year. New Railroad Properties accounted
for 49.1% of this increase. Diesel fuel expense for Comparable Railroad
Properties increased by approximately $880,000, or 13.5%, due to a combination
of increased consumption related to increased carloadings and higher fuel prices
during the current year. The Company's average fuel cost per gallon increased by
approximately $0.10 per gallon, or 14.5%, in 1996.
Purchased services in 1996 increased by $1.9 million, or 30.6%, to $8.1
million from $6.2 million in the prior year. Purchased services attributable to
New Railroad Properties accounted for 16.2% of this increase. Purchased services
for Comparable Railroad Properties increased by approximately $978,000, or
19.5%, 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 expense.
31
<PAGE>
Casualties and insurance expense in 1996 increased by approximately
$260,000, or 4.6%, to $5.9 million from $5.6 million in the prior year. New
Railroad Properties accounted for 51.9% of the increase. Casualties and
insurance expense for Comparable Railroad Properties increased by approximately
$690,000, or 15.7%, related to higher casualty expenses primarily 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 in 1996 decreased by approximately $490,000, or 10.0%, to
$4.4 million from $4.9 million in the prior year. Materials expense for New
Railroad Properties increased by approximately $205,000. Materials expense for
Comparable Railroad Properties decreased by approximately $910,000, or 23.0%,
primarily as a result of decreased car repair and locomotive repair materials in
the current year. The remainder of the change is due to an increase of
approximately $200,000 in headquarters' expenses attributable to increased
spending on locomotives related to new acquisitions and locomotives leased from
third parties.
Joint facilities expense in 1996 increased by approximately $718,000, or
41.9% to 2.4 million from 1.7 million in the prior year. Joint facilites expense
for New Railroad Properties accounted for approximately $523,000 of the increase
reflecting the higher level of joint facilities expense for New Railroad
Properties relative to Comparable Railroad Properties. Joint facilities expense
for Comparable Railroad Properties increased by approximately $195,000 or 11.4%
due primarily to an increase in switching charges and trackage right fees.
Trackage rights expense increased due to the track lease and operating rights
agreement with a connecting Class I carrier on GSWR (See "Properties").
Other expenses in 1996 increased by $1.0 million, or 11.7%, to $9.9 million
from $8.9 million in the prior year. Other expenses for New Railroad Properties
accounted for 40.7% of this increase. Other expenses for Comparable Railroad
Properties increased by approximately $24,000, or 0.4%, primarily due to
increased bad debt expenses. The remainder of the increase is due to an
approximately $644,000 increase in headquarters' expenses primarily attributable
to the Company's growth.
INTEREST EXPENSE. Interest expense in 1996 increased by $1.2 million, or
21.0%, to $6.9 million from $5.7 million in the prior year due to borrowings
totaling $20.0 million to fund acquisitions and totaling $21.2 million to fund
the Company's equity investments in Brazil.
OTHER INCOME. Other income in 1996 decreased by approximately $194,000, or
11.3%, to $1.5 million from $1.7 million in the prior year due primarily to
fewer sales of non-operating properties.
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 1997, the Company generated cash from operations of $25.8 million,
borrowed a total of $7.0 million on its credit facilities and received $7.3
million from the sales of non-operating assets which was primarily used to fund
capital expenditures in 1997 as follows (in thousands):
Track............................................ 16,020
Locomotives...................................... 7,973
DTI track rehabilitation......................... 6,994
Technology....................................... 1,966
Other............................................ 2,554
--------
$35,507
========
32
<PAGE>
On February 15, 1997, a wholly owned subsidiary of INOH purchased
substantially all of the assets of the former DTI from Grand Trunk Western
Railroad, Inc., a subsidiary of CN, for $22.0 million. The Company spent an
additional $4.0 million to fund the purchase of locomotives and other costs
related to the DTI acquisition. The purchase price and related costs were
financed under the Company's $75.0 million U.S. acquisition facility ("U.S.
Acquisition Facility.") In connection with the purchase of the assets of the
former DTI, the Company committed to return the former DTI track to Federal
Railroad Administration Class IV Standard over a three year period. As shown in
the table above, at December 31, 1997, the Company has spent approximately $7.0
million and expects to spend an additional $5.0 million on the rehabilitation
project in 1998, which will be funded through cash flow from operations or
borrowings under the Company's U.S. Acquisition Facility.
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.
At December 31, 1997, the Company had long-term senior debt, capital leases
and senior subordinated debt outstanding totaling $125.7 million, which
constituted 48.5% of its total capitalization. Comparable figures at December
31, 1996 were $98.7 million and 44.6%, respectively.
At December 31, 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 was, in
U.S. dollars, $63.0 million, $6.0 million, $2.7 million and $17.5 million,
respectively. The unused portion of all of the Company's senior bank credit
facilities are subject to a 0.25% commitment fee.
The Company currently anticipates that its maintenance capital expenditure
requirements in 1998 for track, excluding DTI track rehabilitation, locomotives
and equipment on properties it currently operates will be $22.0 million.
Additionally, computer hardware, software and related capital expenditures are
currently expected to be $3.0 million.
In connection with the lease of one of its railroad properties, the Company
has committed to upgrade approximately 107 miles of track, net of abandonments,
to Class II standards as defined by the FRA by October 1998; however, the
Company is negotiating with the lessor to extend this period. Management now
estimates the total cost of this upgrade to be $2.0 million, net
of state funding.
On August 4, 1995, the Company entered into a ten year Information
Technology Services Agreement ("ITS Agreement") with Electronic Data Systems
Corporation ("EDS"). Under the ITS Agreement, EDS is responsible for the
management information systems of the Company, including developing, obtaining
licenses for and maintaining new software for the Company, coordinating the
acquisition and maintenance of computers and related equipment and coordinating
the maintenance of the Company's existing software. The Company currently pays
EDS $1.8 million annually which is subject to annual escalation based on the
Consumer Price Index.
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 December 31, 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 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. The Company further believes that these facilities
will be renewed and extended upon expiration.
33
<PAGE>
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 STB's cost or
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 June 1997, the Financial Accounting Standards Board ("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. The Company believes the adoption of this statement
will not impact the Company's consolidated financial statement disclosures.
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
this statement will not impact the Company's consolidated financial statement
disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" ("FAS 132"). FAS 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. This statement is effective for financial statements
for periods beginning after December 15, 1997. The Company does not provide
post-retirement or post-employment benefits to its employees.
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. The Proposed SOP is expected to be
approved in the second quarter of 1998 and to be effective for financial
statements for fiscal years beginning after December 15, 1998. 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. If the proposed
SOP had been approved in 1997, the Company would have reported a cumulative
effect of a change in accounting principle in the amount of $1.8 million, net of
associated income taxes. Prospectively, the Company's results of operations will
reflect higher costs associated with the acquisition of new railroad properties
if the SOP is ultimately approved.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology infrastructure for the year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance.
34
<PAGE>
The Company is currently investigating the year 2000 compliance status of
its suppliers and customers. If it appears that some of its suppliers will be
unable to become year 2000 compliant, the Company will switch to suppliers that
are already year 2000 compliant. However, if any of the Company's significant
suppliers or customers, including Class I railroads, do not successfully and
timely achieve year 2000 compliance the Company's business or operations may be
adversely affected.
The remainder of this page is intentionally left blank.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
RAILTEX, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants......................... 37
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995............................... 38
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 39
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995.......... 40
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995......................... 41
Notes to Consolidated Financial Statements....................... 42
QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)
(unaudited)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
1997:
Operating revenues............. $34,175 $37,365 $37,970 $39,281
Operating income............... 5,052 6,225 6,348 5,376
Net income..................... 1,575 2,418 2,830 3,801
Basic earnings per share....... 0.17 0.27 0.31 0.41
Diluted earnings per share..... 0.17 0.26 0.31 0.41
1996:
Operating revenues............. $28,609 $30,148 $29,857 $32,492
Operating income............... 4,930 5,658 5,471 5,982
Net income..................... 2,183 2,621 2,308 2,849
Basic earnings per share....... 0.24 0.29 0.25 0.31
Diluted earnings per share..... 0.24 0.28 0.25 0.31
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of RailTex, Inc.:
We have audited the accompanying consolidated balance sheets of RailTex,
Inc. (a Texas corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RailTex, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 4, 1998
37
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
OPERATING REVENUES.................... $148,791 $121,106 $107,841
OPERATING EXPENSES:
Transportation..................... 54,361 39,006 33,523
General and administrative......... 26,367 20,948 21,250
Equipment.......................... 17,954 15,718 15,828
Maintenance of way................. 14,168 13,246 11,208
Depreciation and amortization...... 12,940 10,147 8,237
Special Charge..................... -- -- 2,140
---------- ---------- ----------
Total operating expenses........ 125,790 99,065 92,186
--------- --------- ---------
OPERATING INCOME...................... 23,001 22,041 15,655
INTEREST EXPENSE...................... (10,527) (6,893) (5,696)
OTHER INCOME, net..................... 4,198 1,521 1,715
---------- ---------- ---------
INCOME BEFORE INCOME TAXES............ 16,672 16,669 11,674
INCOME TAXES.......................... (6,048) (6,708) (4,776)
---------- ---------- ---------
NET INCOME............................ $ 10,624 $ 9,961 $ 6,898
========= ========= =========
BASIC EARNINGS PER SHARE (Note 3).....$ 1.16 $ 1.09 $ 0.79
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF BASIC
SHARES OF COMMON STOCK OUTSTANDING.. 9,153 9,112 8,699
DILUTED EARNINGS PER SHARE (Note 3)...$ 1.15 $ 1.08 $ 0.78
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF DILUTED
SHARES OF COMMON STOCK OUTSTANDING.. 9,222 9,231 8,897
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
ASSETS 1997 1996
-------- --------
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 570 $ 2,108
Accounts receivable, less doubtful receivables
of $1,563 in 1997; $612 in 1996 ................. 32,171 26,834
Prepaid expenses .................................. 2,527 2,468
Deferred tax assets, net .......................... 1,777 1,141
--------- ---------
Total current assets ........................... 37,045 32,551
PROPERTY AND EQUIPMENT, net .......................... 259,444 209,420
OTHER ASSETS:
Investments in Brazilian railroad companies ....... 17,809 21,380
Other, net ........................................ 5,610 6,119
--------- ---------
Total other assets ............................. 23,419 27,499
Total assets ................................... $ 319,908 $ 269,470
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable .......................... $ 384 $ 352
Current portion of long-term debt ................. 7,763 6,361
Accounts payable .................................. 18,829 14,624
Accrued liabilities ............................... 17,434 11,445
--------- ---------
Total current liabilities ...................... 44,410 32,782
DEFERRED INCOME TAXES, NET ........................... 20,521 17,703
LONG-TERM DEBT ....................................... 112,893 87,343
SENIOR SUBORDINATED NOTES PAYABLE .................... 5,000 5,000
OTHER LIABILITIES .................................... 3,826 3,939
--------- ---------
Total liabilities .............................. 186,650 146,767
--------- ---------
COMMITMENTS AND CONTINGENCIES
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 in 1997; 9,124,290 in 1996 ............ 916 912
Paid-in capital ................................... 83,799 83,629
Retained earnings ................................. 48,901 38,277
Cumulative translation adjustment ................. (358) (115)
--------- ---------
Total shareholders' equity ..................... 133,258 122,703
--------- ---------
Total liabilities and shareholders' equity ..... $ 319,908 $ 269,470
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
SHARES $.10 CUMULATIVE TOTAL
ISSUED AND PAR PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
OUTSTANDING VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- ------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 .......................... 7,157 $ 716 $50,462 $21,418 $(214) $ 72,382
Net income ....................................... -- -- -- 6,898 -- 6,898
Exercise of stock options ........................ 306 30 2,784 -- -- 2,814
Shares tendered and canceled in
payment of exercised options ................... (23) (2) -- -- -- (2)
Conversion of senior subordinated
notes payable .................................. 521 52 4,948 -- -- 5,000
Issuance of Common Stock ......................... 1,150 115 25,245 -- -- 25,360
Cumulative effect of translation
adjustment ..................................... -- -- -- -- 150 150
------ ----- ------- ------- ----- ---------
BALANCE, December 31, 1995 .......................... 9,111 $ 911 $83,439 $28,316 $ (64) $ 112,602
Net income ....................................... -- -- -- 9,961 -- 9,961
Exercise of stock options ........................ 13 1 190 -- -- 191
Cumulative effect of translation
adjustment ..................................... -- -- -- -- (51) (51)
------ ----- ------- ------- ----- ---------
BALANCE, December 31, 1996 .......................... 9,124 $ 912 $83,629 $38,277 $(115) $ 122,703
Net income ....................................... -- -- -- 10,624 -- 10,624
Exercise of stock options ........................ 37 4 170 -- -- 174
Cumulative effect of translation
adjustment ..................................... -- -- -- -- (243) (243)
------ ----- ------- ------- ----- ---------
BALANCE, December 31, 1997 .......................... 9,161 $ 916 $83,799 $48,901 $(358) $ 133,258
====== ===== ======= ======= ===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
40
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 10,624 $ 9,961 $ 6,898
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 12,940 10,147 8,237
Special Charge ......................................... -- -- 2,140
Deferred income taxes .................................. 2,182 3,424 1,371
Provision for losses on accounts receivable ............ 638 783 544
Amortization of deferred financing costs ............... 384 348 345
Gain on sale of assets ................................. (6,771) (1,280) (1,599)
Write down of investments .............................. 2,100 -- --
Other .................................................. (275) -- --
Changes in current assets and liabilities
affecting operations--
Accounts receivable ................................. (5,975) (6,950) (7,817)
Prepaid expenses .................................... (59) 51 (177)
Accounts payable and accrued liabilities ............ 10,109 7,035 7,824
-------- -------- ---------
Net cash provided by operating activities .............. 25,897 23,519 17,766
-------- -------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment ........................ (35,507) (21,393) (23,975)
Proceeds from sale of property and
equipment ............................................... 7,327 2,354 2,320
Purchase of new properties and related
equipment and other costs ............................... (25,978) (16,682) (40,200)
Purchase of investments in Brazilian
railroad companies and related costs .................... (1,362) (21,775) --
Sale of preferred shares in Brazilian railroad company .... 2,758 -- --
Organization and acquisition costs ........................ (97) (88) (484)
(Increase) decrease in other assets ....................... (152) (917) 25
-------- -------- ---------
Net cash used in investing activities .................. (53,011) (58,501) (62,314)
-------- -------- ---------
FINANCING ACTIVITIES:
Short-term notes payable, net ............................. 218 (937) 27
Proceeds from long-term debt .............................. 75,000 41,569 100,343
Principal payments on long-term debt and capital leases ... (53,398) (5,197) (81,144)
Net increase in working capital facility .................. 4,000 -- --
Deferred financing costs .................................. (369) (465) (521)
Issuance of common stock .................................. 74 25 25,749
-------- -------- ---------
Net cash provided by financing activities .............. 25,525 34,995 44,454
-------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... 51 (35) 57
-------- -------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... (1,538) (22) (37)
CASH AND CASH EQUIVALENTS, beginning of year ................. 2,108 2,130 2,167
-------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year ....................... $ 570 $ 2,108 $ 2,130
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
RailTex, Inc., through its subsidiaries, ("Company") operates short line
freight railroads over more than 3,900 miles of track in 22 states, Canada and
Mexico as of December 31, 1997. The Company also owns investments in two
Brazilian railroads.
The Company's strategy is to grow through (i) additions to its portfolio of
short line railroad properties, primarily through strategic acquisitions of
Class I railroad divestitures or independently owned short lines which
complement RailTex's current base of railroad properties, (ii) creation of new
business on currently owned properties, and (iii) improvement in the operating
performance of newly added and currently operated properties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS AND CONSOLIDATED STATEMENTS OF CASH FLOWS
All short-term investments which mature in less than 90 days when purchased
are considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
42
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest...................................................... $ 8,962 $ 5,795 $ 4,715
Income taxes.................................................. 2,604 2,008 1,994
Non-cash investing and financing activities:
Capital leases................................................ 1,844 599 950
Grants........................................................ 352 859 1,224
Conversion of senior subordinated notes payable............... -- -- 5,000
Tax benefit from exercise of non-qualified stock options...... 100 83 2,672
Prepaid secondary offering costs.............................. -- -- 247
</TABLE>
On June 4, 1996, the Company acquired 100.0% of the outstanding capital
stock of Indiana & Ohio Rail Corp. 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 17). Fair value of the assets acquired was $17.7
million.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized while routine maintenance and repairs, which do not improve the
asset or extend asset lives, are charged to expense when incurred. Gains or
losses on sales or other dispositions are credited or charged to income.
Depreciation is computed using the straight-line method over periods ranging
from 15 to 30 years for roadway and structures, five to 15 years for locomotives
and other railroad equipment, and three to five years for other non-railroad
equipment. Leasehold improvements are amortized over the life of the lease or
the service lives of the improvements, whichever is shorter.
INVESTMENTS
Investments represent minority interest in Ferrovia Centro Atlantica, S.A.
("FCA") and Ferrovia Sul Atlantico, S.A. ("FSA") (see Note 6) and are accounted
for using the cost method of accounting and are valued at the lower of cost or
market.
OTHER ASSETS
Other assets primarily include deferred financing costs and organization and
acquisition costs. Financing costs are amortized over the related loan terms
using the effective interest method. Amortization of these costs is included in
interest expense. Organization and acquisition costs are direct costs incurred
in acquiring and licensing operating properties and consist of directly
attributable legal and other costs. These costs are amortized using the
straight-line method over five years. Amortization of financing, organization
and acquisition costs totaled approximately $1.6 million, $1.3 million and $1.4
million for 1997, 1996 and 1995, respectively. Accumulated amortization of these
costs was approximately $7.1 million and $5.6 million at December 31, 1997 and
1996, respectively.
