UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 1998
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
(Address of principal executive 78209
offices) (Zip Code)
Registrant's telephone number,
including area code: (210) 841-7600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of the Registrant's Common Stock as
of April 30, 1998: 9,186,199.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAILTEX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1997
-------- --------
OPERATING REVENUES ............................... $ 38,412 $ 34,175
OPERATING EXPENSES:
Transportation .............................. 13,930 12,637
General and administrative .................. 5,459 5,746
Equipment ................................... 4,414 4,477
Maintenance of way .......................... 4,580 3,278
Depreciation and amortization ............... 3,521 2,985
-------- --------
Total operating expenses ............... 31,904 29,123
-------- --------
OPERATING INCOME ................................. 6,508 5,052
INTEREST EXPENSE ................................. (2,688) (2,366)
OTHER INCOME (EXPENSE) ........................... 345 (49)
-------- --------
INCOME BEFORE INCOME TAXES ....................... 4,165 2,637
INCOME TAXES ..................................... (1,683) (1,062)
-------- --------
NET INCOME ....................................... $ 2,482 $ 1,575
======== ========
BASIC EARNINGS PER SHARE ......................... $ 0.27 $ 0.17
======== ========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OF COMMON STOCK OUTSTANDING ..................... 9,171 9,131
DILUTED EARNINGS PER SHARE ....................... $ 0.27 $ 0.17
======== ========
WEIGHTED AVERAGE NUMBER OF DILUTED
SHARES OF COMMON STOCK OUTSTANDING ............... 9,231 9,209
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 1,354 $ 570
Accounts receivable, less doubtful receivables of $1,536; $1,563 in 1997 ..... 29,899 32,171
Prepaid expenses ............................................................. 2,840 2,527
Deferred tax assets, net ..................................................... 1,777 1,777
--------- ----------
Total current assets ..................................................... 35,870 37,045
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$44,194; $41,122 in 1997 ...................................................... 263,438 259,444
OTHER ASSETS:
Investments in Brazilian railroad companies .................................. 17,809 17,809
Other, net ................................................................... 5,422 5,610
--------- ----------
Total other assets ....................................................... 23,231 23,419
--------- ----------
Total assets ............................................................. $ 322,539 $ 319,908
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable ..................................................... $ 229 $ 384
Current portion of long-term debt ............................................ 11,346 7,763
Accounts payable ............................................................. 16,510 18,829
Accrued liabilities .......................................................... 13,203 17,434
--------- ----------
Total current liabilities ................................................ 41,288 44,410
DEFERRED INCOME TAXES, NET ....................................................... 21,034 20,521
LONG-TERM DEBT ................................................................... 115,251 112,893
SENIOR SUBORDINATED NOTES PAYABLE ................................................ 5,000 5,000
OTHER LIABILITIES ................................................................ 3,898 3,826
--------- ----------
Total liabilities ........................................................ 186,471 186,650
--------- ----------
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 9,186,199; 9,160,924 in 1997 ................................... 919 916
Paid-in capital .............................................................. 84,071 83,799
Retained earnings ............................................................ 51,385 48,901
Cumulative translation adjustment ............................................ (307) (358)
--------- ----------
Total shareholders' equity ............................................... 136,068 133,258
--------- ----------
Total liabilities and shareholders' equity ............................... $ 322,539 $ 319,908
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
RAILTEX, INC. AND SUBSIDAIRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
-------- ---------
OPERATING ACTIVITIES:
Net income ............................................ $ 2,482 $ 1,575
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 3,521 2,985
Deferred income taxes .............................. 535 236
Amortization of deferred financing costs ........... 97 94
Provision for losses on accounts receivable ........ 103 77
(Gain) loss on sale of assets ...................... (243) 54
Changes in working capital:
Accounts receivable .............................. 2,169 831
Prepaid expenses ................................. (311) 592
Accounts payable and accrued liabilities ......... (6,288) (1,915)
------- --------
Net cash provided by operating activities .......... 2,065 4,529
------- --------
INVESTING ACTIVITIES:
Purchase of Detroit, Toledo and Ironton, including
related costs ......................................... -- (22,642)
Purchase of property and equipment .................... (6,567) (5,079)
Purchase of investments in Brazilian railroad
companies ............................................. -- (1,346)
Sale of preferred shares of Brazilian railroad