43
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
REVENUE RECOGNITION
Revenues are recognized on the percentage of completed service method as a
shipment moves across the Company's railroad properties.
INCOME TAXES
The Company files consolidated U.S. Federal income tax returns which include
all of its U.S. subsidiaries and separate Canadian federal income tax returns
for each Canadian subsidiary. Deferred income taxes are provided when certain
revenues and expenses are reported in periods which are different for financial
reporting purposes than for income tax reporting purposes.
Deferred tax liabilities and assets are recorded based on the enacted income
tax rates which are expected to be in effect in the periods in which the
deferred tax liability or asset is expected to be settled or realized. A change
in the tax laws or rates results in adjustments to the deferred tax liabilities
and assets. The effect of such adjustments shall be included in income in the
period in which the tax laws or rates are changed.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's Canadian
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation gains and losses are charged directly to
cumulative translation adjustment, a component of shareholders' equity, and are
not included in net income until realized through sale or liquidation of the
investment.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS AND MAJOR CUSTOMERS
The Company regularly grants trade credit to all of its customers. In
addition, the Company grants trade credit to other railroads through the routine
interchange of traffic. The Company's accounts receivable are well diversified
except for the concentration of accounts receivable with some Class I railroads.
The Company's management believes these Class I railroads are large, financially
strong companies, and thus believe the Company's exposure to credit risk is
minimized.
In 1997, the Company served more than 900 customers which shipped and
received a wide variety of products. Although most of the Company's railroads
have a well-diversified customer base, several have one or two dominant
customers. The Company's largest customer in 1997 was Canadian National Railways
("CN"), as a result of bridge traffic with Indiana and Ohio Railway ("IORY",
formerly the Detroit, Toledo and Ironton), representing 8.1% of operating
revenues. The Company's largest customer in 1996 and 1995 was Indianapolis Power
& Light Company, representing 4.6% and 5.3% of operating revenues, respectively.
PRICE RISK MANAGEMENT ACTIVITIES
The Company historically has hedged certain anticipated transactions.
Interest rate swaps and diesel fuel price collar contracts with third parties
are used to hedge interest rates and diesel fuel costs. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in interest expense and operating expenses when
the hedged transaction occurs. The Company does not currently hold or issue
financial instruments for trading purposes.
44
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Estinguishments of Liabilities" (FAS 125).
FAS 125 provides accounting and reporting standards for, among other things, the
transfer and servicing of financial assets, such as factoring receivables with
recourse. This statement is effective for transfers and servicing of financial
assets occurring after December 31, 1996, and is to be applied prospectively.
Earlier or retroactive application is not permitted. In 1996, FASB issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No 125" ("FAS 127"). This statement
moves the effective date of some, but not all, of the provisions under FAS 125
to December 31, 1997. The Company believes the adoption of this statement will
not have an impact on the financial condition or results of operations of 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. The Company
believes the adoption of this statement will not impact the Company's
consolidated financial statement disclosures.
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 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 impact the Company's consolidated
financial statement disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" ("FAS 132"). FAS 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. This statement is effective for financial statements
for periods beginning after December 15, 1997. The Company does not provide
post-retirement or post-employment benefits to its employees.
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. The Proposed SOP is expected to be
approved in the second quarter of 1998 and to be effective for financial
statements for fiscal years beginning after December 15, 1998. 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. If the proposed
SOP had been approved in 1997, the Company would have reported a cumulative
effect of a change in accounting principle in the amount of $1.8 million, net of
associated income taxes. Prospectively, the Company's results of operations will
reflect higher costs associated with the acquisition of new railroad properties
if the SOP is ultimately approved.
45
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.
2. RELATED PARTY TRANSACTIONS
The Company purchases, in the normal course of business, various parts for
locomotives and grade crossing signals from certain subsidiaries of Harmon
Industries, Inc. of which the Company's chairman and chief executive officer is
a director. Purchases from Harmon Industries, Inc. and subsidiaries in 1997 and
1996 were approximately $25,000 and $586,000, respectively.
3. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"), effective December 15, 1997. As a result,
the Company reported earnings per share for 1996 and 1995 were restated. Basic
earnings per share is determined by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is determined by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Stock options with an exercise price below fair market value and the
effects of convertible senior subordinated notes for any of the periods
presented are considered common stock equivalents. If the conversion of the
senior subordinated notes (see Note 9) and the Secondary Offering (see Note 18)
would have occurred as of January 1, 1995, the effect on net income per share
for the year ended December 31, 1995 would not have been material. Thus no pro
forma earnings per share information is presented.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted per-share computations for net income (in thousands).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- ----------
<S> <C> <C> <C>
BASIC EPS
Net income available to common stockholders ................... $10,624 9,153 $ 1.16
======== ========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ................................................. 69
-----
DILUTED EPS
Net income available to common stockholders
including assumed conversions ............................... $10,624 9,222 $ 1.15
======= ===== =====
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- ----------
BASIC EPS
Net income available to common stockholders ................... $ 9,961 9,112 $ 1.09
======= =====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ................................................. 119
-----
DILUTED EPS
Net income available to common stockholders
including assumed conversions ............................... $ 9,961 9,231 $ 1.08
======= ===== =====
</TABLE>
46
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- ----------
<S> <C> <C> <C>
BASIC EPS
Net income available to common stockholders ................... $6,898 8,699 $ 0.79
====== ========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Convertible senior subordinated notes ......................... 44
Stock options ................................................. 154
-----
DILUTED EPS
Net income available to common stockholders
including assumed conversions ............................... $6,898 8,897 $ 0.78
====== ===== ========
</TABLE>
The effect of this accounting change on previously reported earnings per
share ("EPS") data was as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Primary EPS as reported........................................ $1.08 $0.78
Effect of FAS 128.............................................. .01 .01
------- -------
Basic EPS as restated.......................................... $1.09 $0.79
===== =====
Fully diluted EPS as reported.................................. $1.08 $0.78
Effect of FAS 128.............................................. -- --
------- ------
Diluted EPS as restated........................................ $1.08 $0.78
===== =====
</TABLE>
4. SPECIAL CHARGE
In May 1996, the Company ceased operations on one of its railroads, the
Austin & Northwestern Railroad Company, Inc. ("AUNW"). As a result, 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 AUNW.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Roadway and structures......................................... $227,455 $182,186
Locomotives and other railroad equipment....................... 55,171 43,194
Office furniture and other equipment........................... 11,487 8,999
Equipment and vehicles held under capital leases (see Note 8).. 5,264 3,111
Vehicles....................................................... 1,189 1,671
---------- ----------
300,566 239,161
Less accumulated depreciation and amortization................. (41,122) (29,741)
--------- ---------
$259,444 $209,420
========= =========
</TABLE>
47
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. INVESTMENTS
In 1996, a newly formed wholly owned subsidiary of the Company, RailTex
International Holdings, Inc. ("RIHI"), purchased an investment, totaling
Brazilian Reals ("R") 16.0 million (U.S. $16.1 million), in FCA which was
awarded a 30 year concession to operate the 4,400 mile Center Eastern Network of
the Brazilian federal railroad. The purchase price of the concession, which was
the governments minimum bid price, was R316.9 million (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.
During December 1996, RIHI purchased an approximate 6% interest, for R5.4
million (U.S. $5.2 million), in FSA which was awarded the concession to operate
the 4,200 mile Southern Network of the Brazilian federal railroad. The purchase
price for the concession was R216.6 million (U.S. $208.0 million). The Brazilian
government structured the transaction as a 30 year concession with a down
payment consisting of a 20.0% installment and a payment consisting of 100.0% of
the difference between the Brazilian government's minimum bid price and the
purchase price. The remainder of the purchase price is structured as lease
payments due in quarterly installments after an initial two year grace period.
RIHI's initial investments in FCA and FSA were funded by borrowings under
the Company's U.S. Acquisition Facility. On February 28, 1997, RIHI sold 2.8
million shares of preferred stock in FCA for R2.9 million (U.S. $2.8 million) of
which it used R1.4 million (approximately U.S. $1.3 million) to fund the
additional investments in FSA. RIHI currently owns 11.7% of the voting stock and
8.3% of the preferred stock of FCA and 15.1% of the voting stock and less than
1.0% of the preferred stock of FSA.
RIHI accounts for the FCA and FSA investment under the cost method of
accounting. In the fourth quarter of 1997, the Company recorded a write down of
its investments in FCA and FSA in the amount of $2,100,000 before tax and
$1,400,000 after tax, or $0.15 per basic and diluted share, reflecting the
effect of the devaluation in the Brazilian Real.
7. SHORT-TERM NOTES PAYABLE
As of December 31, 1997, the Company had outstanding unsecured short term
notes payable to insurance companies totaling approximately $384,000. The notes
bear interest at 6.9% and are due in monthly installments of principal and
interest totaling approximately $67,000 through July 1998. For the year ended
December 31, 1997, the weighted average interest rate for the short term notes
payable was 6.7%
As of December 31, 1996, the Company had outstanding unsecured short term
notes payable to an insurance company totaling approximately $352,000. These
notes bore interest at 5.0% and 7.5%, were due in monthly installments of
principal and interest totaling approximately $109,000 through July 1997. For
the year ended December 31, 1996, the weighted average interest rate for short
term notes payable was 6.5%.
48
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ -----
(in thousands)
<S> <C>
Senior unsecured notes payable to two institutions; interest at 7.44%;
interest only due semiannually; principal balance payable through six
annual mandatory prepayments beginning July 2007.............................. $50,000 -
Senior unsecured notes payable to four institutions;
interest at 7.23%; interest only due semiannually;
principal balance due September 2005.......................................... 40,000 $40,000
Senior unsecured notes payable to two institutions; interest at 9.21%;
interest only due semiannually; principal balance of $7.0 million and
$3.5 million due September 2005 and October 2005, respectively................ 10,499 10,952
Senior unsecured notes payable to banks (U.S. Acquisition Facility);
interest is variable (LIBOR based weighted average
interest rate of 7.66% and 7.07% at December 31,
1997 and 1996, respectively); interest due monthly; then
principal due partially through quarterly principal
payments through April 2002 with remaining balance due
April 2002.................................................................... 11,956 38,766
Senior unsecured notes payable to banks (U.S. Working Capital Facility);
interest is variable (LIBOR based weighted average interest rate of
7.85% at December 31, 1997); interest only due monthly through April
1999 when all borrowings become payable....................................... 4,000 --
Senior unsecured notes payable to banks (Canadian Working
Capital Facility); interest is variable (90 day Canadian BA rate of
5.25% at December 31, 1997 and 90 day Canadian BA rate
of 4.47% and 4.71% on principal balance of U.S.
$800,000 and U.S. $734,200, respectively, and at
Canadian prime rate of 5.25% on a principal balance of
U.S. $33,546 at December 31, 1996); interest only due
monthly through April 1999 when all borrowings become
payable....................................................................... 769 1,567
Senior unsecured notes payable to banks (Canadian
Acquisition Facility); interest is variable; interest
due monthly; then principal due partially through quarterly
principal payments through April 2002 with remaining
balance due April 2002 ....................................................... -- --
Capital lease obligations; interest at rates ranging from
7.25% to 22.00% at December 31, 1997; payable in
variable monthly installments through September 30, 2000..................... 2,890 1,815
Other, primarily due to state agencies; interest at rates
ranging from 5.0% to 7.90%; payable in variable
installments from February 1998 to January 2008............................... 542 604
------- ------
Total long-term debt............................................................ 120,656 93,704
Less current portion............................................................ (7,763) (6,361)
------- ------
Long-term debt, less current portion........................................... $112,893 $87,343
======== =======
</TABLE>
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".)
On May 17, 1996, the Company entered into a new U.S. credit agreement
consisting of a $10.0 million U.S. working capital facility ("U.S. Working
Capital Facility") and the U.S. Acquisition Facility, replacing the 1995 U.S.
Working Capital Facility and the 1995 U.S. Acquisition Facility. The Company may
borrow 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
49
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
when all borrowings become payable. Interest only is payable monthly on new
borrowings under the U.S. Acquisition Facility until April 30 of each year when
all such borrowings are rolled into a term note. Term notes are amortized over a
six year period; however, all borrowings become payable not 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 at the U.S. prime rate. The borrowing margins are based on a
matrix dependent upon the Company's funded debt to EBITDA ratio and are adjusted
quarterly. At December 31, 1997, availability under the U.S. Acquisition
Facility and U.S. Working Capital Facility were $63.0 million and $6.0 million,
respectively.
On June 21, 1996, a wholly owned subsidiary of the Company, RailTex Canada
Inc. ("RCI") entered into a new Canadian credit agreement consisting of a CDN
$5.0 million Canadian working capital facility ("Canadian Working Capital
Facility"), which replaced the 1995 Canadian Credit Facility and a new CDN $25.0
million Canadian acquisition credit agreement ("Canadian Acquisition Facility").
The Canadian credit agreements contain terms and conditions similar to the U.S.
agreements. The Canadian facilities bear interest based on stated borrowing
margins over the bankers acceptance rate ("BA Rate") or at the Canadian prime
rate. The borrowing margins are based on a matrix dependent upon the Company's
funded debt to EBITDA and are adjusted quarterly. In addition, RailTex, Inc.,
the parent company, is a guarantor of the Canadian credit facilities. At
December 31, 1997, availability under the Canadian Working Capital Facility was
CDN $3.9 million (U.S. $2.7 million). There were no borrowings under the
Canadian Acquisition Facility at December 31, 1997.
In October 1995, the Company completed a private placement of senior
unsecured notes with three institutions. These notes consist of U.S. $40.0
million notes and CDN $15.0 million (U.S. $11.0 million) notes. The proceeds
were used to reduce outstanding bank debt under the 1995 U.S. Acquisition
Facility, the 1995 U.S. Working Capital Facility and the 1995 Canadian Credit
Facility.
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 capital 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 December 31, 1997, the Company was in
compliance with all covenants.
Maturities of long-term debt, including Senior Subordinated Debt (see Note
9), as of December 31, 1997 were as follows (in thousands):
YEAR ENDED DECEMBER 31,
1998............................... $ 7,763
1999............................... 2,956
2000............................... 2,710
2001............................... 5,074
2002............................... 6,469
Thereafter......................... 100,684
--------
Total..................... $125,656
========
50
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. SENIOR SUBORDINATED DEBT
On February 16, 1993, the Company issued $5 million of senior subordinated
notes, with interest at 12.0%, payable semi-annually and principal due in
January 2001 and January 2002. The Company also issued $5 million of convertible
senior subordinated notes with interest at 10.0% due semi-annually and principal
due in January 2003, which were converted into 520,833 shares of the Company's
common stock concurrent with the closing of the Secondary Offering in March 1995
(see Note 18).
The Company may prepay the senior subordinated notes subject to penalties.
The senior subordinated notes are unsecured and subject to covenants similar to
those contained in the senior bank debt agreements as discussed in Note 8.
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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 $0.5250 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. Based on a notional amount of 200,000 gallons per month, the Company
hedged approximately 36.0% of its annual fuel consumption.
At December 31, 1997, the Company had not entered into any interest rate
swaps contracts. In December 1997, the Company terminated a Canadian dollar
based interest rate swap agreement scheduled to expire in 1999 by paying CDN
$420,000 (approximately U.S. $303,000).
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates fair
value due to the short maturity of these items.
Accrued interest payable: The carrying amount approximates fair value as the
majority of interest payments are made monthly or semiannually.
Long-term investment: The carrying value approximates fair value based on
discounted cash flows.
Long-term debt, senior subordinated debt and senior notes payable: The fair
value of the Company's long-term debt, senior subordinated debt and senior notes
payable is based on secondary market indicators. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics, including
remaining maturities, interest rates, credit rating, collateral, amortization
schedule and liquidity. The carrying amount approximates fair value.
Commodity collar transactions: The fair value of commodity collar
transactions is the amount at which they could be settled, based on estimates
obtained from dealers. The unrealized loss on the commodity collar transactions
at December 31, 1997 is approximately $76,000. At December 31, 1996 the
unrealized gain on the commodity collar transaction was approximately $167,000.
51
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
12. EMPLOYEE BENEFITS
STOCK OPTIONS
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"). The Company has adopted
FAS 123 effective January 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by FAS 123
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 ("1993 Plan"). On
June 12, 1996, the 1993 Plan was amended to (i) increase the maximum number of
shares of Common Stock issuable 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) extend the exercise period for Outside
Director's Options from two to ten years and increase the number of shares which
may be purchased under Outside Director's Options from 2,000 to 3,000; (iii)
specify 1,250,000 shares as the maximum number of shares issuable under the 1993
Plan to any employee in any year; (iv) permit the 1993 Plan administrator to
specify shorter vesting periods for non-qualified options; and (v) clarify that
cashless exercises of stock rights are permitted under the 1993 Plan.
Under the Company's stock option plan, options have been granted to outside
directors and certain key employees of the Company at prices equal to the fair
market value of the Company's stock on the date of grant and expire 10 years
from the date of grant. Stock options granted to outside directors are
exercisable immediately and stock options granted to key employees vest at a
rate of 20% per year.
A summary of the status of the Company's 1993 Plan, as amended, for the
years ended December 31, 1997, 1996 and 1995, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the year...... 743,954 $19.00 399,792 $13.94 576,221 $ 5.87
Granted................................. 188,973 19.31 455,750 24.08 129,311 22.72
Exercised............................... (58,667) 4.71 (13,684) 7.92 (305,740) 2.45
Forfeited...............................(292,477) 23.93 (97,904) 23.51 -- --
------- ------- -------
Outstanding, end of year................ 581,783 18.07 743,954 19.00 399,792 13.94
======= ======= =======
Options exercisable end of year......... 245,940 $13.50 222,918 $ 8.95 197,641 $ 7.34
======= ====== ======= ======== ======= =======
Weighted average fair value
of options granted during year $12.66 $ 15.64 $ 13.08
====== ======= =======
</TABLE>
52
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table summarizes the information about the 1993 Plan options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISABLE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.74 - 8.80 147,280 3.68 $ 6.28 147,280 $ 6.28
$17.25 - 21.13 201,507 8.72 18.41 26,000 20.01
$23.75 - 27.75 232,996 8.20 25.22 72,660 29.43
------- --------
581,783 7.23 $18.07 245,940 $13.50
======= =======
</TABLE>
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its 1993 Plan. Had
compensation cost for the Company's stock-based compensation plans been
determined on the fair value of the grant dates for awards under those plans
consistent with the method of FAS 123, the Company's net income, earnings per
basic share and earnings per diluted share would have been decreased to the pro
forma amounts indicated below (in thousands, except per share amounts):
DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
Net income:
As reported......................... $ 10,624 $ 9,961 $ 6,898
Pro forma........................... $ 9,289 $ 8,173 $ 6,427
Basic earnings per share:
As reported......................... $ 1.16 $ 1.09 $ 0.79
Pro forma........................... $ 1.01 $ 0.90 $ 0.74
Diluted earnings per share:
As reported......................... $ 1.15 $ 1.08 $ 0.78
Pro forma........................... $ 1.01 $ 0.89 $ 0.72
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively:
Dividend yield of 0.0% for all years; expected volatility of 42.2%, 42.5%
and 42.0%; risk-free interest rates of 6.5%, 6.1% and 6.8%; and expected lives
of 10, 8.4 and 6 years.
EMPLOYEE BONUS PROGRAM
The Company has various performance-based, cash incentive compensation
programs which include all employees. Total cash incentive compensation of
approximately $3,081,000, $2,350,000 and $2,249,000 was awarded under the
various incentive compensation programs in 1997, 1996 and 1995, respectively.
53
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In addition, headquarters' senior management, railroad general managers and
executive management are also awarded, through the 1993 Plan, stock options and
performance shares on an annual basis. Employees must be employed by the Company
at the end of three years from the date of the award to receive the performance
shares. During the three year period, the number of shares to be awarded can
increase by a maximum of 200.0% or decrease to zero as determined by the
Company's total shareholder return as compared to benchmarks, as defined in the
plan. As of December 31, 1997, a total of 19,949 performance shares had been
granted for potential future distribution in the year 2000. At December 31,
1997, the Company had not recorded any compensation expense related to the
performance shares.
RETIREMENT PLANS
The Company has a 401(k) profit sharing plan ("401(k) Plan") for all
eligible employees of the Company, as defined in the 401(k) Plan document. The
401(k) Plan qualifies under Section 401(k) of the Internal Revenue Code as a
salary reduction plan. Employees may elect to contribute a certain percentage of
their salary on a before-tax basis. Employees are immediately fully vested in
their contributions and begin vesting in employer contributions after one year
of service, as defined in the 401(k) Plan document. The 401(k) Plan is a defined
contribution plan with employer contributions made solely at the discretion of
the Board of Directors.
Effective July 1, 1995, the 401(k) Plan was amended to provide for a Company
matching contribution for certain employees of RailTex, Inc., the parent
company, who are not covered under the Railroad Retirement and Railroad
Unemployment Insurance Acts ("The Retirement Acts"). The Company matches
employee contributions, for these employees, at the rate of 200.0% on employee
contributions up to 5.0% of eligible compensation. Employees begin vesting in
the employer matching contributions after one year of service. Company matching
contributions to the 401(k) Plan totaled $230,000, $134,000 and $58,000 in 1997,
1996 and 1995, respectively.
EMPLOYEE OPEN MARKET STOCK PURCHASE PLAN
The Company has an Employee Open Market Stock Purchase Plan ("Stock Purchase
Plan"). The purpose of the Stock Purchase Plan is to allow employees of the
Company to participate in the Company's future. The Stock Purchase Plan is a
payroll deduction plan which permits employees who meet specified length of
service requirements to purchase shares, on an after-tax basis, of the Company's
common stock on the open market at prevailing market prices. The Company pays
the brokerage commissions on all purchases and incurs the administrative
expenses associated with the Stock Purchase Plan. Stock Purchase Plan expenses
in 1997, 1996 and 1995 were not significant.
EXECUTIVE DEFERRED COMPENSATION
During 1995, the Company implemented an Executive Deferred Compensation Plan
wherein certain key employees are provided with life insurance protection in an
amount sufficient to provide supplemental income, based upon a percentage of the
employee's base salary, at retirement.
The Executive Deferred Compensation Plan is funded through the purchase of
split-dollar life insurance contracts. Upon death or retirement, the participant
or the participant's estate must reimburse the Company for all policy premiums
paid. Also, should employment terminate prior to death or retirement, the
participant may forfeit, at the discretion of the Compensation Committee, any
future rights in the insurance policy. Premiums paid under this Plan for 1997,
1996 and 1995 were approximately $311,000, $309,000 and $272,000, respectively.
The combined cash surrender value of these policies was approximately $468,000
and $227,000 at December 31, 1997 and 1996, respectively.
54
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company does not provide post-retirement or post-employment benefits to
its employees.
13. INCOME TAXES
Income tax expense consisted of the following (in thousands):
YEARS ENDED DECEMEBER 31,
------------------------------------
1997 1996 1995
------ ------ ------
UNITED STATES:
Federal--
Current .................... $2,358 $1,702 $2,044
Deferred ................... 1,837 2,941 1,013
------ ------ ------
4,195 4,643 3,057
------ ------ ------
State--
Current .................... 965 771 457
Deferred ................... 36 140 67
------ ------ ------
1,001 911 524
------ ------ ------
FOREIGN:
Current .................... 543 811 904
Deferred ................... 309 343 291
------ ------ ------
852 1,154 1,195
------ ------ ------
$6,048 $6,708 $4,776
====== ====== ======
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax liability
(in thousands):
DECEMBER 31,
---------------------
1997 1996
--------- ---------
Differences in depreciation and amortization ........... $ 18,362 $ 13,894
Accruals and reserves not deducted for tax purposes
until paid or realized .............................. (2,566) (985)
Federal benefit of state taxes ......................... (379) (328)
Deferred taxes related to acquisition .................. 4,100 4,100
Other items, net ....................................... (17) (119)
Charitable contribution carryforward ................... (1,206) --
Valuation allowance .................................... 450 --
-------- --------
Net deferred tax liability ........................ $ 18,744 $ 16,562
======== ========
The Company recorded a valuation allowance of $450,000 against its
charitable contribution carryforward at December 31, 1997. There were no
valuation allowances against deferred tax assets at December 31, 1996.
55
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The reconciliation of the U.S. statutory tax rate to the effective income
tax rate follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ----- -----
United States statutory rate ....................... 35.0% 34.3% 34.0%
Effect of foreign operations ....................... 1.3 0.9 1.2
State income taxes, net of federal income
tax benefit ...................................... 5.0 5.0 5.7
Contribution for tax purposes, net of
valuation allowance .............................. (5.0) -- --
---- ---- ----
36.3% 40.2% 40.9%
==== ==== ====
14. LEASES
Operating lease expense for the years ended December 31, 1997, 1996 and 1995
was approximately $6,080,000, $4,929,000 and $4,486,000, respectively.
The minimum future lease payments for equipment and facilities under
non-cancelable leases are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
---------- ---------
YEAR ENDED DECEMBER 31,
1998 ............................................. $ 5,778 $1,056
1999 ............................................. 5,213 893
2000 ............................................. 3,955 602
2001 ............................................. 2,638 420
2002 ............................................. 2,595 219
Thereafter ....................................... 3,265 --
-------- ------
Total minimum payments ........................... $ 23,444 3,190
========
Less amount representing interest at rates
ranging from 7.25% to 10.37% ................. (300)
------
Present value of minimum lease payments ........ $2,890
======
The Company has entered into various lease agreements covering certain of
its railroad properties. For railroad properties it leases, the Company
ordinarily assumes upon the commencement date all operating and financial
responsibilities including maintenance, payment of property taxes and regulatory
compliance. Lease payments on three railroad properties leased from one lessor
are structured to ensure that the Company interchanges an agreed-upon percentage
of outbound carloads with the lessor railroad. Under these leases, no payments
to the lessor are required as long as a minimum percentage of traffic volume is
interchanged with the lessor, therefore the Company controls the amounts which
may be payable under these leases. These leases are subject to an initial 20
year term with one or more renewal terms at the Company's option. In addition,
lease payments on five properties leased from two other major railroads are
subject to reduction from the base rate, down to zero, depending upon the level
of traffic interchanged with the lessors. The maximum annual aggregate base rate
lease payments under these leases is approximately $1.7 million. These leases
have initial lease terms of five years to 20 years and leases on four of the
five properties include purchase options which may be exercised by the Company
after three years of operation. No payments have been required under any of the
Company's railroad property leases, and the Company anticipates that its traffic
interchange for the foreseeable future will not result in any rentals being
incurred under these railroad property leases. Therefore, the above table does
not include any rentals pertaining to the Company's railroad property leases.
56
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
The Company has added railroad properties to its portfolio through the
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 Rail Corp. which was structured as an acquisition
of stock, the Company typically does not contractually assume any of the
operations or liabilities of the divesting carriers.
Rail properties operated by the Company under management agreements
typically have initial ten year terms followed by either a purchase option or
one or more renewal terms at the Company's option. These operating contracts
typically require that the Company assume all operating and financial
responsibilities for freight operations on the property including maintenance,
payment of property taxes and regulatory compliance. Payments by the Company for
the right to conduct rail operations on these properties are typically
calculated as a percentage of revenues from the respective properties.
In connection with the lease of one of its railroad properties, the Company
has committed to upgrade approximately 107 miles of track, net of abandonments,
to Class II standards as defined by the Federal Railroad Administration ("FRA")
by October 1998. Management now estimates the cost of this upgrade to be
approximately $2.0 million, net of state funding; however, the Company is
negotiating with the lessor to extend this period or abandon the portion of the
track that will not be upgraded through state funds.
In August 1995, the Company entered into a ten year Information Technology
Services Agreement ("ITS Agreement") with Electronic Data Systems Corporation
("EDS"). Under the ITS Agreement, EDS is responsible for the management
information systems of the Company, including developing, obtaining licenses for
and maintaining new software for the Company, coordinating the acquisition and
maintenance of computers and related equipment and coordinating the maintenance
of the Company's existing software. The Company currently pays EDS $1.8 million
annually which is subject to annual escalation based on the Consumer Price
Index. The ITS Agreement is subject to earlier termination under certain limited
conditions.
Under certain limited circumstances, two of the Company's railroads may be
repurchased by the selling carrier for their original purchase prices. It is
management's opinion that the likelihood of these properties being repurchased
is remote.
The Oregon Department of Environmental Quality ("DEQ") has filed an
administrative action against one of the Company's railroads for alleged
violations of the Clean Water Act by the disposal of landslide debris into a
waterway. The administrative action requires the railroad to cease and desist
all further disposal of slide material and to develop a plan for the appropriate
disposal of future material and subjects the Company to a potential civil
penalty of up to $10,000 per day of violation. Upon receipt of the
administrative action the Company filed an answer denying the charges and
asserted various affirmative defenses to the violation and requested an informal
conference to see if the matter could be resolved. The representatives from the
DEQ and the Company met in November 1997 to discuss an informal resolution of
the administrative proceedings and the DEQ agreed to dismiss the administrative
enforcement actions if the Company would develop, with the assistance of an
appropriate environmental consultant, a landslide excavation and debris disposal
plan. A plan was prepared, with the assistance of an environmental consultant,
which has been submitted to the DEQ. The DEQ has not responded formally but the
Company believes it will be able to resolve the matter and have the
administrative proceedings withdrawn.
57
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In connection with the alleged Clean Water Act violation discussed above,
the Environmental Protection Agency ("EPA") has commenced a criminal
investigation. In connection with the investigation, a subpoena was issued on
October 29, 1997, requesting various documents from the Company. The Company
complied with the subpoena and there has been no additional action by the EPA.
The Company intends to vigorously defend its position but is unable to predict
the outcome of this investigation.
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 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 the purchase of the assets of the former Detroit, Toledo
and Ironton ("DTI") on February 15, 1997, the Company committed to return the
DTI track to Federal Railroad Administration Class IV standard, over a three
year period. As a result, at December 31, 1997, the Company has spent
approximately $7.0 million and expects to spend an additional $5.0 million on
the rehabilitation project in 1998.
The Company maintains insurance to cover costs associated with personal
injury, including death, and property damage, including derailments. The
Company's liability policies, which include third party property damage, are
currently subject to a self-insured retention of $500,000 per occurrence. With
respect to its transportation of hazardous commodities, the Company's liability
policies cover sudden releases of hazardous materials, including expenses
related to evacuation. Personal injuries associated with grade crossing
accidents and damage to property of shippers are also covered under the
Company's liability policies. The Company property damage policies, which cover
owned/leased property, are currently subject to a self-insured retention of
$100,000 per occurrence.
The Company's railroad employees are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths of
railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims are
covered under the Company's liability insurance policies.
The Company is a defendant in certain lawsuits resulting from railroad
operations. In management's judgment, based on the opinion of the Company's
legal counsel, 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.
58
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
16. FOREIGN AND DOMESTIC OPERATIONS
Financial information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Operating revenues from unaffiliated customers:
United States....................................... $135,992 $106,937 $93,586
Canada.............................................. 12,799 14,169 14,255
--------- -------- ---------
Total operating revenues.......................... $148,791 $121,106 $107,841
========= ======== =========
Operating income:
United States ...................................... $ 19,096 $17,793 $11,559
Canada ............................................. 3,905 4,248 4,096
--------- -------- --------
Total operating income............................ $ 23,001 $22,041 $15,655
========= ======== ========
Identifiable assets:
United States ...................................... $274,994 $220,857 $177,719
Canada ............................................. 21,855 21,488 23,186
--------- --------- ---------
Total identifiable assets ........................ $296,849 $242,345 $200,905
========= ======== =========
</TABLE>
17. ACQUISITIONS
On February 15, 1997, a wholly-owned subsidiary of the Indiana & Ohio Rail
Corp., Indiana & Ohio Railway Company ("IORY"), purchased substantially all of
the assets of the former DTI from the Grand Trunk Western Railroad, Inc., a
subsidiary of CN. IORY acquired 146 miles of track for $22.0 million and, with
trackage rights, will operate over 255 miles of track between Detroit, Michigan
and Cincinnati, Ohio. IORY committed to return the former DTI track to Federal
Railroad Administration Class IV standards, over a three year period. As a
result, at December 31, 1997, the Company has spent $7.0 million and expects to
spend an additional $5.0 million on the rehabilitation project in 1998. In
addition, up to $5.0 million of the purchase price is subject to reimbursement
if certain levels of carloadings are not achieved within a specified time period
as detailed in the purchase and sale agreement. The DTI acquisition was funded
through borrowings under the Company's U.S. Acquisition Facility.
On December 7, 1996, a wholly owned subsidiary of the Company, the
Pittsburgh Industrial Railroad, Inc. ("PIRR"), purchased from Consolidated Rail
Corporation ("Conrail") certain assets consisting of 42 miles of track located
in the Pittsburgh metropolitan area. The purchase price was $3.0 million and was
funded by borrowings under the Company's U.S. Acquisition Facility. This
transaction has been accounted for as a purchase of assets.
On November 2, 1996, a newly formed wholly owned subsidiary of the Company,
the Ontario L'Orignal Railway, Inc. ("OLOR"), purchased from CN certain assets
consisting of 26 miles of track in eastern Ontario, Canada. The OLOR was granted
rights by CN to operate the property and commenced operations on November 2,
1996 and the acquisition closed on December 2, 1996. The purchase price was CDN
$1.1 million (approximately U.S. $800,000) and was funded by borrowings under
the Company's Canadian Acquisition Facility. This transaction has been accounted
for as a purchase of assets.
On September 21, 1996, a newly formed wholly owned subsidiary of the
Company, Connecticut Southern Railroad, Inc. ("CSOR"), purchased from Conrail
certain assets including 23 miles of rail segments located in Connecticut and
six locomotives. The CSOR was also granted rights to operate over an additional
55 miles of track, from just north of New 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. This transaction has been accounted for as a purchase of
assets.
59
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
On June 4, 1996, the Company acquired 100% of the outstanding stock of the
Indiana & Ohio Rail Corp. ("INOH"), an existing short line railroad
headquartered in Cincinnati, Ohio. Through its subsidiaries, the INOH operates
ten 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 after completion of the acquisition. This
acquisition was funded by borrowings under the Company's U.S. Acquisition
Facility. 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.
In May 1994, the Company entered into a letter of intent with an affiliate
of CN to acquire certain assets of the Central Vermont Railway, Inc. ("Central
Vermont"). These assets consisted primarily of a 325 mile line in New England
extending from East Alburg, Vermont to New London, Connecticut. The purchase
price, including related costs, was $40.2 million. The Central Vermont connects
with several carriers, including the CN, Conrail and nine regional or short line
railroads. On October 6, 1994, a newly formed subsidiary of the Company, New
England Central Railroad, Inc. ("NECR") executed definitive documentation for
the transaction with the selling parties. The NECR commenced operations on
February 4, 1995. In connection with the acquisition, the Company borrowed $41.1
million under its acquisition facility. The Company accounted for this business
combination as a purchase in 1995. 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 of the contracts of the Central Vermont.
The following unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995, assumes the acquisition of the NECR and the INOH
occurred as of the beginning of the respective periods. (in thousands, except
per share amounts.)