company ............................................... -- 2,758
Proceeds from sale of property and equipment .......... 279 17
Increase in other long-term assets .................... (177) (38)
------- --------
Net cash used in investing activities ............... (6,465) (26,330)
------- --------
FINANCING ACTIVITIES:
Payments of short-term notes payable .................. (342) (255)
Proceeds from long-term debt .......................... 3,000 22,000
Principal payments on long-term debt .................. (669) (1,175)
Net increase in working capital facility .............. 3,000 2,000
Issuance of common stock .............................. 199 45
Deferred financing costs .............................. (1) --
------- --------
Net cash provided by financing activities ........... 5,187 22,615
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................. (3) (17)
------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................. 784 797
CASH AND CASH EQUIVALENTS, beginning of period .......... 570 2,108
------- --------
CASH AND CASH EQUIVALENTS, end of period ................ $ 1,354 $ 2,905
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................ $ 4,551 3,099
Income taxes ........................................ 590 622
Non-cash investing and financing activities:
Capital leases ...................................... 554 6
Grants .............................................. 107 18
Tax benefit from exercise of non-qualified stock
options ............................................. 76 54
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim consolidated financial statements presented herein include the
accounts of RailTex, Inc. and its wholly-owned subsidiaries. References to
"RailTex" or the "Company" mean RailTex, Inc. and, unless the context indicates
otherwise, its consolidated subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation. These interim
consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). All adjustments have been made to the accompanying interim
consolidated financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's operating
results. All adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is recommended that these
interim consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the entire year. Certain reclassifications have
been made in the prior period financial statements to conform with the current
period presentation.
2. RECENTLY ISSUED PRONOUNCEMENTS
In 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. Because the Company's component of comprehensive
income, foreign currency translation adjustment, is immaterial to the financial
condition or results of operations for the three months ended March 31, 1998 and
1997, the amounts are not reported or displayed in the financial statements.
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 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires the costs of start-up activities and
organization costs, as defined, to be expensed as incurred. The SOP is effective
for fiscal years beginning after December 15, 1998. Earlier application is
encouraged, initial application will be reported as a cumulative effect of a
change in accounting principle and restatement of previously issued financial
statements is not permitted. The Company currently capitalizes the costs of
start-up activities and organization costs associated with the acquisition of
new railroad properties and amortizes these costs over five years. As of January
1, 1998, the Company would have reported a cumulative effect of a change in
accounting principle in the amount of $1.5 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.
5
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted per-share computation for net income (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------- -------
<S> <C> <C>
Numerator:
Net income-numerator for basic and diluted earnings per share .. $2,482 $1,575
Denominator:
Denominator for basic earnings per share-weighted average shares 9,171 9,131
Effect of dilutive securities:
Employee and Director stock options .......................... 60 78
------ ------
Denominator for diluted earnings per share-adjusted
weighted average shares ........................................ 9,231 9,209
====== ======
Basic earnings per share ......................................... $ 0.27 $ 0.17
====== ======
Diluted earnings per share ....................................... $ 0.27 $ 0.17
====== ======
</TABLE>
4. DERIVATIVE ACCOUNTING PRINCIPLES
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.
The Company has entered into three commodity collar transactions to hedge
market risks of diesel fuel prices. Two collars are effective July 1, 1997 and
terminate 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.
The third collar is effective April 1, 1998 and terminates March 31, 1999
and represents notional amounts totaling 250,000 gallons per month with a cap
price of $0.5600 per gallon and a floor price of $0.4375 per gallon. At March
31, 1998, the Company had not entered into any interest rate swaps contracts.
5. COMMITMENTS AND CONTINGENCIES
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
6
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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.
The Company is also involved in other litigation and various legal matters
which are being defended and handled in the ordinary course of business. In
management's judgment, based on the opinion of the Company's legal counsel
handling such matters, the ultimate liability, if any, from such legal
proceedings will not have a material effect on the Company's financial position
and results of operations.
6. SUBSEQUENT EVENT
In April 1998, the Company announced that it's wholly-owned subsidiary,
RailTex Acquisition Corp., had entered into a definitive agreement to acquire
100% of the stock of Central Properties, Inc. ("CPI"), a privately held company
which owns 100 percent of the stock of the Central Railroad of Indianapolis
("CERA") and the Central Railroad of Indiana ("CIND"). The purchase price is
$14.1 million including a $14.0 million cash payment and the assumption of
$100,000 in long-term liabilities. CERA operates over approximately 73 miles of
rail line in north central Indiana: a 17 mile north-south line between Kokomo
and Tipton, IN and a 56 mile east-west line from Marion through Kokomo to
Frankfort, IN. CIND currently owns and operates approximately 81 miles of rail
line between Cincinnati, Ohio and Shelbyville, Indiana. The CIND also has
overhead trackage rights over 96 miles between Shelbyville and Frankfort,
Indiana which allows for connection with the CERA. The Company currently expects
to close this transaction prior to the end of the second quarter.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE
IN THIS QUARTERLY REPORT ON FORM 10-Q.
This Form 10-Q contains certain "forward-looking" statements as such term
is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, technological
change, changes in industry practices, one-time events and other factors
described herein and in other filings made by the Company with the Securities
and Exchange Commission. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended. The
Company does not intend to update these forward-looking statements.
GENERAL
The Company's growth to date has resulted primarily from implementation of
its expansion strategy. The number of miles operated by RailTex has grown to
more than 3,900 at March 31, 1998.
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") and the pending acquisition of Central Properties, Inc., the
Company typically does not contractually assume any of the operations or
liabilities of the divesting carriers. After acquiring the right to operate each
of its railroad properties, the Company must arrange for the purchase or lease
of operating equipment and hire the work force necessary to operate the
railroad. Accordingly, for any railroad property, the historical results of
operations of the railroad property as previously operated are not necessarily
indicative of the results of operations for the property following commencement
of operations by the Company.
Because of variations in the structure, timing and size of portfolio
additions and differences in economics among the Company's portfolio railroads
resulting from the unique terms, rates and other provisions for each railroad's
operation established through negotiation between RailTex and each divesting
carrier, the Company's results of operations in any reporting period are not
directly comparable to (i) its results of operations in other reporting periods
or (ii) the results of operations of other railroad companies. Therefore, care
should be taken when using traditional measurements of railroad operating
performance, such as freight revenues per carload, operating ratio and labor
ratio, in assessing or comparing the Company's operating results.
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. To the extent that the UP problems
continue or worsen, the Company's results of operations could be materially
adversely impacted.
8
<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. As a result, the
Board of Directors of FSA implemented a call for additional capital
contributions from the existing shareholders. The Company decided not to
participate in the capital call, and, as a result, its equity percentage will be
diluted from 6.0% to as low as 4.0%. The respective Board of Directors of FCA
and FSA may implement additional capital contribution calls from the existing
shareholders. In the event the Company does not participate in the capital call,
its equity percentage could be further diluted.
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 those properties.
In April 1998, the Company announced that it's wholly-owned subsidiary,
RailTex Acquisition Corp., had entered into a definitive agreement to acquire
100% of the stock of Central Properties, Inc. ("CPI"), a privately held company
which owns 100 percent of the stock of the Central Railroad of Indianapolis
("CERA") and the Central Railroad of Indiana ("CIND"). The purchase price is
$14.1 million including a $14.0 million cash payment and the assumption of
$100,000 in long-term liabilities. CERA operates over approximately 73 miles of
rail line in north central Indiana: a 17 mile north-south line between Kokomo
and Tipton, IN and a 56 mile east-west line from Marion through Kokomo to
Frankfort, IN. CIND currently owns and operates approximately 81 miles of rail
line between Cincinnati, Ohio and Shelbyville, Indiana. The CIND also has
overhead trackage rights over 96 miles between Shelbyville and Frankfort,
Indiana which allows for connection with the CERA. The Company currently expects
to close this transaction prior to the end of the second quarter.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997.