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995
-------- --------
(Unaudited)
Operating revenues..................... $123,848 $116,828
======== ========
Net income............................. $9,828 $7,505
======== ========
Net income per share................... $1.07 $0.82
======== ========
These pro forma 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. The unaudited pro forma information is not
necessarily indicative of the results that would have occurred had such
transactions actually taken place at the beginning of the periods specified nor
does such information purport to project the results of operations for any
future date or period.
18. SECURITIES OFFERINGS
In March 1995, the Company completed an underwritten public offering of
Common Stock ("Secondary Offering") of which 1,150,000 shares were sold by the
Company and 1,165,000 shares were sold by certain selling shareholders. The
number of shares sold by the Company reflects the underwriters' exercise of
their over-allotment
60
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
option. Net proceeds to the Company from the Secondary Offering were
approximately $25.4 million. Approximately $25.3 million of the net proceeds was
used to reduce borrowings outstanding under the Company's 1995 U.S. Acquisition
Facility and 1995 U.S. Working Capital Facility. Concurrent with the closing of
the Secondary Offering, a former officer and current director of the Company
exercised options to purchase 286,322 shares of Common Stock and paid such
options exercise price by tendering 23,416 shares of Common Stock to the
Company. The shares of Common Stock tendered by such former officer were
canceled by the Company. Also, concurrent with the closing of the Secondary
Offering, the Company's $5.0 million Convertible Senior Subordinated Notes due
January 2003 were converted into 520,833 shares of Common Stock (see Note 10).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
The remainder of this page is intentionally left blank
61
<PAGE>
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I for information
regarding executive officers of the Company. Information regarding the Directors
of the Company is incorporated by reference to the caption "Election of
Directors" in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's fiscal year
covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation is incorporated by reference to
the caption "Executive Compensation" in the Company's definitive Proxy Statement
to be filed pursuant to the Regulation 14A within 120 days after the end of the
Company's fiscal year covered by this Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the caption "Principal and Management
Shareholders" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
covered by this Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is
incorporated by reference to the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement to be filed pursuant
to regulation 14A within 120 days after the end of the Company's fiscal year
covered by this Report on Form 10-K.
The remainder of this page is intentionally left blank.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. DOCUMENTS
The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants ........................... 37
Consolidated Statements of Income for the Three
Years Ended December 31, 1997 .................................... 38
Consolidated Balance Sheets at December 31, 1997 and 1996 .......... 39
Consolidated Statements of Shareholders' Equity for
the Three Years Ended December 31, 1997 .......................... 40
Consolidated Statements of Cash Flow for the
Three Years Ended December 31, 1997 .............................. 41
Notes to Consolidated Financial Statements ......................... 42
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------
*3(i) Restated Articles of Incorporation of the Company.
3(ii) Amended 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.
63
<PAGE>
+++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.
10.6 Fourth Amendment to Credit Agreement, dated December 5, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.
10.7 Fifth Amendment to Credit Agreement, dated November 14, 1997,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.
*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.
64
<PAGE>
*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.
*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 Form of Severance Agreement between the Company and its
executive officers.
*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 Letter of Intent, dated February 11, 1998, confirming amendments
to Loan Agreement between RailTex Canada, Inc., National Bank of
Canada, as Agent and several financial institutions that are
parties to the loan 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.
65
<PAGE>
***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.
***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 to the 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 ("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 (This exhibit is intentionally left blank).
+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.
++++10.52 The Note Agreement, dated as of July 22, 1997, between the
Company and the Purchasers named on Schedule I to the Note
Agreement.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule
- ------------------------
66
<PAGE>
* 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 ("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 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 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.
+ These exhibits are incorporated by reference to the same Exhibit to the
Registrants 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.
+++ These exhibits are incorporated by reference to the same Exhibit to the
Registrant's Quarterly Report on Form10-Q for the quarterly period
ended September 30, 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, 1997.
B. REPORTS ON FORM 8-K:
No Reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
67
<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.
(Registrant)
By: /S/ BRUCE M. FLOHR
Name: Bruce M. Flohr
Title: Chairman of the Board,
Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
SIGNATURES TITLE
/s/ BRUCE M. FLOHR Chairman of the Board,
Bruce M. Flohr Chief Executive
Officer and Director
/s/ LAURA D. DAVIES Vice President-Finance,
LAURA D. Davies Chief Financial
Officer and Director
/s/ CLEMENT J. WYDRA Controller and Chief Accounting
Clement J. Wydra Officer
/s/ ROBERT R. LENDE Director
Robert R. Lende
/s/ ROBERT M. AYRES, JR. Director
Robert M. Ayres, Jr.
/s/ HEATHER J. GRADISON Director
Heather J. Gradison
/s/ FERD. C. MEYER, JR. Director
Ferd. C. Meyer, Jr.
/s/ PALMER L. MOE Director
Palmer L. Moe
68
EXHIBIT 3(ii)
BYLAWS
OF
RAILTEX, INC.,
A TEXAS CORPORATION
<PAGE>
BYLAWS OF RAILTEX, INC.
A TEXAS CORPORATION
PAGE
ARTICLE 1. Offices........................................................ 1
1.1 Registered Office............................................... 1
1.2 Other Offices................................................... 1
ARTICLE 2. Shareholders................................................... 1
2.1 Place of Meetings............................................... 1
2.2 Annual Meetings................................................. 1
2.3 Voting List..................................................... 1
2.4 Special Meetings................................................ 1
2.5 Notice.......................................................... 1
2.6 Quorum.......................................................... 2
2.7 Majority Vote; Withdrawal of Quorum............................. 2
2.8 Method of Voting................................................ 2
2.9 Record Date; Closing Transfer Books............................. 2
2.10 Action Without Meeting.......................................... 2
2.11 Telephone and Similar Meetings.................................. 3
2.12 Order of Business at Meetings................................... 3
ARTICLE 3. Directors...................................................... 3
3.1 Management...................................................... 3
3.2 Number; Qualification; Election; Term........................... 3
3.3 Change in Number................................................ 3
3.4 Removal......................................................... 4
3.5 Vacancies....................................................... 4
3.6 Election of Directors........................................... 4
3.7 Place of Meetings............................................... 4
3.8 First Meeting................................................... 4
3.9 Regular Meetings................................................ 4
3.10 Special Meetings................................................ 4
3.11 Quorum; Majority Vote........................................... 4
3.12 Compensation.................................................... 5
3.13 Procedure....................................................... 5
3.14 Action Without Meeting.......................................... 5
3.15 Telephone and Similar Meetings.................................. 5
3.16 Interested Directors, Officers and Shareholders................. 5
i
<PAGE>
ARTICLE 4. Committees..................................................... 6
4.1 Designation...................................................... 6
4.2 Term............................................................. 6
4.3 Authority........................................................ 6
4.4 Change in Number................................................. 7
4.5 Removal.......................................................... 7
4.6 Vacancies........................................................ 7
4.7 Meetings......................................................... 7
4.8 Quorum; Majority Vote............................................ 8
4.9 Compensation..................................................... 8
4.10 Procedure....................................................... 8
4.11 Action Without Meeting.......................................... 8
4.12 Telephone and Similar Meetings.................................. 8
4.13 Responsibility.................................................. 8
ARTICLE 5. Notice......................................................... 8
5.1 Method........................................................... 8
5.2 When Notice Not Required......................................... 9
5.3 Waiver........................................................... 9
ARTICLE 6. Officers and Agents............................................ 9
6.1 Number; Qualification; Election; Term............................ 9
6.2 Removal.......................................................... 10
6.3 Vacancies........................................................ 10
6.4 Authority........................................................ 10
6.5 Compensation..................................................... 10
6.6 Chairman of the Board............................................ 10
6.7 President........................................................ 10
6.8 Vice Presidents.................................................. 10
6.9 Secretary........................................................ 10
6.10 Assistant Secretaries........................................... 11
6.11 Treasurer....................................................... 11
6.12 Assistant Treasurers............................................ 11
6.13 Controller...................................................... 11
6.14 Assistant Controllers........................................... 12
6.15 Designation of an Officer as the Chief Executive Officer........ 12
6.16 Designation of an Officer as the Chief Operating Officer........ 12
6.17 Designation of an Officer as the Chief Financial Officer........ 12
ARTICLE 7. Certificates and Shareholders.................................. 12
7.1 Certificates..................................................... 12
ii
<PAGE>
7.2 Issuance......................................................... 12
7.3 Payment for Shares............................................... 12
7.4 Subscriptions.................................................... 13
7.5 Lien............................................................. 13
7.6 Lost, Stolen or Destroyed Certificates........................... 13
7.7 Registration of Transfer......................................... 14
7.8 Registered Owner................................................. 14
ARTICLE 8. General Provisions............................................. 14
8.1 Distributions; Share Dividends................................... 14
8.2 Books and Records................................................ 15
8.3 Annual Statement................................................. 15
8.4 Checks and Notes................................................. 15
8.5 Fiscal Year...................................................... 15
8.6 Seal............................................................. 15
8.7 Indemnification; Insurance....................................... 15
8.8 Resignation...................................................... 16
8.9 Amendments of Bylaws............................................. 16
8.10 Construction.................................................... 16
8.11 Table of Contents; Headings..................................... 17
8.12 Relation to Articles of Incorporation........................... 17
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ARTICLE 1. OFFICES
1.1 REGISTERED OFFICE. The registered office of the Corporation shall be at 4040
Broadway, Suite 200, San Antonio, Texas 78209.
1.2 OTHER OFFICES. The Corporation may also have offices at other places in or
out of the State of Texas as the Board of Directors may determine or as the
business of the Corporation may require.
ARTICLE 2. SHAREHOLDERS
2.1 PLACE OF MEETINGS. Meetings of Shareholders shall be held at the time and
place, in or out of the State of Texas, stated in the notice of the meeting or
in a waiver of notice.
2.2 ANNUAL MEETINGS. An annual meeting of the Shareholders shall be held each
year on a day and at a time to be chosen by the Board of Directors. At the
meeting, the Shareholders shall elect Directors and transact such other business
as may properly be brought before the meeting.
2.3 VOTING LIST. At least ten (10) days before each meeting of Shareholders
entitled to vote at the meeting, a complete list of the Shareholders entitled to
vote at the meeting, arranged in alphabetical order, with the address of each
and the number of voting shares held by each, shall be prepared by the officer
or agent having charge of the stock transfer books. The list, for a period of
ten (10) days prior to the meeting, shall be kept on file at the registered
office of the Corporation and shall be subject to inspection by any Shareholder
at any time during usual business hours. The list shall also be produced and
kept open at the time and place of the meeting during the whole time thereof,
and shall be subject to the inspection of any Shareholder during the whole time
of the meeting.
2.4 SPECIAL MEETINGS. Special meetings of the Shareholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Articles of
Incorporation, or by these Bylaws, may be called by the Chairman of the Board,
the President, the Board of Directors, or the holders of not less than one-tenth
(1/10th) of all the shares entitled to vote at the meetings. Business transacted
at a special meeting shall be confined to the purposes stated in the notice of
the meeting.
2.5 NOTICE. Written or printed notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the date of the meeting, either personally or by mail, by or at
the direction of the Chairman of the Board, the President, the Secretary, or the
officer or person calling the meeting, to each Shareholder of record entitled to
vote at the meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the Shareholder at his address
as it appears on the stock transfer books of the Corporation, with postage
thereon prepaid.
2.6 QUORUM. The holders of a majority of the shares issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at meetings of the Shareholders for the
transaction of business except as otherwise provided by
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statute, by the Articles of Incorporation or by these Bylaws. If a quorum is not
present or represented at a meeting of the Shareholders, the Shareholders
entitled to vote, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At an adjourned meeting
at which a quorum is present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
2.7 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at a meeting,
the vote of the holders of a majority of the shares entitled to vote on, and
voted for or against, that matter shall decide any question brought before the
meeting, unless the question is one on which, by express provision of the
statutes, the Articles of Incorporation, or these Bylaws, a higher vote is
required, in which case the express provision shall govern. The Shareholders
present at a duly constituted meeting may continue to transact business until
adjournment, and the subsequent withdrawal from the meeting of any Shareholder
represented in person or by proxy to vote shall not affect the presence of a
quorum at a meeting.
2.8 METHOD OF VOTING. Each outstanding share, regardless of class, shall be
entitled to one (1) vote on each matter submitted to a vote at a meeting of
Shareholders, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation. At any
meeting of the Shareholders, every Shareholder having the right to vote may vote
either in person, or by proxy executed in writing by the Shareholder or by his
duly authorized attorney-in-fact. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law. Each proxy shall be
filed with the Secretary of the Corporation prior to or at the time of the
meeting. Voting for Directors shall be in accordance with Section 3.6 of these
Bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case written ballots shall be used.
2.9 RECORD DATE; CLOSING TRANSFER BOOKS. The Board of Directors may fix in
advance a record date for the purpose of determining Shareholders entitled to
notice of or to vote at a meeting of the Shareholders, such record date to be
not less than ten (10) nor more than sixty (60) days prior to the meeting; or
the Board of Directors may close the stock transfer books for such purpose for a
period of not less than ten (10) nor more than sixty (60) days prior to such
meeting. In the absence of any action by the Board of Directors, the date upon
which the notice of meeting is mailed shall be the record date.
2.10 ACTION WITHOUT MEETING. Any action required by statute to be taken at a
meeting of the Shareholders, or any action which may be taken at a meeting of
the Shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the Shareholders
entitled to vote with respect to the subject matter thereof and such consent
shall have the same force and effect as a unanimous vote of the Shareholders.
The consent may be in more than one counterpart so long
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as each Shareholder signs one of the counterparts. The signed consent, or a
signed copy, shall be placed in the Minute Book.
2.11 TELEPHONE AND SIMILAR MEETINGS. Shareholders may participate in and hold a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.
2.12 ORDER OF BUSINESS AT MEETINGS. The order of business at annual meetings and
so far as practicable at all other meetings of Shareholders shall be set by the
Board of Directors.
ARTICLE 3. DIRECTORS
3.1 MANAGEMENT. The business and affairs of the Corporation shall be managed by
the Board of Directors who may exercise all such powers of the Corporation and
do all such lawful acts and things as are not (by statute or by the Articles of
Incorporation or by these Bylaws) directed or required to be exercised or done
by the Shareholders.
3.2 NUMBER; QUALIFICATION; ELECTION; TERM. The Board of Directors shall consist
of no fewer than three (3) nor more than ten (10) Directors, none of whom need
to be a Shareholder or a resident of any particular state. The Directors of the
Corporation shall be divided into three classes as nearly equal in size as is
practicable, hereby designated Class I, Class II and Class III. The term of
office of the initial Class I Directors shall expire at the next succeeding
annual meeting of the Shareholders after the 1995 annual meeting of
Shareholders, the term of office of the initial Class II Directors shall expire
at the second succeeding annual meeting of Shareholders after the 1995 annual
meeting of Shareholders and the term of office of the initial Class III
Directors shall expire at the third succeeding annual meeting of the
Shareholders after the 1995 annual meeting of Shareholders. All of the initial
Class I, Class II and Class III Directors shall be elected at the Corporation's
1995 annual meeting of Shareholders. At each annual meeting after the 1995
annual meeting of Shareholders, Directors elected to replace those of a Class
whose terms expire at such annual meeting shall be elected to hold office until
the third succeeding annual meeting and until their respective successors shall
have been duly elected and shall qualify. If the number of Directors is
hereafter changed, any newly created directorships or decrease in directorships
shall be so appointed among the classes as to make all classes as nearly equal
in number as is practicable.
3.3 CHANGE IN NUMBER. The number of Directors may be increased or decreased from
time to time by amendment to these Bylaws, but no decrease shall have the effect
of shortening the term of any incumbent Director. Any directorship to be filled
by reason of an increase in the number of Directors may be filled (i) by the
Board of Directors for a term of office continuing only until the next election
of one or more directors by the Shareholders, provided that the Board of
Directors may not fill more than two (2) such
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directorships during the period between any two successive annual meetings of
Shareholders, or (ii) by election at an annual meeting or at a special meeting
of Shareholders called for that purpose.
3.4 REMOVAL. Any Director may be removed either for or without cause at any
special or annual meeting of Shareholders, by the affirmative vote of a majority
in number of shares of the Shareholders present, in person or by proxy, at such
meeting and entitled to vote for the election of such Director if notice of
intention to act upon such matter shall have been given in the notice calling
such meeting.
3.5 VACANCIES. Any vacancy occurring in the Board of Directors (by death,
resignation, removal or otherwise) may be filled by majority vote of the
remaining Directors though less than a quorum of the Board of Directors. A
Director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.
3.6 ELECTION OF DIRECTORS. Directors shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
Directors at a meeting of Shareholders at which a quorum is present.
Cumulative voting shall not be permitted.
3.7 PLACE OF MEETINGS. Meetings of the Board of Directors, regular or special,
may be held in or out of the State of Texas.
3.8 FIRST MEETING. The first meeting of a Board of Directors shall be held
without further notice immediately following the annual meeting of Shareholders,
and at the same place, unless by unanimous consent of the Directors then elected
and serving the time or place is changed.
3.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held
without notice of such time and place as shall from time to time be determined
by the Board of Directors.
3.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called
by the Chairman of the Board or President on three (3) days' notice to each
Director, either personally or by mail or by telegram. Special meetings shall be
called by the Chairman of the Board, the President or Secretary in like manner
and on like notice on the written request of two Directors. Except as otherwise
expressly provided by statute, the Articles of Incorporation, or these Bylaws,
neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in a notice or waiver of notice.
3.11 QUORUM; MAJORITY VOTE. At meetings of the Board of Directors a majority of
the Directors shall constitute a quorum for the transaction of business. The act
of a majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, except as otherwise specifically
provided by statute, the Articles of Incorporation, or these Bylaws. If a quorum
is not present at a meeting of the Board of Directors, the Directors present may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present.