The Company's net income for the three months ended March 31, 1998
increased by approximately $907,000, or 57.6%, to $2.5 million from $1.6 million
in the prior year period and basic and diluted earnings per share increased
58.8% to $0.27 per share from $0.17 per share in the prior year period.
OPERATING REVENUES. Operating revenues for the three months ended March
31, 1998 increased by $4.2 million, or 12.4%, to $38.4 million from $34.2
million in the prior year period. Carloads transported increased by 17,095
carloads, or 15.6%, to 126,793 carloads from 109,698 carloads in the prior year
period.
Freight revenues for the three months ended March 31, 1998 increased by
$3.7 million, or 12.4%, to $33.2 million from $29.5 million in the prior year
period. The following table compares freight revenues, traffic volume (in
carloads) and average freight revenues per carload by commodity group for the
three months ended March 31, 1998 and 1997.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
(IN THOUSANDS, EXCEPT PER CARLOAD AMOUNTS)
<TABLE>
<CAPTION>
AVERAGE
FREIGHT
REVENUES
PER
FREIGHT REVENUES CARLOADS CARLOAD(1)
-------------------------------------- ------------------------------------ --------------
1998 1997 1998 1997 1998 1997
----------------- ---------------- --------------- ---------------- ----- ----
% OF % OF % OF % OF
COMMODITY GROUP DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL
- --------------- -------- ----- -------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products...... $ 6,648 20.0% $ 5,631 19.1% 16,847 13.3% 15,177 13.8% $395 $371
Coal............................ 4,503 13.6 3,427 11.6 25,861 20.4 18,679 17.0 174 183
Chemicals....................... 4,069 12.3 3,684 12.5 12,716 10.0 11,230 10.2 320 328
Scrap metal and metal products.. 3,022 9.1 2,206 7.5 10,590 8.4 7,635 7.0 285 289
Scrap paper and paper products.. 2,907 8.8 3,041 10.3 8,809 6.9 8,114 7.4 330 375
Farm products................... 2,758 8.3 2,902 9.8 10,864 8.6 11,956 10.9 254 243
Food products................... 1,676 5.1 1,650 5.6 6,237 4.9 6,149 5.6 269 268
Non-metallic ores............... 1,527 4.6 1,578 5.3 8,029 6.3 8,261 7.5 190 191
Autos and auto parts............ 1,406 4.2 1,065 3.6 7,914 6.2 6,014 5.5 178 177
Petroleum products.............. 1,311 4.0 1,354 4.6 3,569 2.8 3,471 3.2 367 390
Minerals and stone.............. 1,232 3.7 1,227 4.2 3,596 2.8 3,848 3.5 343 319
Railroad equipment.............. 1,060 3.2 806 2.7 7,001 5.5 5,006 4.6 151 161
Other........................... 1,065 3.1 948 3.2 4,760 3.9 4,158 3.8 224 228
--------- ------ ------- ----- ------- ----- ------- -----
Total...................... $33,184 100.0% $29,519 100.0% 126,793 100.0% 109,698 100.0% $262 $269
========= ====== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------------
(1)Calculated as freight revenues divided by carloads.
The increase in freight revenues and carloadings is primarily due to
increases in coal (7,182), scrap metal and metal products (2,955), railroad
equipment (1,995) and auto and auto parts (1,900) as a result of increases in
business for existing customers and the existence of the DTI for a full quarter
in 1998 compared to half of a quarter in 1997.
Non-freight revenues for the three months ended March 31, 1998 increased
by approximately $572,000, or 12.3%, to $5.2 million from $4.6 million in the
prior year period. Non-freight revenues include joint facilities, switching,
demurrage, car hire and car repair services performed for third parties and
lease income. These non-freight revenues contributed 13.6% of operating revenues
in both the three months ended March 31, 1998 and 1997. The increase in
non-freight revenues is primarily due to increases in car hire, car repair,
switching and joint facilities income from Amtrak.