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3.12 COMPENSATION. By resolution of the Board of Directors, the Directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as Director. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may,
by resolution of the Board of Directors, be allowed like compensation for
attending committee meetings.
3.13 PROCEDURE. The Board of Directors shall keep regular Minutes of its
proceedings. The Minutes shall be placed in the Minute Book of the Corporation.
3.14 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all the members of the
Board of Directors. Such consent shall have the same force and effect as a
unanimous vote at a meeting. The signed consent, or a signed copy, shall be
placed in the Minute Book. The consent may be in more than one counterpart so
long as each Director signs one of the counterparts.
3.15 TELEPHONE AND SIMILAR MEETINGS. Directors may participate and hold a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in a meeting for the express purpose
of objecting to the transaction of any business on the grounds that the meeting
is not lawfully called or convened.
3.16 INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS.
A. VALIDITY. If paragraph B of this Section 3.16 is satisfied, no
contract or other transaction between the Corporation and any of its Directors,
officers or security holders, or any corporation or firm in which any of them
are directly or indirectly interested, shall be invalid solely because of this
relationship or because of the presence of the Director, officer or security
holder at the meeting authorizing the contract or transaction, or his
participation or vote in the meeting or authorization.
B. DISCLOSURE, APPROVAL; FAIRNESS. Paragraph A of this Section shall
apply only if:
1. the material facts of the relationship or interest of each such
Director, officer or security holder are known or disclosed:
(a) to the Board of Directors and it nevertheless authorizes
or ratifies the contract or transaction by a majority of the Directors present,
each such interested Director to be counted in determining whether a quorum is
present but not in calculating the majority necessary to carry the vote; or
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(b) to the Shareholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the shares present, each
such interested person to be counted for quorum and voting purposes; or
2. the contract or transaction is fair to the Corporation as of the
time it is authorized or ratified by the Board of Directors or the Shareholders.
C. NON-EXCLUSIVE. This provision shall not be construed to
invalidate a contract or transaction which would be valid in the absence of this
provision.
ARTICLE 4. COMMITTEES
4.1 DESIGNATION. The Board of Directors may, by resolution adopted by a majority
of the full Board of Directors, designate from among its members one or more
committees, each of which shall be comprised of one or more of its members, and
may designate one or more of its members as alternate members of any committee,
who may, subject to the limitations imposed by the Board of Directors, replace
absent or disqualified members at any meeting of that committee.
4.2 TERM. All committees shall serve at the pleasure of the Board of Directors.
4.3 AUTHORITY. All committees, to the extent provided in such resolution, shall
have and may exercise all of the authority of the Board of Directors in the
management of the business and affairs of the Corporation. However, no committee
shall have the authority of the Board of Directors in reference to:
(a) amending the Articles of Incorporation, except that a
committee may, to the extent provided in the resolution
designating the committee or if permitted in the Articles of
Incorporation or these Bylaws, exercise the authority of the
Board of Directors vested in it in accordance with Article
2.13 of the Texas Business Corporation Act (the "TBCA");
(b) proposing a reduction of the stated capital of the Corporation
in the manner permitted by Article 4.12 of the TBCA;
(c) approving a plan of merger or share exchange of the
Corporation;
(d) recommending to the Shareholders the sale, lease or exchange
of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of
its business;
(e) recommending to the Shareholders a voluntary dissolution of
the Corporation or a revocation thereof;
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(f) amending, altering, or repealing these Bylaws or adopting new
Bylaws of the Corporation;
(g) filling vacancies in the Board of Directors;
(h) filling vacancies in or designating alternate members of any
such committee;
(i) filling any directorship to be filled by reason of an increase
in the number of Directors;
(j) electing or removing officers of the Corporation or members or
alternate members of any such committee;
(k) fixing the compensation of any member of such committee;
(l) altering or repealing any resolution of the Board of Directors
which by its terms provides that it shall not be so amendable
or repealable;
(m) authorizing a distribution, unless the resolution designating
the particular committee or the Articles of Incorporation or
these Bylaws expressly so provide; or
(n) authorizing the issuance of shares of the Corporation, unless
the resolution designating the particular committee or the
Articles of Incorporation or these Bylaws expressly so
provide.
4.4 CHANGE IN NUMBER. The number of committee members of a particular committee
may be increased or decreased from time to time by resolution adopted by a
majority of the whole Board of Directors.
4.5 REMOVAL. Any member of a committee may be removed by the Board of Directors
by the affirmative vote of a majority of the whole Board of Directors, whenever
in its judgment the best interests of the Corporation will be served thereby.
4.6 VACANCIES. A vacancy occurring on a committee (by death, resignation,
removal or otherwise) may be filled by the Board of Directors in the manner
provided for original designation by Section 4.1 of these Bylaws.
4.7 MEETINGS. Time, place and notice (if any) of a committee meeting shall be
determined by the committee.
4.8 QUORUM; MAJORITY VOTE. At meetings of a committee, a majority of the number
of members designated by the Board of Directors shall constitute a quorum for
the transaction of business. The act of a majority
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of the members present at any meeting at which a quorum is present shall be the
act of the committee, except as otherwise specifically provided by statute, the
Articles of Incorporation or these Bylaws. If a quorum is not present at a
meeting of a committee, the members present may adjourn the meeting from time to
time, without notice other than an announcement at the meeting, until a quorum
is present.
4.9 COMPENSATION. By resolution of the Board of Directors, the members of a
committee may be paid their expenses, if any, of attendance at each meeting of
the committee and may be paid a fixed sum for attendance at each meeting of the
committee or a stated salary as a member of the committee. No such payment shall
preclude any committee member from serving the Corporation in any other capacity
and receiving compensation therefore.
4.10 PROCEDURE. Each committee shall keep regular Minutes of its proceedings and
report the same to the Board of Directors when required. The Minutes of the
proceedings of a committee shall be placed in the Minute Book of the
Corporation.
4.11 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a
meeting of a committee may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the
committee. Such consent shall have the same force and effect as a unanimous vote
at a meeting. The signed consent, or a signed copy, shall be placed in the
Minute Book.
4.12 TELEPHONE AND SIMILAR MEETINGS. Committee members may participate in and
hold a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in such meeting shall constitute presence in person at
the meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.
4.13 RESPONSIBILITY. The designation of a committee and the delegation of
authority to it shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed upon it or him by law; however, a
director shall not be liable for the acts of a committee to the maximum extent
permitted by law and shall not be liable if, in good faith and with ordinary
care, the director relies upon the statements, valuations, information,
opinions, reports or statements prepared or presented by a committee of which
the director is not a member.
ARTICLE 5. NOTICE
5.1 METHOD. Whenever by statute, the Articles of Incorporation, these Bylaws, or
otherwise, notice is required to be given to a Director, committee member, or
security holder, and no provision is made as to how the notice shall be given,
it shall not be construed to mean personal notice, but any such notice may be
given: (a) in writing, by mail, postage prepaid, addressed to the Director,
committee member, or security holder at the address appearing on the books of
the Corporation; or (b) in any other method permitted by
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law. Any notice required or permitted to be given by mail shall be deemed given
at the time when the same is deposited in the United States mail.
5.2 WHEN NOTICE NOT REQUIRED. Any notice required to be given to any
Shareholder, under any provision of any statute or the Articles of Incorporation
or these Bylaws, need not be given to a Shareholder if (i) notice of two
consecutive annual meetings and all notices of meetings held during the period
between those annual meetings, if any, or (ii) all (but in no event less than
two) payments (if sent by first class mail) of distributions or interest on
securities during a twelve-month period have been mailed to that person,
addressed at his address as shown on the records of the Corporation, and have
been returned undeliverable. Any action or meeting taken or held without notice
to such a person shall have the same force and effect as if the notice had been
duly given and, if the action taken by the Corporation is reflected in any
Articles or document filed with the Secretary of State, those Articles or that
document may state that notice was duly given to all persons to whom notice was
required to be given. If such a person delivers to the Corporation a written
notice setting forth his then current address, the requirement that notice be
given to that person shall be reinstated.
5.3 WAIVER. Whenever, by statute or the Articles of Incorporation or these
Bylaws, notice is required to be given to a security holder, committee member,
or Director, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated in such notice,
shall be equivalent to the giving of such notice. Attendance at a meeting shall
constitute a waiver of notice of such meeting, except where a person attends for
the express purpose of objecting to the transaction of any business on the
grounds that the meeting is not lawfully called or convened.
ARTICLE 6. OFFICERS AND AGENTS
6.1 NUMBER; QUALIFICATION; ELECTION; TERM.
A. The Corporation shall have: (1) a President and a Secretary; and
(2) such other officers (including Chairman of the Board, Vice President,
Treasurer and additional Vice Presidents) and assistant officers and agents as
the Board of Directors may deem necessary.
B. No officer or agent need be a Shareholder, a Director or a
resident of the Corporation's state of incorporation.
C. Officers named in Section 6.1(A)(1) shall be elected by the Board
of Directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Section 6.1(A)(2) may be elected by the
Board of Directors at any meeting.
D. Unless otherwise specified by the Board of Directors at the time
of election or appointment, or in an employment contract approved by the Board
of Directors, each officer's and agent's
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term shall end at the first meeting of Directors after the next annual meeting
of Shareholders. He shall serve until the end of his term or, if earlier, his
death, resignation, or removal.
E. Any two or more offices may be held by the same person.
6.2 REMOVAL. Any officer or agent elected or appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the best
interest of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself, nor shall
anything in these Bylaws, create contract rights.
6.3 VACANCIES. Any vacancy occurring in any office of the Corporation (by death,
resignation, removal or otherwise) may be filled by the Board of Directors.
6.4 AUTHORITY. Officers and agents shall have such authority and perform such
duties in the management of the Corporation as are provided in these Bylaws or
as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.
6.5 COMPENSATION. The compensation of officers and agents shall be fixed from
time to time by the Board of Directors.
6.6 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of the Board of Directors, and shall perform such duties and have such
authority and powers as the Board of Directors may from time to time prescribe.
6.7 PRESIDENT. The President shall perform such duties and have such authority
and powers as the Board of Directors may from time to time prescribe.
6.8 VICE PRESIDENTS. The Vice Presidents, in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and have the authority and
exercise the powers of the President. They shall perform such other duties and
have such other authority and powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.
6.9 SECRETARY.
A. The Secretary shall attend all meetings of the Board of Directors
and all meetings of the Shareholders and record all votes, actions and Minutes
of all proceedings in a Book to be kept for that purpose and shall perform like
duties for any committees when required.
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B. He shall give, or cause to be given, notice of all meetings of
the Shareholders and special meetings of the Board of Directors.
C. He shall keep in safe custody the seal of the Corporation, if
any, and, when authorized by the Board of Directors or any committee, affix it
to any instrument requiring it. When so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary.
D. He shall be under the supervision of the officer and shall
perform such other duties and have such other authority and powers as the Board
of Directors may from time to time prescribe or as the Board of Directors may
from time to time delegate.
6.10 ASSISTANT SECRETARIES. The Assistant Secretaries, in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Secretary, perform the duties and have the
authority to exercise the powers of the Secretary. They shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.
6.11 TREASURER.
A. The Treasurer shall have the custody of the corporate funds and
securities, shall keep full and accurate accounts of receipts and disbursements
of the Corporation, and shall deposit all funds and other valuables in the name
and to the credit of the Corporation in depositories designated by the Board of
Directors.
B. He shall disburse the funds of the Corporation as ordered by the
Board of Directors, and prepare financial statements as they direct.
C. If required by the Board of Directors, he shall give the
Corporation a bond (in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the Board of Directors) for the faithful performance
of the duties of his office and for the restoration of the Corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
D. He shall perform such other duties and have such other authority
and powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
6.12 ASSISTANT TREASURERS. The Assistant Treasurers, in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Treasurer, perform the duties and have the
authority and exercise the powers of the Treasurer. They shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe or the President may from time to time delegate.
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6.13 CONTROLLER. The Controller shall be in charge of the accounts of the
Company. The Controller shall have such other powers and perform such other
duties as may be assigned by the Board of Directors and shall submit such
reports and records to the Board of Directors as it may request.
6.14 ASSISTANT CONTROLLERS. Each Assistant Controller shall have such powers and
perform such duties as may be assigned by the Controller or the Board of
Directors.
6.15 DESIGNATION OF AN OFFICER AS THE CHIEF EXECUTIVE OFFICER. The Board of
Directors shall designate one of the elected officers as the chief executive
officer of the Company. The chief executive officer shall be in general and
active charge of the business and affairs of the Company.
6.16 DESIGNATION OF AN OFFICER AS THE CHIEF OPERATING OFFICER. The Board of
Directors may designate one of the elected officers the chief operating officer
of the Company with such powers and duties as may be assigned by the Board of
Directors.
6.17 DESIGNATION OF AN OFFICER AS THE CHIEF FINANCIAL OFFICER. The Board of
Directors may designate one of the elected officers the chief financial officer
of the Company with such powers and duties as may be assigned by the Board of
Directors.
ARTICLE 7. CERTIFICATES AND SHAREHOLDERS
7.1 CERTIFICATES. Certificates in the form determined by the Board of Directors
shall be delivered representing all shares to which Shareholders are entitled.
Certificates shall be consecutively numbered and shall be entered in the books
of the Corporation as they are issued. Each certificate shall state on its face
the holder's name, the number and class of shares, the par value of shares or a
statement that such shares are without par value, and such other matters as may
be required by law. It shall be signed by the Chairman of the Board, the
President or a Vice President and such other officer or officers as the Board of
Directors shall designate, and may be sealed with the seal of the Corporation or
a facsimile thereof, if any. If a certificate is countersigned by a transfer
agent or an assistant transfer agent or registered by a registrar (either of
which is other than the Corporation or an employee of the Corporation), the
signature of any officer may be facsimile.
7.2 ISSUANCE. Shares (both treasury and authorized but unissued) may be issued
for such consideration (not less than par value) and to such persons as the
Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as provided by law, has been
paid.
7.3 PAYMENT FOR SHARES.
A. KIND. Subject to any provision of the Constitution of the State
of Texas to the contrary, the Board of Directors may authorize shares to be
issued for consideration consisting of any
12
<PAGE>
tangible or intangible benefit to the Corporation, including cash, promissory
notes, services performed, contracts for services to be performed, or other
securities of the Corporation.
B. VALUATION. In the absence of fraud in the transaction, the
judgment of the Board of Directors as to the value of consideration received
shall be conclusive.
C. EFFECT. When consideration, fixed as provided by law, has been
paid, the shares shall be deemed to have been issued and shall be considered
fully paid and nonassessable.
D. ALLOCATION OF CONSIDERATION. The consideration received for
shares shall be allocated by the Board of Directors, in accordance with the law,
between stated capital and capital surplus accounts.
7.4 SUBSCRIPTIONS. Unless otherwise provided in the subscription agreement,
subscriptions for shares, whether made before or after organization of the
Corporation, shall be paid in full at such time or in such installments and at
such times as shall be determined by the Board of Directors. Any call made by
the Board of Directors for payment on subscriptions shall be uniform as to all
shares of the same series. In case of default in the payment on any installment
or call when payment is due, the Corporation may proceed to collect the amount
due in the same manner as any debt due to the Corporation.
7.5 LIEN. For any indebtedness of a Shareholder to the Corporation, the
Corporation shall have a first and prior lien on all shares of its stock owned
by him and on all dividends or other distributions declared thereon.
7.6 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation shall issue a new
certificate in place of any certificate for shares previously issued if the
registered owner of the certificate:
A. CLAIM. Makes proof in affidavit form that it has been lost,
destroyed or wrongfully taken; and
B. TIMELY REQUEST. Requests the issuance of a new certificate before
the Corporation has notice that the certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim; and
C. BOND. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction or theft
of the certificate; and
D. OTHER REQUIREMENTS. Satisfies any other reasonable requirements
imposed by the Corporation. When a certificate has been lost, apparently
destroyed or wrongfully taken, and the holder
13
<PAGE>
of record fails to notify the Corporation within a reasonable time after he has
notice of it, and the Corporation registers a transfer of the shares represented
by the certificate before receiving such notification, the holder of record is
precluded from making any claim against the Corporation for the transfer or for
a new certificate.
7.7 REGISTRATION OF TRANSFER. The Corporation shall register the transfer of a
certificate for shares presented to it for transfer if:
A. ENDORSEMENT. The certificate on a separate stock power is
properly endorsed by the registered owner or by his duly authorized attorney;
and
B. GUARANTEE AND EFFECTIVENESS OF SIGNATURE. The signature of such
person has been guaranteed by a national banking association or member of the
New York Stock Exchange, and reasonable assurance is given that such
endorsements are effective; and
C. ADVERSE CLAIMS. The Corporation has no notice of an adverse claim
or has discharged any duty to inquire into such a claim; and
D. COLLECTION OF TAXES. Any applicable law relating to the
collection of taxes has been complied with.
7.8 REGISTERED OWNER. Prior to due presentment for registration of transfer of a
certificate for shares, the Corporation may regard the person in whose name any
shares issued by the Corporation or registered in the share transfer records of
the Corporation at any particular time as the owner of those shares at that time
for purposes of voting those shares, receiving distributions thereon or notices
in respect thereof, transferring those shares, exercising rights of dissent with
respect to those shares, exercising or waiving any preemptive right with respect
to those shares, if any, entering into agreements with respect to those shares
in accordance with Article 2.22 or 2.30 of the TBCA, or giving proxies with
respect to those shares.
ARTICLE 8. GENERAL PROVISIONS
8.1 DISTRIBUTIONS; SHARE DIVIDENDS.
A. DECLARATION AND PAYMENT. Subject to statute and the Articles of
Incorporation, distributions and share dividends may be declared by the Board of
Directors at any regular or special meeting. The declaration and payment shall
be at the discretion of the Board of Directors.
B. RECORD DATE. The Board of Directors may fix in advance a record
date for the purpose of determining Shareholders entitled to receive a
distribution (other than a distribution involving a purchase or redemption by
the Corporation of any of its own shares) or a share dividend, the record date
to be not more than sixty (60) days prior to the payment date of such
distribution or share dividend, or the
14
<PAGE>
Board of Directors may close the stock transfer books for such purpose for a
period of not more than sixty (60) days prior to the payment date of such
distribution or share dividend. In the absence of any action by the Board of
Directors, the date upon which the Board of Directors adopts the resolution
declaring the distribution or share dividend shall be the record date.
C. RESERVES. By resolution the Board of Directors may create such
reserve or reserves out of the earned surplus of the Corporation as the
Directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize distributions or share dividends, or to repair or
maintain any property of the Corporation, or for any other purpose they think
beneficial to the Corporation. The Directors may modify or abolish any such
reserve in the manner in which it is created.
8.2 BOOKS AND RECORDS. The Corporation shall keep books and records of account,
shall keep Minutes of the proceedings of its Shareholders, its Board of
Directors, and each committee of its Board of Directors, and shall keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of the original issuance of shares issued
by the Corporation and a record of each transfer of those shares that have been
presented to the Corporation for registration of transfer. Such records shall
contain the names and addresses of all past and current Shareholders of the
Corporation and the number and class of shares held by each of them. Any books,
records, Minutes, and share transfer records may be in written form or in any
other form capable of being converted into written form within a reasonable
time. The principal place of business of the Corporation, or the office of its
transfer agent or registrar, may be located outside the State of Texas.
8.3 ANNUAL STATEMENT. Upon the written request of any Shareholder of the
Corporation, the Board of Directors shall mail to such Shareholder its annual
statements for the last fiscal year showing in reasonable detail its assets and
liabilities and the results of its operations and the most recent interim
statements, if any, which have been filed in a public record or otherwise
published. The Corporation shall be allowed a reasonable time to prepare such
annual statements.
8.4 CHECKS AND NOTES. Checks, demands for money, and notes of the Corporation
shall be signed by officer(s) or other person(s) designated from time to time by
the Board of Directors.
8.5 FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year.
8.6 SEAL. If the Corporation has a corporate seal, the corporate seal (of which
there may be one or more exemplars) shall contain the name of the Corporation
and the name of the state of incorporation. The seal may be used by impressing
it or reproducing a facsimile of it, or otherwise.
8.7 INDEMNIFICATION; INSURANCE.
A. DEFINITIONS. For purposes of this Section 8.7, the term:
15
<PAGE>
1. "Person" means
(a) Any person who is or was a Director, officer, employee or
agent of the Corporation; and
(b) Any person who serves or served at the Corporation's
request as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise.
2. "Director" means any person who is or was a Director of the
Corporation and any person who, while a Director of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise.
B. GENERAL. The Corporation shall indemnify and may insure its
Directors, officers, agents and other persons to the maximum extent permitted
under the TBCA, as such Act exists or shall from time to time be amended
8.8 RESIGNATION. A Director, committee member, officer or agent may resign by
giving written notice to the Chairman of the Board, the President or the
Secretary. The resignation shall take effect at the time specified in it, or
immediately if no time is specified. Unless it specifies otherwise, the
resignation takes effect without being accepted.
8.9 AMENDMENTS OF BYLAWS.
A. These Bylaws may be altered, amended, or repealed at any meeting
of the Board of Directors at which a quorum is present, by the affirmative vote
of a majority of the Directors present at such meeting, provided notice of the
proposed alteration, amendment, or repeal is contained in the notice of the
meeting.
B. These Bylaws may also be altered, amended or repealed at any
meeting of the Shareholders at which a quorum is present or represented, by the
affirmative vote of the holders of a majority of the shares present or
represented at the meeting and entitled to vote thereat, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of the
meeting.
8.10 CONSTRUCTION. Whenever the context so requires, the masculine shall include
the feminine and neuter, and the singular shall include the plural, and
conversely. If any portion of these Bylaws shall be invalid or inoperative,
then, so far as is reasonable and possible:
16
<PAGE>
A. The remainder of these Bylaws shall be considered valid and
operative, and
B. Effect shall be given to the intent manifested by the portion
held invalid or inoperative.
8.11 TABLE OF CONTENTS; HEADINGS. The table of contents and headings are for
organization, convenience and clarity. In interpreting these Bylaws, they shall
be subordinated in importance to the other written material.
8.12 RELATION TO ARTICLES OF INCORPORATION. These Bylaws are subject to, and
governed by, the Articles of Incorporation.
17
FOURTH 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 December 5, 1996
<PAGE>
TABLE OF CONTENTS
Page
Section 1 Certain Defined Terms ............................ 1
Section 2 Recitals ......................................... 1
Section 3 Amendments ....................................... 1
Section 4 Ratification of Continued Force and Effect ....... 2
Section 5 Applicable Law ................................... 2
Section 6 Successors and Assigns ........................... 2
Section 7 Counterparts ..................................... 2
Section 8 Effect of Waiver ................................. 3
Section 9 Headings ......................................... 3
Section 10 Non-Application of Chapter 15 of Texas Credit Code 3
Section 11 ENTIRE AGREEMENT ................................. 3
i
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
This is the Fourth Amendment (the "Amendment") dated as of December 5,
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 Banks delete
Section 3.6(f) of the Agreement relating to a bridge fee for Brazilian
Acquisition Loans, charge a fee for issuing a Letter of Credit in connection
with the transaction referenced to later in this sentence on a basis other than
that provided in the Agreement and permit the Borrower to participate in a
transaction involving the privatization of the Southern Network of Rede
Ferroviaria Federal, S.A. The Agent and the Banks are so to do.
Section 3. AMENDMENTS. The Agreement is amended as follows:
(A) The definitions of "BRAZILIAN EQUITY," "BRAZILIAN TRANSACTION,"
"CONSORTIUM" and "CONSORTIUM DOCUMENTS" are amended in their entirety to read as
follows:
"BRAZILIAN EQUITY" means cash equity of up to $22,000,000 in
RailTex International, which shall permit RailTex International to
invest in Consortiums.
"BRAZILIAN TRANSACTION" means RailTex International's
participation in a Consortium.
"CONSORTIUMS" means the Person or Persons formed pursuant to
Consortium Documents by RailTex International, GP Capital Partners, L.P.
and certain other investors, or any combination thereof, and which,
pursuant to one or more agreements, (a) acquired Rede Ferroviaria
Federal S.A.'s Center - Eastern Network at the June 14, 1996
privatization auction and (b) intends to acquire Rede Ferroviaria
Federal S.A.'s Southern Network at a privatization auction; "CONSORTIUM"
means one of the Consortiums.
"CONSORTIUM DOCUMENTS" means constituent documents of a
Consortium and any railroad operating company formed by such Consortium,
whether the same is a partnership agreement, consortium agreement or
other document, or any combination thereof, as well as any and all other
documents and agreements to which the Borrower, RailTex International or
any Affiliate of the foregoing, or
<PAGE>
any combination thereof, is a party that are related, directly or
indirectly, to a Brazilian Transaction.
(B) Subsection (d) of Section 3.6 of the Agreement is amended by
adding the following as the penultimate sentence thereof:
"In respect of the Letter of Credit issued in connection with the second
Brazilian Transaction involving the Southern Network, the letter of
credit fee shall be one-half of one percent of the face amount of such
Letter of Credit, to be shared by the Lenders in proportion to their
respective Commitment Percentages."
(C) Subsection (f) of Section 3.6 of the Agreement is deleted
therefrom in its entirety and subsection (g) is relettered as subsection (f).
(D) Subsection (a) of Section 4.6 of the Agreement is amended by
deleting the reference to "19,500,000" and inserting in lieu thereof the number
"22,000,000."
(E) Subsection (d) of Section 4.6 of the Agreement is amended by
adding in clause (i) the word "applicable" before the word "Consortium."
Section 4. 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. 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 6. 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 7. 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.
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<PAGE>
Section 8. EFFECT OF WAIVER. No consent or waiver, express or implied,
by any Lender 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 9. HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 10. 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 11. 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered effective as of December 5, 1996.
BORROWER:
RAILTEX, INC. Address: 4040 Broadway, Suite 200
San Antonio, Texas 78209
Attn: Laura D. Davies
By: /s/ LAURA D. DAVIES 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), Domestic Lending Office and
NATIONAL ASSOCIATION Eurodollar Lending Office
Address: 1000 Louisiana
Houston, Texas 77002
By: /s/ BENNET D. DOUGLASS Attn: Bennett D. Douglas
Bennett D. Douglas Vice President
Vice President Telephone No. (713) 250-1039
Telecopy No. (713) 250-7031
LENDERS:
WELLS FARGO BANK (TEXAS), Domestic Lending Office and
NATIONAL ASSOCIATION Eurodollar Lending Office
Address: 1000 Louisiana
Houston, Texas 77002
Attn: Bennett D. Douglas
By: /s/ BENNETT D. DOUGLAS Vice President
Bennett D. Douglas Telephone No. (713) 250-1039
Vice President Telecopy No. (713) 250-7031
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<PAGE>
NATIONAL BANK OF CANADA, Domestic Lending Office and
NEW YORK BRANCH Eurodollar Lending Office
Address: National Bank of Canada,
New York Branch
125 W. 55th Street
By: /s/ LARRY L. SEARS New York, New York 10019
Larry L. Sears Attn: Mr. Wayne Rosen
Group Vice President Telephone No. (212) 632-8568
Telecopy No. (212) 632-8736
and
With a copy to:
By: /s/ DOUGLAS CLARK National Bank of Canada
Douglas Clark 2121 San Jacinto, Suite 1850
Vice President Dallas, Texas 75201
Attn: Mr. Douglas Clark
Vice President
Telephone No. (214) 871-1265
Telecopy No. (214) 871-2015
ABN AMRO BANK, N.V. -
HOUSTON AGENCY
By:ABN AMRO NORTH AMERICA, Domestic Lending Office and
INC., as Agent Eurodollar Lending Office
By: /s/ LAURIE C. TUZO Address: 3 Riverway, Suite 1700
Laurie C. Tuzo Houston, Texas 77056
Group Vice President Attn: Belinda Rowell
Telephone No. (713) 964-3363
and Telecopy No. (713) 629-7533
By: /s/ RONALD A. MAHLE
Ronald A. Mahle
Group Vice President
-5-
EXHIBIT 10.7
FIFTH 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 November 14, 1997
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Certain Defined Terms.......................................... 1
Section 2. Recitals....................................................... 1
Section 3. Amendments..................................................... 1
Section 4. Conditions Precedent........................................... 3
Section 5. Consent........................................................ 3
Section 6. Ratification of Continued Force and Effect..................... 3
Section 7. Applicable Law................................................. 4
Section 8. Successors and Assigns......................................... 4
Section 9. Counterparts................................................... 4
Section 10. Effect of Waiver............................................... 4
Section 11. Headings....................................................... 4
Section 12. Non-Application of Chapter 15 of Texas Finance Code............ 4
Section 13. ENTIRE AGREEMENT............................................... 4
i
<PAGE>
FIFTH AMENDMENT TO CREDIT AGREEMENT
This is the Fifth Amendment (the "Amendment") dated as of November 14,
1997 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.
and previously amended by amendments dated as of June 1, 1996, July 22, 1996,
August 13, 1996 and December 3, 1996 (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, the Agent and the Lenders previously
executed and delivered a Consent and Waiver (the "Consent") permitting the
Borrower to (i) issue $50,000,000 of 7.44% Senior Notes due July 22, 2012
pursuant to the Note Agreement dated July 22, 1997, and (ii) use approximately
$9,000,000 of proceeds of the Acquisition Loan Commitments for capital
expenditures to upgrade the Detroit, Toledo and Ironton Railroad purchased by
the Borrower and waiving certain Defaults and Events of Default that would have
resulted therefrom in the absence of such Consent. In part, this Amendment
formalizes the Consent as part of the Agreement. The Borrower has requested that
the Agent and the Lenders (i) change the Eurodollar Rate Margin and the Prime
Rate Margin definitions found in Section 1.1 of the Agreement and (ii) delete
the Loan Formula and related reporting covenants. Subject to the terms and
conditions herein contained, the Agent and the Lenders are willing to amend the
Agreement as set forth below in this amendment.
Section 3. AMENDMENTS. The Agreement is amended as follows:
(A) The definitions of "AVAILABLE CREDIT," "ELIGIBLE ACCOUNTS" and "LOAN
FORMULA" and "MANDATORY PREPAYMENT" are deleted from Section 1.1.
(B) The following definitions are added to Section 1.1 in appropriate
alphabetical order:
"1997 SENIOR NOTES" means $50,000,000 of 7.44% Senior notes due July
22, 2012 pursuant to the Note Agreement dated July 22, 1997, a copy of the
Draft of 7/8/97 having been distributed to the Agent and the Lenders.
"DTIR CAP EX" means approximately $9,000,000 capital expenditures to
upgrade the Detroit, Toledo and Ironton Railroad.
(C) The definition of "APPLICABLE PERCENTAGE" found in Section 1.1 is
amended (i) by deleting the reference to "1.25" and inserting in lieu thereof a
reference to "1.125," (ii) by
<PAGE>
deleting the words "Closing Date until June 30, 1997" and inserting in lieu
thereof the words "November 14, 1997 through December 31, 1997" and (iii) by
adding the following at the end of the existing text:
"Notwithstanding the foregoing, for all periods until October 15,
1997 and for the period from October 15, 1997 to November 14, 1997, the
Applicable Percentage shall be as provided in the Agreement prior to the
fifth amendment thereof."
(D) The definition of "COMPLIANCE CERTIFICATE" found in Section 1.1 is
amended (i) by deleting the text thereof found after the comma in line two and
(ii) by changing the comma to a period.
(E) The definitions found in Section 1.1 of "Eurodollar Rate Margin" and
"Prime Rate Margin" are amended in their entirety to read as follows:
"EURODOLLAR RATE MARGIN" means, with respect to Eurodollar Rate
Loans, the specified percentage set forth below based on the ratio of
Funded Debt to EBITDA as measured at the end of each calendar quarter
throughout the term hereof as specified in the definition of Applicable
Percentage:
RATIO OF
FUNDED DEBT TO EBITDA LIBOR MARGIN
------------------------------------- ------------
(less than) 2.00 to 1.0 .75%
2.00 to 1.0 through 2.49 to 1.0 .875%
2.50 to 1.0 through 2.99 to 1.0 1.00%
3.00 to 1.0 through 3.49 to 1.0 1.125%
3.50 to 1.0 through 3.99 to 1.0 1.25%
(greater than or equal to) 4.00 to 1.0 1.50%
"PRIME RATE MARGIN" means, with respect to Prime Rate Loans, zero
throughout the term hereof.
(F) Section 2.6 is amended by adding the following sentence thereto:
"Proceeds of Acquisition Loan Commitments may also be used for DTIR
Cap Ex."
(G) The first sentence of Section 3.1(a) is amended in its entirety to
read as follows:
"Subject to, and upon the terms, conditions, covenants and
agreements contained herein, each Lender severally agrees to make
Revolving Loans to the Borrower, at any time and from time to time,
prior to the Revolving Termination Date, equal to its Commitment
Percentage of such amounts
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<PAGE>
as the Borrower may request, up to but not exceeding an aggregate
principal sum at any time outstanding equal to Lender's Revolving
Commitment."
(H) Section 3.2(a) is amended by changing existing clause (ii) of the
first sentence thereof to clause (iii) and by inserting a new clause (ii)
reading as follows:
", (ii) the DTIR Cap Ex."
(I) Section 3.5(b) is deleted in its entirety and the following
substituted therefor:
"[omitted intentionally]."
(J) Section 4.3 is amended by adding the following thereto:
"Notwithstanding anything in this Section 4.3 to the contrary,
proceeds of Acquisition Loans may be used for DTIR Cap Ex."
(K) Section 6.1(ix) is amended in its entirety to read as follows:
"(ix) the Senior Notes and the 1997 Senior Notes".
(L) Section 6.13(i) is amended by adding the following parenthetical at
the end thereof: "(including the DTIR Cap Ex)".
Section 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
subject to the following conditions precedent:
(A) Receipt by the Agent of fully signed counterparts of this Amendment;
(B) Delivery of such other documents from the Borrower as Agent shall
reasonably request.
Section 5. CONSENT. The Agent and the Lenders waive the requirement found
in Section 3.5 of the Agreement to apply approximately $900,000 of net proceeds
received from the grant of an easement to the Acquisition Loans and consent to
the application thereof to the Revolving Credit Loans.
Section 6. 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"
-3-
<PAGE>
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 7. 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 8. 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 9. 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 10. EFFECT OF WAIVER. No consent or waiver, express or implied, by
any Lender 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 11. HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 12. NON-APPLICATION OF CHAPTER 15 OF TEXAS FINANCE CODE. The
provisions of Chapter 15 of the Texas Finance Code 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 13. 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.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered effective as of the date first written above.