10
<PAGE>
OPERATING EXPENSES. Operating expenses for the three months ended
March 31, 1998 increased by $2.8 million, or 9.6%, to $31.9 million from $29.1
million in the prior year period. The Company's operating ratio (operating
expenses divided by operating revenues) decreased for the period to 83.1%,
compared to 85.2% in the prior year period, primarily a result of lower diesel
fuel costs and equipment rent expenses.
The following table sets forth a comparison of the Company's operating
expenses during the three month periods ended March 31, 1998 and 1997, in
dollars and as a percentage of operating revenues:
OPERATING EXPENSES COMPARISON
(DOLLARS IN THOUSANDS)
1998 1997
----------------- --------------------
% OF % OF
OPERATING OPERATING
DOLLARS REVENUES DOLLARS REVENUES
-------- --------- ------- ---------
Labor and benefits........... $11,841 30.8% $10,254 30.0%
Equipment rents.............. 4,300 11.2 4,088 12.0
Depreciation and amortization 3,521 9.2 2,985 8.7
Diesel fuel.................. 2,651 6.9 3,177 9.3
Purchased services........... 2,256 5.9 2,067 6.0
Casualties and insurance..... 1,520 4.0 1,223 3.6
Materials.................... 1,396 3.6 1,342 3.9
Joint facilities............. 1,263 3.3 1,069 3.1
Other........................ 3,156 8.2 2,918 8.5
------- ---- ------- ----
Total................... $31,904 83.1% $29,123 85.2%
======= ==== ======= ====
Labor and benefits for the three months ended March 31, 1998 increased by
$1.6 million, or 15.5%, to $11.8 million from $10.3 million in the prior year
period. The increase in labor and benefits is primarily a result of an increase
in profit sharing incentives at one of the Company's railroads due to increased
profitability at the railroad, increase in overtime related to increase in
traffic volumes on certain railroads and as a result of UP service problems and
an increase in total employment.
Equipment rents for the three months ended March 31, 1998 increased by
approximately $212,000, or 5.2%, to $4.3 million from $4.1 million in the prior
year period. The increase in equipment rents is primarily attributable to an
increase in locomotive leases offset by a decrease in railcar equipment rents.
Depreciation and amortization for the three months ended March 31, 1998
increased by approximately $536,000, or 18.0%, to $3.5 million from $3.0 million
in the prior year period. The increase in depreciation and amortization is
primarily a result of capital asset additions in 1997 and first quarter 1998.
Diesel fuel expense for the three months ended March 31, 1998 decreased by
approximately $525,000, or 16.5%, to $2.6 million from $3.2 million in the prior
year period. The decrease in diesel fuel expense is primarily a result of a
$0.21 per gallon, or 25.0%, decrease in average fuel prices as compared to the
prior year period.
Purchased services for the three months ended March 31, 1998 increased by
approximately $189,000, or 9.1%, to $2.3 million from $2.1 million in the prior
year period. The increase in purchased services is primarily a result of
increased legal and consulting expense related to training, public relations,
information technology and labor and compensation issues.
11
<PAGE>
Casualties and insurance expense for the three months ended March 31, 1998
increased by approximately $297,000, or 24.3%, to $1.5 million from $1.2 million
in the prior year period. The increase in casualties and insurance expense is a
result of increased derailment costs.
Materials expense for the three months ended March 31, 1998 increased by
approximately $54,000, or 4.0%, to $1.4 million from $1.3 million in the prior
year period. The increase in materials expense is primarily due to an increase
in locomotive materials due to routine and non-routine maintenance.
Joint facilities expense for the three months ended March 31, 1998
increased by approximately $194,000, or 18.1%, to $1.3 million from $1.1 million
in the prior year period due primarily to an increase in carload activity.
Other expenses for the three months ended March 31, 1998 increased by
approximately $238,000, or 8.2%, to $3.2 million from $3.0 million in the prior
year period. The increase in other expenses is primarily attributable to
increases in property taxes, telephone and communications expense and travel
expenses related to training for transportation specialists.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1998 increased by approximately $321,000, or 13.6%, to $2.7 million from $2.4
million in the prior year period due primarily to an increase in borrowings for
capital asset additions.
OTHER INCOME (EXPENSES). For the three months ended March 31, 1998, other
income was approximately $345,000 as compared to expense of approximately
$49,000 in the prior year period primarily as a result of a net gain from the
sale of non-operating assets for the three months ended March 31, 1998 as
compared to a net loss from the sale of non-operating assets in the prior year
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditure needs relating to
ongoing operations while relying on contributed capital and borrowed funds to
finance its acquisitions.
During the three months ended March 31, 1998, the Company generated cash
from operations of $2.1 million and borrowed a total of $6.0 million on its
credit facilities which was primarily used to fund capital expenditures as
follows (in thousands):
Track.................................... 2,501
Locomotives.............................. 2,194
DTI track rehabilitation................. 1,236
Technology............................... 429
Other.................................... 207
-------
$6,567
=======
At March 31, 1998, the Company had long-term senior debt, capital leases
and senior subordinated debt outstanding totaling $131.6 million, which
constituted 49.2% of its total capitalization. Comparable figures at December
31, 1997 were $125.7 million and 48.5%, respectively.
At March 31, 1998, availability under the Company's $75.0 million U.S.
acquisition facility, $10.0 million U.S. working capital facility, CDN $25.0
million Canadian acquisition agreement, and CDN $5.0 million Canadian working
capital facility was, in U.S. dollars, $60.5 million, $3.0 million, $2.7 million
and $17.6 million, respectively. The unused portion of all of the Company's
senior bank credit facilities are subject to a 0.25% commitment fee.
12
<PAGE>
As shown in the table above, the Company has spent approximately $1.2
million on rehabilitation of the DTI track in 1998 and expects to spend an
additional $3.8 million in 1998. The Company currently anticipates that its
maintenance capital expenditure requirements in 1998 for track, excluding DTI
track rehabilitation, locomotives and equipment will be $22.0 million.
Additionally, computer hardware, software and related capital expenditures are
currently expected to be $3.0 million.
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 March 31, 1998, the Company was in compliance
with all covenants, except for its debt covenant related to Capital Expenditure
Amount Limit. The Company is currently in negotiations with its lenders and
expects its Capital Expenditure Amount Limit to be waived or amended.
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.
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 revenue from shipment of farm products, which represent less
than 10.0% of revenues, the Company's operating revenues from existing
operations have not historically been subject to significant seasonal changes.
ACCOUNTING MATTERS
In February 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 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires all start-up activities, as defined,
to be expensed as incurred. The SOP is effective for fiscal years beginning
after December 15, 1998. Earlier application is encouraged, initial application
will be reported as a cumulative effect of a change in accounting principle and
restatement of previously issued financial statements is not permitted. The
Company currently capitalizes start-up activities associated with the
acquisition of new railroad properties and amortizes these costs over five
years. As of January 1, 1998, the Company would have reported a cumulative
effect of a change in accounting principle in the amount of $1.5 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.
13
<PAGE>
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.
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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule.
(B). REPORTS ON FORM 8-K:
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Antonio,
Texas.
RAILTEX, INC.
Date: May 15, 1998 By: /s/ LAURA D. DAVIES
Name: LAURA D. DAVIES
Title: Vice President and Chief
Financial Officer
Date: May 15, 1998 By: /s/ CLEMENT J. WYDRA
Name: CLEMENT J. WYDRA
Title: Controller and Chief
Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,354
<SECURITIES> 0
<RECEIVABLES> 31,435
<ALLOWANCES> 1,536
<INVENTORY> 0
<CURRENT-ASSETS> 35,870
<PP&E> 307,632
<DEPRECIATION> 44,194
<TOTAL-ASSETS> 322,539
<CURRENT-LIABILITIES> 41,288
<BONDS> 131,597
0
0
<COMMON> 919
<OTHER-SE> 135,149
<TOTAL-LIABILITY-AND-EQUITY> 322,539
<SALES> 0
<TOTAL-REVENUES> 38,412
<CGS> 0
<TOTAL-COSTS> 31,904
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 103
<INTEREST-EXPENSE> 2,688
<INCOME-PRETAX> 4,165
<INCOME-TAX> 1,683
<INCOME-CONTINUING> 2,482
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