BORROWER:
RAILTEX, INC. Address: 4040 Broadway, Suite 200
San Antonio, Texas 78209
Attn: Laura D. Davies
Vice President and
By: /s/ LAURA D. DAVIES Chief Financial Officer
Laura D. Davies Telephone No. (210) 841-7600
Vice President and Telecopy No. (210) 841-7629
Chief Financial Officer
AGENT:
WELLS FARGO BANK (TEXAS), Domestic Lending Office and
NATIONAL ASSOCIATION Eurodollar Lending Office
Address: 1000 Louisiana
Houston, Texas 77002
By: /s/ BENNETT D. DOUGLAS Attn: Bennett D. Douglas
Bennett D. Douglas Vice President
Vice President Telephone No. (713) 250-1039
Telecopy No. (713) 250-7031
LENDERS:
WELLS FARGO BANK (TEXAS), Domestic Lending Office and
NATIONAL ASSOCIATION Eurodollar Lending Office
Address: 1000 Louisiana
Houston, Texas 77002
By: /s/ BENNETT D. DOUGLAS Attn: Bennett D. Douglas
Bennett D. Douglas Vice President
Vice President Telephone No. (713) 250-1039
Telecopy No. (713) 250-7031
-5-
<PAGE>
NATIONAL BANK OF CANADA, Domestic Lending Office and
NEW YORK BRANCH Eurodollar Lending Office
Address: National Bank of Canada,
New York Branch
By: /s/ LARRY L. SEARS 125 W. 55th Street
Larry L. Sears New York, New York 10019
Group Vice President Attn: Judy Tong
Telephone No. (212) 632-8529
and Telecopy No. (212) 632-8736
With a copy to:
By: /s/ DOUGLAS CLARK
Douglas Clark National Bank of Canada
Vice President 2121 San Jacinto, Suite 1850
Dallas, Texas 75201
Attn: Mr. Douglas Clark
Vice President
Telephone No. (214) 871-1265
Telecopy No. (214) 871-2015
ABN AMRO BANK, N.V. - Domestic Lending Office and
HOUSTON AGENCY Eurodollar Lending Office
By: ABN AMRO NORTH AMERICA,
INC., as Agent Address: 3 Riverway, Suite 1700
Houston, Texas 77056
Attn: Belinda Rowell
Telephone No. (713) 964-3363
By: /s/ LAURIE C. TUZO Telecopy No. (713) 629-7533
Name:Laurie C. Tuzo
Title: Group Vice President
and
By: /s/ DIEGO PUIGGARI
Name:Diego Puiggari
Title: Vice President
-6-
<PAGE>
NATIONAL CITY BANK, KENTUCKY Domestic Lending Office and
Eurodollar Lending Office
Address: 101 South Fifth Street
By: /s/ DONALD R. PULLEN Louisville, Kentucky 40202
Donald R. Pullen Attn:Donald R. Pullen, Jr.
Vice President Telephone No. (502) 581-6352
Telecopy No. (502) 582-5122
-7-
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of February
25, 1998, is made and entered by and between RailTex, Inc., a Texas corporation
(the "Company"), and _______________ (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and
has made and is expected to continue to make major contributions to the short-
and long-term profitability, growth and financial strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most
publicly held companies, the possibility of a Change in Control (as defined
below) exists;
WHEREAS, the Company desires to assure itself of both present and
future continuity of management and desires to establish certain minimum
severance benefits for certain of its senior executives, including the
Executive, applicable in the event of a Change in Control;
WHEREAS, the Company wishes to ensure that its senior executives
are not practically disabled from discharging their duties in respect of a
proposed or actual transaction involving a Change in Control; and
WHEREAS, the Company desires to provide additional inducement for
the Executive to continue to remain in the employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. CERTAIN DEFINED TERMS. In addition to terms defined elsewhere herein,
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Base Pay" means the Executive's annual base salary rate as
in effect from time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to
Section 3(b) or Section 3(c), the Executive shall have committed:
(i) conviction of a criminal violation involving fraud,
embezzlement or theft in connection with his duties or in the course of
his employment with the Company or any Subsidiary;
<PAGE>
(ii) intentional wrongful damage to property of the Company
or any Subsidiary; or
(iii) intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary;
and any such act shall have been demonstrably and materially harmful to
the Company. For purposes of this Agreement, no act or failure to act on
the part of the Executive shall be deemed "intentional" if it was due
primarily to an error in judgment or negligence, but shall be deemed
"intentional" only if done or omitted to be done by the Executive not in
good faith and without reasonable belief that his action or omission was
in the best interest of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for "Cause"
hereunder unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of
not less than three quarters of the Board then in office at a meeting of
the Board called and held for such purpose, after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel (if the Executive chooses to have counsel present at
such meeting), to be heard before the Board, finding that, in the good
faith opinion of the Board, the Executive had committed an act
constituting "Cause" as herein defined and specifying the particulars
thereof in detail. Nothing herein will limit the right of the Executive
or his beneficiaries to contest the validity or propriety of any such
determination.
(d) "Change in Control" means the occurrence during the Term of
any of the following events:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
(a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of the combined
voting power of the then outstanding Voting Stock of the Company;
provided, however, that for purposes of this Section 1(d)(i), the
following acquisitions of Voting Stock of the Company shall not
constitute a Change in Control: (A) any issuance of Voting Stock of the
Company directly from the Company that is approved by the Incumbent
Board (as defined in Section 1(d)(ii), below), the consideration for
which consists principally of property other than cash, (B) any
acquisition by the Company of Voting Stock of the Company, (C) any
acquisition of Voting Stock of the Company by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any
Subsidiary, or (D) any acquisition of Voting Stock of the Company by any
Person pursuant to a Business Combination that complies with clauses
(A), (B) and (C) of Section 1(d)(iii) below; or
(ii) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a Director subsequent to the date hereof
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<PAGE>
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of the
Directors then comprising the Incumbent Board (either by a specific vote
or by approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to such
nomination) shall be deemed to have been a member of the Incumbent
Board; or
(iii) consummation of a reorganization, merger or
consolidation, a sale or other disposition of all or substantially all
of the assets of the Company, or other transaction (each, a "Business
Combination"), unless, in each case, immediately following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners of Voting Stock of the Company
immediately prior to such Business Combination beneficially own,
directly or indirectly, more than two-thirds of the combined voting
power of the then outstanding shares of Voting Stock of the entity
resulting from such Business Combination (including, without limitation,
an entity which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through
one or more subsidiaries), (B) no Person (other than the Company, such
entity resulting from such Business Combination, or any employee benefit
plan (or related trust) sponsored or maintained by the Company, any
Subsidiary or such entity resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of the combined
voting power of the then outstanding shares of Voting Stock of the
entity resulting from such Business Combination, and (C) at least a
majority of the members of the Board of Directors of the entity
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement or of the
action of the Board providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company, except pursuant to a
Business Combination that complies with clauses (A), (B) and (C) of
Section 1(d)(iii).
(e) "Employee Benefits" means the perquisites, benefits and
service credit for benefits as provided under any and all employee
retirement income and welfare benefit policies, plans, programs or
arrangements in which Executive is entitled to participate, including
without limitation any stock option, performance share, performance
unit, stock purchase, stock appreciation, savings, pension, supplemental
executive retirement, or other retirement income or welfare benefit,
deferred compensation, incentive compensation, group or other life,
health, medical/hospital or other insurance (whether funded by actual
insurance or self-insured by the Company or a Subsidiary), disability,
salary continuation, expense reimbursement and other employee benefit
policies, plans, programs or arrangements that may now exist or any
equivalent successor policies, plans, programs or arrangements that may
be adopted hereafter by the Company or a Subsidiary, providing
perquisites, benefits and service credit for benefits at least as great
in the aggregate as are payable thereunder prior to a Change in Control.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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<PAGE>
(g) "Incentive Pay" means an annual bonus, incentive or other
payment of compensation, in addition to Base Pay, made or to be made in
regard to services rendered in any year or other period pursuant to any
bonus, incentive, profit-sharing, performance, discretionary pay or
similar agreement, policy, plan, program or arrangement (whether or not
funded) of the Company or a Subsidiary, or any successor thereto.
(h) "Severance Period" means the period of time commencing on the
date of the first occurrence of a Change in Control and continuing until
the earlier of (i) the second anniversary of the occurrence of the
Change in Control, or (ii) the Executive's death; PROVIDED, HOWEVER,
that commencing on each anniversary of the Change in Control, the
Severance Period will automatically be extended for an additional year
unless, not later than 90 calendar days prior to such anniversary date,
either the Company or the Executive shall have given written notice to
the other that the Severance Period is not to be so extended.
(i) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting
Stock.
(j) "Term" means the period commencing as of the date hereof and
expiring as of the later of (i) the close of business on December 31,
2001, or (ii) the expiration of the Severance Period; PROVIDED, HOWEVER,
that (A) commencing on January 1, 2001 and each January 1 thereafter,
the term of this Agreement will automatically be extended for an
additional year unless, not later than September 30 of the immediately
preceding year, the Company or the Executive shall have given notice
that it or the Executive, as the case may be, does not wish to have the
Term extended and (B) subject to the last sentence of Section 9, if,
prior to a Change in Control, the Executive ceases for any reason to be
an executive officer of the Company and any Subsidiary, thereupon
without further action the Term shall be deemed to have expired and this
Agreement will immediately terminate and be of no further effect.
(k) "Termination Date" means the date on which the Executive's
employment is terminated (the effective date of which shall be the date
of termination, or such other date that may be specified by the
Executive if the termination is pursuant to Section 3(b) or Section
3(c)).
(l) "Voting Stock" means securities entitled to vote generally in
the election of directors.
2. OPERATION OF AGREEMENT. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement will not be operative unless and until a Change
in Control occurs. Upon the occurrence of a Change in Control at any time during
the Term, without further action, this Agreement shall become immediately
operative, including without limitation, the last sentence of
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<PAGE>
Section 9 notwithstanding that the Term may have theretofore expired.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL.
(a) In the event of the occurrence of a Change in Control, the
Executive's employment may be terminated by the Company or a Subsidiary
during the Severance Period and the Executive shall be entitled to the
benefits provided by Section 4 unless such termination is the result of
the occurrence of one or more of the following events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled within the
meaning of, and begins actually to receive disability benefits pursuant
to, the long-term disability plan in effect for, or applicable to,
Executive immediately prior to the Change in Control; or
(iii) Cause.
If, during the Severance Period, the Executive's employment is terminated by the
Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or
3(a)(iii), the Executive will be entitled to the benefits provided by Section 4
hereof.
(b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and any Subsidiary
during the Severance Period with the right to severance compensation as
provided in Section 4 upon the occurrence of one or more of the
following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for such termination exists or has
occurred, including without limitation other employment):
(ii) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company and/or RailTex Service Co.,
Inc. (or any successor entity by operation of law or otherwise), as the
case may be, which the Executive held immediately prior to a Change in
Control, or the removal of the Executive as a Director of the Company
(or any successor thereto) if the Executive shall have been a Director
of the Company immediately prior to the Change in Control;
(iii) (A) A significant adverse change in the nature or scope
of the authorities, powers, functions, responsibilities or duties
attached to the position with the Company and any Subsidiary which the
Executive held immediately prior to the Change in Control, (B) a
reduction in the aggregate of the Executive's Base Pay and Incentive Pay
received from the Company and any Subsidiary, or (C) the termination or
denial of the Executive's rights to Employee Benefits or a reduction in
the scope or value thereof, any of which is not remedied by the Company
within 10 calendar days after receipt by the Company of written notice
from the Executive of such change, reduction or termination, as the case
may be;
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<PAGE>
(iv) A determination by the Executive (which determination
will be conclusive and binding upon the parties hereto provided it has
been made in good faith and in all events will be presumed to have been
made in good faith unless otherwise shown by the Company by clear and
convincing evidence) that a change in circumstances has occurred
following a Change in Control, including, without limitation, a change
in the scope of the business or other activities for which the Executive
was responsible immediately prior to the Change in Control, which has
rendered the Executive substantially unable to carry out, has
substantially hindered Executive's performance of, or has caused
Executive to suffer a substantial reduction in, any of the authorities,
powers, functions, responsibilities or duties attached to the position
held by the Executive immediately prior to the Change in Control, which
situation is not remedied within 10 calendar days after written notice
to the Company from the Executive of such determination;
(v) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or
otherwise) to which all or substantially all of its business and/or
assets have been transferred (by operation of law or otherwise) assumed
all duties and obligations of the Company under this Agreement pursuant
to Section 11(a);
(vi) The Company (A) relocates its principal executive
offices (if such offices are the principal location of Executive's
work), or (B) requires the Executive to have his principal location of
work changed, to any location that, in either case, is in excess of 50
miles from the location thereof immediately prior to the Change in
Control, or (C) requires the Executive to travel away from his office in
the course of discharging his responsibilities or duties hereunder at
least 20% more (in terms of aggregate days in any calendar year or in
any calendar quarter when annualized for purposes of comparison to any
prior year) than was required of Executive in any of the three full
years immediately prior to the Change in Control without, in either
case, his prior written consent, and, in the case of clause (C), which
is not remedied by the Company within 10 calendar days after receipt by
the Company of written notice of such increase; or
(vii) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto which is not remedied by the Company within 10
calendar days after receipt by the Company of written notice from the
Executive of such breach.
(c) Notwithstanding anything contained in this Agreement to the
contrary, in the event of a Change in Control, the Executive may
terminate employment with the Company and any Subsidiary for any reason,
or without reason, during the 30-day period immediately following the
first anniversary of the first occurrence of a Change in Control with
the right to severance compensation as provided in Section 4.
6
<PAGE>
(d) A termination by the Company pursuant to Section 3(a) or by
the Executive pursuant to Section 3(b) or Section 3(c) will not affect
any rights that the Executive may have pursuant to any agreement,
policy, plan, program or arrangement of the Company or Subsidiary
providing Employee Benefits, which rights shall be governed by the terms
thereof.
4. SEVERANCE COMPENSATION.
(a) If, following the occurrence of a Change in Control, the
Company or Subsidiary terminates the Executive's employment during the
Severance Period other than pursuant to Section 3(a)(i), 3(a)(ii) or
3(a)(iii), or if the Executive terminates his employment pursuant to
Section 3(b) or Section 3(c), the Company will pay to the Executive the
amounts described in Annex A within five business days after the
Termination Date and will continue to provide to the Executive the
benefits described on Annex A for the periods described therein.
(b) Without limiting the rights of the Executive at law or in
equity, if the Company fails to make any payment or provide any benefit
required to be made or provided hereunder on a timely basis, the Company
will pay interest on the amount or value thereof at an annualized rate
of interest equal to the so-called composite "prime rate" as quoted from
time to time during the relevant period in the Southwest Edition of THE
WALL STREET JOURNAL, plus 2%. Such interest will be payable as it
accrues on demand. Any change in such prime rate will be effective on
and as of the date of such change.
(c) Notwithstanding any provision of this Agreement to the
contrary, the parties' respective rights and obligations under this
Section 4 and under Sections 5, 7, 8 and the last sentence of Section 9
will survive any termination or expiration of this Agreement or the
termination of the Executive's employment following a Change in Control
for any reason whatsoever.
(d) Unless otherwise expressly provided by the applicable annual
bonus plan, after the occurrence of a Change in Control, the Company
shall pay in cash to the Executive a lump-sum amount equal to the value
of the Executive's annual bonus earned or accrued with respect to the
Executive's service during the annual performance period that includes
the date on which the Change in Control occurred, disregarding any
applicable vesting requirements; provided that such amount shall be
calculated at the plan target rate, but prorated to base payment only on
the portion of the Executive's service that had elapsed during the
applicable performance period. Such payment shall take into account
service rendered through the payment date and shall be made at the
earlier of (i) the date prescribed for payment pursuant to the
applicable plan, program or agreement, and (ii) within five business
days after the Termination Date.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding,
but subject to Section 5(h), in the event that this Agreement shall
become operative and it shall be
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<PAGE>
determined (as hereafter provided) that any payment (other than the Gross-Up
payments provided for in this Section 5) or distribution by the Company or any
of its affiliates to or for the benefit of the Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise pursuant to or by reason of any other agreement, policy, plan,
program or arrangement, including without limitation any stock option,
performance share, performance unit, stock appreciation right or similar right,
or the lapse or termination of any restriction on or the vesting or
exercisability of any of the foregoing (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor provision thereto) by reason of being
considered "contingent on a change in ownership or control" of the Company,
within the meaning of Section 280G of the Code (or any successor provision
thereto) or to any similar tax imposed by state or local law, or any interest or
penalties with respect to such tax (such tax or taxes, together with any such
interest and penalties, being hereafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to receive an additional payment or
payments (collectively, a "Gross-Up Payment"); provided, however, that no
Gross-up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (i). The Gross-Up Payment shall be in an amount such
that, after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 5(f), all determinations
required to be made under this Section 5, including whether an Excise
Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, shall be made
by a nationally recognized accounting firm (the "Accounting Firm")
selected by the Executive in his sole discretion. The Executive shall
direct the Accounting Firm to submit its determination and detailed
supporting calculations to both the Company and the Executive within 30
calendar days after the Termination Date, if applicable, and any such
other time or times as may be requested by the Company or the Executive.
If the Accounting Firm determines that any Excise Tax is payable by the
Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination
and calculations with respect to any Payment to the Executive. If the
Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall, at the same time as it makes such determination,
furnish the Company and the Executive an opinion that the Executive has
substantial authority not to report any Excise Tax on his federal, state
or local income or other tax return. As a result of the uncertainty in
the application of Section 4999 of the Code (or any successor provision
thereto) and the possibility of similar uncertainty regarding applicable
state or local tax law at the time of any determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the
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Company should have been made (an "Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts or fails to pursue its remedies pursuant to Section 5(f) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Executive shall direct the Accounting Firm to determine the amount of the
Underpayment that has occurred and to submit its determination and detailed
supporting calculations to both the Company and the Executive as promptly as
possible. Any such Underpayment shall be promptly paid by the Company to, or for
the benefit of, the Executive within five business days after receipt of such
determination and calculations.
(c) The Company and the Executive shall each provide the
Accounting Firm access to and copies of any books, records and documents
in the possession of the Company or the Executive, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in connection with the preparation and issuance
of the determinations and calculations contemplated by Section 5(b). Any
determination by the Accounting Firm as to the amount of the Gross-Up
Payment shall be binding upon the Company and the Executive.
(d) The federal, state and local income or other tax returns
filed by the Executive shall be prepared and filed on a consistent basis
with the determination of the Accounting Firm with respect to the Excise
Tax payable by the Executive. The Executive shall make proper payment of
the amount of any Excise Payment, and at the request of the Company,
provide to the Company true and correct copies (with any amendments) of
his federal income tax return as filed with the Internal Revenue Service
and corresponding state and local tax returns, if relevant, as filed
with the applicable taxing authority, and such other documents
reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting
Firm determines that the amount of the Gross-Up Payment should be
reduced, the Executive shall within five business days pay to the
Company the amount of such reduction.
(e) The fees and expenses of the Accounting Firm for its services
in connection with the determinations and calculations contemplated by
Section 5(b) shall be borne by the Company. If such fees and expenses
are initially paid by the Executive, the Company shall reimburse the
Executive the full amount of such fees and expenses within five business
days after receipt from the Executive of a statement therefor and
reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service or any other taxing authority
that, if successful, would require the payment by the Company of a
Gross-Up Payment. Such notification shall be given as promptly as
practicable but no later than 10 business days after the Executive
actually receives notice of such claim and the Executive shall further
apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid (in each case, to the extent known by
the Executive). The Executive shall not pay such claim
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prior to the earlier of (i) the expiration of the 30-calendar-day period
following the date on which he gives such notice to the Company and (ii)
the date that any payment of amount with respect to such claim is due.
If the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(i) provide the Company with any written records or
documents in his possession relating to such claim reasonably requested
by the Company;
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the subject
matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all
costs and expenses (including interest and penalties) incurred in
connection with such contest and shall indemnify and hold harmless the
Executive, on an after-tax basis, for and against any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and
expenses. Without limiting the foregoing provisions of this Section
5(f), the Company shall control all proceedings taken in connection with
the contest of any claim contemplated by this Section 5(f) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in
respect of such claim (provided, however, that the Executive may
participate therein at his own cost and expense) and may, at its option,
either direct the Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; PROVIDED, however,
that if the Company directs the Executive to pay the tax claimed and sue
for a refund, the Company shall advance the amount of such payment to
the Executive on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income
or other tax, including interest or penalties with respect thereto,
imposed with respect to such advance; and PROVIDED FURTHER, HOWEVER,
that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which the
contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such
contested claim shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue
raised by the Internal
10
<PAGE>
Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 5(f), the Executive receives any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 5(f)) promptly pay
to the Company the amount of such refund (together with any interest
paid or credited thereon after any taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company
pursuant to Section 5(f), a determination is made that the Executive
shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to
contest such denial or refund prior to the expiration of 30 calendar
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of any such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid by the Company to the Executive pursuant to this
Section 5.
(h) Notwithstanding any provision of this Agreement to the
contrary, if (i) but for this sentence, the Company would be obligated
to make a Gross-Up Payment to the Executive and (ii) the aggregate
"present value" of the "parachute payments" to be paid or provided to
the Executive under this Agreement or otherwise does not exceed 1.15
multiplied by three times the Executive's "base amount," then the
payments and benefits to be paid or provided under this Agreement will
be reduced to the minimum extent necessary (but in no event to less than
zero) so that no portion of any payment or benefit to the Executive, as
so reduced, constitutes an "excess parachute payment." For purposes of
this Section 5(h), the terms "excess parachute payment," "present
value," "parachute payment," and "base amount" will have the meanings
assigned to them by Section 280G of the Code. The determination of
whether any reduction in such payments or benefits to be provided under
this Agreement is required pursuant to the preceding sentence will be
made at the expense of the Company, if requested by the Executive or the
Company, by the Accounting Firm. The fact that the Executive's right to
payments or benefits may be reduced by reason of the limitations
contained in this Section 5(h) will not of itself limit or otherwise
affect any other rights of the Executive other than pursuant to this
Agreement. In the event that any payment or benefit intended to be
provided under this Agreement or otherwise is required to be reduced
pursuant to this Section 5(h), the Executive will be entitled to
designate the payments and/or benefits to be so reduced in order to give
effect to this Section 5(h). The Company will provide the Executive with
all information reasonably requested by the Executive to permit the
Executive to make such designation. In the event that the Executive
fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner it
deems appropriate.
6. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it
will be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the payment
of the severance compensation by the Company to the Executive in accordance with
the terms of this Agreement is hereby
11
<PAGE>
acknowledged by the Company to be reasonable, and the Executive will not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor will any profits, income, earnings or
other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive hereunder or
otherwise, except as expressly provided in the last sentence of Paragraph 2 set
forth on Annex A.
7. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing; provided that, in regard to such matters,
the Executive has not acted in bad faith or with no colorable claim of success.
8. CONFIDENTIALITY; NONSOLICITATION.
(a) During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in
this Section 8(a)) to the extent necessary for Executive to carry out
his obligations to the Company. The Executive hereby covenants and
agrees that the Executive will not, without the prior written consent of
the Company, during the Term or thereafter disclose to any person not
employed by the Company, or use in connection with engaging in
competition with the Company, any confidential or proprietary
information of the Company. For purposes of this Agreement, the term
"confidential or proprietary information" will include all information
of any nature and in any form that is owned by the Company and that is
not publicly available (other than by Executive's breach of this Section
8(a)) or generally known to persons engaged in businesses similar or
related to those of the Company. Confidential or
12
<PAGE>
proprietary information will include, information concerning the
Company's business, affairs, customers, clients, sources of supply and
customer lists. For purposes of the preceding two sentences, the term
"Company" will also include any Subsidiary (collectively, the
"Restricted Group"). The foregoing obligations imposed by this Section
8(a) will not apply (i) during the Term, in the course of the business
of and for the benefit of the Company, (ii) if such confidential or
proprietary information will have become, through no fault of the
Executive, generally known to the public or (iii) if the Executive is
required by law to make disclosure (after giving the Company notice and
an opportunity to contest such requirement).
(b) The Executive hereby covenants and agrees that during the
Term and for one year thereafter Executive will not, without the prior
written consent of the Company, which consent will not unreasonably be
withheld, knowingly solicit any employee of the Restricted Group to
leave the employment of the Restricted Group.
9. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any Subsidiary
prior to or following any Change in Control. Any termination of employment of
the Executive or the removal of the Executive from the office or position in the
Company or any Subsidiary that occurs (i) (A) not more than one year prior to
the date on which a Change in Control, as defined in Section 1(d)(ii), 1(d)(iii)
or 1(d)(iv), occurs, or (B) not more than 90 days prior to the date on which a
Change in Control, as defined in Section 1(d)(i), but not otherwise in Section
1(d), occurs, and (ii) following the commencement of any discussion with a third
person that ultimately results in a Change in Control, shall be deemed to be a
termination or removal of the Executive after a Change in Control for purposes
of this Agreement.
10. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any applicable law, regulation or
ruling.
11. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form and substance reasonably satisfactory to
the Executive, expressly to assume and agree to perform this Agreement
in the same manner and to the same extent the Company would be required
to perform if no such succession had taken place. This Agreement will be
binding upon and inure to the benefit of the Company and any successor
to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business or
assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor shall thereafter be
deemed the "Company" for the purposes of this Agreement), but will not
otherwise be assignable, transferable or delegable by the Company.
13
<PAGE>
(b) This Agreement will inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer
or delegate this Agreement or any rights or obligations hereunder except
as expressly provided in Sections 11(a) and 11(b). Without limiting the
generality or effect of the foregoing, the Executive's right to receive
payments hereunder will not be assignable, transferable or delegable,
whether by pledge, creation of a security interest, or otherwise, other
than by a transfer by Executive's will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer
contrary to this Section 11(c), the Company shall have no liability to
pay any amount so attempted to be assigned, transferred or delegated.
12. NOTICES. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder will be in writing and will be deemed to have
been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or five business days
after having been mailed by United States registered or certified mail, return
receipt requested, postage prepaid, or three business days after having been
sent by a nationally recognized overnight courier service such as FedEx, UPS, or
Purolator, addressed to the Company (to the attention of the Secretary of the
Company) at its principal executive office and to the Executive at his principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
shall be effective only upon receipt.
13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Texas, without giving effect to the
principles of conflict of laws of such State.
14. VALIDITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid or legal.
15. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by
14
<PAGE>
either party which are not set forth expressly in this Agreement. References to
Sections are to references to Sections of this Agreement.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered as of the date first above written.
RAILTEX, INC.
By: _______________________________
[Name and Title]
_______________________________
[Executive]
16
<PAGE>
ANNEX A
SEVERANCE COMPENSATION
(1) A lump-sum payment
in an amount equal to three times
the sum of (A) Base Pay (at the
highest rate in effect for any
period prior to the Termination
Date), plus (B) Incentive Pay (in an
amount equal to the target bonus
applicable immediately prior to the
Change in Control or, if greater,
the target bonus in effect prior to
the Termination Date).
(2) For a period of 36
months following the Termination
Date (the "Continuation Period"),
the Company will arrange to provide
the Executive with Employee Benefits
that are welfare benefits (but not
stock option, performance share,
performance unit, stock purchase,
stock appreciation or similar
compensatory benefits) substantially
similar to those that the Executive
was receiving or entitled to receive
immediately prior to the Termination
Date (or, if greater, immediately
prior to the reduction, termination,
or denial described in Section
3(b)(ii)), including, but not
limited to, health care, dental,
group life, and group long-term
disability benefits, and the term
life equivalent benefit for any
split-dollar insurance program. If
and to the extent that any benefit
described in this Paragraph 2 is not
or cannot be paid or provided under
any policy, plan, program or
arrangement of the Company or any
Subsidiary, as the case may be, then
the Company will itself pay or
provide for the payment to the
Executive, his dependents and
beneficiaries, of such Employee
Benefits. Notwithstanding the
foregoing, or any other provision of
the Agreement, for purposes of
determining the period of
continuation coverage to which the
Executive or any of his dependents
is entitled pursuant to Section
4980B of the Code (or any successor
provision thereto) under the
Company's medical, dental and other
group health plans, or successor
plans, the Executive's "qualifying
event" shall be the termination of
the Continuation Period and the
Executive shall be
A-1
<PAGE>
considered to have remained actively
employed on a full-time basis
through that date. Employee Benefits
otherwise receivable by the
Executive pursuant to this Paragraph
2 will be reduced to the extent
comparable welfare benefits are
actually received by the Executive
from another employer during the
Continuation Period following the
Executive's Termination Date, and
any such benefits actually received
by the Executive shall be reported
by the Executive to the Company.
(3) If, prior to the
Change in Control, Executive has
been provided the use of a Company
car, then within five business days
after the Termination Date, the
Company will convey title to such
car to Executive without additional
consideration therefor.
February 11, 1998
RailTex Canada, Inc.
c/o RailTex, Inc.
4040 Broadway
Suite 200
San Antonio, TX 78209
ATTENTION: LAURA DAVIES
Dear Sirs and Mesdames:
We refer to the loan agreement made as of June 21, 1996 among you
and the undersigned (the "Loan Agreement"). All defined terms used in this
letter and not otherwise defined have the meaning ascribed to them in the Loan
Agreement. This letter will confirm the following amendments to the Loan
Agreement:
(1) The following definition is added to section 1.01 of the Loan
Agreement in alphabetical order:
"Debt/EBITDA Ratio" means, with respect to any calendar quarter,
the ratio of Funded Debt of RailTex and its Subsidiaries as at
the end of such calendar quarter to EBITDA of RailTex and its
Subsidiaries for the four calendar quarters ending on the last
day of such calendar quarter;"
(2) The definition of "Prime Factor" in section 1.01(as) of the Loan
Agreement is deleted;
(3) Section 3.01 of the Loan Agreement is amended by deleting text
beginning on the sixth line with the word "plus" to and including
the number "45%" at the end of 3.01(c);
(4) Section 3.02 of the Loan Agreement is amended by replacing 3.02
(a) through (e) with the following:
"(a) 1 1/2% at any time that the Debt/EBITDA Ratio is greater
than or equal to 4.00 to 1.00;
(b) 1 1/4% at any time that the Debt/EBITDA Ratio is greater
than or equal to 3.50 to 1.00 but less than 4.00 to 1.00;
(c) 1 1/8% at any time that the Debt/EBITDA Ratio is greater
than or equal to 3.00 to 1.00 but less than 3.50 to 1.00;
(d) 1% at any time that the Debt/EBITDA Ratio is greater than or
equal to 2.50 to 1.00 but less than 3.00 to 1.00;
(e) 7/8% at any time that the Debt/EBITDA Ratio is greater than
or equal to 2.00 to 1.00 but less than 2.50 to 1.00; and
<PAGE>
(f) 3/4% at any time that the Debt/EBITDA Ratio is less than
2.00 to 1.00."
(5) Section 3.03 of the Loan Agreement is amended by deleting the
phrase "Prime Factor and the" on the first line, inserting the
word "level" immediately following the word "fee" on the first
line and the fourth last line thereof, replacing the word
"Leverage" on the third line with the phrase "Debt/EBITDA", and
deleting the phrase "Prime Factor and" on the fourth last line
thereof; and
(6) Section 12.05 of the Loan Agreement is amended by replacing the
name "Douglas Richmond" with the name "Karen Koury".
The amendments set out herein shall be effective from and
including February 13, 1998. For greater certainty, the amendments set out
herein shall have no effect with respect to any period of time prior to the date
that such amendments become effective. All terms and conditions of the Loan
Agreement will remain in full force and effect unchanged except as amended
hereby.
If you are in agreement with the foregoing, please arrange to
have the acknowledgment on the two enclosed copies of this letter executed by
duly authorized officers of the parties set out therein, and return both copies
to the Agent.
Yours very truly,
NATIONAL BANK OF CANADA,
as Agent
By: /s/KAREN KOURY
Karen Koury
Senior Manager
By: /s/LILI SHAIN
Lili Shain
Vice President
NATIONAL BANK OF CANADA, ABN AMRO BANK CANADA,
as Lender as Lender
By: /s/ KAREN KOURY By: /s/JOANNE BONAIR
Karen Koury Authorized Officer
Senior Manager
By: /s/ LILI SHAIN By: /s/JOHN GLEASON
Lili Shain Authorized Officer
Vice President
EXHIBIT 11.1
RAILTEX, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------ ------
Net Income ......................................... $10,624 $9,961 $6,898
======= ====== ======
Weighted average number of Common Stock
outstanding ...................................... 9,153 9,112 8,699
======= ====== ======
Earnings per share - basic ......................... $ 1.16 $ 1.09 $ 0.79
======= ====== ======
Net Income ......................................... $10,624 $9,961 $6,898
======= ====== ======
Weighted average number of Common Stock
and Common Stock equivalents outstanding:
Weighted average number of shares of
Common Stock outstanding ......................... 9,153 9,112 8,699
Common Stock equivalents applicable to
convertible senior subordinated notes ............ -- -- 44
Weighted average number of Common Stock
equivalents applicable to stock options .......... 69 119 154
------- ------ ------
Common Stock and Common Stock equivalents .......... 9,222 9,231 8,897
======= ====== ======
Earnings per share - diluted ....................... $ 1.15 $ 1.08 $ 0.78
======= ====== ======
EXHIBIT 21.1
RAILTEX, INC. AND SUBSIDIARIES
LIST OF SUBSIDIARIES
RailTex Service Co., Inc.
San Diego & Imperial Valley Railroad Company, Inc.
Austin & Northwestern Railroad Company, Inc.
North Carolina & Virginia Railroad Company, Inc.
South Carolina Central Railroad Company, Inc.
Mid-Michigan Railroad, Inc.
Chesapeake and Albemarle Railroad Company, Inc.
Michigan Shore Railroad, Inc.
New Orleans Lower Coast Railroad, Inc.
Dallas, Garland & Northeastern Railroad, Inc.
Goderich-Exeter Railroad Company Limited
Indiana Southern Railroad, Inc.
RailTex Distribution Services, Inc.
RailTex Trac Company, Inc.
Missouri & Northern Arkansas Railroad Company, Inc.
Salt Lake City Southern Railroad Company, Inc.
Grand Rapids Eastern Railroad, Inc.
Cape Breton & Central Nova Scotia Railway Limited
RailTex Canada, Inc.
New England Central Railroad, Inc.
Central Oregon & Pacific Railroad, Inc.
Georgia Southwestern Railroad, Inc.
RailTex International Services, Inc.
Connecticut Southern Railroad, Inc.
Indiana & Ohio Rail Corp.
Ontario L'Orignal Railway, Inc.
Pittsburgh Industrial Railroad, Inc.
RailTex Logistics, Inc.
RailTex International Holdings, Inc.
Boston Central Freight Railroads, Inc.
Indiana & Ohio Central Railroad, Inc.
Indiana & Ohio Railway Company
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8 (File No. 33-79174).
ARTHUR ANDERSEN LLP
San Antonio, Texas
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 570
<SECURITIES> 0
<RECEIVABLES> 33,734
<ALLOWANCES> 1,563
<INVENTORY> 0
<CURRENT-ASSETS> 37,045
<PP&E> 300,566
<DEPRECIATION> 41,122
<TOTAL-ASSETS> 319,908
<CURRENT-LIABILITIES> 44,410
<BONDS> 125,656
0
0
<COMMON> 916
<OTHER-SE> 132,342
<TOTAL-LIABILITY-AND-EQUITY> 319,908
<SALES> 0
<TOTAL-REVENUES> 148,791
<CGS> 0
<TOTAL-COSTS> 125,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 638
<INTEREST-EXPENSE> 10,527
<INCOME-PRETAX> 16,672
<INCOME-TAX> 6,048
<INCOME-CONTINUING> 10,624
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,624
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
